Earnings Call Transcript - NGVT Q4 2025

Operator, Operator

Hello, everyone, and welcome to the Ingevity Fourth Quarter and Full Year 2025 Earnings Call and Webcast. I will now hand over to our host, Surabhi Varshney of Ingevity to begin. Surabhi, please go ahead.

Surabhi Varshney, Host

Thank you. Good morning, and welcome to Ingevity's Fourth Quarter 2025 Earnings Call. Last evening, 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 projections, and actual results or events may differ materially from these projections as further described in our earnings release. Slide 3. Today, you will hear from Dave Li, our CEO and President; and Phil Platt, Senior Vice President, Finance and Incoming CFO. Mary Dean Hall, our outgoing CFO, will also be joining us for Q&A. Our prepared comments will focus on full year total company results and will include both continuing and discontinued operations, which refer to the divested Industrial Specialties product line. We will take any questions related to the quarter during the Q&A session right after the prepared remarks. Dave, over to you.

David Li, CEO

Thank you, Suri, and good morning, everyone. Please turn to Slide 4. Before we discuss the financial results, I'd like to remind everyone that in early December, we shared the findings of our strategic portfolio review through a virtual event. During this presentation, we laid out our plans for growing adjusted earnings per share by 10% and free cash flow per share by 5% through 2027. We also announced the decision to initiate sales processes for our Advanced Polymer Technologies segment and Road Markings product line. If you've not had a chance to listen to the webcast, I would highly recommend reviewing the materials on our website under Events and Presentations. I'm also pleased to confirm that on January 1, 2026, we completed the sale of our North Charleston CTO refinery and the majority of the Industrial Specialties product line to mainstream pine products. With this transaction complete, we have reduced our portfolio volatility, strengthened our profitability and cash flow profile and enhanced our strategic flexibility. Looking at our 2025 results, we are incredibly proud of the strong execution by our teams globally that enabled us to grow total company adjusted EBITDA by almost 10% over 2024, along with delivering industry-leading margins of over 30%. These results generated $274 million of free cash flow, slightly exceeding our commitments. We used the cash to pay down debt and reduce leverage to 2.6x and to buy back over 1 million shares. Performance Materials continue to generate EBITDA margins above 50% and held revenue flat despite lower global auto production, which was impacted by tariff uncertainty and supply chain challenges, delivering another year of near record level sales. This strong performance is a testament to the differentiated value that our activated carbon technology delivers to customers globally. The momentum from continued adoption of hybrids and fuel-efficient ICE vehicles is encouraging and supports our view of a long runway for this business. We also continue to be encouraged by the optimization of our filtration business and see a bright future and good fit for the company in this application space. Within the Performance Chemicals segment, we meaningfully lowered CTO exposure ahead of the Industrial Specialties divestiture. Also, Pavement Technologies grew year-over-year as our innovative solutions facilitated the extension of the paving season into late fall to allow catch-up of projects delayed by adverse weather earlier in the year. Advanced Polymer Technologies continue to face tough market conditions due to tariff uncertainty and competitive pressure, which we are addressing with disciplined commercial actions and productivity initiatives. Overall, we start 2026 with confidence and optimism as we continue to drive performance in our core businesses. And with that, I'll turn it over to Phil.

