Good morning or good afternoon, everyone. Welcome to the Ingevity Second Quarter 2023 Earnings Call and Webcast. My name is Adam, and I will be your operator for today. I will now hand the floor over to John Nypaver to begin. So, John, please go ahead when you are ready.

Thank you, Adam. Good morning, and welcome to Ingevity’s second quarter 2023 earnings call. Earlier 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. Actual results or events may differ materially from those projections as further described in our earnings release. Our agenda is on slide three. Our speakers today are John Fortson, our President and CEO; and Mary Hall, our CFO. Our business leads Ed Woodcock, President of Performance Materials; and Rich White, President of Performance Chemicals are available for questions and comments. Steve Hulme, President of Advanced Polymer Technologies is away on business travel, so John will field any APT questions. John will start us off with some highlights for the quarter. Mary will follow with a review of our consolidated financial performance and the business segment results for the second 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 four you can see our highlights for Q2. The team delivered double-digit revenue growth while maintaining mid-20s EBITDA margins, a great outcome in this environment. Three of our four business lines performed well. Performance Materials had double-digit growth from last year, and we saw sequential growth as well. We were excited to see Nexeon, the company in which we invested $60 million last year, has announced an agreement to supply silicon anode material to Panasonic, one of the world’s leading battery companies. Additionally, overnight Nexeon issued another press release announcing their intention to build a manufacturing plant in Korea as well as a supply agreement with OCI. Nexeon’s silicon-based anode solution can increase the energy density of lithium-ion cells by up to 50%, increasing vehicle range and reducing charging time. This agreement validates the promise of Nexeon’s technology and its progress and development. We are continuing our joint development work with Nexeon to include our activated carbon in their solution. This is a great step forward in our multi-pronged approach to finding alternative uses for our carbon. The Advanced Polymer Technologies team continues to manage that business efficiently and effectively, increasing margins into the 20s even with sluggish economies in Europe and China, APT’s two largest markets. While volumes were down in lower-margin areas like footwear, we saw volume growth in the strategic areas we identified at our Investor Day, bioplastics and automotive applications such as paint protective films. Increasing recognition for the sustainable nature of our technology is supporting growth in bioplastics. Just recently, we added to our growing list of biodegradable certifications when our Capa Thermoplastic products were awarded the TUV Austria SOIL Certification for providing biodegradable solutions for agricultural and horticultural applications. Results in the Performance Chemicals segment reflect two very different business environments. Mary and I both focus on walking you through what is transpiring. Our Pavement Technologies business delivered a record quarter. Even excluding the addition of Ozark road markings, our legacy Pavement business had their highest sales quarter ever. The Pavement team is executing the strategy we shared at Investor Day. The team is expanding our footprint globally and generating higher volumes in Europe and South America due to technology adoption. The U.K. is quickly converting to having one of the highest warmest mix adoption rates in the world, which means less energy use and lower emissions when using our flagship product Evotherm. In Brazil, Petrobras Pavement plant is converting an entire refinery to include Evotherm. This is a terrific development as only 12% of existing public roads in Brazil are made from asphalt today. We are also adding new products and technologies to keep expanding our portfolio both in warm mix and pavement recycling to meet the evolving needs of customers around the world. Our Industrial Specialties business and Performance Chemicals, however, had a challenging quarter and faces a tough environment. As we have discussed, crude tall oil or CTO is the key raw material for this business and the cost of CTO remains near record highs. When we refine CTO, we get equal parts tall oil fatty acid or TOFA and rosin. While TOFA demand remains solid, the headwinds we highlighted in our Q1 call remain, namely a cheaper China recovery and continued destocking, or very slow restocking by customers, particularly in our rosin-based products such as adhesives. We are also seeing some adhesives customers shift to lower-cost alternatives. As a result, we have slowed down plant run rates to manage the inventory build in rosin, which has negatively impacted plant throughput and the availability of TOFA for sale. If you have followed us for a while, you know this business is cyclical. The difference now is the step change in inflated CTO prices, which we expect to linger for some time. On an annual basis, we expect this to be a $200 million increase in the cost of CTO compared to what we paid last year. We knew that these costs would increase over the course of the year and have built that into our initial forecast and guidance. However, at that time we anticipated we would be able to offset this cost pressure to a large extent through price increases as we expected end market demand to continue to be strong, following the trend we saw into late last year. As we all now know, industrial end-market demand has weakened throughout this year, particularly in our rosin end markets, but also in many other markets. As a result, performance in Industrial Specialties has deteriorated, and we are not seeing the offsetting strength in APT Performance Materials that we anticipated. To mitigate these pressures, we initiated significant cost reduction actions across the company at the end of the second quarter, which Mary will discuss in more detail. In the current economic environment, we will only recover roughly $100 million of the increased cost structure during the year. Our alternate fatty acid or AFA transition is critical to offsetting higher CTO costs over the long-term and it continues full bore. We continue to expand production and expect to surpass historic CTO run rates at the Crossett facility by this time next year. Our AFAs are currently being used in our existing products within Pavement Technologies in oilfield business lines. In fact, we are building new storage tanks to utilize more AFA in our pavement production and we are making inroads with potential customers on products that are new to Ingevity. We are also investing in talent to support this transition, adding a lead commercial officer to help accelerate our entry into these new markets. Mary will provide more details on our quarterly performance and I will cover the expected impact for the remainder of the year and beyond when we discuss our guidance later in the call. With that, I will turn it over to Mary.

