Good morning. My name is Brika, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Ingevity Third Quarter 2022 Earnings Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.

[Operator Instructions] Thank you. John Nypaver, Treasurer of Investor Relations. You may begin your conference..

Thank you, Brika. Good morning, and welcome to Ingevity's third quarter 2022 earnings call. Early this morning, we posted a presentation on our investor site that you can use to follow today's discussion. It can be found on ir.ingevity.com under Events and Presentations.

Also throughout this call, we may refer to non-GAAP financial measures, which are intended to supplement, not substitute for comparable GAAP measures. Definitions of these non-GAAP financial measures and reconciliations to comparable GAAP measures are included in our earnings release and are also in our Form 10-K.

We may also make forward-looking statements regarding future events and future financial performance of the Company during this call. And we caution you that these statements are just projections, and actual results or events may differ materially from those projections as further described in our earnings release. Our agenda is on Slide 3.

Our speakers today are John Fortson, our President and CEO; Mary Hall, our CFO; Ed Woodcock, President of Performance Materials; and Rich White, President of Industrial Specialties and Payment Technologies.

In addition, Steve Hume, President, Engineered Polymers; and Eric Ripple, Chief Growth and Innovation Officer, will be available for questions and comments. John will start us off with some highlights for the quarter. Mary will follow with a review of our consolidated financial performance.

Rich, on behalf of his Performance Chemicals segment, colleague Steve Hume, will discuss the entire Performance Chemicals segment, and Ed will review the results of Performance Materials. Finally, John will conclude with our outlook for 2022. With that, over to you, John..

Thanks, John, and good morning, everyone. Please turn to Slide 4, and we'll jump right in. Ingevity had another great quarter, and I want to thank everyone on the team for how well they have navigated the current market.

This is an environment where we continue to hear other chemical and material companies reduce their guidance and paint a pessimistic outlook. Yet for Ingevity, this quarter, we posted record sales, adjusted EBITDA and adjusted EPS.

Our Performance Chemicals segment saw record sales across its businesses and Engineered Polymers, Pavement Technologies and Industrial Specialties. Performance Materials saw significant volume growth as global auto production increased during the quarter.

Our consolidated results are directly due to our team's focus on attractive end markets, where customers require unique performance characteristics and where we can gain market share.

For example, with increased automotive production this quarter, our Engineered Polymers Capa business sold more higher-value products used in auto applications, such as paint, protective film and gas, bumpers. And of course, higher auto production aided performance materials with significant volume growth in our activated carbon and honey homes.

Another end market where our products are experiencing strong demand is road construction. Municipalities are increasingly asking for sustainable performance-enhancing products like Evotherm, which lowers the amount of energy needed to pay roads while reducing harmful emissions.

In the quarter, input costs, including energy, raw materials and logistics continue to rise, and Industrial Specialties volume was constrained due to lower availability of key raw materials.

But by strategically focusing our product mix on derivatized products that bring higher value to both our customers and to Ingevity in markets like oilfield, agricultural chemicals and adhesives. Industrial Specialties was able to post a record sales quarter even on lower volume.

In other businesses, we have experienced a lag between the timing of higher input costs and our price increases, either due to the speed with which the cost rose or due to the nature of our supply agreements. These are timing issues that will correct as we adjust prices and represent expected upside into next year.

We continue to generate strong free cash flow, and this allowed us to return cash to shareholders, pay down some debt and continue spending on growth initiatives. As we announced a few weeks ago, we completed the acquisition of Ozark Materials and are excited to have the Ozark family of specialty products to support this end market.

Our integration efforts are moving forward and remain on track. They are a high-quality team and a great addition to Ingevity. There are tremendous opportunities for our teams to work together to better serve our customers with a broad array of products and technologies.

We were also pleased to announce the completion of one of our key organic growth initiatives as we finished the addition of caprolactone polyols production at our Louisiana site. We have been telling you about the demand customers have for our Capa polyols.

Our polyols enhance high-performing end-use products such as top coats on auto or planes, coatings on specialty flooring and boats, protective films and footwear by making them stronger and more durable. The addition will increase our global capacity by 40%. Before I turn it over to Mary, you all know that ESG is in our DNA at Ingevity.

Our purpose is to purify, protect and enhance the world around us, and we work to achieve this every day. As such, we were extremely pleased when we were awarded the gold rating for corporate social responsibility by EcoVadis. This rating puts us in the top 3% of respondents in the specialty chemicals sector.

It is a reflection of who we are, what we do and how we do it. With that, I'll turn it over to Mary to discuss the financials..

