Good morning or good afternoon, and welcome to the Ingevity Third Quarter 2023 Earnings Call and Webcast. My name is Adam, and I'll be your operator for today. I will now hand the floor over to John Nypaver to begin. So John, please go ahead.

Thank you, Adam. Good morning, and welcome to Ingevity's Third 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 and 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 these 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, Ed Woodcock, President of Performance Materials, Rich White, President of Performance Chemicals; and Steve Hulme, President of Advanced Polymer Technologies, are available for questions and comments. John will start us off with some highlights for the quarter, and Mary will follow with a review of our consolidated financial performance and the business segment results for the third quarter. John will then provide an update on guidance followed by remarks addressing our announcement last night regarding the repositioning of our Performance Chemicals segment and its expected impact. With that, over to you, John.

Thanks, John, and hello, everyone. Let's begin on Slide 4. As you know, we made an announcement last night to reposition and restructure the company, and this includes the closure of our DeRidder, Louisiana facility, among other actions. These decisions are consistent with our objective of being a top-tier specialty chemicals company and are part of the execution of our long-term growth strategy. We are committed to maximizing the profitability and the earnings stability of the company. And later in the call, I'll go into detail about how these actions get us closer to our goals. But first, a few comments on our third quarter performance. To level set, last year's third quarter revenue and EBITDA were the highest ever for our company. Our Performance Chemicals and Advanced Polymer Technology segments led the way last year with both posting record quarters in a very robust demand environment. This quarter this year, our strongest performing segment was Performance Materials, which posted EBITDA margins north of 50%. We saw modest revenue growth and strong EBITDA drop-through due to increased demand for our automotive activated carbon in both North America and Asia Pacific. Impacts in the quarter from the auto industry strike were very limited. Additionally, the increased demand for hybrids over battery electric vehicles benefited the segment and bodes well for the segment longer term as well. Advanced Polymer Technologies saw their volume drop in all business lines across all regions due to the continued industrial slowdown, but the team maintained their focus on profitability, improving their EBITDA margins by nearly 1,000 basis points. The team is using this time to advance the adoption of our products in new economy markets like bioplastics, where our capital products enable biodegradability in areas such as packaging, agriculture, and sustainable fibers for apparel. In Performance Chemicals, paving had another great quarter as international expansion continues with strong adoption of our products progressing in South America. I would say the number of projects the team saw in the U.S. was not as robust as we had hoped as funding from the infrastructure bill was slow to make its way into local levels. But we do expect those dollars will be put to work, and our teams are ready to deliver solutions that use less energy during the paving process, make growth last longer, and improve safety for drivers and pedestrians through more reflective markings. Industrial Specialties continues to feel the impact from the lack of rosin demand, particularly in the adhesive end markets. And during the quarter, we also saw a slowdown in drilling activity, which resulted in weaker oil field sales. The price we're paying for CTO, as expected, increased in the quarter, reaching approximately 25% of the company's total cost of goods sold. As a result, even with the addition of Ozark, Performance Chemicals saw lower sales and a sharp drop in EBITDA. I'll speak more on these market dynamics and how we are responding after Mary finishes a review of Q3 financials. Mary?