Thanks, John and good morning, everyone. Please turn to slide five. Sales were up almost 15% as a result of stronger pricing across all segments and higher volumes in the Performance Materials segment and Pavement Technologies business line, and the addition of Ozark, which we acquired in Q4 of last year. If Ozark were excluded, sales were still up versus prior year. These positives more than offset the impact of volume declines in the Industrial Specialties business line and the APC segment. Gross profit was up slightly year-over-year, but adjusted gross margin was down about 440 basis points due primarily to higher input costs, particularly CTO, and the impact on plant throughput of lower volumes, particularly in Industrial Specialties. SG&A excluding depreciation and amortization improved to 9.5% of sales compared with 11.2% in the prior year. Adjusted EBITDA for the quarter was $120.7 million, flat to last year, with an adjusted EBITDA margin of 25.1%, a very solid result given the challenges we faced in the quarter. Diluted adjusted EPS of $1.41 is lower than prior year, due primarily to higher interest expense and depreciation and amortization associated with the Ozark acquisition and a higher effective income tax rate driven primarily by higher U.K. earnings and this year’s increase in U.K. corporate tax rates from 19% to 25%. Turning to slide six, you will see our free cash flow of $27 million for the quarter was a bit lower than usual for Q2, reflecting significant working capital increases in the quarter, particularly for inventory of rosin-based products and CTO as demand for rosin-based products continued to be weak in the quarter, and in response, we dialed back processing of CTO. During the quarter, we repurchased about $59 million of shares, bringing our year-to-date total to about $92 million, and while we continue to be opportunistic with share repurchases, we expect to focus on reducing leverage in the second half of the year while remaining disciplined in our capital allocation decisions. Also, as a result of WestRock’s announcement in May that they will be closing the paper mill co-located with our Performance Chemicals North Charleston plan, we expect to incur some additional cash costs and expenses as we transition previously WestRock managed shared services such as utilities to our sole use. For this year, we expect those costs to be between $15 million and $20 million, most of which will be incurred in the second half. We are continuing to evaluate the ongoing impact on our operating costs. As John mentioned in his comments, we are taking actions to reduce costs across the company to better align our cost structure with the business environment and we expect to see annualized savings from the actions we have already taken to be approximately $35 million, with $20 million expected to be realized in 2023. These actions include headcount reductions, renegotiating supply contracts, and a tight rein on discretionary spending, including travel. If business trends do not improve in the second half of the year, we are prepared to take further action. Turning to Performance Chemicals on slide seven. As John said, it was a tale of two business lines. Pavement had a strong quarter. A big piece of the year-over-year increase in sales is the addition of Ozark, but our legacy Pavement business alone posted a record quarter, driven by growth not only in the U.S., but also in Europe and South America. The strong demand for our sustainable products gave the team pricing power across all regions. Industrial Specialties volume was down in the quarter, primarily as a result of macroeconomic trends seen throughout the industry, namely continued customer destocking, weak demand for rosin-based products in particular, and the slower China recovery. We attribute roughly 20% of the drop in volume to customers moving to lower price substitutes such as hydrocarbons. As John said, due to the higher cost of CTO, we are on track to spend roughly $200 million more on CTO this year versus last year. The team has done a good job of capturing price, but with market weakness continuing, unlike last year when we covered the cost inflation, we now expect to cover only about half of this year’s inflated CTO cost through increased price. We want to emphasize that the major headwind for Industrial Specialties is on the rosin side, not TOFA. Rosin end markets are more susceptible to economic slowdowns, and those customers are more price sensitive since there are various substitute products available, as we are seeing with our packaging customers. Demand for TOFA is still strong. However, we slowed down the refining of CTO in order to reduce the amount of rosin inventory we are building, resulting in less TOFA available for sale. As a reminder, the transition to non-CTO feedstocks, what we call the AFA initiative, addresses this challenge, since other oleo feedstocks do not produce rosin. Turning to slide eight. Sales for Advanced Polymer Technologies were flat year-over-year. However, the team did a great job increasing prices and improving profitability, more than tripling EBITDA year-over-year. Volumes in North America were up for the quarter, but overall volumes were down primarily due to customers in Asia being reluctant to restock as a result of the uncertain demand outlook in the region and Europe’s ongoing industrial slowdown. Asia and Europe represent roughly 75% of APT sales. Therefore, the pace of those regions' recoveries will impact the second half performance for this segment. Our profit improvement initiatives, including pricing actions and product mix management along with lower input costs, more than offset the impact of lower volumes to generate a 21.8% EBITDA margin. Product mix benefited from increased demand in bioplastics and automotive applications, particularly paint protective film, two key strategic growth markets that we discussed at Investor Day in May. We are seeing increased adoption of our Capa products as customers shift toward materials that have a more sustainable footprint. Our new product and business development efforts are accelerating and we are seeing tangible results with new customer additions, particularly in areas that support our growth strategy, such as bioplastics, apparel, and automotive. On slide nine, you will find results for Performance Materials. We are pleased to see the continued volume growth in this segment, not only year-over-year but also sequentially. The global auto industry appears to be improving, although more slowly than we had expected, and results vary by region. North America was our strongest region for the quarter, and China was up from last year’s extended shutdowns, while Europe was flat. We are cautiously optimistic North America’s auto production rates will remain steady, but the outlook for Asia and Europe is less clear. Margins were down slightly versus last year, primarily due to higher operating costs as we reduced plant run rates to manage inventory. In summary, most of our business lines posted strong results for the quarter despite a cautious economic climate and a sluggish recovery in China. Our Industrial Specialties business faces unique challenges as we transition away from CTO as a sole feedstock at the same time that a key product, rosin, is undergoing a cyclical downturn. We have implemented cost reduction actions to realign our cost structure, and we will take further actions as needed. We remain focused on ramping up our AFA output and sales while maintaining strict cost discipline. And now, I will turn the call back over to you, John, for an update on guidance and closing comments.