Thanks, John. Please turn to Slide 5. As you heard from John, we're very pleased with our third quarter results with sales up 28% and adjusted EBITDA up almost 16%.

We delivered a record quarter on the top and bottom lines as our products and technologies continue to demonstrate their value to our customers due to their unique performance attributes and the sustainability benefits they deliver.

As we move down to Slide 5, please note that we've excluded depreciation and amortization from gross profit and SG&A in order to provide more transparency to the changes year-over-year. A reconciliation to GAAP gross profit and SG&A is in the appendix.

As you can see, our adjusted gross profit dollars were up over 21% year-over-year driven by the higher sales, while our adjusted gross margin declined 220 basis points. This decline was due to margin compression in both segments, driven by continued inflation impacting input costs.

Similar to Q2, Performance Chemicals adjusted gross margin was negatively impacted by higher input costs and raw material constraints. The margin compression in Performance Materials was primarily attributed to the timing of raw material cost increases versus the timing of customer price increases, particularly in automotive.

We're beginning to see the pace of raw material increases moderate, and we expect to see our gross margins improve as that occurs. SG&A excluding depreciation and amortization, increased about $12 million year-over-year as we continue to fund strategic growth initiatives and also saw higher labor-related costs.

Our strong sales performance drove record adjusted EBITDA of $138.2 million, up nearly 16%, while our adjusted EBITDA margin was down about 300 basis points due primarily to the combination of gross margin pressure and SG&A increase. Our quarterly diluted adjusted EPS of $2.09 is a record for the Company.

Many chemical companies have commented recently on the negative foreign exchange impact to both their top-line and bottom-line results. As a global company, Ingevity saw some pressure on the top line from the strong U.S. dollar, which negatively impacted sales by about 2%. However, the impact of warrant exchange on our bottom line was not meaningful.

We attribute this primarily to a combination of our diverse global sales mix and global manufacturing input footprint. This is another area where our diverse end markets and geographies enables us to perform well despite market volatility. Turning to Slide 6.

In the upper left-hand chart, you can see our sales through the third quarter have outpaced full-year sales in some prior years. You've heard us attribute much of the sales growth this year to pricing actions we've taken. I want to emphasize that our ability to increase prices is not just a function of capturing higher input costs.

It's also a reflection of our success over several years in managing and upgrading our mix of sales to more derivatized products and technologies that drive higher performance and value for our customers and for us, a win-win.

For example, in 2016, about 1/3 of our sales came from lower-margin commodity products, predominantly in our Industrial Specialties business. Today, that number is cut in half to about 17%. We will continue to focus on improving mix to drive value for our customers and for our shareholders.

The upper right chart shows another quarter of strong free cash flow. As you can see in the capital allocation chart bottom right, this allowed us to continue returning cash to shareholders through share repurchases, and we have repurchased over 2 million shares year-to-date, while maintaining leverage within our 2x to 2.5x target area.

We completed the Ozark acquisition October 3rd, so it is not included in these Q3 numbers. I will note, however, that we financed the $325 million purchase price with a combination of cash on hand and borrowings on the revolving credit facility.

So our leverage will shift up in Q4, but should stay under 3x and be back in our target range in less than 12 months. In summary, we delivered a strong third quarter, executing well on our organic and inorganic growth initiatives while managing to a balanced capital allocation strategy.

Should the business environment worsen, we believe we are well-positioned to manage through the challenges. And now I'll turn it over to Rich for more color on Performance Chemicals..

Thanks, Mary, and hello all. Turning to Slide #7. As John mentioned in his opening comments, the Performance Chemicals segment posted record sales across all three businesses in the third quarter.

Sales of $337 million is over 30% higher than last year, driven by a product mix that was heavily weighted toward high-performance derivatized products, thus command at higher prices.

This product mix helped offset will continue to be in an inflationary environment for input costs and resulted in a record EBITDA of $77 million for the quarter, 22% higher than last year.

Our Engineered Polymers team rebounded strongly from last quarter's unexpected downtime due to constrained raw material availability and ran the plant near capacity for the entire quarter to meet the demand for our polyols and thermoplastics.

Customer demand is strong for these high-performance products because they make end products more sustainable by giving them greater durability and resistance to wear and tear. In Q3, we continue to see strong growth in automotive as well as footwear and apparel where the performance attributes of our products are appreciated.

One of the fastest-growing end markets for the camper products is automotive paint protective films where our polyols technology is incorporated to provide film with non-yellow and clarity, self-healing and stain-resistant properties that can help keep vehicles looking showroom new and improve the resale value.