Thanks, John, and good morning everyone. Please look at Slide 5. Sales decreased by 7.5% compared to last year, as all segments faced lower volumes than the previous year's record quarter. The volume decline was partially compensated by an improved product mix within Performance Materials and the inclusion of Ozark sales in Performance Chemicals. Gross profit fell mainly due to increased CTO costs affecting the Performance Chemicals segment. SG&A, excluding depreciation and amortization, improved to 7.6% of sales from 10.8% last year, as we began to see the benefits of cost-saving measures implemented earlier this year. Adjusted EBITDA for the quarter decreased by 20.1% to $110.4 million, but we maintained an adjusted EBITDA margin of 24.8%, which is in the top quartile among specialty peers. Diluted adjusted EPS of $1.21 is lower than last year primarily due to weaker results in Performance Chemicals and higher interest expenses linked to the Ozark acquisition. Moving to Slide 6, we generated free cash flow of $73 million for the quarter, as reduced CapEx spending and better accounts receivable turnover helped to mitigate the inventory challenges we face with CTO and Rosin. With this free cash flow, we prioritized debt repayment, allowing us to keep leverage stable compared to last year, even with lower EBITDA. Last quarter, we announced cost-saving initiatives anticipated to yield $35 million in annualized savings, with $20 million expected this year, and we are on track to achieve this target. Transitioning to Performance Chemicals on Slide 7, revenue declined by 4.3% as the drop in Industrial Specialties volume was only partially offset by Ozark's inclusion and higher pricing in pavement. Segment EBITDA decreased by 62.4%. Although price adjustments helped counteract lower volume impacts, we were unable to recover the increased CTO costs. Similar to last quarter, the decline in volumes resulted from global weakness, particularly in rosin-based markets, including adhesives and printing inks. We estimate that around two-thirds of the decline stems from demand weakness, with the remaining third linked to product substitution. In the TOFA market, we noticed reduced activity in oilfield drilling during the quarter. Legacy pavement sales rose due to higher prices and greater technology adoption in South America, while Ozark performed well with their paint portfolio, though their thermoplastics business underperformed expectations as competitors gained market share through pricing strategies. Our sales teams are actively working to enhance thermoplastic growth as we approach the paving season next year. On Slide 8, advanced polymer technologies saw a 38.4% sales decline due to reduced volumes across all end markets and regions, as John mentioned. We estimate that 70% of the drop is due to decreased demand, as customers seem to be holding back on inventory restocking. The remaining 30% comes from lower-priced product substitutions in certain markets like footwear and new competitors entering our markets. We view these challenges as temporary, and as industrial demand recovers, we anticipate a rebound in volumes. In fact, we've observed slight improvements since the middle of Q3, suggesting we may have reached the low point. However, customer ordering patterns limit our visibility beyond a few weeks. Despite lower revenue, segment EBITDA remained steady, resulting in margins of 26.2%, reflecting a 990 basis point improvement over last year. This improvement is primarily driven by pricing, lower energy costs, and material expenses, along with benefits from earlier cost-saving measures. Steve and his team have excelled in enhancing the profitability of this segment and we believe that as volumes increase, sustaining mid-20s margins over the long term is achievable. On Slide 9, you can see the results for Performance Materials. Revenue rose by 1.6%, with EBITDA increasing by 21.7% due to a better product mix and cost-saving initiatives. Although we are pleased with the margins, we do not expect the segment to consistently maintain margins above 50%, and anticipate settling for mid- to upper 40s margins, which is still beneficial. The quarter benefited from an improved sales mix of higher-margin activated carbon for automotive applications. As we monitor battery electric vehicle adoption rates, it appears hybrids are being preferred by consumers. In Europe, for every registered BEV, there are 2.2 hybrids, and in the U.S., nearly 1.3 hybrids are sold for each BEV. This trend favors Ingevity, as hybrids use our activated carbon. Should these trends persist, it will support our stance expressed at Investor Day that the transition to all-electric vehicles will involve hybrids and this business has significant growth potential. Results in Asia were robust this quarter as auto production stabilized and exports from China and Korea rose. In North America, the recent auto industry strikes did not have a major impact on our Q3 results. Given the recent positive developments in negotiations, we currently expect minimal impact from the strikes on our Q4 results. I'll now pass the call back to John for an update on guidance and additional details regarding the repositioning of Performance Chemicals.

