Ingevity Corp Q1 FY2023 Earnings Call

Good morning, or good afternoon, everyone, and welcome to the Ingevity First quarter 2023 Earnings Webcast. My name is Adam, and I will be your representative today. I will now hand the call over to John Nypaver to begin. John, please proceed when you're ready.

Thank you, Adam. Good morning, and welcome to Ingevity's First Quarter 2023 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; and Mary Hall, our CFO; our business leads which include Ed Woodcock, President of Performance Materials; Rich White, President of Performance Chemicals; and Steve Hume, President of Advanced Polymer Technologies, are 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 in the business segment results for the first quarter. John will then provide an update on guidance followed by closing comments. With that, over to you John.

Thanks, John, and hello, everyone. On Slide 4, you can see our highlights for Q1. After a slow start, we put up a solid quarter. The quarter ended with what we would consider more normal sales levels. However, it was not enough to offset the weakness of the start. This manifested itself in lower volumes in all of our businesses except Pavement Technologies. We did have a number of positive developments in the quarter. Auto production started picking up in North America, which is obviously good for Performance Materials and also for APT, which also sells a lot into the automobile industry. Another positive for APT was that we saw higher demand for bioplastics in the U.S. Pavement Technologies enjoyed strong organic growth in the quarter, which is good news for Performance Chemicals. But the quarter also had its challenges. The slower China recovery affected all the business segments in some way, and we're still seeing some customers who have not restocked to normal expected levels, most acutely in the adhesives markets. As we have discussed, CTO prices continue to rise in the quarter, offsetting gains we have made in reducing costs elsewhere. When comparing the last year, remember that Q1 2022 was a record for both revenue and EBITDA as demand was picking up and inflation hadn't quite peaked, which allowed us to raise prices to offset higher input costs. It is a tough comp. This is the first quarter we get to share the details of the business line formerly known as Engineered Polymers. The segment is now called Advanced Polymer Technologies, or APT for short. The new name better reflects what we do today and where we are going. We produce specialty caprolactone products with tremendously sustainable characteristics, including improved durability and biodegradability in its end users. By separating this segment, you'll be able to see the strength of this business and the growth opportunities and improved profitability. It's exciting stuff. In the quarter, we continued a number of key strategic moves to transition and better position our Performance Chemicals business for the future. Ingevity has a long history of innovation and execution. As market demands for CTO-based products have evolved, we are evolving too. Hopefully, everyone noticed our filings regarding the extensions of our long-term supply agreements for CTO from both Georgia-Pacific and WestRock. These agreements provide us with the certainty of supply to fully run our Charleston and DeRidder plants well into the future. These plants will continue to support our existing chemical customer base while also entering the biofuels market. In April, we shut down Crossett to transition its production fully to alternate soy, palm, and canola fatty acids. We expect the plant to be back up in the next few weeks. These products will offer a broader array of alternatives to our existing customers while also enabling us to enter new markets such as personal care. This strategy should drive our plant utilization rates and resulting volumes up by over one-third when we complete this journey. I'm very proud of what has been accomplished so far, but this transition of products and markets will continue through the remainder of the year. However, when complete, we will emerge a stronger and better company. With that, I'll turn it over to Mary to discuss this quarter's financials.