Phillip Platt, SVP, Finance and Incoming CFO

Thank you, Dave, and good morning, all. Please turn to Slide 5. Consistent with last quarter and with our November 2025 outlook for the full year, I'll focus my comments on total company results, which will include both continuing and discontinued operations. As previously noted, beginning in the third quarter of 2025, the results of the Industrial Specialties product line have been reported within discontinued operations. As Dave has mentioned, we completed the sale of that product line earlier this year. Total company full year 2025 sales of $1.3 billion declined 8% compared to last year. Performance Materials sales remained flat versus 2024 despite lower auto production driven by industry volatility from tariffs and supply chain disruptions. Performance Chemicals sales declined by $86 million, primarily due to our repositioning actions within Industrial Specialties. We also continue to see weakness in demand from indirect tariffs and competitive pressures in Advanced Polymer Technologies. In 2025, we recorded a GAAP net loss of $167 million, which included $337 million of pretax special charges. These charges primarily consisted of a noncash goodwill impairment of $184 million in Advanced Polymer Technologies and a noncash asset impairment of $109 million in road markings. For the remainder of my remarks, I will focus on the non-GAAP results, which exclude these special charges. Reconciliations of our non-GAAP financial measures to the most comparable GAAP measures are included in the appendix to this presentation. Adjusted gross profit of $556 million increased 6.8% year-over-year, with gross margin expanding by 610 basis points. Total adjusted EBITDA increased 10% year-over-year to $398 million, with margins expanding 500 basis points to 30.8%. Total diluted adjusted EPS improved 30% to $4.55. This improvement in profitability reflects the successful execution of our PC repositioning actions, which have also resulted in lower overall raw materials, supply chain efficiencies and plant footprint optimization. SG&A increased primarily due to higher variable compensation expense, driven by improved business performance. We delivered industry-leading margins, and this performance is a clear testament to the resilience and strength of our business model. Moving on to Slide 6. In the top left chart, you'll see how our strong earnings performance and disciplined capital management translated into free cash flow of $274 million, the highest level that we have generated in the past 5 years and exceeded our updated guidance from November. The $220 million increase from 2024 was driven by the absence of approximately $180 million in cash outflows related to the Performance Chemicals repositioning, higher overall earnings and a working capital benefit in Industrial Specialties. With this free cash flow, we resumed share repurchases in 2025, deploying $56 million to repurchase approximately 1 million shares. At year-end, our remaining share repurchase authorization was just under $300 million. At the beginning of 2025, we committed to derisking our balance sheet and reducing net leverage from 3.5x to below 2.8x. Through our disciplined capital management, we exceeded that target, reducing net leverage to 2.6x, nearly a full turn improvement versus the prior year. Importantly, this reduction does not include any of the proceeds from the sale of our Industrial Specialties product line, which closed in early January. With that, let's dive into segment results, beginning with Performance Materials on Slide 7. Sales of $607 million were in line with the prior year, which is a strong result given that 2024 was a record year for that business. Throughout 2025, the automotive industry faced significant disruption from tariff uncertainties, fires and chip shortages. Against that backdrop, the resilience of our Performance Materials business becomes evident. While these dynamics led to slightly lower volumes, disciplined pricing actions helped to offset that impact, allowing us to hold year-over-year sales essentially flat. Segment EBITDA declined 2% year-over-year due to lower volume and higher SG&A. Despite this, EBITDA margin remained strong at 53.8%. Looking ahead, we remain confident that this business will maintain margins north of 50%, supported by its technology-leading position and proven high-quality solutions that provide a compelling value proposition for both automotive and filtration customers. Moving on to Performance Chemicals on Slide 8. The combined Performance Chemicals results presented here include both continuing and discontinued operations, which means results from the divested Industrial Specialties product line are in the numbers. A reconciliation of Performance Chemicals results on a continuing operations basis to the total segment results is provided on this slide. As you'll note, the sales of the previously reported Road Technologies product line have been split into Pavement Technologies and Road Markings, which together represent Performance Chemicals continuing operations segment. Since we have initiated the sales process for Road Markings, we are now presenting its sales separately. Upon completion of that process, the segment will be renamed from Performance Chemicals to Pavement Technologies. Total segment sales declined primarily due to the execution of the repositioning actions of the Industrial Specialties product line. Pavement Technologies 2025 sales remained flat to 2024 as volume growth in NAFTA region was largely offset by lower infrastructure spend in South America. Pavement Technologies also benefited from pricing and favorable mix shift. While adverse wet weather impacted results in the first half of 2025, demand shifted into the second half and a combination of good weather and our season extending technology enabled many projects to be completed within the year. Road Markings continue to experience price pressure from competition, although volumes grew slightly. Total segment EBITDA increased by $45 million over prior year, driven by the successful execution of our PC repositioning actions, which have resulted in lower overall raw material costs, improved logistics costs and a more efficient manufacturing footprint. These actions helped to improve Industrial Specialties EBITDA by $40 million year-over-year. Performance Chemicals continuing EBITDA, which includes Pavement Technologies and Road Markings, increased by $7 million or 12%, supported by improved pricing, favorable mix and lower raw material costs, partially offset by volume declines and higher SG&A. As a result, combined segment EBITDA margin expanded to 13.5%, up from 4% last year. Please turn to Slide 9. During 2025, APT faced headwinds from the indirect impact of tariffs and continued weak end market demand, primarily in automotive, footwear and industrial end markets. In addition, competitive dynamics in China continue to pressure sales, most notably in the paint protective film markets. As a result, sales declined 15% and segment EBITDA was 18% lower year-over-year due to volume declines that more than offset improved operating efficiency. Despite these pressures, we held pricing and maintained a stable mix. The team remained focused on operational discipline, which drove more reliable plant production and reduced operating costs. These efforts, combined with favorable foreign exchange, enabled a strong EBITDA margin of 20%. Overall, 2025 was a great year. Our focus on execution generated solid earnings, driven by operational improvements and footprint optimization despite weak end market demand, tariff uncertainties and supply chain disruptions. We generated robust free cash flow, which enabled us to meaningfully reduce leverage and resume returning cash to investors via share buyback. Looking ahead, we expect to reach and maintain our target leverage ratio of 2 to 2.5x this year and complete $300 million of share repurchases through 2027. I will now turn the call back to Dave to share additional color on guidance for 2026.

