Ingevity Corp Q1 FY2024 Earnings Call

Good morning or good afternoon, and welcome to the Ingevity First Quarter 2024 Earnings Webcast. My name is Adam and I'll be your operator for today. I will now hand the call to John Nypaver to begin. John, please go ahead when you're ready.

Thank you, Adam. Good morning and welcome to Ingevity's first quarter 2024 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 most recent 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 Dean 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. Mary will follow with a review of our consolidated financial performance and the business segment results for the first quarter. John will then provide closing comments and discuss 2024 guidance. With that, over to you John.

Thanks, John, and good morning, everyone. Turning to Slide 4. We had a good strong start to 2024. Performance Materials' revenue and EBITDA were both up strongly and the segment generated margins close to 54%, exceeding expectations and executing well. This performance is a result of a lot of hard work by the PM team. Volumes were up from a year ago and the business benefited from higher pricing, improved throughput and lower input costs. APT performed relatively well this quarter. While revenue and EBITDA were down versus a year ago, they are being measured against a tough comparable period. First quarter 2023 was the last quarter before the stocking began. Positively though, they have now posted 2 quarters of sequential volume improvements and this is hopefully a good sign of a gradual recovery in their end markets. Importantly, despite these lower volumes, they maintain strong margins in the quarter. Performance Chemicals is tracking in line with our expectations for our repositioning strategy. The first quarter is a seasonally light quarter before the paving season really kicks in and it is also being negatively impacted by the cost we are paying for crude tall oil. Our savings targets remain on track. The transition to reduce our reliance on CTO is moving forward as we completed the shutdown of our DeRidder site during the quarter, and we are increasingly using oleo-based products coming out of our CrossFit facility in existing end markets like pavement and lubricants. In a few moments, I'll review our 2024 guidance and provide some perspective on expectations for the rest of the year. But before that, let me turn it over to Mary for more details on the quarter's results.

Thanks, John, and good morning, all. Please turn to Slide 5. First quarter sales of $340.1 million were down 13% due primarily to our repositioning actions in Performance Chemicals, which included a plant closure and our exit from certain low-margin end markets. Also contributing to lower sales were continued weakness in China and certain industrial end markets that negatively impacted sales in our APT segment and industrial specialties product line, more than offsetting a 3% increase in Performance Materials sales. For the quarter, we had $64.8 million of restructuring charges and $26.5 million of CTO resale losses related to the Performance Chemicals repositioning. These charges led to a GAAP net loss of $56 million. We've excluded the impacts of the restructuring charges and the CTO resale losses in our non-GAAP disclosure and our discussion for the remainder of this presentation. A reconciliation of our non-GAAP measures to GAAP is in the appendix to this deck and also in our earnings release and Form 10-Q, which will be filed later this evening. Our adjusted gross profit of about $120 million declined 19% and our adjusted gross margin was down 260 basis points to 35.2% due primarily to the combination of lower sales in Performance Chemicals and APT and CTO spend that was significantly higher year-over-year on lower purchase volumes. Adjusted SG&A improved 6% year-over-year. For the quarter, we realized a total of approximately $20 million of savings related to the Performance Chemicals repositioning and the other corporate actions taken last year. Of the $20 million in savings, about $5 million is reflected in SG&A and about $15 million in COGS. We are on track to realize our target of $65 million to $75 million in annual savings. Our diluted adjusted EPS and adjusted EBITDA declined on lower earnings, but we still delivered a strong adjusted EBITDA margin of 22.6%, reflecting the underlying strength of the company's core portfolio as we complete the repositioning of Performance Chemicals and exit certain lower-margin products and end markets. We estimate our 2024 tax rate will be between 23% and 25%, slightly higher than last year. Turning to Slide 6, the top-left chart shows a key impact of the Performance Chemicals repositioning. As we exit the low-margin end markets in PC, the Performance Materials segment becomes a larger percentage of total company sales increasing to 43% of sales this quarter. As we discussed last quarter, our actions are improving the company's overall portfolio mix, making it more balanced and improving the margin profile. Our first quarter free cash flow was negative $28.7 million compared to negative $20 million in Q1 last year. Remember that negative free cash flow is more the norm for the first quarter as we're building inventory for the summer paving season. But this quarter's number also includes $19.8 million of cash losses on CTO resales and $7.3 million of cash spend associated with Performance Chemicals repositioning. While our net debt was lower year-over-year, our leverage ratio increased due to lower EBITDA. We anticipate leverage will peak in the second quarter before improving to around 3x by year-end. Reducing our leverage is our number one priority for capital allocation this year. We are in compliance with all of our bank covenants and expect to remain so. Turning to Slide 7, you'll find results for Performance Materials. Sales were up 3% to $145.1 million and EBITDA was up an impressive 12% to $78 million with an EBITDA margin of almost 54%. Truly, the business was firing on all cylinders for the quarter. There were many drivers of this performance. Annual price increases went into effect. Our activated carbon volumes were up in all regions. We had no scheduled nor unplanned downtime and our talented engineers completed a series of debottlenecking projects that improved plant throughput. Also, input costs such as energy and certain key raw materials were lower year-over-year. For the remainder of the year, the segment has scheduled downtime and at least one facility in each quarter, so the benefit we saw this quarter from high utilization rates is expected to be lower going forward and energy and other input costs can fluctuate significantly as you know. On the positive side, auto production estimates are calling for higher production this year versus last year despite softer than expected production numbers in Q1. This is a long-winded way of saying don't expect every quarter to pull or post 54% EBITDA margins. As we always caution, quarters can be choppy. For example, last year, quarterly margins ranged from 44% to 51%. We continue to expect mid-to-high 40% full year margins for this segment.

