Ingevity Corp Q2 FY2024 Earnings Call

Good morning everyone and thank you for joining the Ingevity Second Quarter 2024 Earnings Call and Webcast. My name is Brika, and I will be your moderator today. I would now like to turn the call over to your host, John Nypaver from Ingevity, to begin. Please go ahead, John.

Thank you, Brika. Good morning and welcome to Ingevity's second-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 the 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 Hume, President of Advanced Polymer Technologies are available for questions and comments. John will start us off with some highlights for the quarter and an update on our repositioning efforts and Performance Chemicals. Mary will follow with a review of our consolidated financial performance and the business segment results for the second quarter. John will then provide closing comments and discuss 2024 guidance. With that, over to you, John.

Thanks, John, and hello, everyone. There's lots to talk about in this call. As you have no doubt seen, we announced further repositioning of our Performance Chemicals segment, a process that started last fall with the closure of our DeRidder, Louisiana facility. Mary and I will speak in detail about what we have done, why, and where we are going. These recent actions, the termination of the CTO supply contract, goodwill impairment, and the relocation of our oil refining to Charleston are important milestones to move the PC segments forward and get these issues behind us to create a stronger, more stable PC segment for 2025 and beyond. First, though, let us address the quarter. Overall, it was a mixed quarter. I'll start by highlighting Performance Materials, which for the first time ever delivered a fourth straight quarter of over 50% EBITDA margins. Simply put, the value we get in the market for our products, lower production costs, and increased hybrid adoption are more than offsetting both soft auto production and full BEV vehicle market penetration. Macro trends continue to benefit the segment as hybrids and ICE vehicles are making up a larger mix of cars being produced. And while the cost of energy improved versus last year, what is helping this segment maintain these margins is our plants are using less energy due to operational efficiencies the team has implemented. Both the commercial team and the operations team are ensuring this segment continues to fire on all cylinders. Advanced Polymer Technologies saw a third straight quarter of volume growth and year-over-year volumes increased as well. We see encouraging signs in end markets such as electronics and automotive, which are driving higher demand for CAPA encodings and high-performing adhesives. Yearly volumes have begun to bounce back. However, China and, to some extent, the U.S. continue to be impacted by slower industrial demand. The team is focusing on markets where CAPA's value proposition helps maximize profitability in a dynamic environment, and they continue to deliver 20% margins. In Performance Chemicals, the quarter's results were affected by our reduced exposure to certain end markets as part of our repositioning efforts. Several other factors were at play as well. The first was weather. You may have heard from other companies that there was a lot of rain across the country in May. You can't pay for or do road markings when it rains. So the quarter got off to a slow start. We estimate we missed about two weeks' worth of sales due to this rain. In fact, July was wet as well due to the hurricane reaching landfall in Texas. If the weather improves and holds up the rest of the summer and well into the fall, we can recover those sales. But road construction projects are weather-dependent, so we'll see. We are confident, however, that the pavers, if they can, will work as hard as possible to make up for this lost time. Second, a weaker-than-anticipated industrial market recovery has impacted the Industrial Specialist product lines. In the quarter, revenue from our non-CTO oleo-based products was up compared to last year, but the pace of this growth is slower than we'd like. Finally, the price we pay for CTO in the quarter remained elevated and negatively impacted the segment's profitability. Let's turn to slide 5. We will discuss CTO in more detail. A few weeks ago, we announced the termination of our final long-term CTO supply agreement. This was a critical step to move as quickly as possible to a market cost for CTO, as the price we have been paying was well in excess of what we and our competitors could source in the open market. This creates a clear path for the PC business to improve profitability and put