Ingevity Corporation (NGVT) Earnings Call Transcript & Summary

Greetings, and welcome to the Ingevity Engineered Polymers Webinar. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to Dan Gallagher. Thank you. You may begin

Thank you very much, Kevin. Good morning, everyone. Welcome back to Ingevity's 2020 Webinar Series. From all of us here at Ingevity, we'd like to express our continued hope for the safety, health and well-being of you and your families. We'd especially like to express the same for our employees worldwide as we work together through the challenges that we continue to be faced with. As you saw from our press release on March 24, we're holding these webinars as a way to continue to inform and educate the financial communities about our businesses. Today, we'll be focusing on the Engineered Polymers business. For participants who are logged into our webcast, the slides should be visible in the online viewing pane, and we will be advancing them for you. Or you can download the slides from the Investors section of our website. You can find it by visiting ir.ingevity.com under Events and Presentations. On Slide 2 of that deck, you'll see our disclaimer that today's webinar may contain forward-looking statements. Relevant factors that could cause actual results to differ materially from these forward-looking statements are contained in our SEC filings, including our Form 10-K and our most recent Form 10-Q. Ingevity undertakes no obligation to publicly release any revision to these projections or forward-looking statements made during the call or to update them to reflect events or circumstances occurring after the date of the call. Turning to Slide 3. I'd like you to -- I'd like to introduce you to the very experienced business leaders from Ingevity that will be taking through -- you through our materials today. First, Mike Smith, President of Performance Chemicals, who, as you can see from the slide, has a very diverse background in terms of chemical industry experience and leadership. Second, we have Stephen Lewis, Vice President of Engineered Polymers. As you can see, Stephen has a strong history of leadership in the polyurethane industry. After Mike and Stephen's presentation, we'll open the line for questions. In addition to Mike and Stephen, Rick Kelson, our Chairman and Interim President and CEO; and John Fortson, Executive Vice President and CFO, will also be available to participate in the Q&A. We'd like to keep the Q&A at the end of the call focused on our Engineered Polymers business. We'll be happy to answer any other questions about our businesses at their upcoming webinars with the dates listed in our press release from March 24. As for our current company outlook for 2020, we just gave an update a short month ago with our Q1 earnings results and won't be making any updates to that today. With that, I'll turn it to Mike.

So thank you, Dan, and thank all of you for joining Ingevity's webinar today. We're excited to provide you an overview of our Engineered Polymers business and the exciting opportunities our team is progressing to drive growth with our customers. Slide 4 summarizes the leading positions Ingevity has across our businesses and provide some context to our Engineered Polymers business sits within our company. With as reported sales last year of $122 million and pro forma sales of $140 million, the Engineered Polymers business represented approximately 18% of the $800 million in sales across the 4 business units we had in Performance Chemicals in 2019. The business is the clear global leader for caprolactone products. As Stephen will cover in more detail, our high-margin specialty products are using a variety of applications, which have strong growth rates and significant future runway for further adoption and market penetration. Slide 5 summarizes the strong strategic rationale for Ingevity's value-creating acquisition of the Capa Engineered Polymers business early last year. As we'll describe further, this business is a well-established market leader and is focused on end-use applications with high-growth rates. While the chemistry involved with Engineered Polymers business may be new to Ingevity, it has strong complementary fit with our business model and capabilities. Like other businesses within Ingevity's portfolio, the Engineered Polymers business is highly customer intimate and provides technology, which deliver benefits and solutions, which customers value greatly. While many of the end-use applications are new to Ingevity, some such as adhesives, are businesses which we have a strong foundation in. Adding Engineered Polymers further enhances our position with adhesive customers through providing products into more technically demanding uses, which have higher growth rates as caprolactone-based high-performance technology is adopted. Engineered Polymers business also uses a very similar manufacturing approach to our legacy Performance Chemicals business. Much like a number of our products, which are pine chemistry base, the business is focused on derivatizing products through downstream reactions from some of their more basic forms to enhance the properties which customers value to meet their demanding needs. Accordingly, these products have higher margin and more sustainable profiles. While the Engineered Polymers business is an excellent one in its own right, we believe it also represents opportunity for future strategic growth to expand into additional attractive areas in high-value segments of the specialty polymer market. And finally, the business has an excellent financial profile from both a top and bottom line perspective. Business has shown solid historical growth and continues to deliver high profitability, consistent with mid-30% EBITDA margins. In addition, as we continue to grow and further globalize the business, we have good options to expand our capacity with modest capital investment to support higher demand. Slide 6 provides an overview of the Engineered Polymers business. From a product standpoint, we manufacture caprolactone monomer, polyols and thermoplastics for a number of growing end-use applications. As you can see in the bottom left, polyols represent half our sales with the remainder split between thermoplastics and monomers. It is also a well-balanced global business with established positions in all 3 regions. While Ingevity's business is the clear global leader, the industry has a good market structure with 3 major producers, one in each region. As you can see in the upper right, while there has been some fluctuation during the period, the average sales growth since 2015 has been 5.4% per year. And turning to Slide 7. We are confident the Engineered Polymers business is well positioned for future profitable growth and value creation. As Stephen will provide in further detail, Ingevity is the clear global market leader in caprolactone technology and products. We have a strong, defendable competitive advantage within these niche chemistries. We have a targeted strategy on applications with strong growth rates and significant upside based on additional market penetration. The organization is very adept at leveraging its strong relationships, deliver value technology and solutions to customers, and we feel as a company, we can further leverage our capabilities to grow the business geographically. Now I'll turn the discussion to Stephen Lewis, Vice President of our Engineered Polymers business, who is joining us today from the U.K. Stephen?

