Ingevity Corp Q1 FY2021 Earnings Call

Thank you, Jesse. Good morning, everyone. Welcome to Ingevity's First Quarter 2021 Earnings Conference Call. Earlier this morning, we posted a presentation onto the Investors section of our website. If you haven't already done so, I encourage you to download this file so you can follow along during the call. You can find it by visiting ir.ingevity.com under Events and Presentations. For participants who are logged into our webcast, the slides should be visible in the online viewing pane and also available to download. On Slide 2 of that deck, you'll see our disclaimer that today's earnings call may contain forward-looking statements. Relevant factors that could cause actual results to differ materially from these forward-looking statements are contained in our earnings release and in our SEC filings, including our Form 10-K and our most recent Form 10-Q, which we expect to file later today. Ingevity undertakes no obligation to publicly release any revision to the projections and forward-looking statements made during this call or to update them to reflect events or circumstances occurring after the date of this call. 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 financial measures are included in our earnings release and can be found on the Investor Relations section of our website. Our agenda is on Slide 3. With me today are John Fortson, President and CEO; our new CFO, Mary Hall; Mike Smith, President of Performance Chemicals; Ed Woodcock, President of Performance Materials; and Erik Ripple, Chief Growth and Innovation Officer. First, John will comment on the highlights of the quarter. Mike and Ed will review the performance of our two segments. Erik will discuss details of our recently announced strategic partnership with GreenGasUSA Holdings, LLC. Then Mary will comment on our current financial status. And lastly, John will discuss our revised guidance for the year. With that, I'll turn the call over to our CEO, John Fortson.

Thanks, Bill, and good morning, everyone. Thank you for joining us, and we appreciate your continued interest in Ingevity. Before we go any further, I'd like to take a moment to welcome two of our teammates to the call. First, I'd like to formally welcome Mary to the Ingevity team. Many of you know Mary from her former position at Quaker; we are thrilled that a professional of her caliber has joined Ingevity, and we know that she will be a valuable member of our team in this critical role. Welcome, Mary. You may also have noticed that Bill Hamilton led the introduction of this call. Bill is taking over IR duties from Jack Maurer, who has made the decision to retire. We wish Jack the best, and we know Bill will do a great job in his new role as Treasurer and Head of IR. Bill led our FP&A efforts for the last four years and has spoken on some of the most recent earning calls. He knows this company inside and out, and I know you will enjoy working with him. With that, if you turn to Slide 4, you'll note some highlights for the quarter. We had a strong first quarter. Demand improved across the board in all of our businesses. Revenues in the first quarter were $320 million, up 11% compared to the previous year's first quarter. Our results were driven by both volume and price increases in certain key businesses. Automotive-based activated carbon sales were up sharply given last year's Q1 shutdowns in China. Engineered Polymers delivered and experienced strong growth across many of its end-use applications. Our Industrial Specialties business, which now includes oilfield applications, was up slightly, and we're off to a good start to the paving season. With respect to earnings, adjusted EBITDA was $105 million, up 14% from the same period last year, representing strong drop-through. Our margins continue to hold up well across the board. And as a result, our adjusted EBITDA margin for the first quarter rose to 32.9%, up 90 basis points. We generated free cash flow of $34 million. And as a result, we're able to both reduce debt and repurchase shares in the quarter. Our leverage remains within our targeted 2 to 2.5x range, at 2.39x. I want to thank everyone on the Ingevity team for their continued work. I am so proud of them, especially our manufacturing and supply chain employees. They remain committed to working productively amidst the constraints of operating in a COVID-safe environment. Our performance this quarter is, again, a testament to the efforts of these employees across the company. Finally, earlier this week, we announced an investment in GreenGas Holdings. We are really excited about this opportunity. Through our work on our absorbed natural gas technology, we have learned a lot about how our technology and expertise can add value to the methane renewable natural gas value chain, and we are fortunate to have identified a partner in our region in GreenGas. We expect to be a significant market participant as we scale our investments and realize the value Ingevity provides. You will hear more from Erik Ripple in a few minutes. If you turn to Slide 5, you'll see the first quarter results for Performance Chemicals. At this point, I'll turn the call over to Mike Smith. Mike?