Third-quarter sales of $69.5 million was up over 31% from a year ago, fantastic performance.

Our Engineered Polymers team has done an excellent job managing customer requirements as demand for caprolactone polyols continues to exceed supply, and they generated greater capacity by completing the polyol production facility at our DeRidder site in Louisiana, which, as mentioned earlier, has increased production capacity by 40%.

Reduction commenced in September, the first commercial sales filed in October. This is expected to support the future growth of these specialty products and geographic location and the geographic location should help serve the customer base in this region as well as reduce global lead times. Turning to Payment Technologies.

Q3 sales of $88.3 million, an all-time record quarter was up over 20% versus last year due to strong paving season. During the quarter, we saw increased focus from municipalities on sustainability, which have led to increased technology adoption in both our Evotherm mix product and payment preservation product lines.

Evotherm enables paving at lower temperatures, extending the paving season and reducing energy consumption as well as overall emissions. Our payment preservation products save time, energy and money by extending the life of existing roads.

As you know, we closed on Ozark acquisition early in October and are extremely excited as we have begun working with the Ozark team to complement our existing payment technologies products.

We are working to leverage the strength of our teams and processes to create synergies such as utilizing the resin we produce in their payment marketing formulations. We expect to capture approximately $5 million of synergies during the next 18 months.

Industrial Specialties had a record quarter with sales up over 35% despite a host of challenges during the quarter. We experienced volume constraints due to raw material availability, which limited our production capacity as well as drove higher input costs.

In addition, we saw certain customers choose to work down inventory levels as they assess the macroeconomic environment. To meet these challenges, the team continued to focus on derivatized products, which allowed us to capture higher prices to offset increased input costs.

We saw double-digit gains in agrochemicals, adhesives and oilfield, all in markets that demand high-performing products. Our technology teams are constantly working with customers to find new applications where our products can purify, protect and enhance the world.

In summary, Steve and I couldn't be more proud of the team and what they've delivered during the quarter. Posting these results with all the challenges we face is truly an impressive accomplishment, and we want to thank everyone for their hard work. I will now turn the call over to Ed to discuss the Performance Materials..

Thanks, Rich. As you can see on Slide 8, sales of the Performance Materials segment were up over 22% to $144.9 million versus the prior year's quarter. This increase reflects the rebound in automotive production driven by improvements within the global automotive supply chain.

Throughout the quarter, we saw sequential volume increases in each month within both our auto carbon and honeycomb products. Our sales in Asia Pacific were up almost 40% versus Q2 of 2022 as volumes rebounded from COVID impact Q2 lows.

Q3 North American automotive production was at the highest level since Q4 of 2020, and we're seeing signs that OEMs are rebuilding vehicle inventories. We were quite encouraged by our sales in Europe, which improved roughly 19% year-over-year as the availability of auto parts improved.

The EU is still working towards implementing a more stringent regulatory package for auto evaporative emissions. And we're expecting to hear an announcement before the end of the year. Our expectation is that the potential regulations in Europe would look similar to Brazil's requirements and could go into effect as early as 2026.

Our sales in Brazil are illustrative of the impact of more stringent regulations. While Brazil is a smaller sales footprint for us than other regions, our sales have more than tripled to last year. We expect continued growth in Brazil over the next several years, regulations are fully implemented.

Segment EBITDA was $61.2 million, an 8.5% increase from last year. Segment EBITDA margin was 42.2%, down compared to last year, primarily as a result of increased energy and raw material costs. We typically negotiate price with our auto customers annually early in the year.

Although we increased our prices this year, particularly in the process purification market, the rising inflationary costs throughout the year have outpaced our automotive price increases that were implemented during Q1. I will now turn the call back to John to discuss the outlook for 2022 and for closing comments..

Thanks, Ed. On Slide 9, you'll see our revised guidance. As we've said, demand continues to be strong. So we have raised the range of our sales and EBITDA guidance.

We will also spend less in CapEx this year than expected, but we remain committed to maintaining safe and reliable plants while also investing in organic growth initiatives that bring value to the Company. As we look forward to the end of the year and into 2023, we are monitoring the broader economic environment.

Much is being said about a potential recession in the coming months, particularly in Europe. Demand remains robust in our businesses. However, customers in a few markets, adhesives and certain engineered polymers customers are signaling a focus on inventory destocking in Q4.