Thanks, John, and good morning, all. Please turn to Slide 5. Sales were up 2.6% for the quarter as Advanced Polymer Technologies and legacy pavement had year-over-year revenue growth. Plus, we had the benefit of including the Ozark road markings business in this year's numbers. Adjusted gross profit was lower by 250 basis points as lower volumes and higher input costs, primarily for CTO, outpaced price increases. SG&A was up about $7.8 million, excluding depreciation and amortization, due primarily to employee-related costs. Adjusted EBITDA for the quarter was $103.9 million, down 12.7% as a result of the gross margin pressure and increased SG&A, but adjusted EBITDA margin remained solid at 26.5%. Diluted adjusted EPS of $1.09 reflects the margin pressure as well as the increased interest expense and depreciation and amortization associated with the Ozark acquisition. Turning to Slide 6, our free cash flow for the quarter was negative $20 million. The first quarter is typically a negative free cash flow quarter as it is usually our lowest earnings quarter of the year, and we build working capital for the seasonal paving upswing. 2020 to 2022 during COVID were the exceptions to this norm. Our net leverage is similar to year-end and reflects the Q4 Ozark acquisition. As we move into the second quarter, we expect to see our free cash flow pick up and leverage to improve throughout the year towards our year-end target of around 2.5x. We remained active in share repurchases, with $33 million of repurchases in the quarter. Turning to Performance Chemicals on Slide 7, it was a mixed quarter. Despite lower sales volume, primarily from rosin that is sold into adhesives, revenue was up over 7% to $186 million due to higher pricing across the segment and the addition of revenue from Ozark. The lower volumes led to lower capacity utilization, and combined with higher CTO costs and increased employee-related expenses negatively impacted segment EBITDA, which was down 34% in the quarter. In Pavement Technologies, we see the step-up in revenue that is primarily related to Ozark. However, the legacy pavement business did grow year-over-year. The legacy increase in sales was primarily outside of North America, and we continue to drive geographic expansion in this higher-margin business, which should also help reduce its seasonality. In Industrial Specialties, the themes are higher CTO costs and continued customer destocking, particularly in our adhesives product line, which we attribute to a weak consumer packaging market. We've talked for the last couple of quarters about higher CTO costs. To put it in perspective, in 2022, the price we paid for CTO increased by nearly 40% over 2021. The price we paid for CTO in Q1 of this year was higher sequentially than Q4, and we expect Q2 prices to be significantly higher than Q1. Higher CTO prices were the main driver of the EBITDA drop in Performance Chemicals in the quarter. We do expect pricing to level off towards the end of the year, but it will be a challenging year for Industrial Specialties and CTO is their key raw material. That said, as John mentioned, we reached a major milestone in our strategy to diversify raw material feedstocks by consolidating CTO processing in our DeRidder and North Charleston sites and dedicating our Crossett site to run a 100% non-CTO feedstocks, such as soy, canola, and palm oils to produce alternative fatty acids, or AFA. Beginning in Q1, we more than tripled our use of these non-CTO raw materials and products that we sell. So we are well on our way to mitigating the higher cost of CTO, but it will take some time to ramp up both for production and for customer adoption of AFA products. As we execute this transition, we expect results in this business will be choppy.

Turning to Slide 8. Here you see our new segment, Advanced Polymer Technologies, or APT, formerly our Engineered Polymers business within Performance Chemicals. They had a great quarter to kick off the year. Revenue was up 6%, and our focused management of prices and costs resulted in a 430 basis points improvement in EBITDA margin from last year, with particularly strong sales in auto and bioplastics. Great job by Steve and the team. This segment has a diverse geographical mix of sales, which was important in the first quarter as different regions had different paces of recovery. For instance, in the Americas, auto and bioplastics were strong, partially offset by weakness in Europe and Asia, particularly China. As we've discussed in prior quarters, we added polyols capacity to our Louisiana site last year in order to meet the growing North America demand for Capa products and to better serve these customers. In Q1, we saw a perfect example of this as a large U.S. company needed product in a very short time. And because we had U.S. capacity, we were able to fulfill the order within the customer's required timeline. Turning to Slide 9, you'll find results for Performance Materials. Of all the business segments, this one has the largest exposure to China, and China's slower-than-expected recovery resulted in lower revenue and EBITDA compared to last year, which was a good Q1, so a tough comp. It should be noted that this quarter's revenue is still one of the highest ever for the segment, primarily due to price increases. While China was slow, sales in North America were the highest in three years as auto showed signs of life. Segment EBITDA was down 10% to $70 million, primarily as a result of unplanned downtime at our China plant as we look to control inventory due to market softness there. Even with the lower EBITDA, margins were still 49%. In summary, Ingevity continues to produce top quartile specialty chemical margins even in the face of unprecedented cost increases for key raw materials. We can deliver this performance because of our unique technologies in each business segment, serving a wide range of end markets across the globe. In addition, we are taking the strategic actions necessary to diversify our raw materials and increase the operating flexibility of our fixed assets while developing new markets for our products. We saw the changing market dynamics in CTO coming and began our AFA transition about two years ago, and our execution plan is well underway. While the timing is perhaps not ideal, given the uncertain state of the global economy, we're confident we are setting the foundation for continued long-term growth at attractive margins. And I'll now turn the call back over to John for an update on guidance and closing comments.