Thank you, Mary. Please look at Slide 10. We do not expect industrial markets to recover in the fourth quarter, so we are reducing our 2023 full year EBITDA guidance to a range of $375 million to $390 million, and free cash flow to between $75 million and $85 million. We also expect our net leverage target to remain around the Q3 levels. Our typical Q4 seasonality is being intensified by the weaker economy. In October, we observed minimal impact from the UAW strike. While we believe any effects might be compensated for later in the year, it could extend into Q1 of next year. The paving season in the northern hemisphere will conclude as colder weather arrives. If this fourth quarter mirrors last year's performance, we anticipate a slowdown in customer buying patterns for Performance Chemicals and APT as we approach the year's end. The specific impacts of our restructuring will be limited in this quarter and will mainly begin in earnest in Q1 of 2024. We will be selling surplus CTO this quarter and expect losses from those sales as we adjust our inventories and manage working capital. Moving to Slide 12, we'll provide further details on the repositioning of Performance Chemicals and its overall implications for Ingevity. I want to emphasize that our strategy remains unchanged, aimed at being a top-tier specialty chemical company. Given the significant structural changes impacting the business, we are expediting our efforts to refocus our Performance Chemicals segment on our most profitable markets. By implementing these actions, we will concentrate our resources on higher-margin, higher-growth products in less cyclical markets. These products include our Pavement Technologies business, which encompasses both our legacy payment and road markings sectors, as well as certain industrial and oilfield markets. We are withdrawing from non-specialty, more commoditized markets that have demonstrated high cyclicality and price sensitivity, many of which are rosin-based, such as printing inks and adhesives, along with certain oilfield markets. The margins within the PC business have faced substantial pressure. By enacting these changes, we aim to restore margins to the mid-teens as AFA sales grow. We are reducing our reliance on CTO, which, although crucial for our past, has seen significant structural cost changes due to its role in the European biofuels market, driven by regulations. These abrupt changes in demand and pricing are unlikely to reverse. Ironically, the cost of TOFA from CTO has become so high that its use in biofuels is now limited due to the availability of cheaper alternatives. Nevertheless, this trend has pushed CTO prices to unsustainable levels in lower-margin chemical markets. We do expect CTO prices to decline from current levels, yet they are likely to stay elevated compared to historical norms, with pricing remaining volatile. Only select products can absorb this new cost structure while maintaining high margins. By closing DeRidder, we will operate a two-plant network with dual feedstocks. For now, we will run the Charleston refinery on CTO and produce AFA through cross-utilization. It's important to note the distinction between our refinery and other potential options for producing products for payment in other markets in Charleston. The necessary derivatization capabilities to support our target markets are available in Charleston, independent of the CTO refinery. Our capacity to expand production at both sites, especially cross-utilizing, ensures we can meet any recovery in our target markets and grow alongside increasing demand for our products. Both facilities will focus on specialty markets and provide chemistries from various feedstocks optimized based on cost and availability. If and when it becomes economically viable, we have the capacity to enter the biofuels market. The cost savings we anticipate from our actions are substantial, ranging from $65 million to $75 million annually starting in 2024. Exiting a facility as large as DeRidder requires time, and we expect to halt operations in the first half of next year. I was in DeRidder yesterday, and I want to take a moment to acknowledge that DeRidder has played a vital role in Ingevity's history, operating since 1947. The team there is exceptional, and we are grateful for their contributions to Ingevity. As we transition into 2024, we will continue to evaluate our plant network and cost structure to optimally support our specialty businesses. Ultimately, these actions will lead to a stronger and more focused Ingevity. We will be able to concentrate our capital and resources on our most profitable growth markets, including promising opportunities in Performance Materials and APT. Full company EBITDA margins are projected to improve to the upper 20% range. As part of these initiatives, we are streamlining Ingevity overall and restructuring our business and support functions to align with our renewed focus on specialty markets. On Slide 13, you will see the breakdown of the company's segments and business hiring. We predict that the repositioning of Performance Chemicals will result in approximately $300 million less revenue in the Industrial Specialties business line. What will remain is a company with a revenue profile that heavily features our higher-margin businesses like Performance Materials, APT, and paving. We will be smaller in terms of top-line revenue but more agile and profitable moving forward due to this improved business mix. This is a significant restructuring, leading to a nearly 20% reduction in Ingevity's workforce. With the closure of DeRidder, we expect to incur around $280 million in charges, with approximately $180 million of that being noncash. We anticipate that most noncash charges and around 50% to 60% of cash charges will be recognized by the end of the first half of 2024. Slide 14 outlines our roadmap for the future of Performance Chemicals, featuring a streamlined manufacturing footprint utilizing multiple raw materials. These facilities will concentrate on producing high-margin, high-growth specialty products. Beyond paving and road markings, we will foster growth in the agricultural dispersal market and AFA markets, including personal care, home cleaning, and animal feed. We will not partake in low-margin cyclical markets like inks and most adhesives. The remaining RASM we produce will be allocated to higher-margin adhesive products blended with AFAs to create substitutes for TOFA or used in road markings. One cost linked to this restructuring will involve balancing our future CTO needs with the surplus stemming from our contractual obligations. With one less plant producing CTO, we will have an excess of CTO for a while. We will sell this surplus in the market to manage inventory and convert it into cash. Initially, we expect to incur a loss from these sales, estimated between $30 million and $80 million next year. CTO pricing is volatile with significant variances in the market, making it difficult to nail down this figure currently. However, as the year progresses, we expect CTO prices, both for what we pay and what we obtain from sales, to decrease, particularly in the latter half of the year. Moreover, our assessment of excess CTO, defined as what we need to purchase versus what we can utilize, may vary. That said, we anticipate selling substantial amounts of CTO in 2024. We consider these sales distinct from the segment's core operations. As market dynamics affecting CTO resale evolve, we will keep you updated. In conclusion, our strategy is centered on end markets that employ our higher-margin, higher-growth specialty products, diversifying our feedstocks, and optimizing our manufacturing network. We commit to providing transparency each quarter as we undergo this repositioning, including sharing our charges, expenses, and our CTO status along with its financial effects. We are confident in our development of a top-tier specialty chemical business, and we are dedicated to making it more stable and profitable.