an end to the negative cash drain these purchases were creating. We said on our last quarterly call that we expected the CTO price we pay under our long-term supply contract to moderate in the second half of the year. However, during the quarter, we were informed that the contracted price into the second half will be much higher than expected. As we have discussed before, when we closed our DeRidder, Louisiana facility, our remaining long-term supply contract required us to continue buying CTO earmarked for that facility for a two-year wind-down period, leaving us with excess CTO. We were reselling that excess CTO at forecasted losses of $50 to $80 million in 2024. We expected our contract prices to come down in the second half of 2024 and throughout 2025, but it became apparent that this would not be the case in the foreseeable future. Therefore, we negotiated a buyout of a contract for $100 million, payable in $250 million installments. Effective July 1, we are no longer obligated to take CTO from any long-term contract. We have enough CTO on hand and available via short-term deals to cover our needs through the first quarter of 2025. We believe there are enough available options in the market to meet our needs next year and beyond. We will still feel the impact of this higher price CTO on this PC segment's P&L through the remainder of this year until the end of the first quarter of 2025 as we work through the higher cost inventory we have on hand. However, after that point, we will be purchasing and using CTO that we acquire in the open market. While painful, this was an important step for the business to move forward and return to profitability and cash generation. Mary will provide more detail on the impacts to our financial statements in a few minutes. Now please turn to slide 6. In order to reduce our cost structure, we are transferring the refining of oleo-based raw materials to our North Charleston facility. This will result in the closure of our Crossett, Arkansas site. A key tenet of our growth strategy and performance chemicals is to diversify our raw material streams and grow our oleo-based penetration into our legacy markets while also developing new market opportunities for these oleo-based products. This does not change. Operationally, we've proven the fatty acids we made from soy and canola work and in fact, we've made great progress in using them as substitutes in existing products like paving and lubricants. North Charleston is where we originally piloted the refining of oleos, and other changes we have made at the site have freed up capacity, so we can use existing infrastructure to quickly begin refining soy, canola, and other oleo-based materials. With the added benefit of having post-refinery derivation capabilities on site in North Charleston. The North Charleston site has both a refinery that runs CTO but also a smaller secondary refinery, which we call the BNG. This refinery has approximately 25% to 30% of the capacity across it, and with modest investment, that capacity can be increased to 50% of Crossett's output, with the ability to expand further as needed. This capacity is enough to meet the foreseeable demand for oleo growth. By operating both refineries on one site, we achieve the benefit of higher fixed cost absorption. We also save on the transport of oleo products from Crossett to Charleston, where we derive them into finished goods. Process underutilization was causing a drag on the segment's earnings. Concurrent with the Crossett closure, we are reducing headcount to adjust for the smaller physical footprint, with overall annual savings expected to be $30 to $35 million beginning in 2025 when you account for both the closure in Crossett and reductions at corporate functions. On slide 7, you'll see a recap of our repositioning strategy, which is to reduce our exposure to low-margin cyclical end markets, diversify our raw material streams, and optimize our physical footprint, all of which will create a more profitable and stable business segment. By exiting the CTO contract, we have put this cash stream behind us, and by the end of the first quarter of next year, we will be running the business with lower cost market price CTO, which will enhance both our profitability and competitive position in the market. We said previously that 2024 was going to be a transition year for Performance Chemicals as we execute on this repositioning. While we continuously assess how best to optimize our businesses, we believe most of the heavy lifting is now behind us to return this segment to profitability. Now I'll turn it over to Mary to run through the financials for the quarter.