Thanks, Mary. As you saw in our release, we are reducing our guidance for the remainder of the year. When we provided our original full-year guidance, we knew that elevated CTO prices would negatively impact the business. But we expected a more robust recovery in China and a stabilizing Europe that would allow growth in our Pavement Technology business, Performance Materials, and APT to more than offset the shortfall. When we reported our Q1 results in May, it was clear the recovery in China was not going as planned and Europe was facing an industrial slowdown. We were one of the first companies to say this. And remember, China, along with the rest of Asia and Europe represented roughly half of PM sales and nearly three-quarters of APT sales. Therefore, when we didn’t see the boost from those regions, we realized we would not be able to offset higher CTO prices and we reduced our guidance, which brings us to where we are now. We still have not seen significant improvement in China or Europe. General market weakness continues to suppress volumes in our Industrial Specialties business, and the historically high CTO prices we expected to moderate have remained elevated. We don’t expect to see relief from these prices until 2024, which is why we are reducing guidance for the remainder of the year. We are taking actions to mitigate our CTO exposure longer term, consistent with the strategy that we laid out for you at our Investor Day. There are four variables we manage in the Performance Chemicals segment, two of which are in our direct control. Our industrial end markets will improve as the economy improves. CTO costs should come down as the biofuels market matures and rationalizes. Our AFA strategy will reduce our risk exposure. And we will control our cost structure to ensure what we produce we can sell profitably. The last two we control, and we are aggressively taking actions. Three of our businesses are performing well and will contribute to our overall performance. Auto production is improving, perhaps not at the rate we would like and certainly not across all regions evenly, but it is improving. Plus, the adoption of hybrids, both here and in China seems to be gaining steam, which is good for the PM segment. Our work on alternative carbon applications is progressing, and the Pavement team continues to both expand our global footprint and to enhance the growth we will see from government infrastructure funding in the United States. Greater adoption of biodegradable materials in consumer packaging and apparel is a secular tailwind for APT that should provide significant increased demand. The AFA transition directly addresses the biggest headwind we have, which is relying on a single raw material, CTO, to support the business segment. As we continue to ramp up capacity, the impact of higher CTO prices will abate, and we will have the flexibility to pivot to different raw materials to optimize cost with the added benefit of not producing rosin. Finally, we will continue to constantly evaluate all options and adjust our business and cost structure to reflect the changes in our markets. By leveraging all these opportunities, we will cover the gap from the increase in CTO costs. We remain confident that we will emerge a stronger, best-in-class Performance Chemical company that sustainably purifies, protects, and enhances the world around us. With that, I will turn it over for questions.