Thanks, John. On Slide 5, you'll see our Performance Chemicals segment sales in the first quarter were $180 million, up almost 8% versus the prior year period. Sales to pavement technology applications were slightly higher than prior year and reached a first quarter record, driven by growth in our Evotherm warm-mix asphalt product sales. Increased sales in North America were partially offset by other regions. Sales in Industrial Specialties applications, as John mentioned, now include sales in Oilfield Technologies, reflecting the reduced size of that business in our view that the category of products is another end-use for tall oil fatty acid or TOFA and its derivatives. Industrial Specialty sales were up slightly due to increases above 10% to lubricants, adhesives and dispersants customers. These increases were partially offset by decreases in sales to oilfield applications due to a lower year-over-year North American rig count and drilling activity. In addition, the business implemented price increases for rosin and TOFA products. We are encouraged that the Chinese gum rosin export price increased an additional 10% during the first quarter, which is a continued positive signal of improving supply-demand dynamics. Alternative vegetable and tall oil-based fatty acids have also increased in price during the first quarter and should support further improvement in TOFA prices. We are also very encouraged by our first commercial production of soy-based fatty acid and derivatives during the first quarter. This is an exciting and important step in expanding our market focus and product portfolio into products and applications where we already have strong capabilities by broadening our raw material feedstocks beyond legacy crude tall oil. We made our first commercial sales of soy-based fatty acid derivatives during the first half of April. Quarterly sales of Engineered Polymer products were up a sharp 27% due to improved polyurethane demand in industrial equipment, automotive applications, electronic devices, medical equipment and footwear. Sales grew in all geographic regions, but were particularly strong in Asia. We realized strong technology adoption and sales growth in microcellular polyurethane applications for battery pads in electric vehicles and in electronic devices. The Engineered Polymers sales increases were largely due to volume improvement and were also supported by price improvement. Performance Chemicals segment EBITDA for the first quarter was $32 million, up 2% versus the prior year quarter due to higher volumes and price/mix, partially offset by slightly higher freight and raw material pricing. I will note that absent the effect of foreign currency exchange, our segment EBITDA growth would have been more closely reflected in sales growth. We continue to control costs and generate a good mix of higher profitability products, which resulted in adjusted EBITDA margin holding respectively at almost 18% in the first quarter. With that, I'll turn the call over to Ed Woodcock to review the results of Performance Materials.

Thanks, Mike. As you can see on Slide 6, revenues for the segment were up 16% at $141 million. Strong automotive production and sales in China, supported by increased demand in South Korea and Europe, drove growth for our activated carbon products used in gasoline vapor emission control systems. Sales in China nearly doubled versus the prior year period, given the dramatic decrease in automotive production that occurred during February and March of 2020 due to COVID-19. In the January and February period for which data is currently available, China vehicle production and sales were both up substantially at 87% and 75%, respectively. In the first quarter, North American vehicle production was down 5% and was outpaced by sales in the U.S. and Canada, which rose 12%. The U.S. and Canada vehicle sales mix of light-duty trucks and SUVs versus sedans continues to maintain record levels, hitting over 78% during the quarter. This truck and SUV mix has trended high since April of 2020 and is favorable as these vehicles typically have larger canisters and multiple honeycombs as part of their evaporative emissions control systems. Additionally, U.S. and Canada Tier 3 implementation is ongoing as some model year 2022 platforms were delayed due to COVID-19 impact. The remaining Tier 3 implementations should be complete by the end of this year or by early 2022. OEMs continue to face production issues, primarily associated with the global semiconductor chip shortage and, to a lesser extent, the ongoing global supply chain challenges. Based on IHS data, we estimate the Q1 impact to Ingevity of chip-related production losses to be about $10 million in revenue. We expect the chip supply issue to continue throughout 2021, with the most significant impact in Q2, followed by gradual recovery in the second half of the year. That being said, the strong U.S. and Canada vehicle sales and production mix of trucks and SUVs, and ongoing implementation of U.S. Tier 3 will continue to drive a favorable sales mix for us. Additionally, our process purification business, including sales into air filtration devices that combat the spread of COVID-19, continue to be a reliable and profitable revenue source for us outside of the automotive gasoline vapor emission control. Segment EBITDA was $74 million, up almost 20% versus the prior year period. Segment EBITDA margin increased 190 basis points to 52%, reflecting our facilities across the globe operating at full utilization. I'll now turn the call over to Erik Ripple.