Turning to Slide 8, revenue in APT was $48 million, down 27% to primarily the lower volumes, which we attribute to the continued global demand weakness in many of the segments and markets. As John mentioned in his earlier comments, APT had a strong Q1 last year, but end market demand weakness beginning in second quarter last year. So the Q1 year-over-year comp is challenging. China demand in particular continues to be weak, negatively impacting one of our biggest end markets in China, which is paint protective film for autos. While China auto production is up, the film is an aftermarket purchase and due to the economic slowdown, Chinese customers appear to have paused discretionary purchases on items like protective film for their cars. While China remains weak, we are encouraged to see 2 quarters of sequential volume improvement in APT driven by Europe and North America. However, forward visibility is limited as customers continue to be cautious in their outlooks for the year. Based on discussions with customers and peers, we believe the recovery is likely to be more of a second half event. Despite lower volumes negatively impacting plant throughput, EBITDA margins remained a healthy 20% supported by lower energy, logistics and raw material costs as well as improved SG&A as a result of cost-saving actions. Should the industrial recovery continue to be delayed, we are confident in the steps Steve and his team have taken to improve business operations. Please turn to Slide 9 for Performance Chemicals.

Sales of $147 million were down nearly $40 million as we continue to execute the repositioning of Performance Chemicals and exited lower-margin products and markets. We also experienced some softness compared to last year in certain industrial markets such as lubricants and rubber. These end markets, along with ag chemicals and certain oil field products are the primary end markets in which we continue to participate and they represented roughly 2/3 of the $101.3 million of industrial specialty sales in the quarter. We believe this is a good proxy for quarterly sales for industrial specialties going forward in 2024. The remaining roughly 1/3 of industrial specialty sales this quarter were finished goods inventory into the end markets we are exiting. Road technology sales in Q1 were flat year-over-year with Q1 being a seasonally low quarter. Wet weather delayed some projects that had been slated for the first quarter in Europe, but the strength of the North American market helped minimize the impact of those delays. We believe that summer paving season will be strong for both pavement and road markings. EBITDA for the segment was negative $10.6 million due to a significant decline in gross margin driven by higher CTO spend, which nearly doubled from last year and unfavorable plant throughput due to continued weakness in industrial end markets, which is negatively impacting utilization rates at both the Charleston and CrossFit manufacturing sites. We expect second quarter CTO spend to be similar to Q1 and expect it will trend lower in the second half of the year. Based on the prices we see in our CTO contracts and on the spot market, we are adjusting our 2024 estimate of the losses on CTO resales from between $30 million to $80 million to between $50 million to $80 million. As a reminder, these losses are not included in our adjusted EBITDA, but are reflected in free cash flow. In addition, we still expect to spend approximately $50 million to $60 million this year in cash costs related to the repositioning with about $7 million spent in Q1. As John mentioned, our repositioning of Performance Chemicals is on track. We have ceased production at our DeRidder site. We are realizing the cost savings from the actions we took last year and we have improved the profitability profile of the company moving forward.