Our first question today comes from Vincent Anderson from Stifel. Vincent, your line is open. Please go ahead.

Yeah. Thanks and good morning. So let’s just start with CTO and here’s what I think I know about CTO markets right now. Spot, as best we can tell, is down. There is no biofuel capacity that emerged out of the blue. U.S. exports year-to-date through May are down 10%, generally falling for the last two years, export prices there seem to have also peaked in March. So we don’t have a lot to go off of. But the only place that we are seeing prices stay elevated are the prices you pay and export prices to Sweden and Finland, which is a little different given Kraton has assets there. So I know your contracts are confidential, but is there anything you can unpack for us as to why we have this apparent disconnect and what gives you confidence that this won’t be a persistent risk?

I will start off, and Rich, feel free to add anything. We've tried to clearly outline the impacts for you, Vincent. We've provided a number that should help you and others understand the issue we're facing with complete transparency. The challenge is that this is not an efficient market. The data you see, whether from Argus or other sources, may not accurately reflect the current situation because, as you've noted, they sometimes include certain exports while excluding others. They may include the biofuels market at times and not at others. Just to be honest, we didn't contribute our data to Argus until recently, which makes it less effective for this analysis. Our pricing tends to lag behind what you're seeing by three to six months, which works against us when prices drop and in our favor when they rise. But you have to be cautious with that information. We recognize this market issue because I know everyone is looking for reliable predictions. We're trying to communicate the scale of this year's issue, which is essentially a $200 million shortfall, from which we've managed to recover about $100 million so far. We'll continue to do our best in that regard, but this is our current situation. Looking ahead, I expect CTO prices to decrease. The market has overestimated the potential of European biofuel inputs, and the European biofuel market hasn't developed as quickly as expected, all while entering a period of economic slowdown. Thus, we anticipate some relief in CTO prices, although I can't specify exactly what those levels will reach. We have some insights into where they should stabilize, but again, the market remains inefficient. I hope this gives you a clearer understanding, Vincent.

Yeah. No. That’s helpful and very fair points. Turning over to the demand side, on the margin side of the equation, could you give us a rough order of magnitude around what your mix impact looks like when you lose a rosin ester sale into something like an adhesive and have to instead drum that product and send it to the export spot market instead?

Well, our merchant rosin sales had for the most part abated, which is why we are building so much rosin inventory at the moment, but on the order of magnitude, our rosin sales into the merchant market are significantly on the order of 50% less than what we are doing in the derivatives market today.

Okay…

Again in that matter.

And if I could add, compared to the alternatives, whether it’s hydrocarbons or gum rosin, our merchant rosin pricing to date has been about 15% higher than merchant rosin, I mean, gum rosin area and about 30% higher than the hydrocarbon market to date.

Okay. So we are kind of past the negative mix impact of losing your higher value derivatives or into really more just absolute volume demand when we think about…

I think and the way we…

…and in the back half of the year? Yeah.

That’s correct.

I think that’s fair.

Yeah.

Okay. And then just a really quick one and I will turn it over. But do you have to requalify any of your pavement products based on feedstock change like moving from TOFA to AFA?

Yeah. Primarily for North America, not so much externally, not outside of the U.S., but yes.

Okay. And did I understand correctly in your prepared remarks that you have already begun that process in some respects?

We have. Yes. We have. It just takes time.