We've made the decision to lower our revenue and EBITDA guidance for 2023. We continue to see increased CTO costs, and our strategy to deal with this has been explained to you. However, as Mary described, this CTO inflation is not insignificant, and we expect it to continue to sequentially increase each quarter over the course of the year, albeit at a slower pace in the back half of the year. Our decision to lower our guidance though is really being driven by softness that has materialized over the last few months in several of our other core markets. We do expect the paving season to be strong. However, the broader global economy appears to be weakening, and this is particularly true in China, where we have not seen the level of recovery that was expected even a few months ago. These trends are impacting both our Advanced Polymer Technologies and Performance Materials segments. The lack of robust restocking and its impact on sales volumes indicates a softer next several quarters. However, we expect both these segments to grow and increase margins, but not at the rates we had previously forecasted. We are adjusting our full-year guidance to sales between $1.75 billion and $1.95 billion and adjusted EBITDA of between $450 million and $480 million. We will also reduce our capital expenditures in this environment and focus on debt reduction. To the extent we do see some acceleration of an economic recovery in China or in the U.S., we would obviously be a beneficiary of that. Let me end by formally inviting all of you to our Investor Day on Monday, May 22, in New York City. John or Meredith can ensure you have an invitation and all the details. We are excited about what will be our first Investor Day in over five years. Senior management from across the company will present and showcase many of our technologies. At the reception, you will have a chance to touch and feel our products and ask any questions of our leadership team that you might have. We consider this day an important milestone for investors. Despite the near-term challenges of the economic environment, we view the changes in our markets as tremendous opportunities. As we transition both our legacy Pine Chemicals and Performance Materials businesses over the next 18 months, we will emerge a stronger, more customer-focused company that offers a range of solutions to the end markets we serve. We will improve our position as a best-in-class specialty chemical company with industry-leading financial performance. This Investor Day will be our opportunity to show you our road map. With that, I'll turn it over for questions.

Yes. Let's just spend a little bit of time on the guidance because there's a lot of moving parts. But how much of that is kind of implying the carrying costs, carrying the fixed cost and any noncapitalized expenses across the conversion?

Are you talking about transition-related costs related to the AFA?

Yes.

We will eventually pool those costs together and decide how to address them in the future. However, the guidance we provided today does not primarily include costs related to the transition. It mainly reflects our understanding that we are experiencing a decline in markets beyond just the adhesives market, as demonstrated by volume reductions across the board, except for the pavement business.

So if I started with the pressures from the CTO, it seems that CTO prices are not significantly different from where you set the guidance last time. However, it appears that there is a considerable lag impact in your contract structures if you are anticipating sequential increases throughout.

That's correct. You're looking at it the right way.

That's right. The CTO market and the spot market are probably softening a bit. The uptake in the biofuels market has been more muted this year due to the rapid increase in costs. There's a timing lag with our contracts, which is why we made our earlier statements. Regarding guidance, as Mary mentioned, we have a good understanding of what we'll pay for CTO throughout the year because of our contracts. However, this is now becoming more dynamic as we move closer to true market prices. The adjustment in our guidance is influenced by our expectations at the year's start, where we anticipated more upside from our other businesses to counter the CTO inflation. Right now, things appear a bit uncertain compared to the beginning of the year. China hasn't recovered as we expected, and while the U.S. is doing okay, it's not exceptional. We also haven't seen restocking on the adhesives. This situation could change, and customers may eventually need to start buying. Personally, I believe we should be conservative in our approach, avoiding overpromising as we see how the rest of the year unfolds.