Thanks, John, and good morning, everyone. Please turn to slide 8. Second quarter sales of $390.6 million were down 19% due primarily to our repositioning actions in Performance Chemicals, which included reducing our exposure to certain low-margin end markets in the Industrial Specialties product line and continued weakness in industrial demand, which impacted both Industrial Specialties and APT. In addition, we saw lower sales in road technologies in the quarter due to adverse weather conditions in North America. EBITDA margins improved 80 basis points to 26%, as a strong quarter from Performance Materials more than offset lower margins in Performance Chemicals. During the quarter, we incurred $13 million in restructuring charges and $24 million in CTO resale losses related to the Performance Chemicals repositioning. We also recorded a non-cash goodwill impairment charge of $349 million for the Performance Chemicals segment, which was triggered when we received new information from our long-term supplier regarding CTO pricing for the second half of 2024, which was much higher than expected. When performing the goodwill impairment testing, we updated the growth assumptions for all product lines in Performance Chemicals as required. The combination of current depressed financial performance and the continued weakness in industrial demand with limited indications of near-term recovery caused us to revise our growth expectations for Industrial Specialties end markets, including oleo markets and road markings, which is being negatively impacted by fierce competition in the paint space, representing approximately half of our road markings product sales. Our analysis indicated that the book value of the segment significantly exceeded fair value, resulting in a total impairment of performance chemicals recorded goodwill. The goodwill charge of $349 million, the CTO losses of $24 million, and restructuring charges of $13 million amount to a combined total of $386 million in non-operating charges, which led to a GAAP net loss of $283.7 million. We've excluded the impact of these charges 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 in Form 10-Q, which will be filed this evening. Our adjusted gross profit of $140.5 million declined 17% primarily due to lower sales in Performance Chemicals, while gross profit margin was higher by 80 basis points due to a combination of increased sales in Performance Materials, reduced exposure to lower margin end markets in Performance Chemicals, and realized savings of $17 million related to the Performance Chemicals repositioning and other corporate actions taken last year. Adjusted SG&A improved 16% year-over-year, which included realized savings of about $5 million related to last year's actions. The total realized savings of $22 million in the quarter put us on track to achieve our target of $65 to $75 million in annual savings from the restructuring actions taken last year. Our diluted adjusted EPS and adjusted EBITDA dollars declined on the lower sales, but we delivered a strong adjusted EBITDA margin of 26%, reflecting the underlying strength of the company's core portfolio as we reposition Performance Chemicals. We estimate our 2024 tax rate will be between 23% and 25%. Turning to slide 9, I’ll focus on leverage and free cash flow. We ended the quarter with reported leverage of about 4 times and expect Q2 to be the peak leverage this year, as we noted in our last earnings call. Also, I want to point out that there are leverage calculations for the prior two quarters changed as a result of guidance from the SEC to revise future filings to no longer exclude certain inventory charges from adjusted EBITDA. We had excluded inventory write-downs of $19.7 million in Q4 of 2023 and $2.5 million in Q1 of 2024. These have now been included, thus reducing adjusted EBITDA in those respective quarters. The appendix to the slide deck and the press release has the details of our leverage calculation. We expect leverage to decline through the second half of this year and to end the year at about 3.5 times. Our bank-calculated leverage was 3.3 times at the end of Q2, and we are comfortably in compliance with all of our bank covenants. Free cash flow for the quarter was $12 million, which includes the negative cash impact of $26 million from CTO resale losses and $13 million in restructuring charges. Without these, free cash flow would have been $50 million and on pace to exceed our original guidance for full-year free cash flow of greater than $75 million. Looking at the second half of the year, we have revised our guidance to include the $100 million CTO contract termination fee and approximately $10 million for primarily severance-related cash costs associated with the closure of the Crossett plant, resulting in updated free cash flow guidance from $75 million to slightly positive for the full year. We have a table on our guidance slide, slide 13, highlighting the $155 million of cash drag from CTO resales and the termination fee that won't recur. So let's turn to slide 10 and you'll find results for Performance Materials. Sales were up 9% to $157.2 million and EBITDA was up 28% to $82.2 million, with an EBITDA margin of 52.3%. I always caution folks not to forecast to repeat quarterly margins when it comes to this business, but after four quarters of over 50% margins, even I am ready to say that we expect full-year margins for PM to be around 50%. We had our normal scheduled downtime at the plants during the quarter and expect similar downtime for the rest of the year. Input costs such as energy and certain raw materials were lower year-over-year, but a major driver of the improved EBITDA is the operational efficiencies John mentioned earlier. Energy prices will fluctuate, but the team has made improvements at our plants such that we are consistently using less energy than before, and we're seeing these results benefiting the bottom line. We believe this is a structural improvement in the business. Over the long term, we continue to expect EBITDA margins in the mid to high 40%. Turning to slide 11. Revenue in APT was $47.9 million, down 10% as lower pricing in all regions offset higher volumes. Volumes were up nearly 5% year-over-year, and this was also the third straight quarter of volume growth. Europe has seen a very strong rebound from last year's lows, while Asia, particularly China, continues to be weak, but we're seeing encouraging signs as the team focuses on higher margin opportunities in end markets such as electronics and automotive that appear to be in the midst of a rebound. These efforts, along with lower energy costs and continued discipline in managing SG&A contributed to the segment's 20% EBITDA margins. Now please turn to slide 12 for Performance Chemicals results. Sales of $185.5 million were down 35%, primarily due to the repositioning actions affecting the Industrial Specialties product line, which experienced sales dropping 60% to $56.4 million. On our last call, we indicated that we expected sales for Industrial Specialties to be about $65 million per quarter for the rest of the year, but given the muted industrial recovery expectations for the second half of this year, it's more likely that sales will be in the $50 to $55 million range per quarter for the remainder of the year. Road technology sales were down $11.8 million from a record quarter last year attributed to weather-related delays and road construction projects. EBITDA for this segment was $9.3 million, down 79% due to significantly higher CTO costs and low capacity utilization rates at our Crossett and North Charleston site. As John mentioned, the segment will be working through the existing high-cost CTO inventory for the remainder of the year and into Q1 of 2025, which will negatively impact margins over the next three quarters. Given the many changes impacting this segment, we are sharing our expectation that segment EBITDA will be breakeven for the full year 2024, with a return to profitability in 2025. The transformation of the Performance Chemicals segment into a more specialty-focused, less capital-intensive business is well underway, and we expect to see the benefits beginning in the second quarter of 2025, resulting in more profitable and stable financial performance. Now I'll turn the call back to John for an update on guidance and closing comments.