Okay. Thank you, Mike, and good morning, everybody. I'd like to start the next stage of this presentation by just reminding everybody what is caprolactone and how it's used within the markets in which we operate. Caprolactone is a benzene derivative. Specifically, it comes down for a phenol chain. And we utilize a product known as cyclohexanone, together with hydrogen peroxide, and we utilize something called the Baeyer-Villiger reaction to produce a cyclic lactone that you all know as caprolactone monomer. This particular molecule finds a lot of use in a wide range of applications and markets, mainly in the coatings and resins sector. However, by a ring-opening polymerization, it is also used to manufacture downstream derivatives that we know as Capa polyols and much higher molecular weight Capa thermoplastics. And these products offer specific enhancement and performance advantages in a number of different applications. And as you can see, in the bottom right of this particular slide, you see there some of the key areas in markets in which we operate. So for example, if I take the example of the polyurethane elastomers area, the adoption of a Capa polyol in this particular area would make those particular end products tougher, more resistant and long-lasting in those dynamic applications. If I take the example of bioplastics, products adopting Capa thermoplastics in biomaterials are generally more biodegradable, food friendly and more flexible. Slide 9, please. So I'm going to talk now about the -- specifically, 2 of our high-growth product families starting with Ingevity polyols or Capa polyols. Polyols is the largest and most diversified product family in the portfolio. If you look at the right, we have tried to depict this in what we call the polyol performance pyramid to compare the positioning of Capa among its peers and its substitutes within the sphere in which it operates. So in this performance pyramid, it offers very, very specific characteristics and advantages. So for example, in the area of high-performance polyolefin systems versus alternative technologies, it gives out in strength, durability, it can provide a high-quality finish to coated parts. It gives a -- excellent dynamic and flexural performance, and it can also give products with very, very low temperature properties as well. And a couple of applications in selected key markets demonstrate by further looking at coatings. And if I pick out the example of window coatings as an example, Capa provides improved flexibility and viability of thickly coated product. In the area of polyurethane elastomers and if I pick up the example of dynamic tires in forklift applications, Capa polyols provide added durability for giving much needed resistance to wear and also good firmer stability of the wheel during its operation. In the case of adhesives and again looking at laminating adhesive area, Capa polyols give excellent penetration and bonding to very difficult substrates in this particular area. The takeaway on this slide for me is the statement that we have in the bottom right-hand corner here. These polyols are used in different percentages, some low, some much higher and they are very effective, enhancing whiter properties that solve critical performance problems in the marketplace within these specific applications. Next slide, please. I'd now like to provide 2 specific examples of where Capa polyols have overcome a specific technical challenge and where they have been successfully adopted. The first case that I'm showing here is a coatings application. And in this case, it's an aerospace coating, but needed to withstand extreme operating conditions. By adopting a percentage of caprolactone polyol into the acrylic coating formulation, we were able to significantly increase the impact resistance of the coating by over 500%. And also improving the chemical and weathering resistance that is needed as these coatings operate at very, very extreme conditions. An added benefit as well was the low viscosity, but it is an inherent property of caprolactone polyols, but also allowed the formulator to reduce the solvent content by around 8% and thereby reduce what we call the VOC due to the nature of the polyol. The end effect here was to extend the life of the coating in a very exacting demanding application and further reduce maintenance costs in this particular application. Next slide, please. The next example illustrates the durability of caprolactone-based polyols in extreme temperatures as in the case of polyurethane seals used in commercial construction equipment. Such seals typically fail due to their limited resistance to water, what we call hydrolysis and also their limited resistance to oils and greases that cause the seal to crack and swell. In this case, the choice of a specific caprolactone polyol gives with sealing 400% improvement in water resistance and a 16% improvement in oil resistance when compared to other polyol alternatives. Again, this gives the equipment manufacturer and the equipment operator greater reliability in the equipment and much longer life, meaning reduced cost to maintain and operate. Next slide, please. The second product family I'd like to talk about is the Capa thermoplastics product family, and that is our second largest product family. These products either replace competing thermoplastics technologies such what was highlighted in the ring that you see on the right-hand side of this page that can also complement those computing technologies by partial substitution in a particular formulation. Thermoplastic adoption, Capa thermoplastic adoption is all about