David Li, CEO

Thanks, Phil. Turning to Slide 10. Please note that the 2026 guidance includes a full year of APT and Road Markings, but excludes the divested Industrial Specialties product line. Sales processes for both APT and Road Markings are underway and we are encouraged by the interest shown in both. We will provide updates as they advance and revise our outlook accordingly. We expect 2026 adjusted EPS to be in the range of $4.08 and to $5.20 in a year where we do not expect meaningful recovery in the global economy. Sales are expected to be between $1.1 billion and $1.2 billion and adjusted EBITDA between $380 million and $400 million. Performance Materials sales are expected to grow low single digits supported by price increases in automotive, while delivering margins consistent with 2025. Sales in Performance Chemicals, including Road Markings, are expected to grow mid-single digits with EBITDA margins in the mid-teens, reflecting our strong industry leadership and strategic advocacy efforts. In APT, we expect flat to low single-digit growth with margins around 20% as recent commercial and productivity actions offset competitive pressures and weak end market demand. CapEx should be consistent with 2025 and be in the range of $40 million to $60 million. We expect to generate free cash flow of $225 million to $250 million. This amount does not include approximately $95 million in pretax litigation-related payments to BASF in the second quarter. We plan to use the free cash flow to continue buying back shares in line with our prior guidance of $300 million through 2027. So far in the first quarter, we've repurchased almost $20 million worth of shares. Additionally, we plan to reduce and maintain net leverage within our long-term target range of 2 to 2.5x in 2026. In 2025, we focused on stabilizing the business and optimizing our portfolio. That translated to total shareholder return of 45%, highest amongst our specialty chemicals peers and top quartile among the Russell 2000 materials companies. We entered 2026 with good momentum and we'll continue to execute the portfolio strategy, drive performance in our core businesses and build Ingevity into a premier specialty materials company. With that, I'll turn it over for questions.

Operator, Operator

Our first question comes from John McNulty of BMO.

John McNulty, Analyst

Maybe we can start out. Just can you give us an update as to the progress you may be seeing regarding the potential asset sales and I guess somewhat related to that on the $300 million of buybacks that you expect to do between now and the end of '27, does that come regardless of the asset sales? Is it dependent on the asset sales? I mean it looks like it generates really solid free cash anyway. But I guess if you could help us to put that into context, that would be helpful.

David Li, CEO

Yes, thanks. I'll provide an update on the processes, and then I'll let Phil talk to sort of the cash flow. We're very encouraged, obviously, with the cash flow generation of the business. So for both processes for APT and Road Markings, they continue to progress. We're encouraged by the interest shown in both assets. Obviously, we're going to be focused on value, and we continue to expect that we'll announce something before the end of the year. And so things continue to progress, we'll obviously also update our guidance as things go along, but seeing good interest for both assets, and we'll be focused on value.

Phillip Platt, SVP, Finance and Incoming CFO

Yes. And with respect to the share buybacks and the proceeds, John, as Dave mentioned during the prepared remarks, the outlook does not include any of the proceeds associated with the APT or the Road Markings potential sales. So we would expect to continue to execute those buybacks of $300 million over the next 2 years. And the way you could think about it is take a ratable cadence throughout the year is how we're thinking about it in our guide.

John McNulty, Analyst

Got it. Okay. Fair enough. As a follow-up, regarding the $15 million in stranded costs that you expect to eliminate by the end of the year, can you help us understand how much of that is essentially fixed at this stage? Additionally, how should we anticipate the timing of that cost reduction throughout the year? Is it expected to be consistent across each quarter, or is it more variable? How should we approach that?

David Li, CEO

Phil, why don't you take that one?

Phillip Platt, SVP, Finance and Incoming CFO

Yes. So as we said, we definitely have a clear line of sight to eliminate that $15 million by the end of the year. I think the way to look at it is it's going to be accumulating throughout the year. More so in the back end of the year than the front end of the year. Some of those costs are tied in the TSA that we expect to hopefully wrap up midyear. So that's how you can kind of think about the cadence throughout the year.