Thanks, Ed, and good morning, everyone. On Slide 7, I'd like to provide more information about the strategic partnership with GreenGasUSA Holdings, LLC that we announced earlier this week. As part of Ingevity 2.0, we stated our commitment to explore value-added applications for activated carbon beyond vehicle gasoline vapor emission control and to growing markets such as renewable natural gas or RNG, and human health. An example of these expansion efforts is our absorbed natural gas or ANG technology for light-duty vehicles that we've spoken about previously and that we continue to advance with commercial and gas utility fleets across the U.S. in the course of our business development efforts with potential ANG fleet partners, we were introduced to GreenGas. As we learn more about the GreenGas business model and the company's role in the larger RNG value chain, we recognized an opportunity to apply our activated carbon expertise to the purification, transport and bulk storage of natural gas. GreenGas is an integrated RNG solutions provider. Today, the company contracts with agricultural farms, landfills and industrial and municipal wastewater treatment facilities to collect and treat biogas from the organic waste of their operations. GreenGas then sells the treated biogas as pipeline-quality, low-carbon RNG. The company also provides compression, transportation and delivery of natural gas directly to customers through its wholly-owned pipeline injection point or as part of its virtual pipeline fleet services. Our partnership with GreenGas is a significant step in advancing Ingevity 2.0 as we work together with GreenGas to broaden the reach of RNG as a cleaner alternative energy and fuel solution. Our investment will enable GreenGas to further develop biogas capture and cleanup systems that currently contracted and future RNG supply partners and help GreenGas fund incremental transportation capabilities as the business continues to grow. Our partnership is focused on two near-term opportunities. First, we will accelerate the application of our ANG technology for the storage and transport of natural gas. We are currently engaged with GreenGas to launch a pilot program to deploy the first use of an activated carbon bulk storage tank to demonstrate the system's efficacy. Second, our collaboration will facilitate the use of RNG as part of our ANG vehicle platform by offering our fleet customers broader access to the greenhouse gas reduction benefits of RNG when used as a transportation fuel. We are uniquely positioned to leverage our expertise as an operating and technology partner for GreenGas. Our investment gives us a foothold in a rapidly expanding RNG industry, an industry in which we see tremendous overlap with Ingevity's purpose to protect, purify, protect and enhance the world. As we continue to pursue strategic partnerships and investments across the RNG value chain, we believe GreenGas has a substantial runway ahead of them, and we are excited to work with their outstanding management team to further grow this business. At this point, I'll turn the call over to Mary.

Thanks, Erik, and good morning. It's great to speak to you all today as part of the Ingevity team. I'll now briefly review our financial summary, which you'll find on Slide 8. Overall, this slide highlights our continued strong financial position, which reflects our solid business performance, combined with our discipline in managing costs and leverage. The stronger sales performance in the quarter led to its sequential and year-over-year increase in trade working capital, driven primarily by the increase in accounts receivable. This is the primary reason why our operating cash flow and free cash flow were down versus last year. Also, as you know, our working capital generally increases in the first half of the year as we prepare for paving season. We remain focused on careful management of working capital to optimize operating cash flow. Our leverage continued to improve, with a net debt to adjusted EBITDA ratio of 2.39x at the end of Q1, down from 2.45x at year-end. Our weighted average cost of debt was approximately 3.7%, and we have no meaningful debt maturities until 2023. We will continue to be opportunistic with share repurchases in 2021 as we were in 2020. In Q1, we repurchased $39 million of shares, bringing our total repurchases under our share repurchase authorization to $127.4 million, leaving approximately $373 million available. In summary, our balance sheet is strong, and we have ample liquidity to support our organic and inorganic growth initiatives. And now back over to you, John.