The first question today comes from Vincent Anderson from Stifel.

Thanks. Good morning, everyone. John. So let's start with Performance Chemicals. I mean the margins this quarter really weren't too bad given pavement and oilfield mix was a bit lighter than we were hoping for. I'm just curious, was this helped by like a longer tail of lower-priced CTO in the P&L? And then transitioning that into 4Q and the negative guidance change. Does some of the excess CTO sales guidance for 2024. Is some of that also going to be impacting 4Q?

The numbers for CTO resales are primarily for 2024. It's true that this segment, which you will see reflected in both Q4 and Q1, does not take advantage of the seasonal trends associated with the payment business during those quarters. Consequently, the quarterly figures are typically lower than those in Q2 and Q3. Additionally, the increasing CTO costs, which are not currently reflected in the P&L, will exacerbate this situation. We anticipate that these costs will stabilize at some point in the first half of next year and start to decline. However, it’s important to note that we will be facing these challenges in Q4 and Q1.

Okay. And then going back to the planned CTO sales for 2024. I mean how much of that is just existing inventory given I thought under at least the public portion of your supply agreements, you had out clauses for the closure of plants, and I'm assuming Crosse being converted to AFAs would also qualify as a closure.

We do have exit strategies, but they require time. We will be operating at the current volumes through 2024, that is our plan. We will manage this situation accordingly. Any excess CTO that we do not need will be sold. However, we will be purchasing more CTO than necessary throughout 2024 and possibly into 2025. Our expectation is to manage that effectively.

So just to add to that, certain contracts do have what I'll call a wind down based on plant closures.

Based on plant closures.

Based on plant closures, such that we're obligated to continue purchasing certain levels of CTO for up to a 2-year period. And then we have more flexibility after that period. So even with the announced closure of DeRidder, we are obligated to take a certain volume of material, and that's why we're saying we will be long CTO in certainly next year, and possibly up to 2 years, and we'll be doing these resales as needed to balance inventory and working capital.

So a $80 million on that page... Just to make sure that everybody is clear on this, right, would represent an estimate between what we think would be the most punitive buying at a certain price, selling at another that we could be dealing with over the course of next year.

And we do want to just reiterate, too, that we are continuing discussions with all of our CTO suppliers to better align those existing contracts with our new footprint, if you will.