It's unclear today if this destocking is short-term in nature or something more sustained. At a high level going forward, we expect continued benefit from the recovery in auto production in both the Performance Materials segment and our Engineered Polymers business.

With although production numbers still low today, we should see them continuing to improve over the next several years, and we will benefit. Additionally, we should benefit in our enlarged Pavement Technologies businesses as infrastructure spending continues to flow into municipalities for road construction and repair.

Engineered Polymers margins have suffered due to energy costs, freight and other material cost inflation in Europe. We are adjusting prices accordingly and expect to benefit into next year as their margins improve.

For Industrial Specialties, while we face higher pine-based raw material costs and may see potential slowdowns in orders due to economic conditions, we see the benefits of the new regulatory-driven biofuel market for [TOFA] beginning to take hold.

Increased use of alternative raw materials to supply both the chemical industry and biofuel markets are also exciting opportunities for us to offset any recessionary pressures in our legacy markets. Finally, you'll see on Slide 10 that we are planning to host an Investor Day event next spring.

Originally, we plan to have it in December, but in an effort to increase transparency to you, the investors, we are in the process of evaluating how we report our businesses. We didn't want to have an Investor Day and to potentially change how we show and explain our business too in the next quarter.

We will complete our assessment and then hold the Investor Day early next year. We're in the process of rescheduling and we'll keep you posted, but our goal is to give you all as much information as possible about Ingevity.

We look forward to sharing with you what we believe are exciting opportunities for us to continue to grow and further increase our profitability. And we hope you will share our enthusiasm for Ingevity. With that, I'll turn it over for questions..

[Operator Instructions] Your first question from the phone lines from John McNulty of BMO Capital Markets..

Really solid results. So I was curious on the Performance Materials business. I guess, how far or can you quantify how far you might be behind on the price versus raws situation? And then I assume that catches up pretty quickly since you are the big supplier in the industry, it catches up really quickly once you reset the pricing next year.

Is that right?.

So look, as Ed alluded to, we do an annual price increase in that business. So you will see us in early next year, raise prices to our customers, and we will get back that margin. I don't really want to quantify the exact hit because, as you know, John, as we've always said, quarter-by-quarter, things can vary. We have outages, et cetera.

But our intent will be to return to what we consider to be more normalized margins for that business, which are more in the mid-40s, mid- to high 40s.So that is where we plan to go..

Got it. Fair enough. And then paving obviously, pretty strong numbers, pretty strong numbers across the board really. But I guess at this point, can you speak to how you're seeing 2023 layout? It sounds like you've gotten a lot of incremental interest from the municipalities. I would assume some of this gets planned out a year in advance.

So I guess, can you speak to how things are maybe starting to look for 2023?.

Look, it's obviously a little early because these are annual paving campaigns. What I will say is, as we move to the end of 2022, the weather remains pretty warm. So as you know, when the weather remains warm, we're able to pay longer into the season.

So that bodes well for the end of this year into next year, we feel good about it, certainly in the U.S. with the infrastructure spending, and we do expect that money to flow through. But we want to -- let's see how we get to the end of this season and see what they set up for next year..

Got it. Fair enough. Maybe I can squeeze one last one and just around Ozark. So I know you haven't owned it particularly long.

Can you tell us what you're seeing right now, the overlap of that business versus your paving business in terms of customer base and how maybe you can leverage areas there where one has a relationship and maybe the other doesn't? And then also....

Go ahead..

Sorry. No, go ahead. And also just remind us of -- I know there's extreme seasonality in this business. So just -- so we all model it out properly.

I guess, can you remind us of how that seasonality works as we look to 2023?.

For sure. Look, first off, Ozark has a traditional -- a fantastic addition to this company. It's a great group of people. We've all been out to see them be to all their sites here, except for one in North America, a great group of people with a great business.

There are obviously a lot of opportunities for us, while it is a different end product, the way we describe it to people is our customers are in the same building, if not in the same room. So when we go to call on them.

So we have a great opportunity to leverage those relationships where they have strength, and we don't, where we have strength and they don't. Certainly, as they move more -- look at things more international here in North America, whether it's Canada or in the Latin America, we will bring capabilities to them that they don't have today.

So it's pretty exciting for us. From a seasonality perspective, it's really not that different from our legacy payment business and that it's tied to weather. So when snow hits the ground, it's pretty hard to paint, just it's hard to do any road work. So I would think about it in that regard.

As you know, the vast majority of the profitability in that business, which can be in the 70%-plus range occurs in Q2 and Q3. But I think a first quarter and fourth quarter anchor shoulder seasons. And as I mentioned earlier, we're actually having a pretty good Q4 in that regard because the weather has been warm, but it's not like that every year..