Thank you, Mary. On Slide 9, I'd like to review our revised guidance for 2021. Based on our strong first quarter and continued optimism, we are increasing our fiscal year 2021 guidance for sales to be between $1.275 billion and $1.325 billion and adjusted EBITDA to between $410 million and $430 million. As our performance continues to improve, we are watching issues related to transportation and logistics, raw material inflation and automotive material disruptions that could become stronger headwinds throughout the rest of the year. Our intention is to address these issues as we always do, head-on through strong execution. We will pay close attention to supply and demand in the market and both pass-through costs and price our products appropriately to ensure we get the value we deserve. We believe deeply in the strength of our reenergized Ingevity 2.0 strategy and our team's ability to execute on the opportunities ahead. Our production of soy-based products, the sale of honeycombs into health and safety applications and our investment in GreenGas are all examples of how we are positioning Ingevity for the future by entering adjacent growth markets where our assets and technologies provide us a competitive advantage. We intend to remain a best-in-class company as measured by growth, profitability and return on investment. Before we end the call, I'd like to encourage you all to attend the second webinar in our series for investors and analysts this year, which occurs on May 26. We will focus on the end users, growth opportunities and strategy for our Engineered Polymers business. In closing, I appreciate the work and efforts of our 1,750 employees worldwide. They are a distinct competitive advantage for us. We continue to believe very strongly in the long-term potential of our company. We hope you share our enthusiasm for Ingevity. At this point, operator, we'll open the call up to questions.

Our first question comes from John McNulty with BMO Capital Markets.

I guess a question just regarding the overall seasonality of the business. I mean, normally, when we look at your core platform, typically, first quarter is about 20% or so of EBITDA. Is there anything that would, given all kind of the wonky moves that we're seeing in terms of like shipping channels and supply chain issues and what have you? Is there anything that dramatically shifts that? Or should we expect the usual seasonality with the help of paving coming in, in 2Q and 3Q, et cetera, et cetera? How should we be thinking about that?

Yes, that's a good question, John. There are quite a few unusual movements happening as we navigate through this. The seasonality will continue to be a factor. We are ramping up and, as I mentioned earlier, we have had a decent start. We are optimistic about the paving season, and it looks promising at this point. However, we also have challenges. Engineered Polymers had a very strong start with impressive performance, and we hope that trend continues, but we need to see how the year unfolds. We must determine how much of that performance was due to restocking compared to more sustainable, fundamental sales. So, while we feel positive, we want to proceed carefully. Additionally, there are unusual dynamics in the auto market that will persist throughout the year; it's important to remember that the first and second quarters are easier comparisons compared to last year. Meanwhile, there was a notable recovery in the third and fourth quarters of last year, and we will need to assess how the chip shortage affects comparisons year-over-year. Overall, at this moment, we feel quite optimistic and we're off to a strong start.

Okay. No. Fair enough. And then, I guess, with your cash flow and your balance sheet improvements are, if anything, probably ahead of where we would have expected, and you're really making some pretty solid progress. I guess can you speak to how you're thinking about capital allocation as we look through this year and into next year, give us maybe an update in terms of the M&A pipeline? And also how you're thinking about buybacks. You obviously took some shares down this past quarter. And I guess how should we think about the potential for more of that as we go through the year?

Yes. No, sure. I mean, look, as we've said, I mean our capital allocation hasn't really fundamentally changed. We do view ourselves as having a lot of growth opportunities in front of us. And I think you'll see us continue to invest in those. I mean the investment strategy really will be a series of probably a number of smaller, more modest investments as opposed to something sort of larger, given the state of the M&A market and also the opportunities that are in front of us, right? So you'll see us invest, but it's not mutually exclusive, right? I mean this is a great quarter. And as an example, we invested, we also paid down or reduced debt and we bought back shares, right? So we're going to remain flexible. I think it is important for you to realize, though, that we are going to buy back shares when we think we have an opportunity to buy our shares at what we consider to be a value or a good price. But we think we can sort of do all three as the opportunities present themselves.

Got it. That makes sense. And maybe just one last question. When we think about the potential for an infrastructure bill, which admittedly, there's kind of a lot of fuzziness still around it. But I guess, how should we think about when the bill is announced and it's a little bit more definitive, how long it would take for your paving business to actually feel the real uptake at that point? Is it a 6 to 9 months thing? Is it multiyear?