And now I'll turn the call back over to John for an update on guidance and closing comments. Thanks, Mary. Please turn to Slide 10. We reiterate our full year guidance of between $1.4 billion and $1.55 billion and adjusted EBITDA between $365 million and $390 million. Our first quarter results are encouraging. We expect the Performance Materials segment and the road technologies product line and our Performance Chemicals segment will both have very strong years. Auto production that includes our material will remain robust as hybrid production increases. The road paving season is off to a good start and our order book is strong. These high-margin, high-growth businesses will anchor our performance this year and are at the center of our strategy going forward. And industrial recovery will primarily benefit our Advanced Polymer Technology segment and sales into industrial specialties markets and Performance Chemicals. I agree with many of our chemical peers that the second half of the year should be better than the first half and that sequential signs of improvement are encouraging. However, many of our peers have yet to see significant enough demand recovery to call for a strong rebound and we are in this camp as well. It is still early in the year and it's an election year. We will see. We are cautiously optimistic about demand patterns and believe APT has upside opportunities to our outlook if we continue to see sequential demand improvement. Sales into the industrial specialties markets will remain challenged due to the high price of our CTO-derived products versus substitutes available in the market. By closing DeRidder, we have exited many of our low-margin markets, but we do have some residual exposure. We are making significant progress in sales of our oleo-based materials, but the broader market weakness is not helping us accelerate those efforts. As we said last quarter, we will be very disciplined in cash management and are reducing capital expenditures and other capital allocation strategies while we focus on deleveraging to our more normalized historical levels by year-end. As we move through the remainder of the year, we are focused on completing our business transformation and positioning the company for more stable and sustainable profitability. We will continue to adjust our footprint and cost base if necessary to respond to any adverse changes from our base case. As I close, there are a lot of reasons to be excited about Ingevity in 2024 and beyond. As a management team, we are committed to delivering on the strategy we have laid out, especially as it pertains to Performance Chemicals repositioning. Our results in the first quarter show how we are tracking to those goals. We also recently completed a comprehensive review of our APT business in the U.K. and we are excited about the opportunities that business has. Bioplastics will continue to play a bigger role in packaging, including fibers and we are participating in that growth. Road technologies is expected to continue its expansion outside of North America while building on its market-leading presence in the U.S. and Performance Materials will continue to be the market leader in gasoline vapor emissions controls, reaping the benefits of the popularity of hybrids and consistently delivering strong margins and growth for us.

And our first question today comes from Vincent Anderson from Stifel.

Is it fair to infer that from the much smaller difference between your booked losses on CTO resale versus your cash losses on CTO resale that your costs are converging towards that resale price?

Not exactly yet, but as we mentioned on the call, I mean, we do expect to see our situation improve in the back half of the year. I mean, our estimated costs for Q2 are down slightly from where we were in Q1, but we do expect that, yes, we'll see similar in Q2, but we'll see more acceleration or more of that convergence in the back half of the year.

Sure. And I mean, I understand that a lot of that is contingent on volume actually pulling that cost to the P&L, but I assume that, that difference between...

Vincent, as I mentioned earlier, we will continue to evaluate our options regarding CTO and how that fits into our strategy. We are making significant progress with oleo-based chemistries, and it's likely that this will account for about 10% of revenue for that business this year. We are also exploring other ways to serve our markets with different operational capabilities. All these possibilities are being considered. To address your question, I believe that the pricing we pay for crude tall oil compared to the secondary market will continue to improve throughout the year, especially in the second half.