Our next question comes from Vincent Anderson of Stifel..

Yes. So it sounds like maybe I'm accidentally front-running the new reporting metrics for next year. But given the volatility in Capa's input costs recently, but also very strong performance on the sales side.

Could you speak maybe just qualitatively about the trend in that businesses, maybe gross profit per pound or some other similar metric that gives us a bit more insight than just the consolidated segment margins?.

Well, yes. So I guess the way to think about it, Vincent, you're correct. That business, because it's based in the U.K. is grappling with issues that are even more challenging than what we have here in North America.

So its margins have come under pretty significant pressure while they've been able to actually see phenomenal demand increases for their product. Truthfully, I think they got a little behind in terms of their ability to keep up with the price increases, but I think we're going to fix that.

We've already started implementing price increases over there to recapture that. I think speaking to your comment about gun-jumping the segment. Part of the challenge when they were operating as a consolidated segment is they didn't have as much visibility as we would like them to have into their cost structure, and we're going to fix that.

But we -- look, we'll get their margin back over the course of next year..

Okay. Sounds good. And then I was just curious what your read is right now on European biorefining of CTO.

It looks like there's still just the same three plants that we know for sure are processing CTO, but just wondering if you had any additional insights into that market if they're fully online? And it is a -- as an aside, how much pressure are you seeing on U.S.

CTO availability with Russia now out of the European market?.

Yes. I mean -- go ahead, Rich..

Well, certainly -- and thanks for the question. Certainly, that CTO market remains very dynamic. You know that globally, there's about 2 million pounds of CTO, million pounds here in the U.S. a million “I'm sorry, 1 million tonnes in the U.S. and same in Europe.

There is about 200,000 tonnes coming out of Russia, but it's not coming out of Russia for all the reasons that we know. But certainly, to your first question, we continue to see additional production capacity come on within the biorefinery market and expect that to grow just based on the Red 2 initiative.

And yes, the CTO, we are seeing inflation on the raw material there and expect to see that going forward. But that market will remain very dynamic for the foreseeable future..

Okay. Perfect. And then just one, hopefully, a quick one on Performance Materials. Just curious what the areas of process purification are that you've had particular success in recently.

And if that pricing power you referenced there is outperforming the traditional activated carbon competitive products?.

Yes. This is Ed. The majority of our process purification revenue is in North America, our process using sodas and phosphoric acid creates a unique poor structure that our competitive materials do not have. We are the only carbon manufacturer in North America that uses this process as compared to raw materials such as bituminous coal or lignite cold.

So the uniqueness of our process and products will give us some inherent advantage -- performance advantages that the competitive carbons don't have versus our carbons. And so we obviously have an advantage in a number of areas, and we capture the value with our pricing..

We now have a question from John Tanwanteng from CJS..

It's actually Pete Lukas for John this morning. Just following up on Ozark.

Anything you can say to quantify any expected synergies at this point now that it's closed?.

As Rich said, we expect roughly $5 million in synergies that we would capture over the next 18 months..

Great. Very helpful. And then just jumping to any updates on Euro 6 and China 6 regulations and when they're expected to be finalized and implemented..

Yes. This is Ed. We're expecting an announcement in November from Europe around the regulatory package that they're putting in place. We expected, as I said earlier, to be similar to what Brazil has. So ORVR with some diurnal emissions requirements, be it either 300 milligrams or 500 milligrams. I think are the two options that are on the table.

But we do expect an announcement in November and with some timing of adopting the regulations beginning around 2026 would be our best estimate..

I would also say, Peter, and I'm just -- I think we should get this out there. I know that there were some rumors around elite copy of the new requirement, and it was circulated in some of the European papers and some write-up. And the headlines do not reflect the reality as it relates to our business.

When you read things like, Oh, they're not changing it, they're going to keep it the same. What they're really talking about is the tailpipe. If you read that lead copy, and we're not commenting on it [indiscernible] or efficacy or what have you.

But if you were to read it thoroughly, you would see that the emissions that are relevant for us, i.e., our Evap emissions are still in there as are some other regulations that will be tighter around things like tires, et cetera. So just would put that out there for everyone. We saw all that.

We know those articles are out there, but they do not portray what will happen to our business correctly..

Very helpful. And last one for me.

Just if you could talk about what you're seeing in terms of M&A opportunity today from a pipeline perspective? Or are you more concerned with integrating what you have and maybe doing other things with your cash?.