Thanks, Mary. Please turn to slide 13. This has been a busy quarter at Ingevity. We discussed additional steps taken in our repositioning efforts. We discussed terminating our CTO contracts. We discussed this lower sale of our oleo-based and insect products in a weaker industrial market and weather delays impacting Road tech. Based on what we see at this point, industrial markets remain soft going into the second half of the year. More bad weather impacted road construction in July. Therefore, we are revising our full-year sales guidance to be between $1.4 billion and $1.5 billion, and adjusted EBITDA guidance to be between $350 and $360 million. This reflects the uncertainty we have as to whether road crews have the time to make up the lost sales due to adverse weather, higher CTO costs, and inventory affecting Performance Chemicals' bottom line, along with a lack of an industrial recovery that could affect both APT and our oleo-based products in the Industrial Specialties line. We can't control the weather, but we can control how we reposition our Performance Chemicals segment to deliver sustained profitability. We remain confident that Ingevity will emerge from 2024 stronger and better. There are nearly $200 million in outflows on that free cash flow table that won't be present next year. We are working to deliver mid to high 20% margins on a consolidated basis and generate over $150 million a year in free cash flow, which we will use to deleverage the balance sheet and then return cash to shareholders. With that, I'll turn it over to questions.

We have the first question from John McNulty with BMO Capital Markets.

Yes. Thanks for taking my question. Obviously a lot going on and a lot to unpack. So I guess the first thing I wanted to understand better is you're going to continue to have kind of the CTO high cost pressures through the first quarter, and then they should drop off to kind of more market level. If today's market was kind of what you see, whatever, say, Q2 of next year, how much of a quarterly benefit would that be on the market pricing versus the stuff that you're working through in your inventory right now, how should we think about that?

Yes. So John, probably the simplest way to think about that is, I think we expect that the price that we're paying for CTO in a given quarter is probably going to fall by half. It's going to be half, roughly. I mean, it's obviously the market will do what the market will do, and we're talking about nine months away or eight months away. But our expectation based on what we're seeing today and where the market is, is that starting in Q2 of 2025, first off, we're not buying any more off-market CTO now, right? So the cash drain piece is cauterized. So while we, but we will be running, as we alluded to, this higher inventory CTO through our plants and therefore through our P&L. But by the second quarter of next year, we will be running a lower-cost CTO that we will be procuring in the open market, and that cost should be about half of what we're paying today. Assuming today's levels. Yes, I mean, it may be better or candidly, but I don't, I think half is probably the right way to think about it.

Okay. Got it. That's helpful. And then on the paving business, so it sounds like you lost, I don't know, somewhere in the neighborhood of $15 to $25 million or so on wet weather, and it sounds like that's going to also impact you in Q3. So whatever, let's call it $40-plus million of revenue that may be getting pushed out. I guess if that can't be made up this year, should we assume that gets additive to next year, or is it with municipalities, it's kind of a look, you use your budget this year, you don't, it's not like you get to push it into the following year. I guess, how should we be thinking about that? Because it does seem like a lot of high-value product for you that at least temporarily has been kind of sidelined.

Well, so I mean a couple of things in that question, right? And Rich is here, so he can chime in, Rich. But the weather, there's no doubt we're having sort of a weird weather year, right? So the paving season got off, and this has happened to us in the past, right? The paving season got off to a slow start, then it kind of fired back up, then we sort of had some weather in Texas in July, which has made July a little soft, and we'll see what August and September hold. There is, as I alluded to in my comments, the pavers are incentivized to go as long as they can, right? And so to the extent the weather pattern shifts and we're able to pave later into the season, we may have a stronger than normal start to Q4, and we've seen that happen before. But it's too early to call, and we are sort of having a strange weather year. So we're taking a prudent approach. Regarding rollovers to next year, it has been our experience that funding is put in, and pavers will roll back to the next year, meaning that they have a plan, they allocate money to it, they get it done, and if they don’t get it done, it will bode well for next year because it will get pushed. But we also have to take that year on year, right? Because we have to see what the environment is. Directionally paving interest and efforts to continue to pay and spend on infrastructure remain strong. But that would be the normal pattern for us.