We are working hard to bring that number down and ultimately eliminate it. This is separate from the overall performance of our core businesses. It is difficult to predict exactly how the year will unfold in this area because we expect CTO prices to decrease, both in what we pay and what we will sell it for. In the first half of the year, we anticipate incurring losses on CTO sales. We hope that by the second half of the year, we will reach a better balance, but I don't want to make any promises about that, which is why we have provided the numbers we did.

Okay. Very, very helpful. And I know that took a little while to get through, but I wanted to ask what hopefully on round.

We want everybody to understand.

Yes. Regarding AFA, I have a lengthy question but a brief answer. You mentioned that currently 15% of your oilfield is using AFA. Your goal is to achieve $70 million in sales by the end of the year, and to fully utilize approximately 175,000 tonnes of capacity by mid-next year, which will allow you to break even. I would like to understand what the $70 million in AFA revenues translates to in terms of an annualized exit rate for 2023, and what the expected exit utilization would be so we can gauge what still needs to be filled in the first half of next year.

So I would say that the numbers you're working with have not really changed since we anticipated them prior to the DeRidder closure. We are currently focused on enhancing the adoption of AFA in some of our traditional legacy markets to offset or transition from TOFA to these AFAs. Therefore, I am not ready to adjust those numbers at this moment as we are still working on this and it is all part of these actions. However, you can expect that as we approach next year, we will provide you with a clearer vision on this. Our strategy will clearly involve moving the profitable ones away from TOFA to AFA.

Okay. So no change, but future change would probably reflect some attempt at an acceleration?

Well, it's going to be more than an attach.

Well, I don't want to speak for you, and I understand you can't make any promises. Thank you very much. I'll hand the call over now.

The next question comes from Jon Tanwanteng from CJS Securities.

My first one is, what utilization do you expect to have at the remaining CTO facility, number one? And number two, do you expect to keep the DeRidder property? Or is it up for sale for some cash maybe just to your plans around the facility after you shut it down?

To answer your first question about the DeRidder property, we have explored a wide range of options for that asset and continue to do so. However, our current decision is to shut it down. Regarding the utilization rate for Charleston, it will depend on the market conditions moving forward. At the moment, we are not operating the refinery but are running the derivatization plan. That distinction is important. As we progress, we do not anticipate running at full capacity immediately since we are managing inventories, which will include some excess as we transition. Eventually, we have the ability to return to full capacity. We have thoroughly assessed our capacity needs and are confident that we can support market recovery as it moves towards a more stable economic environment. It is important to note that we are stepping away from lower-margin cyclical operations. As markets improve, we will be able to increase our capacity in both Charleston and other locations, focusing on areas with the highest margin opportunities.

And John, if I could add to that. This is Rich. That Charleston plant has a north and a south plant, on the one side is the refinery, the other side of derivatization. So out of the refinery, we're making products that feed our pavement business and also within our paper size business and some of our multilayer as well as some of our rubber business. Those businesses are providing us the margin today that we need to sustain the business going forward. But as John mentioned, we have the flexibility to ramp up that refinery to produce even more products as the market detects or demand. So right now, the market has been in a low state many of you can see and have heard from Mary and John's comments on our rosin drag in specific business, but the flexibility that we'll have in Charleston will allow us to toggle as the market demand increases and/or decreases.

Great. Does DeRidder have the capacity to convert to AFA if the demand is there eventually if you don't sell that?

We are exiting DeRidder, which is a refinery that we have operated. It could be managed by us or another party, but we are moving away from DeRidder.

I think it's important to clarify that while some might view our plants as identical, each one possesses unique capabilities. The DeRidder plant originally focused on printing inks, but as that industry declined a couple of decades ago, it transitioned to oilfield and adhesives. Over time, those markets have become lower-margin for us, even though they can be high-volume. This lower margin is the reason for our decision to exit the DeRidder site. In contrast, the Charleston site specializes in derivatization, and as we continue to expand our higher-value specialty products, we have the capacity to grow and increase production at Charleston.