Yeah. Good morning. Thanks for taking my questions. So the magnitude of the cut for the full year is admittedly pretty chunky, but it looks like there’s a lot to kind of unpack here. So I guess can you kind of bucket it out for us, how much is tied to the incremental costs around the WestRock transition, if you will, how much is tied to actual CTO cost and then how much of it’s tied to just running at lower operating rates and kind of having absorbed that fixed cost absorption? I guess can you help us maybe bucket these kind of bigger categories?

So I will start. The WestRock impact that I mentioned in my remarks really goes to cash costs and expenses. We will be kind of – I think of it as carving those out from the GAAP results. So going forward and that impact would be excluded in our adjusted numbers, but it’s still cash. If you note in the release or in the deck that we provided, we also did reduce our guidance with respect to free cash flow coming down and a lot of that, particularly, in the second half of the year is related to the cash costs associated with the WestRock transition. With respect to the EBITDA decline, that’s more, again, CTO related and the inability, both the inability to push enough price to recover those costs, because their end markets are soft, but also the general economic slowdown, which is not permitting a robust recovery in PM or APT to offset or mitigate the costs in fact.

Right. I mean, John, it’s difficult to separate CTO versus the end markets, right? I mean, you have seen us go through cycles before, where we have built rosin, but the last one really kind of occurred in 2018, right? The reason we are in this situation with the orders of magnitude is this large hit to CTO, right, which is why we are trying to quantify for you the numbers so you can understand what the ramifications are, right? I mean, when you look at the Performance Chemicals segment with large, you can do the math on the margins of the Pavement Tech piece of that and come to an annual number, because it’s really spread out mostly over Q2 and Q3 as you know and then you can kind of impute what the ramifications are for Industrial Specialties. It’s a large number. I mean they are absorbing $200 million of incremental cost, of which we have been able to claw across the company about $100 back. So would a better economic environment have helped that? Sure. Had we stayed – I mean, it’s interesting, because we have done a lot of internal analysis, had the market environment stayed as it was last year, we would have been able to bear the CTO inflation. And I say that kind of across all of our businesses, right, not just Inspec, but we would have been able to absorb it. It’s just the economic environment is weakened to the point where this is the put and take of those two, right?

Okay. Okay. No. That’s helpful. And I guess when you think about the reduction in the guide, because, look, CTO was high before and it seems like from a contractual side you probably had a rough idea how those costs were going to play out this year. So is it…

Sure.

… at least when you gave kind of the prior guide. So, I guess, how should we think about the incremental thing that changed that’s causing you to pull down the guidance? Is it just that China is that much weaker and…

The markets are weaker, John. I mean, I don’t – I want to be very clear because I want everybody to understand.

Okay.

I mean the CTO, it is true and I think sometimes people have missed that. The cost of our CTO has been gradually escalating over the course of the year, right? We talked about this at Investor Day, but I don’t know, Q2 was more expensive than Q1, Q3 is going to be more expensive than Q2, Q4 is going to be more expensive than Q3, it will level out going into 2004, okay? So – and at that point we will be more, what I would call at-market, meaning that we will – to the extent we get some relief and CTO, we are going to really feel it, right? And so we remain optimistic about that. But what’s causing the issue in the back part of the year is that the markets that we sell into have really, really weekend with the exception of Pavement Technologies in the oil field. In particular, the rosin markets, it’s very reminiscent to me of where we were back in 2018, where we are having to basically slow down rates because we cannot move the rosin. Rosin is not selling. That’s what’s happening. We raised the prices…

Okay. And then maybe I can just follow…

John, before – we raised prices last year in the Industrial Specialty businesses, almost a quarter of a billion dollars, actually over a quarter of a billion dollars, right? So we were in position to absorb this, right? The challenge is, is that people are not buying, right? So hopefully that’s helpful.

I want to clarify whether the weakness in the rosin market is due to a soft demand from the end customers for the final product or if it's primarily because they can't handle the price increases and are opting out of purchasing.

They are not buying, John. I mean, obviously, price moves up and down, and we will adjust price and we can adjust price, and we obviously have a higher cost structure, but ultimately, they are not buying and they have the ability to substitute into lower-cost alternatives.

And I did mention, we estimate approximately 20% of our customers have shifted to lower-cost alternatives. But maybe, Rich…

If you want to add to that.