The CTO contracts you mentioned may experience a typical lag of about a quarter regarding contract pricing adjustments. When examining the trend of CTO prices in the market, it’s reasonable to expect a significant uptick in Q2, as the major increase in CTO prices actually occurred in Q1, which we will experience in Q2.

If I could just ask a couple on Crossett briefly. So you mentioned soy, palm and canola fatty acids, those are more longer chain oleo chemicals. In the past, you've maybe acknowledged, if not mentioned proactively, the opportunity for something a little bit shorter chain. So just curious if this decision is more of a stepping stone for your AFA portfolio or if there are some other constraints to processing lighter oils at Crossett?

No, it's a stepping stone. I believe that in a couple of years, we will be offering a much broader range of both short and long chain products. We have discovered some really exciting opportunities that are crucial for product substitution for our existing customers and also for new market applications. This aligns with how we are reconfiguring Crossett to pursue these areas first. It’s exciting, and as Mary mentioned in our prepared comments, April has seen a decline, but we expect to see an increase soon. We won't experience the usual absorption, but as we build momentum throughout the year, it presents a genuine volume opportunity for the company. It will be a bit uneven as we transition.

And then just super quick on that because you did mention it recently. Wondering if it's now a higher priority to either come up with a plan for the rosin side of the Crossett asset base, whether that's an alternative feedstock or just minimizing any stranded costs associated with that?

Well, the beauty of those raw materials is they don't generate rosin.

But you have assets associated with processing the rosin cuts?

We do. But they're not fixed to an individual site.

This is on for John. So just given kind of the expectations for the big jump in China autos for Q2, just kind of wondering how you're thinking about the trajectory in PM and how steep do you think the ramp might be for the rest of the year?

Yes. Q1 was somewhat subdued in China due to the conclusion of incentives in December, which resulted in many vehicles being moved from Q1 to Q4. Therefore, Q1 had lighter production levels, but we anticipate growth throughout the year as China addresses chip shortages and supply chain challenges, leading to increased overall output. We have strong expectations for this growth, and we believe they will continue to produce internal combustion engine vehicles. We are ready to support these vehicles with the products they require.

And then how should we think about the puts and takes for free cash flow for the rest of the year given kind of spiking CTO, but then volumes are off?

Yes. So we see a pretty normal pattern for free cash flow this year. Again, free cash flow is typically negative in Q1, excluding the COVID period. So really, no surprise there. We held the guidance, I'm sure you noted, on free cash flow and debt reduction and feel good about that. And sometimes we get the question, well, what about if the recession does play out, things continue to slow down, how does that impact free cash flow. And as you know, in this business, actually, if we really got into a recessionary scenario, free cash flow improves because then you're not building inventory, you're not building accounts receivable. So we are holding steady on that free cash flow projection and feel good about it.

The next question comes from Jon Tanwanteng from CJS Securities.

My first one is on the APT business, which I'm happy you guys are breaking out. Historically, that's been a fairly high-margin business. And I know you have the price increases and maybe some weakness in China and some other places to start the year. But where do you see that ending the year just given the strength of demand there? What your recovery expectations are from volume and just that activity perspective?

Yes. I mean, look, as we talked about, Jon, in last quarter, and we'll talk more, I guess, during the Investor Day, I mean it is a high-margin business with great secular tailwinds behind it. It did have some issues over the last year or so because of all the challenges that were going on in Europe, whether it was Brexit or natural gas, energy, a lot of different challenges, freight and logistics. I think you can see in the fourth quarter of last year and first quarter of this year that it's gaining a lot of momentum. We would like to see that business to be sort of in the mid-20s, which is where we're headed. And we're on that journey, and I think you'll see it manifest itself over the course of the year.