Well, and as we mentioned when we were together for Investor Day, I mean, we have the ability today to double the volume output at Cross it, right? So we feel comfortable we have the volume, we have the volume ability to, as I said, capture the recovery in our markets but also grow the business.

If you're asking why, this is Rich again. When you consider DeRidder and the markets we operate in, the CTO and the fractionation related to an adhesive or inks product is over 90% based on Rosin, which is heavily dependent on CTO. Therefore, as we experience inflation on CTO, it significantly reduces profitability in those markets for us.

The next question comes from John McNulty from BMO Capital Markets.

So one thing I just wanted to clarify. So the $65 million to $75 million of annual savings beginning in '24, is that the run rate at the end of '24? Or is that what you expect in '24? And then actually, the run rate would presumably be higher as you end the year? Like how should we be thinking about that?

We expect those savings to be realized in 2024, fully realized. We're taking the actions now. We expect some amount of the savings to begin here in the last couple of months of the year...

It's pretty de minimis.

It's a total with the actions we took earlier this year of about $25 million. But then the $65 million to $75 million, John, will be fully realized in 2024 and going forward.

If some of these fixes don't occur until the end of the first half of 2024, should we expect even greater savings as we approach 2025? Is that a reasonable expectation, or could it be seen as overly optimistic?

That is possible. We've outlined the timelines and expectations as best as we can and feel confident about the $65 million to $75 million figure. If market dynamics and other factors are favorable, the savings could potentially be greater, but we are not ready to commit to that at this time.

None of this is tied to a...

Fair enough.

These can be described as fixed cost savings.

Controllable costs.

Controllable costs that we are committed to and sort of permanently restructuring out of...

Okay. That makes sense. Taking a step back to look at this from a higher level, you mentioned on Slide 13 that the repositioning essentially removes around $300 million in revenue from Performance Chemicals. Using either 2022 or 2023 as a baseline, this indicates that the normalized revenue for the business is approximately $800 million. Once you've achieved the anticipated cost savings and the situation stabilizes, you're aiming for an EBITDA margin of 15% to 20%. Is it correct to assume that when everything settles, and you've realized all the expected savings, the EBITDA run rate for this business will fall between $120 million and $160 million? I realize this might be a bit simplistic, but is that a reasonable way to approach it moving forward?

It depends on the time frame, John. We're not providing guidance for 2020 yet. To clarify, the business is expected to lose about $300 million, leading to a revenue rate of around $800 million. We believe that the operating businesses can reach a margin of 15% to 20% as the AFA business grows over the next year into 2025. However, I want to emphasize that this excludes the effects of the CTO until that situation resolves itself. Looking at it as a consolidated segment, including CTO sales, it will take time to reach those margins, but the operating businesses can achieve them. As the CTO situation unwinds, you will see the segment margin return to those levels. I want to be careful not to imply that we will immediately bounce back to those figures.

I think the other thing that gets lost and John or Rich, correct me if I don't get the nuance right here. But you can't look at the DeRidder revenue loss that we've said is roughly $300 million. You can't take the average PC margin and apply it to that. What Rich was saying is that the products and the markets that we sell into the product from DeRidder, the adhesives, certain of the oilfield products, the printing inks, those are the lower-margin businesses within that segment. And those are the businesses we'll be exiting. So that's what's helping to drive that margin improvement as the dust settles.

I would like to clarify for everyone regarding the situation. The EBITDA generated in 2023 from the Performance Chemicals segment will primarily come from the Charleston plant. Therefore, while we are exiting the DeRidder plant, we are losing revenue, but we are not losing profit.

The next question comes from Daniel Rizzo from Jefferies.

I just want to change it up a little bit. I know there's a lot of interest in the restructuring. But just in your Performance Materials segment, you mentioned how strong hybrids are doing. Can you remind us or have you said how much activated carbon goes into a hybrid car versus maybe a traditional ICE car? And also, do hybrids use scrubbers?