Sure. Okay. Fair enough. That's helpful. And then just quickly, could you give us maybe an update or details that we didn't get into before on that paving agreement in Brazil? Like is this that you've been specked in with a customer and they'll market it, but sales still depend on adoption...

You are getting around, aren't you there, Vincent?

Well, I mean, you brought it up.

Hey Vincent, this is Rich White. Yes, we are progressing well with this customer that you have uncovered in Brazil. They have transitioned one of their sites totally over to our technology and we're happy with the progression that is being seen associated there with.

I mean, we've got, obviously there's competitive information, Vincent, but what I will say is this is a very large opportunity with a very large company down there. It's very encouraging that they're looking at our technology predominantly because it brings a lot of, not only performance attributes, but also production advantages because you're doing this at warm versus high temperature mix. So that's a big opportunity and we will continue to work on it.

Great. And actually just a quick clarifying question on that one for when it shows up, is Brazil would be opposite season or is it more dependent on rain rather than temperature for them?

Yes, that's a great question, Vincent. It's more dependent on the rainy season. You can really pave all year in Brazil, but it depends on when the rainy season comes on their ability to pave the roads.

Well, are there any further questions?

Just first a clarification, did you indicate that and I hear right that industrial specialties should have a run rate of about a $100 million in sales per quarter for the year? Is that what was said or did I hear that wrong?

No, Dan. I might have been battling a cold, so it could have been a little hard to understand. We had $101 million in sales for the quarter. What I mentioned is that about two-thirds of that is the run rate you should expect for future sales in the inspection segment, with the remaining one-third primarily coming from selling off finished goods inventory in the markets we are exiting.

And that's completely done. That's falling off the inventory?

There's some nominal amount left, but most of it in Q1.

That was the big slug.

You mentioned wanting to reach 10% of sales from oleo-based products, but by the end of the year, I'm not sure if you can share this information. Are we currently at about 2%? Where do we stand right now?

Well, you have to be careful with it because some of it's product substitution versus sort of new market sales, right? So we are selling modest levels of oleo-based stuff. We've got a lot of testing going on, certification, et cetera, right? But when you kind of roll it all up across all the businesses, you get to a number that's not too far from that.

Okay. Okay. And then finally, just again coming back to the PM EBITDA margin of 54%, I realize you said that don't expect that every quarter, but I mean a high-40%s, low-50%s is now the norm because I thought I could be wrong here. Like a few years ago, low-40%s was kind of what we're hoping for and now we've obviously moved well beyond that.

Well, that's right.

You're right. We used to say low-to-mid 40%s and I think we said now we're at mid-to-upper 40%s. That is correct.

And we've always said, Dan, look, we will do everything in our power to maximize the profit of that business every quarter. This, you have to understand that it has some lumpiness to it based on when we take outages, when Chinese New Year comes and when they pre-buy, there's just a lot of moving parts. So you can't take one quarter's margin and extrapolate it across the year, good or bad, right? So we set ourselves a long-term target of being in the high-40%s and we'll do better than that when we can.

So I guess first one, we heard from the EPA kind of a new PFAS kind of level going forward. And some of the solutions, at least early on look like from a water table perspective is going to be tied into activated carbon or carbon in general. I guess, can you speak to the conversations that you're having there and if it's resulting in any early demand flows, that's something more on the come as we kind of look through whatever the end of this year into next year?

Yes, John, this is Ed. Obviously as you mentioned, it's a big deal around the country at this point with PFOS and PFAS. Each carbon that's used for these have unique chains and molecules. And so you really have to test the product first to see whether it's got efficacy for the particular PFAS or PFOS or PFED that you've got in the system. And so we see that opportunity is something for us to do with our powdered-activated carbon products. But we're really trying to make sure that we maximize the sales rate as well as the profitability as we go into those markets.