And then just a question on the non-CTO, the AFA businesses that you're getting into or turning the string over to. Are the margins there better today than on your CTO-based derivatives? Or if not, can you describe the economics you're getting there? And as a second part of that question?

Our expectation is that the margins that we will produce from AFA will be better or at the levels of what I would call sort of our normalized historical margins. The margins today, obviously, because of the CTO price escalations and our legacy products are under some pressure, right? But we believe that once we get the AFA, you get the plant fully utilized, get the absorption cost, get the pricing dynamics properly beaten out into the market, we will find ourselves with a business that's got margins comparable to what has been sort of our historical normal margins. And to add on to that?

Jon, I'd like to elaborate on that. As you know, our previous business focus was primarily on derivatization. We used to only discuss soy, but now we're also looking at canola and palm. When we consider the various short chain and long chain fatty acids, the key question is how and when we will further derivatize them to extract the value we have traditionally associated with our business.

And when do you expect to complete that transition to the full 100% usage of AFA?

As I mentioned earlier, our goal is to have this transition completed by the end of the year. Whether we can reach full volumes by then remains to be seen. However, we're committed to making this transition happen by the year's end. We have sent out hundreds of product samples and are making rapid progress, which is quite impressive. You'll see more at the Investor Day. While this might be a bit controversial for our company due to our history, some of the new products, like the canola fatty acid, are indeed superior to our legacy fatty acids. Additionally, since canola is a more transparent raw material, we have high expectations for its long-term potential. It's simply going to take some time, as transitioning takes a little while.

And just to clarify that end of year, is that just the changing of the facility itself or is that including qualification?

No, the facility will be cut over, hopefully by the end of this month, right? But in terms of getting volumes back up to a more normalized level where we can get the absorption for the plant, it's probably going to take truthfully to the end of the year.

I had a couple. Just wanted to make sure I understood the guidance reduction. You're attributing that to incremental softness at either materialized or sustained in the APT and PM segments. Or is some of that also attributable to incremental softness in adhesives within Pine Chem and/or incremental CTO?

No, it definitely includes adhesives, Chris. Yes. I would characterize it as an incremental softness across all of our businesses, with the exception of maybe Pavement Technologies.

Versus when we spoke at the end of February.

And not attributable to incremental inflation in CTO, correct?

Well, we've been quite transparent. The difference between this year and last year includes CTO inflation, but we've accounted for that from the start. What has changed over the last quarter is the continued weakness in other markets. The CTO market has shown some improvement compared to a quarter ago, but it's still not significant enough to impact overall results. The main concern is with the other markets, as we have yet to see a recovery in China, and the U.S. market remains relatively subdued.

And then on the CTO inflation, can you just remind us, presumably where you can, you would try to push along pricing. I'm assuming the biggest challenge is in the TORrosin side. Are you able to get pricing through on TOFA and TOFA derivatives or is that becoming also challenging, given the macro?

Yes. Chris, we still are seeing good pricing in our TOFA and fatty acid markets as well as the merchant and derivatives products. We will continue to push that as we see fit, but know that there certainly will be an upper limit, as on anything else.

We haven't really decreased rosin pricing. It's just that when you examine our waterfalls, it has been more about volume. We've noticed some declines in volumes.

And then if I could ask a question about the press releases that came out with WestRock looking to shut the mill there in North Charleston.

Yes.

You guys have a fence line relationship. If I look at their materials, it looks like their overall mill capacity may just represent less than 4%. So I don't know if that's a commensurate level of the?

You can't look at it that way, Chris. The contract we mentioned in our press release with WestRock regarding crude tall oil remains unchanged. Their shutting down this mill will not affect us concerning crude tall oil. There is another product, lignin, that we obtain from this mill, but we have alternate sources to replace that through other providers. What will impact us, however, are several shared services, such as utilities, power, steam, water, and managed wastewater, which we will need to move to independent or stand-alone use. We have done this many times before. For instance, at Wickliffe, there was a paper mill down the road. We co-locate today with Covington in Virginia, and if you look at Crossett, it is a Georgia-Pacific mill just 1.5 miles away. We know how to handle this, and while it will incur some incremental costs, it will not affect our operations at the site at all.