Yes, Dan, this is Ed. They do use activated carbon canisters. They're typically larger due to the pressurized fuel tank, so to capture emissions during refueling, you would have approximately a 2-liter canister along with an attached honeycomb.

In the past, you mentioned that for an SUV in the U.S., the cost is around $16 to $20 per vehicle. Could you clarify how that figure compares to a hybrid?

Yes. You've got a little more content on a hybrid because you've got a pressurized fuel tank.

Thank you for the question. We previously indicated that we anticipated a hybrid vehicle could be somewhat less profitable for us due to the carbon levels. However, as hybrid structures have advanced, particularly with the highly pressurized tank that Ed referenced, we have had to adapt our carbon to suit this new tank design. Consequently, the value we can now derive from that carbon is at least comparable to what we were previously achieving with conventional internal combustion engine vehicles.

Okay. That's all that's amazingly helpful. And with thermoplastics, you mentioned competitive pricing kind of like making it a more difficult market. Are you taking share? Are you guys lowering your prices to match that or just kind of giving it up and waiting for things to more normalize?

We've maintained our prices, but I believe we are starting to see some price decline. Like many other chemical companies, we've kept our prices relatively stable. However, I think as we progress through the cycle, prices will likely decrease slightly as volumes begin to pick up, which in turn drives volume. Our primary focus, and I’m very proud of our team's efforts, has been on maintaining margins. They have successfully restored the business to profitable levels. Are you asking about APT or road markings?

Are you talking about Ozark and margins? Or are you talking about thermal plastics and APT?

I was talking about thermal plastics in APT, but I'll take interest in both.

I believe they have done an incredible job working very hard to improve those margins. What encourages me the most is their continued effort; they have taken this time to be aggressive in product development, ensuring that as the markets start to normalize, we will achieve the expected drop-through.

The next question comes from Chris Kapsch from Loop Capital Markets.

A follow-up on the PM segment. So John, I know you've been saying hybrids for many years. And I know that for a while, the macro sentiment was enamored by EV. So you probably have some feeling some validation that the sentiment has shifted with kind of the world kind of anti-EV certainly less...

We are simply managing our business as usual.

So the question on the follow-up, there's a lot of different hybrid lexicon out there, mild hybrids, plug-in hybrids, hybrids with range extenders, or content per... What's that?

You mentioned that you don't see. There is a lot of diverse information out there.

Can you explain how your content per vehicle lift in hybrids is relevant? Additionally, while many discuss EV penetration in China, it appears that about one-third of the EVs in China are hybrids. I'm curious if your content lift in hybrids is also applicable to China.

I’ll start off and then hand it over to you, Chart. We do feel somewhat validated. However, the reality is that there are organizations that categorize start-stop technology as a type of hybrid. This technology works like this: when you stop, the engine turns off, relying on the battery, and then it restarts when you take your foot off the brake. Essentially, if it involves any internal combustion engine, our technology is integrated in some way. The traditional hybrid most people envision combines an internal combustion engine with a battery or larger battery pack and alternates between the two. This system also requires our technology. As mentioned earlier, we are fairly neutral regarding whether it’s just an internal combustion engine or a combination with an electric motor. Ed, do you have anything to add?

Yes. From an overall look at the market in China, we've got data across 3 years that you show basically what I call a classic S curve, right? So you've got battery electric vehicles going up, and then you've got this plateau of battery electric vehicles. But underneath that, you have a growing, rapidly growing plug-in hybrid, hybrid platforms in China. And that's getting upwards of 25%, 30%. And if you think of who's the primary manufacturer of those, it's BYD. And so we do kind of like what's happening in China, but it's also happening elsewhere. It's in Europe, it's in North America, and you're seeing a lot of people walking away from full battery electric vehicles for what is a more simple program with plug-in hybrids and mild hybrids.

