Ingevity reports third quarter 2023 financial results

HIGHLIGHTS: (comparisons versus prior year period)

• Net sales of $446.0 million, down 7%, compared to a record prior year
• Net income of $25.2 million and diluted earnings per share (EPS) of $0.69; adjusted earnings of $44.2 million and diluted adjusted EPS of $1.21
• Adjusted EBITDA of $110.4 million and adjusted EBITDA margin of 24.8%
• Operating cash flow of $106.9 million with free cash flow of $73.4 million
• Updated 2023 full-year guidance for adjusted EBITDA between $375 million to $390 million
• The company also announced today actions to accelerate the repositioning of its Performance Chemicals segment, including the closure of its DeRidder, Louisiana, facility and company-wide restructuring

The results and guidance in this release include non-GAAP financial measures. Refer to the section entitled "Use of non-GAAP financial measures" within this release.

Ingevity Corporation (NYSE:NGVT) today reported its financial results for the third quarter 2023.

Third quarter net sales of $446.0 million declined 7% versus the record prior year quarter, reflecting lower volumes due to weak industrial demand primarily impacting Advanced Polymer Technologies and the Industrial Specialties business line, partially offset by improved North America and Asia sales in Performance Materials and increased pricing in the Pavement Technologies business line.

Net income of $25.2 million and diluted earnings per share (EPS) of $0.69 decreased 67% and 65%, respectively, and were negatively impacted by lower operating earnings, restructuring and other charges recorded during the quarter, and higher interest expense associated with the Ozark acquisition. Adjusted EBITDA of $110.4 million was down versus the prior year quarter, with adjusted EBITDA margin of 24.8%.

"This quarter we saw lower sales versus a record quarter last year as continued weak industrial demand reduced volumes. However, we maintained mid-twenties adjusted EBITDA margins due to the value delivered by our specialty businesses, and the cost reduction actions taken early in the quarter," said Ingevity president and CEO, John Fortson. "Performance Materials benefited from increased sales in automotive products in both Asia and North America, and our Pavement Technologies business line continued to capture value in their specialty products that allow customers to reduce energy costs and emissions, and make longer lasting roads. Advanced Polymer Technologies saw lower volumes in areas like footwear and apparel but delivered strong margins due to disciplined price and cost management. The Industrial Specialties business line continues to address high Crude Tall Oil (CTO) costs along with weak demand for industrial products, particularly in rosin end markets. Our announcement today accelerates the repositioning of the Performance Chemicals segment as the next step in executing our corporate strategy that focuses on higher margin and higher growth specialty products, diversifies feedstocks, and optimizes our manufacturing network."

Performance Chemicals

Sales in Performance Chemicals were $256.0 million, down 4% from prior year.

Industrial Specialties posted sales of $126.3 million, down 30%, due to lower volumes attributed primarily to weak demand across end markets, particularly for rosin-based products. Pavement Technologies sales increased to $129.7 million, driven by higher pricing in legacy pavement applications and sales associated with Ozark.

Segment EBITDA was $24.7 million, down 62%, reflecting lower sales volumes in Industrial Specialties and higher CTO costs, resulting in a segment EBITDA margin of 9.6%.

"Pavement Technologies continues to see increased technology adoption of their high-value products, both in the U.S. and abroad, as strong sales in South America contributed to our results. In Industrial Specialties, end market demand for rosin-based products remains weak, and during the quarter we also saw a reduction in oil drilling activity which negatively impacted our oilfield end market," said Fortson. "These challenging end market dynamics combined with continued elevated CTO costs, resulted in a significant drop in EBITDA and margins, and we expect these dynamics to persist and be more impactful in the fourth quarter as the Pavement Technologies business line enters its customary slow season."

Advanced Polymer Technologies

Sales in Advanced Polymer Technologies (APT) were down 38% to $42.8 million due to market weakness across the segment's end markets in all regions. Segment EBITDA remained flat at $11.2 million and segment EBITDA margin improved to 26.2% due to price, cost management and lower input costs.

"APT delivered strong EBITDA margins in the face of lower demand in all of their end markets. We began to see customers become more price sensitive, which caused some volume to be lost to substitute products," said Fortson. "We believe that the weakness in global demand has begun to abate, but it will likely take some time for a significant recovery in markets such as industrial applications and footwear and apparel. The trend toward higher value markets such as bioplastics is continuing, and we remain focused on helping our customers deliver sustainable products that make things tougher and more durable, as well as biodegradable at end of life."

Performance Materials

Sales in Performance Materials were $147.2 million in the quarter, up 2% as increased automotive carbon demand, particularly in Asia Pacific and North America, offset volume declines of our lower margin, non-automotive carbon. Segment EBITDA was $74.5 million, up 22% versus the prior year quarter as a result of improved product mix and lower SG&A, with segment EBITDA margins of 50.6%.