So it doesn't change anything logistically in terms of sourcing feedstock? It's just about some incremental costs because it's just co-location?

We will need to purchase additional lignin from third-party suppliers. However, this will only involve some logistics-related costs.

And I'm assuming that since their decision is for August, you were aware this was happening, so these additional costs have been included in the guidance? Is that correct?

The answer is that we have been an independent company from WestRock since May of 2016. While we share a heritage and are co-located, we have been monitoring the mill's performance along with its opportunities and challenges for a considerable time. The decision to take action does not rest with us; it is up to WestRock. However, we have always had to plan for the possibility of this occurring. This is not a new situation in this industry. The moment has arrived, and we now need to execute the plans that we have in place.

Just a follow-up on that WestRock question. I mean, do you see any incremental cost pressure in the overall CTO market coming from this closure or...?

No, not really. There will be some reduction in the global market, but it's pretty minimal. This plant did not produce a lot of CTO.

Their CTO, Ian, was less than 1% of the total market coming out of that plant.

Coming out of that plant. But let me be clear, it will not impact our relationship with WestRock.

Regarding the AFA transition, once completed, what percentage of raw materials will be sourced from AFA compared to CTO? Also, what is the target for the raw material mix between CTO and AFA over the next 12 to 18 months?

Yes, this is important, Ian, and I'll address it, with Rick able to add his thoughts as well. Looking back over the past four to five years, our capacity or asset utilization has been about two-thirds. In other words, we have been operating a three-plant network, with each plant functioning at roughly two-thirds capacity. What we're planning is to shift that capacity to Charleston and DeRidder, allowing those plants to operate at or near maximum utilization. This will enable us to load Crossett, leading to a one-third increase in volume over time. This presents an opportunity for us in terms of revenue, volume, and raw materials. Once we achieve full utilization, approximately one-third of our raw materials will be sourced from non-CTO related options, and similarly, one-third of our sales and profitability will also derive from non-CTO sources. That is our goal, and this change will also result in us being one-third larger than we are currently, as that capacity has not been fully utilized.

When I look at your outlook for the year, which is between $450 million and $480 million, considering the weaker environment and the slowdown in the U.S. recession, it appears you expect to maintain flat growth or potentially see a slight increase. This seems like a solid outlook given the current challenges. What are your thoughts on any additional risks to volume in each of the businesses? We've heard a lot about destocking, which you mentioned briefly, but do you see any other risks affecting that outlook for the year?

I think one of the benefits of adjusting our guidance is that we can set new expectations. We've aimed to be balanced, and as we assess the current situation, we notice some weaknesses. Fortunately, our earnings report comes a bit later than some other companies. By nature, we are conservative, so we've adjusted our guidance to numbers we believe are achievable at this moment. However, if significant events occur, like a worsening situation in Ukraine or issues in Taiwan, or even a debt default, those could impact our outlook. These external factors are not accounted for in our guidance, but the existing and expected economic weaknesses are reflected in it.

And then for Performance Materials, are you still looking for some growth in auto build this year? And I guess that if China continues to recover, the second half will be stronger than the first half for its materials?

I think as you listen to the OEMs and as they talk about chip shortages and issues still in the first half, our expectation, and I think what we see in the marketplace, is that we're expecting the chip issues will be in a much better position in the back half of the year. And so we're planning to run at full rates based on what we've got coming up in the back half of the year.

And then one follow-up on Advanced Polymer Technologies. It's a business where customers want to innovate potentially. Do you still see that activity in this environment? And is that some upside potential as the year unfolds for that segment?

Yes. I mean, that's a good point. I mean the answer is yes. We do continue to see a lot of innovation and development going on. We continue to see a lot of innovation and work being done. We're really excited about sort of the next-gen applications that are associated with this. And we have great expectations and aspirations for that business and there probably is some upside, assuming that the economy continues on as we forecasted.