performance enhancement as can be seen in the 6 main characteristics of Capa thermoplastics, that they are durable, they provide added strength and stiffness, they have a very low melting point, meaning that they are malleable and moldable at very low temperatures, in this case, 60 degrees C. They are repeatedly reshapable and they are biodegradable under moderate conditions. Again, to pick up a number of examples, in the case here of shoe component adhesives, Capa thermoplastics are much easier to process and apply, for example, due to its much lower melting point and what we call is open time, giving a much easier adhesive system to operate with. In the realm of bioplastics, they provide much-needed flexibility and a faster biodegradable rate in formulations involving polylactic acid, PLA, for example. And in medical device, the low melting point and lack of skin irritation in the product makes it ideal for medically normalization device such as radiation masks when clients need to use that type of equipment. On to the next slide, please. Again, I'd like to basically talk you through 2 examples of where Capa thermoplastics have been presented with a problem, a challenge, and how it's helped to solve that particular issue. And I think everybody is aware of the need for increased demand for biodegradable plastics as we go through the current environment and we move away from single-use plastics that pollute in the environment. One of the issues continues to be the processability, strengthen and biodegradability of all those biopolymers such as PLA, PHA, starch and other biopolymers. The benefits the caprolactone give is that it is fully biodegradable in its own right as a thermoplastic elastomer. In conjunction with other biopolymers, it can accelerate biodegradability such that the products are fully biodegradable after 40 days. In comparison to competitive materials who only biodegrade to a level of 50% after the same period. The need to improve the flexibility and impact resistance of commercial biopolymers such as PLA is well known. The adoption of a small amount of caprolactone can do that to a level over 500% and also increase the impact resistance by a level of 300% at the same time. So much improved biopolymer processing and end-use performance added to a faster biodegradability, meaning home and industrial compostable is realistic with these type of biomaterials. Next slide, please. I've talked about the use of Capa polyols in adhesives. Capa thermoplastics are also used widely in the adhesive sector as well. In this case, the adoption of caprolactone improved the adhesive stability to both heat and moisture while still increasing the overall strength and durability of the adhesive product. The secondary benefit as well was the reduction in the use of solvents and what we call VOC by up to 8%, meaning that we have been able to provide a more eco-friendly product and also downstream production at much reduced cost. The next slide, please. I'd now like to talk a little bit about the commercial environment, the competitive environment in which we operate. As you can see from this slide, Ingevity is not only the market leader in the marketing and developing of development of caprolactone based solutions, but it is also a capacity leader in this industry space. Our capacity is 3x larger than our nearest competitor and we cover almost 2/3 of the global capacity in the market as of today. An important point that I would like to make here is that we are the only supplier operating a dedicated plant for monomer production, meaning that we make caprolactone monomer on purpose, to sell it to the merchant market in small quantities, but mainly to derivatize it. We do not operate competing products such as hexanediol or cycloaliphatic epoxy, but basically compete for the share of our valuable raw materials. Next slide, please. I'd now like to spend some time talking about our strategy in recent years. We have always been focusing on 4 key pillars to drive our growth in our markets and our strategic agenda moving forward. And I would just like to talk about each one in a little bit more detail. The first next slide, please. So the first slide is, as mentioned by Mike earlier, we strive to basically prioritize derivative products while maintaining leadership in our monomer position. Next slide, please. So we're actively targeting a strategy for the development and delivery of caprolactone derivatives. And our business plan in recent years has been to move away from monomer sale into the market and move a larger percentage of our monomer capabilities to derivatizing those products. We do that for a number of reasons. We do that to basically maintain the sustainability of sales in these markets and also to get the higher margin and profitability that we get on basically derivatizing our available monomer. We intend to maintain market leadership in monomer, not only to basically serve as a reliable source to the marketplace, but also as a feedstock for us to continually to develop and derivatize our products. We have identified 4 key areas with other key strategic segments where we are able to put a large emphasis on derivatizing and driving our new business development and innovation for future growth. But I will talk about that in a little while. We do that as market leader by prioritizing our customer activity and focusing on those key customers and market leaders in our chosen strategic segments to ensure that our products are firmly embedded in their new formulations and their development activities. The goal here is to move our revenue from 2017 from 69% to