I could, John, when we look at the overall demand in Industrial Specialties, particularly on the rosin products and you are talking about adhesives, rubber, paper sizing, we know many mills are shutting down and in printing inks. But when we look at the demand that we have seen this year, Mary is correct, 20% is related to reformulation to hydrocarbons or some other type of gum rosin, but 80%, 40% was related to destocking and another 40% was related to demand destruction, and that’s pretty much what we have seen across the entirety of our rosin offering.

Got it. That’s helpful. Thanks, everyone.

Hi. Good morning. Thanks for taking my questions. Mary, I want to follow up on a previous question. You mentioned that the CTO and rosin have been performing well. What is the reduction in the guidance for the PM and APT businesses? How much less is that expected to contribute this year compared to what you anticipated around three months ago?

I think there hasn't been much change since our last call. Initially, we anticipated a stronger recovery in China and expected the positive economic trends we observed at the beginning of the year to persist. While we've seen volume increases in PM, the recovery in China has not been as strong as we had hoped. North America is performing well, but Asia is sluggish and Europe is struggling. Regarding the APT segment, keep in mind that 75% of their products are sold in Asia and Europe. The lack of a rebound in China and Europe not showing any improvement has lowered our expectations for that business as well. It's not as severe as the situation with Industrial Specialties, but it's still a drop compared to what we had anticipated.

The annual growth rates for those businesses remain strong and healthy compared to other segments we are examining. For instance, PM, APT, and Pavement are all experiencing healthy growth in the current environment. While PM's revenue growth may be limited, APT has successfully increased its profit margins, even if revenue growth isn't as pronounced as last year. Pavement has also had a successful year. Although our expectations have declined from the beginning of the year, relative to our last guidance, there hasn't been a significant change—maybe a slight shift, but nothing major.

Understood. Thank you. And then you started the call off with a really nice bright point, which is the Nexeon agreement to Panasonic and in Korea. Can you help us understand kind of the quantity of commercial sales that Nexeon is expecting to be doing, kind of when you expect to be in the supply chain supplying that material and if that’s any change from your prior expectations?

We are very encouraged and are big fans of Nexeon. We are genuinely excited about their success, which validates a lot of the work we've done analyzing and assessing opportunities in that market. We believe that their plant in Korea is just the beginning. This operation will ramp up to involve thousands of tons of product, moving beyond the initial contract they have with Panasonic. Nexeon has done what many startups do: secured good contracts, plans to establish operations in the region, formed strategic partnerships, and set themselves up to succeed and grow their business, in which we anticipate participating. However, as we mentioned during Investor Day, we don't want to get ahead of ourselves. We see ourselves playing a more significant role in the middle of the decade and beyond. We also have great opportunities in our core businesses and believe our focus will allow us to contribute as they develop next-generation technologies.

Yeah. Jon, I would say that, Nexeon put a press release out in the last 24 hours and that should be able to answer a fair amount of your questions on their pathway.

Particularly in the near-term.

Okay. Great. Thank you. And then just last quick one from me, how is the AFA transition progressing from a demand perspective, are you still in the capacity to bring online kind of where you expect to be by the end of the year there, especially…

Yeah. Look, nothing has changed, but…

…I think the segment. Yeah.

But Jon, I think it’s an important point. While we have these three businesses that are performing well, one business is facing some secular or structural changes. AFA is a crucial part of our strategy moving forward. We expect that CTO prices and the economy will improve, as we mentioned. We have four variables to consider. CTO prices will eventually decrease. However, in the long run, our best approach is to provide our customers with fatty acids that meet their technology requirements. The advantage of AFA is that it is an alternative, more sustainably sourced raw material that does not produce rosin. We are highly focused on this initiative, and it remains on track. We noted in our prepared comments that the production volumes we expect for next year will match the historic CTO volumes processed at that plant. We are continuing to work on this, and our customers are receptive to the necessary reformulations. As I mentioned earlier, it takes time due to the processes and testing involved. But interestingly, high CTO prices are beneficial for selling to customers, as they are in need of an alternative. Therefore, we remain on track and very focused on this.

Hi. Great. Thank you very much. Again on this AFA, I guess, the CTO prices continuing how they are, how much of your production do you think you will actually shift to AFA versus CTO and how long would that actually take? Thanks.