Got it. Okay. And if I could sneak in maybe one last one. The $30 to $35 million that you expect to save from the Crossett rationalization, I guess, should we be thinking about that even coming through evenly? Is it back-end loaded for 2025? I guess how should we be thinking about that?

It's pretty even in the sense that the plant will cease operations here very shortly. By the end of the year, the full benefits will be rolling through in 2025. Just to sort of build on the comments that were prepared, John, you can look at those numbers and obviously deduce that the fixed costs of trying to run that site will be alleviated, because it is a refinery. It needs high utilization to operate. We are taking an operating philosophy now that we're going to build it as we grow. We were hopeful, and I think in a stronger industrial environment, expected that the utilization could pick up at that site quickly enough that we wouldn't need to take these actions. However, we were faced with uncertainty regarding the next couple of years' impact from an earnings perspective versus using an existing refinery, which is a secondary refinery that we have in Charleston that for very modest investment, we're going to build as we grow. So, as I mentioned, with modest investment, we can kind of get 50% of the output across it and just make those capacity expansions as needed.

Got it. Okay. Thanks very much. All makes sense. Appreciate it.

We now have Daniel Rizzo with Jefferies.

Good morning, and thank you for taking my call. Once you do the changes and move to North Charleston, what will be your capacity utilization for refining at that site?

Well, we don't really always discuss those metrics, but obviously it's going to improve because we're moving utilization from Crossett to Charleston. We have plenty of room to expand capacity both on the CTO and non-CTO and oleo-based refining. We feel comfortable that we can expand and produce going forward there. As I alluded to, we can build as we grow back by making relatively modest changes. Plants are always doing this. However, as a very large site that we've operated for a long period of time, we've spent the last six to nine months building out what this would look like.

No I mean, would you, when you say just you can expand as needed, would that be just simple, like, de-bottlenecking? Or is it less than that?

I mean, it's de-bottlenecking; it is piping. These are relatively modest things that, frankly, plants are always doing.

Okay. And then finally, I think you mentioned that lower energy was a tailwind. I think you said in Performance Materials. I was wondering what percentage of COGS energy is. Is it significant?

It's very significant. I mean, beyond the raw material costs of basically sawdust and phosphoric acid, it is a big burn for natural gas, and it's a significant factor explaining what's been transpiring in that margin.

Thank you very much.

Your next question comes from Jonathan Tanwanteng with CJS Securities.

Hi, good morning. Thank you for the questions. Wanted to focus on the outperformance in the materials business, which has really been fantastic. I heard the commentary on the margins, which is great, but I was wondering if you could speak to the revenue run rate and if that is sustainable going forward? Do you think hybrid and ICE cars continue to sustain that kind of revenue run rate? Or is there, is it more of a resumption of other challenges as EV and other things pick up in the second half and through the near future?

No, and Ed is sitting next to me, so he can chime in as appropriate. I think we feel pretty good that the revenue environment that we're operating in today is going to be around for a while, right? We feel good, as Mary alluded to in her prepared comments, certainly about the remainder of 2024. But I think we feel good in a more extended period. What's really going on here is the value that business is getting from products, coupled with the cost savings that the team has put in, and as we alluded to, a number of these are structural. We are using less energy. These are basically large kilns; they burn a lot of natural gas. Those two things are more than offsetting the softness of auto production. And that's kind of bouncing around depending on the region you're in or what have you and the adoption of all-electric vehicles, because remember, we are on hybrid. Our strategy will be to continue to pull the levers that we have to deal with the puts and takes of the auto industry. We feel very good about the remainder of this year and in the next couple of years.

Got it. Thank you. And then just within the guidance, are you expecting any sequential improvements in paving, number one? And number two, are you including any restructuring savings in this year? I know you said next year, but seeing as this plan is closing in August, are you realizing something in Q3 and Q4?