just over 81%. And I am able to confirm that we are actually actively moving in that area as of today. On to the next slide, please. The second strategic pillar is focusing on strategic, higher-margin and high-growth end-use applications. Next slide, please. And the critical thing here is really to comment on that we have chosen 4 strategic segments of the business. Two of these segments have long provided and served the business well and delivered the growth that we've known in the business up until now. We have also chosen 2 areas where we see further opportunities for the uniqueness of Capa to shine and its value proposition to displace alternative technologies. What is clear in all of these markets is that we have a significant headroom to continue to grow and penetrate these growing markets that are growing at attractive rates. So for example, in the elastomers area, one of our core areas, we have a 24% penetration with still a significant addressable market to address. On the other hand, we have a relatively low penetration today in a new market for us, bioplastics. However, this market is growing at very well -- at high rates, which have been well documented and we believe that given the biodegradability performance of caprolactone and its performance enhancing abilities, we have significant opportunity to grow very quickly in this particular area. On to the next slide, please. The third area that we concentrate on is innovation and new business development to fuel growth. Next slide, please. The market for caprolactone is well defined. Our commercial and innovation teams spend a large amount of time focusing on new business development to fuel growth. As I mentioned earlier, that is basically with existing customers, but also new customers and new opportunities, new markets for us to position ourselves in. And some examples here of where we have been successful in recent years in moving the percentage of new sales up to roughly 13% that we saw in the full year '19. Two examples I would like to call out and to demonstrate that is Capa polyols that can produce a microcellular polyurethane elastomer that are used in railway dumping pads. Traditional technologies here are in place. However, caprolactam was able to demonstrate for its improved dynamic and flex performance, but the response and memory in the polyurethane elastomer was superior to the alternatives and was basically meant it was successfully adopted in this particular dynamic application. Another example I would like to pick up is a consumer application. Capa thermoplastics as a heel counter material in an athletic shoe. These applications have been around for a while. However, in this case, we were able to develop a caprolactone thermoplastic that was able to take one of the manufacturing steps out of a shoe-making process based on the long open time and low melting point of the Capa derivative that we used and create a much more efficient shoemaking process. Next slide. The last strategic pillar is all about maintaining our market share and leadership position through strategic CapEx initiatives. Next slide. So our strategic principle remains the same. We intend to be the largest supplier of caprolactone solutions to the marketplace. In order to do that, we will invest as appropriate to ensure that we always have the available monomer supply to supply the market, but also to derivatize and we will have the facilities available to support our customers' developments in a timely manner. So we aim to continue to be the largest caprolactone plant in the world. We take enormous amount of pride in the manufacturing process that has been being developed over the last 40 years. And we continue to fine-tune that process, not only from a safety perspective, but from an efficiency perspective to get more yields from our existing assets. We are lucky to have a reliable hydrogen peroxide supply on-site via our partner, Solvay. And we operate very well-established continuous improvement programs at our sites. We have well maintained assets that are demonstrated by the high plant reliability rates that we enjoy. We have a dedicated innovation lab and personnel on-site who are dedicated to the development and growth of caprolactone technologies. We are able to support customer developments by on-site, small-scale pilot reactors and lab facilities to facilitate those customer developments. And we provide technical services, not only product and application development support, but regulatory support and supply chain support to our customers as well. We have plans in place to produce capital derivatives at existing Ingevity facilities in the U.S., and that is an exciting next stage in the development of the caprolactone business within Ingevity. Next slide, please. So in summary, we fully believe that we are well positioned for value creation in this business given that we are the market leader in caprolactone monomer and derivative chemistry. We have a niche chemistry with a very defensible competitive advantage in the marketplace. We are not all things to all men. We target markets and applications with high-growth rates, and where we believe there is a significant upside in terms of market penetration and growth. This is a niche business, but it is driven by customer intimacy and we have technology-focused relationships and dialogue with market leaders in this area, in our key strategic markets that will basically drive that growth further. And moving forward, we will look further to leverage our global capabilities within Ingevity to expand and balance our business on a geographic basis. Thank you.