If you look at it from a broad perspective, we have a network of three plants. One of these plants is now dedicated exclusively to AFA and we expect that next year it will produce volumes similar to what we have historically achieved. This provides an idea of the volumes we are discussing. Over the long term, as we stated during Investor Day, we actually have the potential to double our volumes in this segment, provided we can produce all of our CTO and AFA.

Okay. And then as far as the questions about or the comments about being able to transition or toggle back and forth between different AFA and CTO, how quickly are you actually able to do that and how flexible this will be versus say CTO prices come back down, etc.?

Yes. We have committed to roughly $70 million of revenue this year coming from AFAs, that’s on track. We have not laid out yet what our expectations are for next year, you can make some assumptions based on the volume comments that we made earlier, right? But it is our intention over the next 24 months to have that plant fully moving on AFA offering alternatives.

Good morning. Thanks for taking my question. Just a follow-up on AFA, is there anything in the production process or is there an input that could cause the price of proofing AFA prices to kind of spike similar to I mean different product with something similar to what we saw with CTO and with rosin and things like that?

To answer your question, this is why we intend to utilize multiple feedstocks. The biofuel market is impacting not only CTO but also many oleo chemicals, particularly those that are non-food-based or do not enter the food chain. Those who track these commodities are aware that prices increased in 2021 and 2022 before declining. They tend to be more cyclical because they are influenced by broader macroeconomic factors. The biofuel market disrupts these to a certain degree. European regulators closely monitor the amount of biofuel in their mix based on consumer prices in Europe, which will also fluctuate. We believe that over the next couple of years, this market will stabilize as it matures and all feedstocks are considered. This is one reason we anticipate CTO prices will decrease. If they stay ahead of the market, prices will fall. We appreciate having multiple feedstocks because we can shift between them when different chemicals experience price spikes. For example, soybean prices soared and have now decreased, making them very appealing right now. Canola experienced a similar pattern. We want that flexibility in our feedstocks.

And let me tag on to that. So, soy, canola, for example, Dan, much, much bigger more liquid markets than CTO. And unlike CTO, remember CTO only made by paper mills. So their sales of CTO are episodic if you will. They are putting chunks into the market. So we are purchasing when they have product available, etc., very different dynamic than a soy, canola type of market, again, because of the size of liquidity of the market. So our ability to control the timing of our purchases and perhaps hedge our purchases, because again there are cost curves that are well established, the size of the market, etc., puts that purchasing dynamic in a very different framework than what we now have with CTO.

That’s helpful. That’s very helpful. Thank you. And then, is there any way, I mean, are you thinking about, as you look at cutting costs, are you looking at any way to, I don’t know, optimize your footprint, reduce the plant or put the plant near the…

Let me put it this way, Dan. All options are on the table, right?

Okay.

As you know, there’s lots of different levers that can be played when you are optimizing a footprint, but all options are on the table.

Good morning. Regarding the $100 million gap you have this year from CTO, how do you plan to recover that next year? Will it simply come from increased pricing this year that carries over, or do you need demand to improve in order to achieve that pricing?

I think of the four levers, Mike, that we talked about, right? Our intention is to try and get it back through continued growth in our other businesses and through continued escalation of AFA sales and through a reduced cost structure, right? Certainly, improvement in market conditions or reduced CTO pricing would help us in that, right? So we have to look at all of those influences or market factors to try and manage this. We control two of them, right? So we will do what we can to control, but obviously to the extent, the market does improve or CTO pricing improves, that’s going to make our jobs easier.

And certainly, as China again, John’s comment about industrial recovery, certainly China will pick up at some point. Certainly, I believe the economy will begin to pick up better than it has today. So again, even rosin, rosin markets have shown a history of taking a deep, digging a deep hole and then coming back quickly when they do turn. What John has discussed though is, we are not waiting for all those things to happen. We believe they will, but we don’t control the timing of those market dynamics. So the actions that we are taking are to better position us so that in those products and feedstocks where we have, we are more at the mercy of…

The markets.

No. I understood. And then, if you think about the price that these products are at now, if you do raise the price further, is that problem relative to maybe an oleo-based product that you are kind of sort of tapped out and your ability to raise the price, or is it…

No. I mean…

… if demand comes back, you can get the price? Yeah. Okay. And then some…

Well…

…and we believe that as we make this move, we will be able to offer lower priced alternatives.

Yeah.