Got it. Okay. Makes sense. And then just a question on the PM business, can you speak to the pricing environment that you're seeing and how much that contributed to the margins? Just first running without downtime, because again, we've seen periods when you haven't had much downtime and we haven't seen margins quite like this. So just wondering how much pricing might have contributed to that?

Yes, John, we assess year-over-year opportunities. We continue to implement price increases in the mid-single digits as the year progresses. While there may be fluctuations in this rate, we aim to consistently capture the value that our products provide.

And when you think about it, most of that price increase really sits on the activated carbon itself and not so much on the honeycomb. So if you're building your models, John, you can think about that.

I think prior quarters, I'll chime in here, prior quarters we were talking about process purification when auto production was a bit depressed. Now auto production is on the rise, so you're getting that mix benefit as well from process purification applications into the activated carbon for autos. And a good piece of that margin upgrade is related to that mix upgrade.

John, I would actually encourage you, so as I was driving in this morning, I was listening to CNBC and they were talking about Ford's, I guess either monthly or quarterly sales numbers, right? And the headline numbers like, well, ICE is down, traditional ICE is down and EVs are up, right? But ICE was down some percentage. All electric EVs were up some percentage, but hybrids were up 59%, right? And a hybrid is for us, basically another internal combustion engine. And those are sales, right? And then they came and actually talked about, because you could argue that a lot of Ford's EVs, so all electric sales were then trying to clear inventories by cutting price on the lots to get the Mustangs and all that stuff moving, right? So we look at obviously what drives us is production, right? But you can look through and I would encourage you as you guys think about this, to understand that dynamic because I thought that was a very telling set of statistics, right? You've got EV sales up, but they're clearing high price stock cutting price, trying to clear their inventory. Where they're building are in hybrids. And that is very, very encouraging for us and we expect that trend to continue and not be just at Ford.

I wanted to ask about the hybrid vehicles in relation to the previous question. What you're observing in the market aligns with your comments about hybrids performing significantly better. However, when you mention hybrids being similar to ICE vehicles, is that due to original equipment manufacturers using shared components for both ICE and hybrid vehicles? I had thought hybrid vehicles would have smaller fuel tanks and therefore require less activated carbon. Is that not accurate? If so, could you provide more details on the situation?

Yes, Ian, it's Ed. With hybrids, you have relatively small vehicles with small gas tanks. When it's time to fill up those gas tanks, you need to depressurize the system, which requires the same amount of activated carbon in the fuel tank as it depressurizes. This gas quickly moves into a canister system where the activated carbon captures it. From my perspective, we also use some honeycombs and carbon in those systems, depending on the approach taken by each individual OEM for their vehicles. I still believe in the hybrid vehicle; its market share is growing. If you look at the data from Q1, both plug-in hybrids and hybrids increased by 320 basis points. As people consider their next purchase, there is a noticeable excitement about hybrids and plug-in hybrids.

Now when you think about it, hybrid vehicles represent a very good solution for most consumers. I can use myself as an example. I live about 10 miles from the office, so I can go back and forth from work running on electric. But when I need to take a long trip, like taking my kids somewhere, I have that flexibility, which removes any range anxiety. Most of the time, it’s running on electric. I think consumers, when you consider the relative price point of these vehicles, are concluding that it makes the most sense, and we are benefiting from that.

Understood. Okay. And then on the AFA push, I know there's a lot of testing certification. Maybe can you give us an idea of how that's going, maybe versus expectations or success rate or anything along those lines as far as just color on how that's going.

It's a very slow process, unfortunately beyond our control. We maintain an ongoing dialogue with the regulators, almost continuously. We're actively engaging with customers to generate interest and conduct tests, and then we proceed to the certification stage. Our most significant successes have been in our pavement technologies business and some other commercial and industrial applications, including oil field projects. It's encouraging because as we achieve certifications, I believe we will see more success. We're managing the situation as quickly as possible and feel positive about the progress we're making within our capabilities.