Well, I mean, obviously, we just closed on something like a month ago. So right now, in the near term, we're definitely focused on making sure we maximize the value between ourselves and Ozark. Look, our capital allocation priorities really haven't changed.

I mean, obviously, to the extent we move into a recessionary environment, we do generate a lot of cash, and we have the ability to pivot that to protect our balance sheet as needed. But longer term, we're going to continue to grow the business, and we're going to look at M&A, and we're going to look at continuing to return capital..

And I'll add to that. M&A, as you know, can be a long process. We had actually been looking at Ozark for quite a while before we brought that transaction to completion. So we're looking for good fit, good strategic fit and has to be the right opportunity. So we have a pipeline. We continue to manage the pipeline.

We don't sit on our hands and wait to digest any acquisition. We're always looking, but we are balancing our leverage, cash flow and making sure that the opportunity is strategic and a good fit for the Company..

We now have another question from Vincent Anderson of Stifel..

Yes. Thanks for entertaining some more here. I wanted to follow up on that Performance Materials question that I left off with. I'm just wondering, you've had a lot of success in moving production into that market. Obviously, very aware of its advantages there, but automotive was always the cream of the crop.

As automotive comes back, I think we've been saying that every year for three years, but let's say it comes back.

How are you thinking about balancing your allocation of capacity between those two businesses if you want to maintain a good relationship in the process purification space?.

Yes, Vincent, this is Ed. Obviously, what we'd be seeking for is where can we place our products for the highest value and the highest margin contribution to them. And we'll continue to do that. That is primarily our automotive segment and the honeycombs as well.

We do have some high-value segments within our process purification and we'll protect those, but there's some lower-value opportunities where we produce product for water markets, which really help us from a contribution margin standpoint, but we'd much rather be selling automotive products and other higher-end products that we've got into the market.

So we'll easily walk away from water markets to swap out for automotive sales..

Okay. No, that makes a lot of sense. And then we've talked about this in the past. I believe most of your participation in the biodegradable plastics space is more selling to compounders, but it feels worth asking, there's a very big PLA investment planned in the U.S. from a mature supplier.

And now that you've started to build out some capacity of Capa here, are there any thoughts around maybe an even more significant investment with a large offtake partner on the upstream side of the bioplastic space?.

In, we're not going to -- I don't want to talk about, as you know, -- and we've been pretty open with everyone. Our stuff -- we're very careful about specific customers that we refer to with this because we're a big part of their formulations and a part of their competitive advantages. So we don't want to go into that.

But what I will tell you is we are always actively looking at expanding capacity where customers need volume. So we are looking at some point at doing another monomer streamline. We just did the polyols in Louisiana. We will continue to invest and grow in that business as our customers need more volume..

Okay. Very fair. And then just one last one, I promise because you tipped your hand on what the price was. I had a coin flip between sulfuric and phosphoric acid. But when you talk about recovering margins next year, obviously, you have price power.

But if I'm not mistaken, phosphoric acid is already largely corrected back to pre-2022 levels, it looks like.

So maybe just absent pricing activities, what's the lag effect on when that will move through your margins?.

Yes. We'll introduce pricing starting on January 1st. We typically try to help our customers so that they can recapture the cost.

So as you look at Japan, their fiscal year begins April 1st, and so we'll have a price increase there as well so that they can, again, make sure that they put the prices that we're putting in, so they can recover them from their various suppliers..

One of the benefits we have, though, Vincent, as you know, is this is not a cost-plus type of business. So we discuss price increases, it's typically tied to more than just one individual variable..

We now have the next question from Ian Zaffino of Oppenheimer..

Ian, we apologize as well as you and Mike. So now we love you Vince, but somehow I didn't realize you could cut the line on a conference call. But go ahead, please..

Yes. That's quite all right. Yes, most of my questions have been answered, but I just wanted to ask you on the paving side.

Maybe this is a very difficult question to answer, but can you give us a little bit of color on paving and how much per se goes into single-family homes and that area of the market compared to the other areas? And maybe what you're seeing on both sides in both areas..

This is Rich. The majority of our product does not go for single-family homes and driveways. Those are more commercial products that you see that you can get at a Home Depot or Lowe's.

But most of ours is for highways, highways and roads and whether it's our Evotherm pavement preservation product and mainly on highways and roads and not on residential homes..

We now have Daniel Rizzo of Jefferies..

With Payment Technologies, as you set up the contracts with the different meaning municipalities, is there take-or-pay component where they have to buy a minimal amount each year regardless of weather or a contractor? How does it work?.