With that, we'll turn it back to Kevin, if you want to open the line for questions.

[Operator Instructions] Our first question today is coming from Jim Sheehan from SunTrust.

Could you talk about your monomer business? And what proportion of sales came from monomer in 2019 and also your expectation for 2020?

Yes Jim, in 2019, I think we were just above 20% of our sales for monomer. And frankly, I don't think that, that's going to change dramatically this year. We've made, as Steve pointed out, as you could see in one of the slides, a lot of really strong progress to further derivatizing the business and that continues to be the strategy.

And looking at your raw material costs, you've got benzene and some other things that are derived from crude oil. When we look at the oil price decline that's occurred in the last few months, how much of that price decline will you retain as margin in your business? And what is the lag that you have in passing through those benzene price declines to customers?

Jim, you're right. We are seeing some fairly significant reduction in the benzene cost that comes through cyclohexanone. Given the highly specialty nature of this business, it's niche applications and high performance, Stephen and his team work very hard to put that money in our pocket and keep it in our pockets. So I wouldn't necessarily say we're -- this is the type of business where over time, there's a lag in giving all of that money back. That's not our intention. This is a highly specialized, high-performance business. And during -- in this particular market environment, we will get some tailwind from the lower benzene raw material costs. Over time, we need to be very conscious of other substitute products to make sure that we remain competitive and viable and continue to get the kind of technology adoption that we want, but we do not sort of allow our pricing to swing dramatically just based on an input raw material.

And where do you see the industry operating rates right now? And what's your outlook for sort of a more normalized utilization rate as we come out of economic shutdowns?

Well, we have, as you might expect, we have -- internally, I can really only speak for Ingevity, we have enough capacity to meet the next few years of growth that we anticipate. We will be doing some major modifications later this year and replacing one of the monomer lines in Warrington, which has a number of benefits. One of them does -- is that it improves our capability. So I'm not sure I can really speak exactly to the overall industry capacity utilization. We just know that we're in a, I would call, a healthy position in order to ensure we can meet the growing demand over the next few years. As we've mentioned previously and Stephen highlighted, I think the next thing we'd like to do in addition to continuing our investment in Warrington is to put a derivative plant here in North America, so we can better service our customer base here in North America. So we've got some work underway that we think can be very cost and capital-efficient in order to put derivative manufacturing at one of our Ingevity sites here in the United States.

Our next question is coming from Ian Zaffino from Oppenheimer.

This is Mark on for Ian. So thanks for giving a breakdown of the plan to get to 81% derivative by 2020. So just a couple of questions there. To get there, should we expect any more meaningful new investments? Or is this sort of a more seamless profit from here? And then sort of the -- beyond 2020 outlook, where do you guys see those derivatives making, I guess, portion of revenue breakdown?

Okay. Thanks, Mark. Yes. So as I've just mentioned, we have some capital investments that are going into the Warrington site this year. There has been a planned replacement of 1 of the 2 monomer lines. So that is part of our capital plan and we've outlined our capital spending for the business this year and that's a project that we remain committed to doing and doing this year. Regrettably, we've had to actually delay that project a bit due to the virus and we just need to make sure we can get contractors in the site and do that safely, but we'll continue to do that. So outside of that, I wouldn't classify anything as very major significant investments. We think we've got good capital-efficient investments to support the growth in the business. And in terms of our derivative sales, as said, we've made really strong progress right around that 80% market -- mark. And -- well, that may accrete somewhat it's sort of, as Stephen had in his slide, targeting that low 80 percentiles for our product mix in derivatives versus monomers.

Our next question is coming from John McNulty from BMO Capital Markets.

So the business in general seems like it's got some relative stability. I guess one of the questions I had was, you highlighted that the margin profile was pretty chunky with kind of mid-30s EBITDA type margins. How does that vary from periods of economics -- during periods of economic strength versus, say, kind of this type of environment? Like how much deviation do you get in the margin as you kind of look at it given the kind of the environment that we're in right now?

So thanks for that question, John. We have seen a very good stability in that margin profile. When we acquired the business, as we said, it was sort of mid-30% EBITDA margins. Those gross margins held up well throughout the course of last year during the -- some challenging industrial times. And frankly, year-to-date, from a margin perspective, those margins are holding up. So we see good sustainability in the percent margin. So I think that speaks to the specialty nature of the product and the great job the team has done with that. And frankly, the overall -- the market structure for this industry is one that I think is -- also helps that sustainability. And so our job is to make sure that we keep those high margins as we seek to grow the business in some of the areas that Stephen has highlighted for future -- further market adoption.