Congratulations on a strong quarter for carbon materials. Could you provide more details about the shift towards hybrids and possibly away from larger trucks and SUVs, where you traditionally had a higher content? Has this change influenced what you've observed this quarter, and are the average selling prices for hybrids similar to the content levels seen in those larger vehicles?

Yes, so we love F-150s. We love full-size trucks. We have a significant amount of content on them because they have large fuel tanks and generate a lot of vapors coming out of them. But that being said, even with smaller vehicles, the heat of the vehicle can drive more emissions coming out of the fuel tank as well. So it depends really on the type of vehicle and the design that they've got and the space that they have to have. And in a lot of cases, they have to put additional content on a canister with additional honeycombs so that they can meet the requirements that the EPA has in place.

Okay. Got it. And then just a quick question on the industrial specialties business. I was wondering if you could comment on the profitability on that 2/3 of that $100 million, if you're making any money on that, if it's relatively neutral, just given the...

It worked against us. We would have been better if we didn't have it.

The source subject here, John.

Fair to say it's loss-making then?

Yes.

No, well, we're talking about the 2/3 that we're keeping.

Are you talking about the 1/3 that we give?

No, the 2/3. I know the 1/3 isn't so great.

Yes. The 2/3 is the stuff that's making money.

Yes. Right. Sorry about that. Make sure you get that straight. We would prefer...

Can you quantify the degree of profitability then?

What's that?

Is it possible to quantify or ballpark the degree of profitability on those sales?

No, we don't get into EBITDA at the product line.

It's too complicated, John. The best way to explain it is that the two-thirds we retained, which Mary mentioned, are expected to be ongoing. These are markets in which we will continue to engage. The one-third that resulted from the DeRidder wind-down was primarily loss selling as we exited those markets. As we discussed, we are moving away from lower-margin markets that we don't find appealing going forward. However, it may be challenging to see that reflected this quarter since it's the first quarter before things begin to progress.

Right. And I understand that in the Performance Chemicals results for the next couple of quarters will be hard to see in spec because paving season kicks in and you've got road technologies and their profitability profile kicking in. But really all we can say is the 2/3 that we kept, we kept it because it's making money.

Hey, nice start to the year. I guess for Performance Chemicals, is the way to look at if you add back the $26.5 million loss to EBITDA and that net number is kind of what the ongoing entity is sort of producing? So it's kind of a 10% EBITDA margin for Q1, but that should scale up as road technologies kicks in gear in 2Q and 3Q?

I don't believe that's the correct perspective. I would argue the opposite. If you consider it on a cash basis, the business incurred a loss of approximately $30 million this quarter. This includes a negative 10% EBITDA loss along with the additional costs. We're currently marking the excess CTO we are acquiring to market value, which we believe is more accurate. You'll find this detailed in the 10-Q and Phil Platt's thorough disclosures. The excess CTO will appear as a noncash charge that affects other income and expenses, and it will also show up in the statement of cash flow. The CTO we're processing will impact the segment's profitability. This quarter, after accounting for offsetting sales and supplier payments, we experienced around $20 million in cash losses. This was not a simple one-to-one offset due to market conditions. Additionally, we made a $6.8 million adjustment for the write-down on the excess inventory we still hold. Moving forward, any resales that exceed our current marks will either increase or decrease our financial outcomes but will be less volatile. It's important to note that we will be continuing to acquire excess CTO for some time, and you will see that reflected in our records.

No, I understand.

From an EBITDA perspective, these are not our ongoing primary operations, so they are not included in EBITDA. This is not a business that we're involved in.

Right. Right. No, understood. And then I apologize if I missed this, but for Performance Materials, what do you think the sales growth is going to be this year?

Well, we don't bring it out by, but I mean, I think we expect sales. I mean, you can look at the first quarter, you can look at what we did last year. We expect our sales to continue to grow at a pretty healthy clip, right? Maybe not as strong as last year, but certainly from...

We tied to auto production.

But we tied to auto production and we see that improving.