I have a couple of quick questions. Have you ever considered how to grow the spot market for CTO? Is that something that comes up occasionally?

Go ahead.

Yes, we procure about 15% of our CTO from the spot market on an annual basis and have been doing that for some time now.

And then more importantly, just something a little different. With the Advanced Polymers, how much of that is tied to the auto end market versus elsewhere?

Steve, you want to take that or?

Yes, I can take that. So the automotive market has always been an important market for this business. But in recent years, with the growth of the protective films, the epoxy materials have become more important. So we've kind of seen growth of about 25% of the business up to about one-third of the business now.

I'm sorry, 25%, what was the last thing you said?

25% to 30%.

Around about 30%.

So is it fair to say that a lot of the growth or a lot of the performance in that business is just coming from auto restock cycle? Is that kind of accurate?

I don't fully agree with that perspective because a lot of the work being done involves new product applications. The image displayed during the presentation was of a protective film that is very popular in Asia, especially in China. This is an aftermarket application, as their roads are rougher compared to those in Western Europe and the United States. Many people apply this film to their vehicles to prevent damage from stones and other debris on the roads. This relates more to technology and product development rather than being solely linked to the automotive industry. Furthermore, significant progress is being made with applications associated with electric vehicles, particularly in relation to these bounce choices, which can be likened to rubber shock pads that support the batteries. So, while there are benefits, it seems the growth is primarily driven by the expansion into new applications.

I believe that in the next few quarters, if there is a rebound and stronger recovery in China, APT will also experience a more significant bounce back, particularly due to its exposure to the auto sector and the products mentioned in China.

Any thoughts on sequential expectations in Q2? I know pavement is usually up maybe from China improvement, but maybe more than offset by CTO, the transition these are going on. Just help me understand the puts and takes of what you're normally seeing on a seasonal basis this year?

Yes, I believe we've tried to explain the situation clearly, Jon. We're facing significant CTO inflation in the traditional Inspection markets. While we anticipated growth in oil fields and are seeing some positive developments there, we're also experiencing downward pressure on adhesives, which is impacting opportunities in other traditional Inspection markets more than we expected. It's unfortunate, but that's the current reality. I believe Pavement Technologies will continue to have a strong year. It performed well last year and is off to a great start this quarter with their hard work. We are optimistic about that segment. Regarding Advanced Polymer Technologies, the growth we witnessed in Q1 is likely what we expect for the entire year, with some chance for additional upside, although we are aware of its sensitivity to broader economic conditions. As Ed mentioned, the auto business is expected to improve compared to last year, but not as much as it would have in a stronger economic climate. As we mentioned earlier, both APT and Performance Materials will grow, and our margins will improve, just not to the extent we would see in a more typical environment. Those are the key factors to consider.

I want to add one more point regarding the pavement business, which now includes Ozark. It seems that some analysts and others we've spoken with may not fully recognize the seasonality associated with Ozark. We're referring to asphalt paving and road markings, and once snow covers the ground in the northern half of the United States, road work comes to a halt. Therefore, the seasonality we've previously discussed in relation to Pavement applies to the entire business line that now encompasses Ozark. Please keep this in mind when you're modeling.

And if I could switch gears a little bit. Could you just give us a little bit more of an update on Nexeon and how that investment is doing and how the business there is doing? I've seen a lot of its competitors receiving a lot of funding, offtake contracts. Can you talk about where they're standing, the progress with the development of customers, you know, funding and then getting into new applications?

Yes. Nexeon is a privately held company, and we respect that, obviously, but they are continuing to test our products. And as we continue to work with them, we're going to help them with their overall projects. Nexeon is what we consider to be the leader in silicon-based composite anode materials. And as we want to integrate with them, we are working hard to evaluate different samples, and we expect to see something in the next, what, four to five years from an activity standpoint. But in the meantime, we continue to work with them to develop new products for their applications.

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

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.