This is Rich again. No, there is not a take-or-pay for the municipalities. They go to a certain amount of product and they use it as they need to pay various mileage of roads..

I mean ultimately, we basically -- a lot of situations. We have tanks on site that are metered and controlled by sensors. And so we dropped the tank and they pull it as they need it, and they go as long as they can until the weather turns. And when it needs to be refilled, we refill it..

But they will buy a certain amount, though, for the contract.

Still take the -- the whole tank or two tanks or whatever they think is going to be required, correct? They don't -- that doesn't change or does it?.

Yes. Well, they're able to tell us the job that they're going to be working on for that season and then that job is then the formulation for that job is in debit on how much they want to need, and that's how they go about providing the product. But again, to your initial point, it's not a take or pay.

It's just based on usage level and what's going to be needed to pave a certain amount of road..

Okay. And then you mentioned the -- with Ozark, the $5 million in synergies. I assume you're talking about costs over the next 18 months. Can you or have you quantified and I missed it, any potential revenue synergies? You did say some of the clients in the same building, just -- and I apologize if I missed this, but if you could just parse that out..

Yes, Dan, we were -- we are right now focused on the cost synergies and the number that we mentioned is cost focused, as you say. The revenue synergies we expect there to be revenue synergies. As you know, most people don't give a lot of credit for revenue synergies. When you talk about them, they're harder to get and perhaps harder to find in the P&L.

But we feel really good about the package of opportunity that we'll be able to offer to customers and I expect you'll hear more about that in the future, but we will update you periodically on the cost synergies that we realize..

With Ozark and with your business, are there -- is there a long lead time for new contracts, whereas -- I mean it's going to take a couple of years for anything to be realized anyway just because of the way the process works..

No. I don't agree with that. That's not really true, Dan. I mean it's just that the issue that we run into with the top line, and I share Mary's view, -- it's very subjective what is actually a synergy versus what is something that was just normal course business.

And we think there's opportunities for our salespeople to work together to complement each other. There's opportunities for them to enter markets. They're not in today to our salespeople. But we're not going to look at it and call it a "synergy" It's going to be more sales growth as you move forward.

What we're focused on is capturing the cost synergies because those are real, tangible, quantifiable and we can move the needle..

Go ahead, I'm sorry..

I was going to add, we were -- this is Rich, again. I was going to add, we're very excited about, as John has already mentioned, the growth synergies, but that is the growth in terms of how the Ozark business can benefit from the extensive network that we have globally for our payment business today. Ozark is a North American company.

The products are done here in the States only, not necessarily into some extent in Canada, not in Mexico. But if you look at our footprint, which is in Europe and South America, in India, in Australia, there's a broader component to what we expect to do with Ozark portfolio that we're very excited about..

We now have Michael Sison of Wells Fargo..

This is actually [indiscernible] on for Mike. So looking ahead to 2023 and a potential recession, I know you briefly touched on this in the call, but I was wondering if you could provide a little bit more color on how you expect your segments to perform and a potential recession.

I know that auto production is expected to increase and not to be a tailwind for Performance Materials, but specifically, Performance Chemicals is the industrial exposure, do you view that as a risk point?.

Yes. Look, so we'll let us try and tell you how we're thinking about it. We obviously -- this is what we do for a living. We think about these things every day. We want to plan for the future, and we want to be prepared if something happens, and we are prepared.

From our perspective though, and we'll just work our way through it, and you touched on some of it. First and foremost, we're going to see improvement in the auto production, predominantly because it's off such a low base. So we will benefit from that in both our Performance Materials segment but also in our Engineered Polymers segment.

So that will be an offset to what would be more of a broader industrial recession. We also have our Payment Technologies business, which we've just actually bolstered in size, but that business will benefit from the infrastructure spending.

What we have seen in past recessions is governments like to turn on that type of spending because it shows their constituents that they're actually doing something and they're trying to create jobs, et cetera. So we will benefit from those in both of those key end markets.

When you think about the legacy pine chemicals business, we've actually been dealing with very, very marked inflation for a couple of years now. So we've been working very hard, as many of you guys have heard us talk about to reposition that business, as Mary alluded to, we've cut our merchant sales or underivatized commoditized type sales and half.

Back in 2016, it was 1/3 of our sales. Probably not something that was broadcast or all that well known, but it was a large chunk back then. Today, we're down to about 17%.

I also think that this economic softness will be different from the last one because we did not have -- in the last downturn, we had these issues in the Far East that we're not market-driven, but more driven by a plant shutdown with regards to turpentine and what that did to rise in pricing. So that was a one-off.