In the first quarter, auto production was somewhat lower than initially anticipated. Consequently, Ed's results benefited from the price increase we previously discussed. Looking ahead, auto estimates are expected to improve over the year, and production is also anticipated to pick up throughout the year, which should provide us with positive results.

We have mentioned this before, Mike, and we generally track IHS. We also consider a variety of sources, including banks and economists.

Customers.

Customers being the predominant input, right? And then we look at a calculation of ICE/hybrid production by region, right? And then that kind of gives you a direction of what we think things are going to look like, right?

Got it. And then last one on APT, do you think we've bottomed here and start to get some sequential improvement in sales or we still got a little bit of a headwind in 2Q before hopefully things get better in the second half?

So we did see 2 quarters actually in a row sequential improvement. So we are hopeful that we are at the bottom. I'd like to see another quarter or so and see that momentum continue. But clearly they did take a hit from the global slowdown, industrial demand weakness, but they have been able to generate 2 quarters of sequential improvement.

We take great pride in our margins despite experiencing a decline in volume. Adjusting our cost structure to accommodate this and maintaining our margins is a challenging task. While they have benefited from lower energy costs, I believe that may have masked some issues from last year. Nevertheless, their ability to manage these challenges and maintain their margin percentages required significant effort. Regarding the industrial economy, we are encouraged by the current situation, as Mary mentioned, but we are not ready to make a definitive statement until we observe more data over time. The situation has been unstable, fluctuating at the lower end, and while things appear to be improving, we prefer to wait for more evidence before making a solid assessment.

And it was volume improvement, which is what we've been keying off of to try to assess whether we're seeing a healthier demand environment going forward.

I have a couple of follow-ups. First on the business that you're exiting, I understand the losses and that the pricing capability there is not strong. It's likely the most competitive area, but could you describe your ability to get pricing in the business that you'll continue with, considering the ongoing inflation in materials?

Yes. So I mean, the biggest issue really centers around rosin pricing, right? Chris, rosin, as you know our rosin is mostly in sort of what I would call industrial applications and highly vulnerable to substitution, right? It doesn't help that some of our competitors in traditional crude tall oil-based rosins have a better cost structure than us, but we have to respond to that and we have to deal with that, right? And that's because of the CTO, but most of the stuff that we exited and this is predominantly a function of DeRidder. DeRidder was really run as a rosin site, right? I mean, that's really where it made its money. And then it also had the advantage of selling some TOFA into the oil field markets, right, because it's obviously producing TOFA. But when you look at that in the aggregate, you have to kind of ask yourself when you run a ton of CTO and where it's end markets are positioned, does it make economic sense for the enterprise, right? We feel like what the footprint that we have today is more in balance, right? That's predominantly because the Charleston plant's primary end market is road technologies, right? And so those are the markets that it's serving. It does have some rosin that comes out that aren't needed in those markets, but things like Ozark help with that because they use rosin, right? But generally speaking, it makes that rosin problem a lot smaller relative to the value that you get from the TOFA. That's the best way to describe it.

Yes. I got it. Makes sense. And then the follow-up on the PM segment was around the hybrid discussion. I'm just curious if to the extent you're getting mix lift, is there any way to characterize how much benefit you're getting from your products for the new technology where you have IP, the low-purge engine technology? I think that's at play both in hybrids as well as maybe just advance model of your platforms.

What percentage of your sales are covered on new patent today? Probably the best way to...

Yes, within North America, there's a high level of patent protection across those, right? As it's a Tier 3 requirement, which you're looking to get extremely low levels and the canisters themselves with activated carbon help, but you need, in a lot of cases honeycombs. Some of those honeycombs vary on their content and efficacy. And we help the OEMs and the Tier 1s to help design the canister system that they're looking to put our products into, right?

And that's important, Chris, because most of this hybrid push is in North America today.

Yes. With China 7 coming along...

Right. Eventually we'll benefit in China, right?

We have no further questions, so I'll hand the call back to John Nypaver for closing remarks. Thanks, Adam. Well, this concludes our call. Thank you all for your interest in Ingevity and we'll talk with you again next quarter.

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