It obviously would be a great tailwind, John. I mean the truth of the matter is funding projects for infrastructure. There's typically a seasonal lag, right? I mean the good news is that the projects that we're seeing for this year are pretty fully funded and ready to go. And so we have good line of sight into that. To the extent we get an infrastructure bill, that just bodes well looking forward into the future, 2021 and beyond. So we'd love to see one, but it's not going to necessarily change our outlook for 2021.

Our next question comes from Jon Tanwanteng with CJS Securities.

Great quarter and Mary, let's get working with you.

I'm here.

John, can you talk about what's built into your guidance at this point? I mean, it looks like you raised the year by the same amount that you beat the expectations by in Q1. Is that more of a comment on the level of demand, maybe not getting better or were sustaining through the year? Or is it more of the input prices just eating up all the upside?

No. Look, I know you're going to ask that question, Jon. So look, obviously, it's a dollar-for-dollar uptick, right? But I think I would interpret it as optimism to where we think the rest of the year is going. We obviously entered the year, there were a lot of uncertainties, right? The good news is, is vaccines are underway, and it felt like things were recovering, but the auto industry has had some issues. And it was unclear to us exactly how the recovery in the Performance Chemicals business would sort of unfold. But sitting here today, it feels good. And I would say our risk position is probably skewed more to continued upside than downside. But you know us, I mean, we're not going to overpromise or be aspirational. We're going to tell you guys what we think and what we feel we can deliver. So we did raise. We think we're off to a good start. Let's see how the rest of the year goes. We're one quarter in.

Okay. Fair enough. And then can you just talk about the soy feedstock business a little bit more? I know you've been trying to do that for a little bit now. Just how big can that business be? How much of the capacity is utilizing? And are the margins similar to your CTO-based business at this point?

I'll share some insights, and Mike can add to it as well. The main goal here is to ensure we maximize the utilization of our current network. We have the capability to run soy alongside CTO at one of our facilities, which will give us some additional capacity, and that's a positive development. I believe this could lead to a market worth between $20 million to $30 million, though that won't happen this year; it's something to aspire to in the future. However, our focus isn't limited to just soy; we're exploring other feedstocks as well. It's possible we might exceed our expectations regarding market expansion. For now, that's our current focus. Mike, do you have anything to add?

Well, the only thing I'd add to that is I think that there's a really interesting opportunity throughout our derivative product line. So we've got a lot of, obviously, TOFA-based derivatives that we have the opportunity to either displace or augment with SOFA and free that up for the market. And from early looks, there may be really interesting value-added derivatives that we can make that have better functionality or improved functionality compared to TOFA-based ones in our current market. And that spans oilfield, industrial and pavement opportunities. So we're going to continue to evaluate the opportunities, both with SOFA and also for a broader range of derivatives.

It's a pretty exciting opportunity, Jon. I mean, it gives us a lot of flexibility and a lot of growth avenues. So we'll see how it evolves. But it's encouraging. I mean, my hat is off to Mike's team; a lot of effort and energy has gone into this, and we'll just see how it unfolds here over the next 18 months.

Okay. Great. Just one more, if I could. The GreenGas business today. How big is that? And kind of where do you see that in like 2 or 3 years?

It's still in the early stages with only a few customers. While I don't want to make any official forecasts, we believe this stand-alone opportunity could generate $50 million to $60 million in revenue over the next four to five years, based on the current configuration of GreenGas.

Our next question comes from Daniel Rizzo with Jefferies.

So I was just looking at Performance Materials margins that took kind of a big step forward. I assume with the increase in Tier 3 standards. I was wondering if we're getting kind of close to peak here, where any growth from here would be marginal or if there is another step change possible.

Well, Ed is here with me, and we've debated whether we should have accepted responsibility for the comments we made last year. Ultimately, Dan, our goal is to maximize margins every quarter, month, and week. We are operating at full capacity, and we have noted some effects on demand. It's possible that if demand were stronger, we could have seen more upside. However, we are satisfied with our current position. We will strive each quarter to maintain the highest margins possible, and we had a solid quarter.