Got it. Got it. Okay. So, if I kept Performance Materials sort of my outlook similar to last quarter, and I think a lot of companies have so it felt pretty good about the auto outlook for the second half of the year? And then it sounds like ATT will maybe, maybe slightly lower. It kind of implies Performance Chemicals takes a pretty big dip third quarter, fourth quarter…

Yeah. If you think about the margin…

…margins are going to be in line.

...it’s mostly in the fourth quarter…

Is that the right way to think about it? Okay. Fourth quarter.

If you consider it, the focus is primarily on the fourth quarter. In terms of Performance Chemicals, we have a strong, high-profit business that performs well in the second and third quarters, but sees a downturn in the first and fourth quarters. While we don’t provide quarterly guidance, it's important to note that in the third quarter, we will still see advantages from asphalt and pavement sales, but those sales will not be present in the fourth quarter. Therefore, we expect Performance Chemicals to face challenges and experience a decline in the fourth quarter.

When considering Performance Chemicals for 2024, we expect to recover a portion of that $100 million based on your initiatives. If CTO decreases, you could potentially gain the remaining amount, bringing it to over $100 million next year.

It's possible. It just depends on my perspective, Mike, because I don't think we will recover the entire $200 million of that CTO. I just want to be completely clear to everyone.

Yeah.

Right. I mean, but if the gap is $100 million, right, what do we do? Well, we have got those four things that work. How much cost can we take out, right? How much AFA can we sell, right? What kind of market improvement do we get, right? So, I mean, we actually feel like 2024, while in fact it’s going to be challenged, we have got levers to pull, but it’s a little early for me to gauge where the market in the CTO is at. What we are working on are the other two because those we control.

Thanks. John, I wanted to clarify some of the AFA comments. Is your target volume for next year essentially equivalent to the full Phase 1 that you outlined, or are you suggesting more like two-thirds of that when you make that CTO comparison?

Well, I think we should be at full run rates by the middle of next year, which would be around 125,000 tons, give or take. However, when considering the year as a whole, we won't achieve the full 125, as we will be ramping up during the first half of the year. We might exceed that, but that's our current position.

Okay. And then as much as you are willing to comment, would that alone be enough to cover fixed costs at the plant and maybe even potentially contribute positive standalone margins?

The goal, as you know, Vincent, is that the more we operate, the better we are at covering our fixed costs, which is why we want to achieve those run rates as quickly as possible. However, realistically speaking, product certifications and the complexities involved mean that it does take time. If we can find a new market customer that doesn't require those certifications, we could speed things up, and we've hired someone to assist with that. Additionally, if we can keep advancing customer certifications, we can also accelerate that. This is our current plan.

Okay. Great. Thank you. And then just last one, promise. There’s still a lot of actually dislocation even within the vegetable oil and animal fat feedstock markets right now, because a lot of this new biodiesel capacity isn’t really set up to take crude grade products. What is your ability to accept lower-grade products, whether it’s based crude, specialty oils or even some of the dirtier stuff that you don’t even really get pricing on?

Yes, we have the capacity to incorporate some lower-grade materials into our processes, and we are already sourcing this lower-grade material at our Crossett facility.

Excellent. All right. Thank you. That’s all from me.

We have no further questions.

Yeah.

I would like to turn now to John.

Yeah. Before you go, John, I have just been reflecting a little bit, Mike, on your thinking through the quarters and how the rest of the year will unfold. Because like I say, we don’t guide on quarters, but I do think it’s important to understand the timing and the sequence. When you think about our new guide, right, this revised guidance, you think about our earnings power that’s coming out of it, I mean, Q3 we talked about right, we have got all those businesses firing right PT, PM, APT, right? And in the fourth quarter, you got three of the four, basically, you got two of the four, right, basically you have got PM and APT. So our guide really is all about PM, APT and Pavement continuing the trajectory that they are on, but we are derisking from a guidance perspective, what’s happened with Inspec, right? So when you think about this. I mean you are correct. Inspec in Q3, particularly, in Q4 when you will see it, the Performance Chemicals segment is going to underperform. But we are trying to derisk that from guidance, right? So going forward upside and the sort of downside, but we think hopefully more upside is really tied to those three core businesses, right? That’s it. Thank you, John Nypaver.

All right. Well, thanks, everyone. That concludes our call. Thank you for your interest in Ingevity, and we will talk with you again next quarter.

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