Operator, Operator

Our next question comes from John Tanwanteng of CJS.

Lee Jagoda, Analyst

It's actually Lee Jagoda for Jon. So I guess David, can we start on the Performance Materials business? And maybe talk through some of your assumptions on the auto production volume side. And if you can get into some geographic commentary, that would be helpful. And then also in terms of just the seasonal cadence, just given some of the headwinds we've seen in the U.S. coming out of Q4 into Q1, that would be helpful.

David Li, CEO

Sure. As we consider the guidance we just shared, the auto industry appears stable, with no expectation for a significant recovery. Looking back, the industry has shown remarkable resilience through 2025. Phil mentioned tariff uncertainties and supply chain issues in his prepared remarks, but overall, we view the market as quite strong. Additionally, in North America, there has been a slowdown in EV adoption. Stellantis recently announced a focus on their more efficient hybrid product lines, and Ford has made similar comments. This is encouraging, particularly in North America, where we have a significant portion of our business. However, for 2026, we are anticipating a stable environment. In the fourth quarter we just reported, we did encounter some supply chain challenges, such as the aluminum fire impacting Ford F-150 production and Honda's chip shortages, which they are still addressing. We believe that production and demand will recover this year. Ford has cited a more back-loaded second half, but we see the environment as stable, with potential for improvement if supply chain issues ease, alongside the observed decline in EV adoption in North America.

Lee Jagoda, Analyst

Great. At the investor event, you discussed your desire to grow outside of automotive in Performance Materials in a way that enhances margins. Are any of the new products or programs included in the guidance? Additionally, from a broader perspective, how long should we expect it to take to see progress reflected in the reported results?

David Li, CEO

Yes, thanks, Lee. I believe you're referring to our near-term focus on filtration, and we're encouraged by our progress in this area. Our aim is to target higher-value applications within filtration. We're already actively involved, selling millions of pounds of activated carbon to this market, with the potential to optimize this volume for more valuable uses. We are currently exploring where we excel technically. Initially, we have identified water as a key focus, along with pharmaceuticals and food and beverage sectors. Our technical advantages over other activated carbons include the speed of separation and selectivity, which enable us to effectively remove large molecules, flavors, and odors, contributing to the overall mouthfeel. We're still in the discovery phase but are positive about receiving support from these markets. The filtration segment is included in our guidance, although it currently represents a small base. We anticipate growth in this area over the next couple of years. Looking further ahead, we have expressed interest in expanding into energy solutions, such as Nexeon and CHASM, which are not included in our financial outlook for the next two years, but we remain optimistic about our involvement in those sectors.

Operator, Operator

Our next question comes from Daniel Rizzo of Jefferies.

Daniel Rizzo, Analyst

Considering the three segments as they currently stand, how should we assess the peak or mid-cycle margins for both the new Road Markings business and the new Pavement business, as well as APT once a recovery takes place? Additionally, in Performance Materials, are we at peak levels or slightly below what we might expect, especially in light of the initiatives you plan to undertake in the coming years?

David Li, CEO

Yes. Let me start and then maybe Phil can provide more details. For the Performance Materials segment, we're in the 50s and expect to maintain that level. We will continue to raise prices in the automotive sector as we have in the past, so there may be some potential for growth, especially as we make progress in filtration. A 50% margin is a strong position, and I would anticipate it to stay above 50% for Performance Materials. Regarding Performance Chemicals, if we proceed with the Road Markings transaction, we expect an increase in margins there. In our investor update, we mentioned expectations of higher teens, or 18%. APT has previously operated in the 20s, and we view it as a very profitable business. Even without any transactions, we foresee some growth potential as we pursue higher-value applications, so we expect margins in the low to mid-20s for that segment. Phil, do you want to add more details?

Phillip Platt, SVP, Finance and Incoming CFO

Dave, I believe you covered everything. The only thing I would add is that for Performance Chemicals, we're guiding for mid-teens for the full year, as Dave mentioned. This includes both Performance Technologies and Road Markings. It's important to note that Road Marking is a lower-margin business, which is currently impacting some of those margins. Additionally, there are some stranded costs carried over into this year. However, looking ahead to 2027, we expect that the Pavement Technologies segment will achieve around 18% margins.

Daniel Rizzo, Analyst

Okay. And then with the sale of Industrial Specialties and the new Pavement and Road Markings business, should we expect all the EBITDA for those 2 segments I say, almost all in the second and third quarters, just given the weather-related aspect of those businesses?