Okay. I think that's very helpful. And then just one more question. So obviously, the focus is on national infrastructure bill. I was wondering if local infrastructure is kind of in a boom phase now or should be going forward, just given some of the federal funding that's now going towards the states, if that could potentially be a tailwind as well?

I think when it comes to federal funding towards the states, the fact that had been reinstated and that support is there is very promising. We were a bit concerned, as you may recall, last year, with state gas tax being significantly reduced, and if that could have an impact. And fortunately, that seems to be behind us. We're happy with the backlog of projects as we enter this year. As John mentioned, if the significant infrastructure bill gets passed, that's only going to provide further tailwinds and more growth opportunities in the years ahead.

Our next question comes from Ian Zaffino with Oppenheimer.

Great. I wanted to kind of touch up on maybe a little bit of a forgotten business now that it's been slammed inside of Industrial Specialties, but energy prices are way up. Some of other people operating in that space have positive comments about oilfield. How are we thinking about the cadence of that going forward? And maybe like what are you seeing maybe into the second quarter and into the back half of the year?

Yes, sure, Ian. The sequential performance has certainly been better than we had anticipated at the end of last year. The first quarter comp naturally is a very tough one because, as you know, the first quarter last year was really not impacted by demand. But as we look towards second quarter, third quarter compared to last year, it's up, and on a sequential basis, it's also improving. So the improved pricing is very positive and should support investment, and it's really a matter of really seeing ongoing increases in demand and continued strong pricing. So we get further investment in drilling. But we're optimistic that on an ongoing basis, it will improve.

Well, just to be clear, that's not a forgotten business, Ian. It remains a good, credible, strong source of demand for TOFA for us, and that's how we view it. It is another alternate end market that we have to weigh against other end markets. As we think about the business, we see that segment having an Engineered Polymers business, an Asphalt business, and a Pine Chemicals or Industrial Specialties business. So don't misinterpret what we're doing as any indication that it's less important.

No, clear. It's a very important application within Industrial Specialties.

Our next question comes from the line of Chris Kapsch with Loop Capital Markets.

The first question is regarding the margin profile in the Performance Chemicals segment. You mentioned that pricing is gaining traction in both rosin and TOFA, but year-over-year margins were down, despite what should have been a positive contribution from the strength in Engineered Polymers. I'm curious if you can elaborate on what we're observing here. Is this simply a lag in pricing pass-through or a result of pricing realization on higher CTO costs? Any insights about this dynamic as we look ahead to the upcoming quarters would be appreciated.

Yes. I think you made an important point there on the pricing dynamics as we move forward. If you think about our pricing in the first quarter, as you can imagine, a lot of that is actually set at the end of last year, tough competitive environment, and that situation fortunately has changed. So our price realization in the first quarter was not really all that significant, especially on rosin. We had some modest improvement on TOFA. But what we see going forward, second quarter, and especially as we get into the second half of the year, as our contract commitments unwind, much more significant price increase capability. And realization. But during the first quarter, we did realize and got hit with increasing raw material costs, whether it be cyclohexanone with an Engineered Polymers or some CTO inflation. And so we're working hard to offset that. And as we said, especially as we get in the second half of the year, we're going to have significant more price realization in Performance Chemicals.

Okay. And just on the guidance, I'm just wondering if you can comment on what was contemplated in terms of North American auto builds, given how important that is, particularly in light of Ford's comments last night on their curtailments of production in the second quarter. How much visibility do you have into knowing that was coming and either with them or other OEs because I imagine it's going to be similar announcements?

Yes, Chris, this is Ed. Just to comment a little bit. Ford, obviously, taking a hit in Q2. If you look at what GM did, their impact was probably more focused in Q1. So you kind of think of these chip issues as kind of rolling through the year in various waves and cycles. But ultimately, Ford is a large customer of ours, a very important customer. That being said, we are a global business, and we're seeing growth outside of the U.S. that will help support the quarter, and relatively we'll continue to monitor the issue. But at this point, we feel we're in pretty good shape.

We obviously had the benefit of their comments, Chris, before this call. So to answer your question, we're not surprised.

Right. So, regarding the full year guidance, if there are production shortages today, it simply means there is unmet demand for the future. Is that what is indicated in the full year guidance?