I believe affordability is a key issue. Electric vehicles and electrification are here to stay, and we firmly believe that. When considering consumers, especially in Europe, it's interesting to note the increasing presence of Chinese vehicles in Western European markets. This trend is largely driven by affordability, as these vehicles can be quite expensive, particularly with current interest rates affecting what consumers can afford. Hybrids present a great solution, allowing drivers to use electric power for their daily commutes while also having the flexibility to switch to gas engines for longer trips. We're very optimistic about these developments, as they bode well for our business in the long run.

Right... It just to be devil's advocate on that cost argument. And some would say, I totally get that I'm watching closely the EVs trying to get some parity with ICE. But one might also say though that true hybrid has dual drivetrains and that's sort of expensive and complex over time. And so is the variant of hybrids that where you're not really truly on 2 drivetrains. Does that require your emission abatement...

We need to have an internal combustion engine. If there's an internal combustion engine present in any form, our technology will be integrated. I understand the focus on cost curves and the expectation that electric vehicles will eventually decrease in price. However, I believe that hybrids will also see cost reductions because the electric component will become cheaper. What hybrids face is the sunk cost associated with the existing development and infrastructure for internal combustion engines. Therefore, I wouldn't overlook a hybrid's potential to reduce its costs alongside electric vehicles. This market will be competitive, and it will ultimately reflect consumer preferences.

Fair enough. Just one quick question about the transformation in PC and the actions you're taking. As I understand it going forward, does Cross It now have the flexibility to operate as a swing plant with the capability for AFA and CTO, or is it still dedicated?

Cross It will remain as an AFA facility. Theoretically, we could convert it back to a tall oil rosin CTO running facility, but right now, the plan is to run it on AFA.

That's right, John. This is Rich, Chris. We completed the transition on April 1. I believe that before we consider transitioning Cross It back to CTO, we should explore different options for Charleston or another location.

I understand that it's important for you to grasp this point that Mary mentioned earlier. Many people view these plants as uniform, but each is tailored for specific capabilities. We're focused on optimizing our network. If we choose to expand our CTO purchasing, there are various options available in Charleston, which are distinct from the refining and derivatives processes. Refining operates separately from derivatives. Our plant optimization will prioritize higher-margin products, and we are well-positioned to meet the demand for these high-growth opportunities.

Got it. And the pathway there is rationalizing some tour products but also some TOFA-based products that are below...

That's right because. I mean TOFA value, Chris. I mean it has a lot of value. It's a problem today is it's value, you have to look at crude tall oil versus the value of TOFA and Rosin, right? And right now, the rosin is despite really elevated TOFA prices, the Rosin is very, very low price. Frankly, this is inhibiting its use in TOFA's use in the biofuel market because it's making it unaffordable relative to what other options they have like used cooking oil. The beauty of AFA is it does not generate Rosin, but this doesn't mean a wholesale exit. However, I want to be upfront if these market conditions persist and it is uneconomic to operate crude tall oil, a refinery of crude tall oil, not necessarily the products but a refiner of crude tall oil, then we will reassess our plant position.

We have a follow-up from John Tanwanteng from CJS Securities.

Just a quick one just on next year. I know it's early, but would you expect EBITDA to be higher or lower just directionally, given how you phrased the contribution from Charleston.

I'm not going to get into 2024.

I know that's noncore...

I'm not going to discuss 2024. What I can say is that we have a strong performance materials business that continues to grow, and our APT business is also seeing growth. Although it faces some macro challenges, it has a promising future if the macro economy improves. We've provided a roadmap for Performance Chemicals, and it's important to understand that we've made the operating assets of this segment more attractive. As the economy recovers, that business is poised to perform well. We will need to navigate through the CTO resales for a period since there is a 2-year term relating to the unwind from DeRidder, but there are many dynamics at play, and we consider that somewhat separate. This is where we want your focus to be.

Okay. Great. Do you know if the CTO resale impact is going to be more front-loaded or back-loaded or is it just impossible to predict at this point?

It's hard to say, but I will say that we are going to be knowing what we've done, we are going to be pretty aggressive sellers of CTO through the first half of 2024.

We have no further questions. I hand back to John Nypaver for some concluding remarks.

Thanks, Adam. Well, everyone, 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.