Got it. No, that's helpful. And then I guess when you think about the cost curve versus competitive or substitute products, I guess, how much does moving oil either up or down influence that? Because I would imagine a lot of your -- a lot of the competitive or substitutable products are also somewhat tied into the petchem market. So I would think that's stable, but I guess I'd be curious to your thoughts on that.

Yes, John, so I think, first off, and I'm going to let Stephen make some additional comments. The substitute products are very sort of application sort of specific. So I know Stephen and his team are very conscious of making sure that they understand the substitute nature by application and then where -- based on that application, there are substitute products that may be significantly impacted, as you indicate by the raw material input costs that are currently in a low environment. So I think that's sort of the general way we approach this to make sure that we keep strong positions in -- where we want to grow. So Stephen, I don't know if you want to add anything kind of more specific to that?

Yes. In fact, it's a very good question. I mean it's a complex one to answer actually. But yes, when I look at the substitutes that are available and some of them are impacted by changes in oil pricing as well, but I think the thing to remember with some of these substitutes is they also implement a value pricing scheme. So whether there is -- a substitute is not going to have one price for all applications. And I think what we are very good at in the business is understanding the downstream applications in which we work and what value our customers and their customers get from utilizing Capa in some of these particular applications. So we always look to specific applications and say, where does the price need to be until a substitute becomes very attractive. So the situation can be actually quite dynamic. And by having that knowledge of the downstream applications, we are able to have sustainable sales into some of these areas.

Got it. That's helpful. And then I guess the last question that I had is just when -- I guess it was on Slide 20, you kind of showed the relative share that caprolactones have versus the addressable market. I guess, what do you need -- like let's take bioplastics as an example where the share is really thin. What do you need? Or how do you push that to gain the share? I mean caprolactones has been around for a while. So I would think there's knowledge that they're out there. So I guess what do you have to do to actually get that penetration rate higher and to accelerate the overall growth of the platform? And it doesn't have to be bioplastics, I mean, if you want to speak to the other 3 segments as well. That's helpful. But whatever you think would be helpful.

Yes. So John, thanks for that question. We have been working on some of those applications and with leading customers for a while. So I'm just going to let Stephen add a little bit more color to -- in terms of what we're doing to increase those penetration rates?

Yes. I think if I look at bioplastics first, clearly, consumer wisdom saying, but we don't want single-use plastics. We want recyclability. We want compostable products. That is clearly going to drive the demand of biomaterials. But these biomaterials need improved processing and performance in the marketplace. So -- and that would actually then mean a position for caprolactone. So some of it will be customer-driven -- sorry, consumer-driven, some of it may be regulatory-driven. And some of it will be driven by a larger number of end users or any customers starting to get into this business as well. So that's really what's going to drive the further penetration of caprolactone in bioplastics. Looking at the other 3 areas, it really is just the case of more of the same of what we've been doing over recent years and aligning with the key market users, the people who are spearheading these downstream markets and just listening to the voice of the customer and being in the right place at the right time, and being their partner of choice when they have a technical problem to solve, that's historically how we've grown. And by putting our innovation and new business development activities in that area, I'm convinced that we will continue to do that.

Our next question today is coming from Jon Tanwanteng from CJS Securities.

It has been pretty helpful so far. My first one is, could you talk about the incremental margins in the derivatives business versus the monomer business in general. And what can that 30% EBITDA margin go to over time as you get back to a growth phase after this pandemic is over?

Yes. So I don't think we're going to get overly specific or granular on the incremental margin derivative versus monomer. But obviously, it's significant, it's meaningful and it's treated over time. So that's why we focus on it. And it is not only a higher margin, but we're convinced that that's the type of -- those are the types of products that are sustainable. As we've already mentioned, we have the strong EBITDA margin that's been driven by getting that derivatization up around 80%. So we'll continue to work on that over time and we'll be applying those types of margins to the higher growth rates once we sort of get out of this current challenging environment. I think this business will hold up reasonably well, all things considered. But I think the future of it and the growth in a lot of these areas is bright as we get into a better economic situation.

Okay. Fair enough. And just maybe on the environment itself. I know that last year, you had a competitive issue with Daicel driving more monomer volumes into the market. How has that dynamic changed with the current situation that's going on demand and supply going up and down all over the world?

Yes. So Tanwanteng, I would say, since around the middle of last year, the actual competitive dynamic situation has been relatively stable. We saw Daicel in being very aggressive in the early part of last year and that situation stabilized by the second half of last year. And that situation has remained, I'd say, essentially stable since then as we've been through in 2020.

Our next question today is coming from Vincent Anderson from Stifel.