Phillip Platt, SVP, Finance and Incoming CFO

Yes, Dan, that's actually a great question. We've always talked about the Performance Chemicals segment as being very seasonal Q2, Q3. It was muted in prior years by the Industrial Specialties business, which was pretty steady across all 4 quarters of the calendar year. Now that Industrial Specialties is gone from that portfolio, you'll be able to see the numbers in the 10-K when we release that later today. But about 90% of the annual EBITDA for that business is going to be recognized in Q2 and Q3 and 75% of the sales will be in Q2 and Q3. So it will become more prominent from a seasonality perspective.

Operator, Operator

Our next question comes from Mike Sison of Wells Fargo.

Michael Sison, Analyst

Nice quarter and outlook. Could you remind me for Performance Materials, I recall the fact that you use wood to create your activated carbon, gives you a pretty big edge in the auto side. Does that sort of technology or base help you in the other areas and maybe more chemistry-wise, why would that help you get a more premium area in other areas like water treatment and such?

David Li, CEO

Thanks, Mike. We are still in the early stages of figuring out where we can add value. Just to remind you, we've been involved in the filtration business for many years. Our current opportunity is to spend more time with end customers to understand how we can truly differentiate ourselves. We've identified that our hardwood-based activated carbon, with its unique engineering, provides separation properties that our customers appreciate. In some applications, our activated carbon is used alongside lower-grade carbon because we can deliver important separation technology. We are focusing on the water, pharmaceutical, and food and beverage sectors, where we believe we have a technical advantage. Additionally, having a streamlined portfolio allows us to direct more resources toward these high potential growth areas, and we are excited to share more updates in the future.

Michael Sison, Analyst

Got it. And then could you remind us any major regulation over the next couple of years, to even decade that could sort of sort of generate some growth for Performance Materials. I think China may be going to a Tier 3 at some point? And maybe any other areas? And then just kind of the mix of the outlook when you talk to customers? I mean, hybrids have been good. Any thoughts on sort of more of that versus EVs or anything else?

David Li, CEO

Sure. I mentioned earlier that we feel very positive about North America, which is our core market, especially considering the current slowdown in electric vehicle adoption that we anticipate will continue for some time. You brought up regulation, and the next significant regulatory change will likely be China moving to essentially a Tier 3 by 2028 or 2029. Our teams are collaborating closely with partners in China, and we expect to see some inventory buildup ahead of that change. This upgrade would introduce more stringent emissions standards, which would create demand for products like honeycombs that would benefit Ingevity. Another important region to watch is India. India has a rapidly growing population and a serious pollution problem, compounded by very hot summers, which will necessitate action on emissions standards. We are also working closely with regulatory bodies in India and anticipate developments there, even though they are still in the early stages of establishing emission requirements. Returning to North America, there have been recent changes by the administration, such as the Endangerment Act, which we believe will be beneficial for Ingevity. The previous regulations that necessitated automakers to increase their electric vehicle mix have been eased, allowing more room for traditional fuel-efficient internal combustion engine vehicles and hybrids. This shift is looking promising for us as we move forward.

Michael Sison, Analyst

And one quick last one. For Pavement Technologies, are there opportunities for acquisitions? Your balance sheet is in pretty good shape. Maybe to add that as some growth over time? And maybe talk about some regions that could be a good area for you? Or are there other sort of technologies or product lines that would fit well?

David Li, CEO

Yes. We love the technologies that we have. We see a lot of runway for growth, especially with Evotherm. So converting that hot mix asphalt to a warm mix with significant value and technology advantages for our customers. Never say never, but I think we've been pretty public about for the next at least a couple of years, acquisitions are not going to be a priority for us. Instead, we really want to focus on generating that cash flow and reducing the leverage on the balance sheet as well as buying back shares.

Operator, Operator

We have no further questions registered on today's call. So I hand back over to Dave Li for any closing or final comments.

David Li, CEO

Thanks. And as we wrap up, I would just like to remind our investors that new Ingevity is a simplified, more predictable and extremely profitable specialty materials company. The company is highly cash generative, and we are committed to returning cash to investors. Our focus in 2026 will be the continued execution of our commercial and operating strategies so that we can deliver growth year-over-year on every metric from sales to EPS. And lastly, as we close the call, I would like to again thank and congratulate Mary Hall, our outgoing CFO, on reaching this milestone in her career. This will be her last earnings call with us, and we are grateful for her years of service and contributions at Ingevity. Thanks everyone for their interest. And with that, Charlie, you can close the call.

Operator, Operator

Thank you. Of course. Ladies and gentlemen, this does conclude today's call. Thank you so much for joining. You may now disconnect your lines.