"Performance Materials benefited from increased auto production as well as the increased adoption of hybrid vehicles, resulting in a higher mix of sales of automotive carbon during the quarter," said Fortson. "We have seen the demand for hybrid vehicles improve, and as that trend continues, it will be a tailwind for this segment. The U.S. automotive strike had a limited impact for the quarter."

Liquidity/Other

Third quarter operating cash flow was $106.9 million with free cash flow of $73.4 million, reflecting higher inventory driven by increased CTO prices and reduced rosin demand. There were no share repurchases for the quarter and $353.4 million remains available under the July 2022 $500 million Board authorization. Net leverage was 3.2 times, reflecting increased borrowing for the Ozark acquisition in Q4 2022.

Full Year 2023 Guidance

"The weak industrial demand environment we have seen throughout the year does not appear to be recovering as we enter the fourth quarter, and therefore we expect continued volume weakness. In addition, as the slowdown persists, there is more pricing pressure, particularly in cyclical markets such as adhesives and oilfield. With our CTO costs rising in the fourth quarter, and our inability to recover costs through pricing actions, we are reducing our full-year adjusted EBITDA guidance to between $375 million and $390 million," said Fortson.

Ingevity: Purify, Protect and Enhance

Ingevity provides products and technologies that purify, protect and enhance the world around us. Through a team of talented and experienced people, we develop, manufacture and bring to market solutions that help customers solve complex problems and make the world more sustainable. We operate in three reporting segments: Performance Chemicals, which includes specialty chemicals and Pavement Technologies; Advanced Polymer Technologies, which includes biodegradable plastics and polyurethane materials; and Performance Materials, which includes activated carbon. Our products are used in a variety of demanding applications, including adhesives, agrochemicals, asphalt paving, bioplastics, coatings, elastomers, lubricants, pavement markings, publication inks, oil exploration and production and automotive components. Headquartered in North Charleston, South Carolina, Ingevity operates from 31 countries around the world and employs approximately 1,900 people. The company's common stock is traded on the New York Stock Exchange (NYSE:NGVT). For more information, visit Ingevity.com. Follow Ingevity on LinkedIn.

Additional Information

The company will host a live webcast on Thursday, November 2, at 10:00 a.m. (Eastern) to discuss third-quarter 2023 fiscal results. The webcast can be accessed here or on the investors section of Ingevity's website. You may also listen to the conference call by dialing 833 470 1428 (inside the U.S.) or 929 526 1599 (outside the U.S.) and entering access code 140564. Information on how to access the webcast and conference call, along with a slide deck containing other relevant financial and statistical information, will be posted to Ingevity's investor site prior to the call. For those unable to join the live event, a recording will be available beginning at approximately 2:00 p.m. (Eastern) on November 2, 2023, through November 1, 2024, at this replay link.

Use of non-GAAP financial measures: This press release includes certain non‐GAAP financial measures intended to supplement, not substitute for, comparable GAAP measures. Reconciliations of non‐GAAP financial measures to GAAP financial measures are provided within the Appendix to this press release. Investors are urged to consider carefully the comparable GAAP measures and the reconciliations to those measures provided. The company does not attempt to provide reconciliations of forward-looking non-GAAP guidance to the comparable GAAP measure because the impact and timing of the factors underlying the guidance assumptions are inherently uncertain and difficult to predict and are unavailable without unreasonable efforts. In addition, Ingevity believes such reconciliations would imply a degree of certainty that could be confusing to investors.

Forward-looking statements:

This press release contains "forward-looking statements" within the meaning of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Such statements generally include the words "will," "plans," "intends," "targets," "expects," "outlook," "guidance," "believes," "anticipates" or similar expressions. Forward-looking statements may include, without limitation, anticipated timing, charges and costs of the closure of our DeRidder, Louisiana plant; the potential benefits of any acquisition or investment transaction, expected financial positions, guidance, results of operations and cash flows; financing plans; business strategies and expectations; operating plans; impact of COVID-19; capital and other expenditures; competitive positions; growth opportunities for existing products; benefits from new technology and cost-reduction initiatives, plans and objectives; litigation related strategies and outcomes; and markets for securities. Actual results could differ materially from the views expressed. Factors that could cause actual results to materially differ from those contained in the forward-looking statements, or that could cause other forward-looking statements to prove incorrect, include, without limitation, charges, costs or actions, including adverse legal or regulatory actions resulting from, or in connection with, the closure of our DeRidder, Louisiana plant; losses due to resale of CTO at less than we paid for it; adverse effects from general global economic, geopolitical and financial conditions beyond our control, including inflation and the Russia-Ukraine war and Israel-Gaza war; risks related to our international sales and operations; adverse conditions in the automotive market; competition from substitute products, new technologies and new or emerging competitors; worldwide air quality standards; a decrease in government infrastructure spending; adverse conditions in cyclical end markets; the limited supply of or lack of access to sufficient raw materials, or any material increase in the cost to acquire such raw materials; issues with or integration of future acquisitions and other investments; the provision of services by third parties at several facilities, including the impact of WestRock's shutdown of its North Charleston paper mill; adverse effects from the COVID-19 pandemic; supply chain disruptions; natural disasters and extreme weather events; or other unanticipated problems such as labor difficulties (including work stoppages), equipment failure or unscheduled maintenance and repair; attracting and retaining key personnel; dependence on certain large customers; legal actions associated with our intellectual property rights; protection of our intellectual property and other proprietary information; information technology security breaches and other disruptions; complications with designing or implementing our new enterprise resource planning system; government policies and regulations, including, but not limited to, those affecting the environment, climate change, tax policies, tariffs and the chemicals industry; and losses due to lawsuits arising out of environmental damage or personal injuries associated with chemical or other manufacturing processes, and the other factors detailed from time to time in the reports we file with the Securities and Exchange Commission (the "SEC"), including those described in Part I, Item 1A. Risk Factors in our most recent Annual Report on Form 10-K as well as in our other filings with the SEC. These forward-looking statements speak only to management's beliefs as of the date of this press release. Ingevity assumes no obligation to provide any revisions to, or update, any projections and forward-looking statements contained in this press release.

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Ingevity Corporation

Non-GAAP Financial Measures

Ingevity has presented certain financial measures, defined below, which have not been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and has provided a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP on the following pages. These financial measures are not meant to be considered in isolation or as a substitute for the most directly comparable financial measure calculated in accordance with GAAP. Investors should consider the limitations associated with these non-GAAP measures, including the potential lack of comparability of these measures from one company to another.

We believe these non-GAAP financial measures provide management as well as investors, potential investors, securities analysts and others with useful information to evaluate the performance of the business, because such measures, when viewed together with our financial results computed in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our historical financial performance and projected future results.

Ingevity uses the following non-GAAP measures:

Adjusted earnings (loss) is defined as net income (loss) plus restructuring and other (income) charges, net, acquisition and other-related costs, debt refinancing fees, litigation verdict charges, (losses) and gains from the sale of strategic investments, pension and postretirement settlement and curtailment (income) charges and the income tax expense (benefit) on those items, less the provision (benefit) from certain discrete tax items.

Diluted adjusted earnings (loss) per share is defined as diluted earnings (loss) per common share plus restructuring and other (income) charges, net per share, acquisition and other-related costs per share, debt refinancing fees per share, litigation verdict charge per share, (losses) and gains from the sale of strategic investments per share, pension and postretirement settlement and curtailment (income) charges per share and the income tax expense (benefit) per share on those items, less the per share tax provision (benefit) from certain discrete tax items per share.

Adjusted EBITDA is defined as net income (loss) plus interest expense, net, provision (benefit) for income taxes, depreciation, amortization, restructuring and other (income) charges, net, acquisition and other-related costs, litigation verdict charge, (losses) and gains from the sale of strategic investments, pension and postretirement settlement and curtailment (income) charges, net.

Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by Net sales.

Free Cash Flow is defined as the sum of cash provided by (used in) the following items: operating activities less capital expenditures.

Net Debt is defined as the sum of notes payable, short-term debt, current maturities of long-term debt and long-term debt less the sum of cash and cash equivalents, restricted cash associated with our New Market Tax Credit financing arrangement, and restricted investment excluding the allowance for credit losses on held-to-maturity debt securities.

Net Debt Ratio is defined as Net Debt divided by last twelve months Adjusted EBITDA, inclusive of acquisition-related pro forma adjustments.

Ingevity also uses the above financial measures as the primary measures of profitability used by managers of the business. In addition, Ingevity believes Adjusted EBITDA and Adjusted EBITDA Margin are useful measures because they exclude the effects of financing and investment activities as well as non-operating activities.

GAAP Reconciliation of 2023 Adjusted EBITDA Guidance

A reconciliation of net income to adjusted EBITDA as projected for 2023 is not provided. Ingevity does not forecast net income as it cannot, without unreasonable effort, estimate or predict with certainty various components of net income. These components, net of tax, include further restructuring and other income (charges), net; additional acquisition and other-related costs; litigation verdict charges; (losses) and gains from the sale of strategic investments; additional pension and postretirement settlement and curtailment (income) charges; and revisions due to legislative tax rate changes. Additionally, discrete tax items could drive variability in our projected effective tax rate. All of these components could significantly impact such financial measures. Further, in the future, other items with similar characteristics to those currently included in adjusted EBITDA, that have a similar impact on comparability of periods, and which are not known at this time, may exist and impact adjusted EBITDA.

INGEVITY CORPORATION

Reconciliation of Non-GAAP Financial Measures

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