Thanks for another solid webinar here. So first, I just wanted to touch on bioplastics. I mean, certainly, they offer some attractive secular growth opportunities. I am curious roughly what share of caprolactone typically makes up the raw material build for single-use plastic application. And in the future, does that end market bring you to a place where you kind of have to balance the attractive growth backdrop with maybe potentially lower unit revenue simply due to the price points of these end products?

Okay. Thanks for that question, Vincent. I'm going to let Stephen take on some of the detail there for bioplastics.

Okay. I think the question was, what is the adoption rate of caprolactone in some of these biomaterials? And it does vary. It depends on the application. Typically, it's a relatively small percentage. It can be as low as 5%, typically no higher than 30% adoption with something like polylactic acid, is typically what you would see in an application where caprolactone is adopted.

Yes. Well, Vincent, I think one of the interesting things that Stephen also pointed out for bioplastics is it has both the attributes of improving the processing, so the manufacturing of the product and then separately adding a lot of real important properties. So as you can imagine, depending on the varying needs, whether it's just the processing of it to make it more efficient for that manufacturer or really delivering a different type of performance level, that's going to change the sort of the percentage of the caprolactone product within the bioplastic.

That's helpful. And you touched on this earlier, but I wanted to dig into the commercialization strategy, specifically in thermoplastics. Just given, one, caprolactone is still quite novel. The compounding industry itself is really fragmented in terms of the number of people you have to reach out to. And then where the value is derived from processing efficiencies, maybe you need a bit more scale than a lab or a prototyping setting in order to really prove the benefits. So just -- what's the commercialization strategy specific to thermoplastics? And then in that vein, are compounding assets something that you're looking to consider as a strategic investment in the future?

So Stephen, why don't you go and take that question on thermoplastics, please?

Yes. I think we don't really sort of limit ourselves with the capabilities of what caprolactone can do. We have a very fair low melting point thermoplastics out there that are fully biodegradable and basically give such performance enhancing materials. So we don't limit ourselves and say, well, we're going to go down the compounding route or we are going to go down this particular route. I think what is so interesting about the product is, that it is so versatile that we can talk to many different types of thermoplastic applications and convert this, that it is a product that can give them so many different types of formulating capabilities. So -- and in terms of what we do internally within the company, clearly, we have innovation capabilities where we can look at caprolactone and what it does in some of these applications and create the application development collateral if you want to support some of the statements that we make.

Next question is coming from Jason Goins from Wellington Management.

Just a couple of clarifying questions. Can you break out revenues on page, I think, it's 5 or 6. Can you break out revenues by end markets? And I guess I wonder since the acquisition, how much does Capa have to compete for capital dollars from the rest of the Ingevity business?

Well, I'm not certain we have the detail at this point on -- by the end market.

We actually broke that -- this is Dan Gallagher. We actually broke that out in sort of -- some of the original deal decks. So you can find it there, Jason, at least the 2018 numbers like coatings, adhesives, et cetera.

And just to answer the question on capital availability, there's no constraints. I mean the amount of capital for these types of expansionary projects relative to what we see in the carbon business is relatively de minimis. So we have plenty of capital available for this expansion.

And then as you can imagine, this is a business that Ingevity is going to support from a capital investment standpoint based on the profitable growth and margin and good returns on it.

Next question today is coming from Paretosh Misra from Berenberg.

So first, as you increase the percentage of derivatives in your mix, I guess it will increase the EBITDA per ton, that is EBITDA per ton of your capacity. But will it also increase your EBITDA margin? Or it will be fairly neutral as you're producing more derivatives?

Yes. It will do both.

Okay. Okay. And then just going back to the -- your comments on substitutes. Is there any specific example of any substitute material that you can highlight for the bioplastics part of the business?

Stephen, would you like to address that on the substitute products?

Yes. There are a number of commercially available substitutes, and I think they are mentioned in the appendix, they are something called PBAT and PBS. Those are the nearest commercially available substitutes to themoplastic caprolactone.

Got it. And lastly, any other, I guess, thoughts on your cost structure as in how much is the fixed cost versus variable cost?

Well, we're not going to be breaking out sort of the detail on fixed versus variable costs for this business.

Next question is a follow-up from Jim Sheehan from SunTrust. Jim perhaps your phone is on mute.

Hello again, Jim. Jim, are you there?

Sorry. Yes, I'm here. I'm sorry. A question on your adoption rates that you're talking about on Slide 20. So it looks like on elastomers, you've got a 24% current share of that part of the market. And when you presented this slide in August of last year, I think you were showing that is around 30%. So what is the time frame on these charts? And can you talk about what the difference was?