Yes, to address your question about the auto market, we are optimistic overall. We just completed a fantastic quarter and are very pleased with the progress in the Engineered Polymers business. They've made significant strides. However, we need to see if this success can be maintained. We feel positive about the outlook, but we will wait and see. As I mentioned earlier, if you ask me which way I lean, I would say we are more optimistic than pessimistic, but we typically take a conservative approach in these matters.

Our next question comes from Paretosh Misra with Berenberg.

Can you talk a bit about your work on developing feedstock for renewable diesel? Any progress that was made during the quarter?

Well, there's not a ton to report, Paretosh. Only that we obviously are working to certify our feedstocks as something that would go into that marketplace, right? So when and if that becomes economically viable for us relative to other opportunities that we have, we would begin to take advantage of that market. We're ready. It's just that market is going to have to evolve.

Got it. And then just as a follow-up on earlier question on your commercial production for that soy-based fatty acid feedstock-based products. I'm sorry if I missed those comments, but how does that change the cost and pricing equation when you're using that feedstock versus the alternatives?

Well, it hasn't yet because it's still in its nascent stages. So just to be clear, right? But as Mike alluded to, I mean, we do have an opportunity potentially in certain of our products to offer a SOFA substitute, right? And our expectation would be that we would maintain our pricing and even potentially in some markets do better; it's interesting. And Mike, you can chime in here. But SOFA, in some end market applications, actually might be more efficacious or stronger or better product than actually TOFA, right? So we want to make sure that we get that value for that in those end markets. I don't know, Mike, if you want to.

No, the only other thing I'd add that John had mentioned earlier is that we've been doing a lot of work from our technology team and our operation teams, and we have essentially free capacity by utilization of some of our distillation capabilities. So on the margin, that's a great cost position to be in. And we're going to make sure we understand these markets and the opportunities and the value these products can deliver and make this as good a business as it can be.

Our next question is coming from the line of Garo Norian with Palisade Capital Management.

I wanted to know if you could provide more details about the Engineered Polymers business. It seems like this is definitely the strongest quarter since you acquired the business, and I'm curious about your perspective on whether you're making progress in developing some of the products you've been focusing on, or if the improvement is mainly due to a rebound in end markets. Any insights on the situation would be appreciated.

I'd say I think the team is making great progress on getting more technology adoption for the products that they've been working on for the last couple of years. There were some challenging end-use demand dynamics from the middle of 2019 until the end of last year. So we naturally do have some improvement in end-use demand dynamics, but also the technology adoption for the specialty applications, high functionality, caprolactone products has been great. We mentioned a couple of applications, such as electronic vehicle batteries. So that's really been positive. We've got the specialty film coatings for automobiles that really seems to be taking off medical devices picking up. So very broad-based technology adoption and overall demand increases really resulted in this business getting turned around, and we're confident that a large percentage of that is highly sustainable through the year. There may have been some pipeline fill in the first quarter. But what we see when we look at our order books and the new customers coming in, we're very encouraged by the technology adoption and demand growth for the business.

That's great. And I think you had mentioned particular strength in Asia. And I'm just curious, for that business, can you remind me what the rough kind of geographic exposures are? And if I recall, historically, you were talking about maybe even bringing some production into North America and didn't know where that stands?

Yes. So let me answer the last question first. We are bringing production of polyol derivatives into North America. We are going to be building a polyol production facility at our DeRidder, Louisiana. So that project is underway, and we would expect that to be online roughly end of the first quarter of next year. And so as you also nailed, this business, the Engineered Polymer business is fairly geographically balanced. So we've got, let's say, 40% Europe, 30% Asia, 30% Americas. And Asia, in this particular quarter, in a very strong quarter, where all regions were up over 10%. Asia was up the strongest on a percentage basis.

We have no additional questions at this time. So I'd like to pass the floor back over to Mr. Hamilton for any additional closing comments.

Thank you, everyone, for your time and interest this morning. We remain very positive about our long-term business outlook, and we look forward to talking with you again next quarter.

Ladies and gentlemen, this does conclude today's teleconference and webcast. We thank you for your participation, and you may disconnect your lines at this time.