It's not going to be a part of the equation, which is going to take a lot of pressure off us in the next downturn. So as we've moved away from these underivatized commodity products, and we've continued to broaden our raw material base.

Look, some of our end markets are going to soften, but we think we're in a good spot to counteract those and to be nimble and to push forward where we think we have opportunities to grow to offset that. So that's how we're thinking about it. We're looking at it market by market, and we're in a position to see how this plays out..

Okay. And then also just touching on raw materials. You noticed that you've seen 60% increases in some of your key inputs. Can you speak to which ones are the worst in terms of inflation? And are there any that are more business into coming down? I know you said some raws have eased..

Look, like every company, we are seeing inflation in almost all of our raw materials. Our crude tall oil has inflated multiples higher from where it was. All business and Performance Materials have seen pressure on phosphoric acid and energy costs are cascading through all of our businesses, logistics, freight, et cetera.

So it's hard to say that there's one that if it turns down, it's going to change things. We manage this -- we manage each of them very carefully. We have dedicated supply chain specialists that work to manage each of those. So whether it's moving rail and truckloads and trying to get our costs down there. We have people that work on energy.

We have dedicated buyers. So we manage them and we push price through to offset where we need to. And we'll see what -- I guess what I would say is while they remain elevated, they don't appear to be continuing to increase. So that's probably a good thing..

[Operator Instructions] The next question comes from Christopher Kapsch from Loop Capital Markets..

I had a couple of follow-ups. You mentioned some potential destocking in the pine chemicals segment, I believe, in non-derivative product lines. So I'm just curious if you could -- if you were referencing more TOFA or ROR. Any color there would be this..

Yes. That's not exactly what we said. What we saw -- we saw what we think could be some destocking in two very specific end markets. One is in adhesives, packaging adhesives, so pretty narrow, but we did see some destocking and some slowdowns there, and then also in just a handful of our Engineered Polymers businesses.

So it wasn't -- that's all we've seen so far, right? We're watching it, but that's really all we have seen as a company..

Okay. Well, I was just curious then on the [Rosin] side for the adhesive end market.

Is it enough to alter your calibration in terms of your refinery run rates in the finetunes business?.

No. As you know, Chris, where we sit, we're volume-constrained. -- we can get, we're going to run. We're a long way from....

And then in the -- just a follow-up on the inflation of feedstock cost and again, focused on the pine chemicals business. So I'm just -- CTO, obviously, a big one. Ever since the Georgia-Pacific acquisition, there is an energy component factored into your CTO costs, I believe. So I'm just curious about the inflation.

Is it more predominantly a function of this global supply-demand situation with CTO? Or is there the potential that lower energy cost than watching WTI coming back from peaks earlier this year. Is there any potential that, that can ease CPO costs? Or is that not really a....

It's an interesting question, and it deserves a longer conversation. So maybe we can talk about it in our follow-up. But the truth of the matter is, is that the CTO is really being driven by global supply and demand for the marketplace regardless of what's really going on with oil. There is a correlation though to fuel.

So as fuel costs come down, the value of a biofuel comes down, it all moved somewhat in tandem. So you're right, as those pressures abate, that it would -- could there -- in theory put some downward pressure on CTO prices. But right now, it's a supply and demand gain amongst all of us who use it..

Fair enough. And then lastly, just to follow up on your response to looking at recessionary scenarios and the fact that there's no spike in turbine time prices.

So should I interpret that as you're saying that there's no real incentive for [Chinese gum Rosin] producers to go after that natural turpentine and therefore, there's not an oversupply or you don't -- wouldn't expect an oversupply of that competitive material becomes [Rosin]..

Well, it depends how you define oversupply. But as you know, what happened last time because that turpentine plant went down, the Chinese went out and tapped trees to get at the turpentine and they got [Rosin] as a byproduct. That's not the normal marketplace for that type of gum rosin. And that situation is in the rearview mirror.

It was at this point two years ago. We don't see that happening. So we think while you might see some pressure because we always look at gum rosin pricing during the harvesting season, it will be more manageable than what we saw the last time. And we also are managing it ourselves by staying away from merchant sales markets.

So we're attacking it from both angles..

Thank you. As we have no further questions, I'd like to hand it back to John for any final remarks..

Thank you, Brika. That concludes our call. Thank you for your interest in Ingevity and we'll talk to you again next quarter..

This concludes today's conference call. You may now disconnect your lines..