Yes. So I mean, it is August, right? Also, I'll take the last part first. By the time these closures occur over the next couple of months, the ability to significantly impact 2024 is fairly modest, right? But there will be some, but pretty modest, right? Because you're talking about something really starting to see it sometime in Q4, right, by the time you sort of get all this done. With regards to paving, you know us well enough, and we try to be as transparent as we can. We had a weak start to the year, a weak first month, good two months, right? Now, we've had kind of a weak July. We are going out and talking about that because it's true, and people saw the storms, right? We'll see what August and September hold, and then we'll see what happens in October and November, right? Because this has happened to us in the past. It's not a normal year, but if the weather holds, the pavers will go into the fourth quarter as long as they can to make up for this lost business. If the weather doesn't hold, they can't. Those projects will get pushed into next year, so that's an assumption we can't make. We are taking a conservative position based on what we know, and we'll see how the year turns out.

Understood. Thank you.

And we now have Mike Sison with Wells Fargo.

Hey, good morning. What's the run rate sales for Performance Chemicals as we head into 2025? Is it a $600 million business, a $500 million business? Just trying to figure out kind of how that shakes out with the restructuring?

Well, we're not disclosing that right now. It's August. So what we're saying is that as we've sort of been clear all year, this is the year we're going to fix this business so we can emerge stronger in 2025. What I would tell you is that the sales impact of shutting Crossett is going to be relatively diminutive because we're transferring all that to Charleston. So I would encourage you to look at thinking about the quarters of this year and making some annualizations because we’ve done, we don't have DeRidder this year. We have been operating with Charleston and Crossett, and Crossett wasn't generating revenue. So you can deduce from that. I would encourage you to think about what the annualization looks like for '24, as this is the baseline for what '25 would be.

Got it. And then, I mean, I get it, I mean, it's probably a tough question, but what gives you confidence that as we head into the second quarter of '25, that when you need CTO supply, that prices will be better than what they are now?

There are really two things that I would point you to, and you could argue a third as well. One, we know with great clarity and I recognize we don't disclose this to the broader market, but we know with tremendous clarity how far off the prices we've been paying our suppliers were from what was available in the market, meaning what we were buying or could have bought from other parties, what we believe our competitors were buying it at, and what transactions we are seeing in that market. We know this because we were selling CTO. Now, as I alluded to earlier, that benefit should be half; that’s probably a good place to start, right? Now you said yourself, and I understand, okay, well, the market is the market. What makes you feel confident the market will stay? It may move around, but we've got a lot of playroom from where we were. What I would also say is this: we're in a weaker economic environment. Demand is not as robust. The biofuels industry is not consuming as much yet as what could arise at some point, so their demand for this product is muted. Over the last months, by terminating these contracts and by closing, we eliminated 200-plus thousand tons of demand for this stuff that used to be in the marketplace. Supply-demand economics tell you that the price for CTO should remain relatively muted. There is a new source of demand with the biofuel stuff, but that demand seems pretty known and relatively muted. We will benefit next year from two things—the reduced cost structure we’ve pointed to today and that our CTO cost should come down significantly. This is all part of getting this business back to profitability and positive cash generation.

Right. And then, so I guess the final question is, if I think about industrial specialties as it is going forward, what do you need to see in terms of profitability returns? It's a fairly small business now relative to the portfolio. And I guess is there a hurdle rate where you need to get to, and if you don't, is it potential that you have to either divest or move on from the business? Or is there at least a fundamental reason you think that this will be a good business in the long term?

We always reserve the right, as we've said, to assess the portfolio and make adjustments to optimize Ingevity. Even with all this noise, we have EBITDA margins around 26%. We want to get to cash position, which has been a problem. We're highly leveraged in today's market, and our cash generation has been impacted by this. We have cauterized that and can move forward to generate cash and reduce debt. What I would tell you is that we're focused on getting this business back to an acceptable level of profitability and have laid out for you all the structural changes that will occur with reduced footprint costs and CTO savings, and then we need to factor in the market itself. This isn't a 2022 market—it’s not a post-COVID balanced market—but industrial markets, at least this year, have remained relatively soft. We’ll have to see what happens in '25. There was talk of rate cuts and other things. Our focus is to achieve cash generation, stop the cash bleed, restore a more normalized footprint, and get this business back to acceptable profitability levels.

Great. Thank you.

Thank you. I would like to hand it back to you, John Nypaver for some final remarks.

Thanks, Brika. Thanks, everyone, for joining us. That concludes our call and we'll speak with you again next quarter.

Thank you all for joining the Ingevity second-quarter 2024 earnings call and webcast. Please enjoy the rest of your day, and you may now disconnect.