Stephen, do you want to make any comment on that based on the elastomers?

I don't recollect the difference. And I can't quantify it for you off the top of my head. But maybe that is something we can look into and get back to the individual.

Yes. So Jim, we'll take that and either myself or Dan will get back to you with the detail on that. Thank you.

And on the caprolactone substitute, once a customer has adopted a caprolactam solution, how difficult is it for them to switch to the substitute chemistry?

That's going to depend on the application. General, these specialty products have a pretty high degree of stickiness. But Stephen, if you want to make any kind of specific comments on that dynamic?

Yes. I think you're taking the words right out of my mouth, Mike, it depends. If I take the example of the aerospace one, that's a very difficult one to substitute once the formulation is embedded in. Similarly would be an automotive base coat, for example, not just because it cannot be done. Of course, technically anything can be substituted, but it's the hoops that a company and the divesting customers have to go through to be a sticky than have that approval for many people in the value chain that makes it an exercise that people sometimes don't do. So hopefully, that gives you some insight, but there is some kind of security in where caprolactone is used in some of these very high value applications.

And on your derivatization strategy, how difficult would it be for one of your competitors to develop a stronger presence in the downstream derivatives market?

Well, of course, anything is possible. But obviously, clearly, but they would need significant access to monomer in order to do that. So if I look at the existing competitor base today, they are primarily supplying monomer to the coatings and resin market. That is their strategy. Their strategy is not to derivatize and to grow the market for caprolactone. They could obviously change strategy. But I believe that they would then need access to significant amounts of monomer to be able to do that.

I would say the other important point to that is we have -- the team has established over time, a significant number of very different, discrete SKUs that are very, very specific, I think, in polyols alone, just on products alone, not to even mention packaging. There are over 50 different polyols that we have that have been sort of specifically designed in order to achieve very specific and demanding performance characteristic. So being successful in a broad range of derivatized products takes a lot more than just kind of deciding you want to do it. There's a lot of customer intimate time-related hoops to jump through as Stephen just said, in order to gain any kind of customer kind of validation, confidence and then a position. So it would certainly take some time.

We've reached end of our question-and-answer session. I'd like to turn the floor back over to Dan at this time.

Thank you, Kevin. We have a question from -- that was submitted via e-mail, question from Chris Kapsch of Loop Capital Markets. In the coatings space, phasing out or diminishing VOCs has been a theme literally for decades. Is there still runway on this trend in the context of a growth opportunity for caprolactones, and in terms of the sustainability theme? And how does caprolactone compare to alternative solution in terms of coatings performance and/or cost of ownership for the coatings formulator?

Great question. Stephen, were you able to hear that from Dan?

I caught some of it. It's clearly a very in-depth question on the positioning of caprolactone versus other substitute in coating areas. I think I'll just address the first part with regards to reducing VOC. The gentleman is completely right. Of course, you'll see reduction has been out for many, many years. However, where caprolactone comes in is that, again, it's low viscosity when I talk about polyols here now and the ability to basically improve the performance of an adhesive system, for example. So it's all one thing to take out VOC or to reduce VOC and substitute something, but it's all about increasing the performance of the final system at the same time and this is where caprolactone starts to win out.

Thank you, Stephen, and thanks for that question.

Got one more question from email. This is from Jonathan Lop from Eagle Capital Partners. I was curious if Stephen or Mike could talk about the potential of producing monomer in the U.S.? How much capacity, what products and what is the process to be able to do that?

Well, at this time, that is not part of our approach. Well, obviously, it could be done. It would require a significant new greenfield plant to manufacture it. We believe that our position in our plant in Warrington in the U.K. to manufacturing monomer, given its capability, its strength, the precision that's required in order to do it, the significant investment that has been made in that site over time, makes it likely the best place for us to continue to expand our monomer capacity. But then as indicated, when we look at making derivatives, putting derivative capacity into regions outside of Europe. So it would be a significant investment in hurdle for anyone, including ourselves, to build a new greenfield monomer plant. And so clearly, for us, we believe the strategy to take the derivatives outside of the U.K. is the right one and keep the monomer production there.

Thanks for that answer, Mike. This is Dan again. We don't have any more questions at this time. We've run a little bit over. We want to thank everyone, especially those that held on with us this extra 4 or 5 minutes. Thank you for taking your time out of your day. The next webinar will be in a couple of weeks covering industrial specialties and oilfield. We look forward to seeing you or hearing from you at that time. And have a great rest of the day, and have a great weekend.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.