Ingevity Corporation (NGVT) Earnings Call Transcript & Summary

Hello, and welcome to the End Uses and Growth Opportunities for Engineered Polymers Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Bill Hamilton. Please go ahead.

Thank you, Kevin. Good morning, everyone. Welcome back to Ingevity's 2021 webinar series. As you may know, we are 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 within our Performance Chemicals segment, particularly our business strategy for growth. In order to follow along with today's presentation, 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. You may also use the slide controls on the right side of the webcast player if you would like to advance the slides while listening to the audio live. Before we begin, I should note 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, which are also available for your review if you visit ir.ingevity.com. Our presenters today are Mike Smith, Executive Vice President and President of Performance Chemicals; and Steve Hulme, Vice President of Engineered Polymers. Many of you on the call today already know Mike well, and we're happy to introduce you to Steve for the first time. These gentlemen have over 50 years of combined experience in the chemicals and polyurethanes industries. On Slide 4, we'll begin with Mike, who will provide an overview of our Engineered Polymers business and outline the end-use markets benefiting from our products. Steve will then discuss the business' growth strategy and highlight some exciting growth opportunities and new end uses for our Engineered Polymers technologies. After the presentation, we'll open the line for questions. In addition to Mike and Steve, John Fortson, our President and CEO; and Mary Hall, our Executive Vice President and CFO, will be available to participate in the Q&A. We'd like to keep the Q&A at the end of the call focused on today's webinar topic. With that, I'll turn the call over to Mike Smith to begin our discussion on the Engineered Polymers business overview and end uses.

Thanks, Bill, and good morning, everyone. If you'll turn to Slide 6, you'll see an overview of Engineered Polymers business, With sales of $128 million in 2020, the Engineered Polymer business represented approximately 18% of the $706 million in sales across our Performance Chemicals segment. And after a strong rebound in 2021, we expect Engineered Polymer sales to return to levels similar to 2018 this year. This business is the clear global leader for caprolactone products. From a product standpoint, we manufacture caprolactone monomer, polyols and thermoplastics for a number of growing primary applications. As you can see at bottom right, polyols represent half of our sales, with the remainder split between thermoplastics and monomer. It is also a well-balanced global business with established positions in the Americas, Asia Pacific and Europe, the Middle East and Africa. As Steve will cover later in more detail, our high-margin specialty products are used in a variety of end-use markets that have strong growth rates and significant future runway for further adoption and market penetration. We have over 300 customers globally, comprised of chemical producers, formulators and applicators. Many of these are long-term customers where we have strong history of collaboration and innovation, which Steve will discuss later in more detail. On Slide 7, we thought it would be helpful to review what Capa caprolactones are and how they're used? We combine cyclohexanone and hydrogen peroxide in a safe and efficient oxidation reaction to create a cyclic lactone that you know is caprolactone monomer. This molecule is useful in array of markets, particularly in resins where our customers use the monomer to modify other polymers. Through a unique ring and opening polymerization process, we manufacture downstream derivatives known as capitol Capa polyols and much higher molecular weight Capa thermoplastics. Both products enhance the performance of end-use products in some key markets you see here, helping our chemical producer, formulator and applicator customers make tougher, more durable, flexible and resistant and even biodegradable products. Moving to Slide 8. Let's take a closer look at how these 2 key polyol and thermoplastic product families stack up against competing technologies and materials. Simply put, our polyols and thermoplastics are performance enhancers.The top half of Slide 8 focuses on our polyol technologies. This is the largest and most diversified product family in our Capa portfolio. Capa polyols enhanced the processing performance and our durability in coding, adhesive, sealants and elastomer, or CASE, polyurethane formulations where polyesters, polycarbonates and PTMEG, either alone or in combination, fall short. At the top left, you'll see the performance pyramid for different types of polyols. Capa polyols are part of the specialty polyols category at the top of the pyramid, where our technology is valued for particular technical attributes and benefits they enable. For example, in the area of high-performance polyurethane systems versus alternative technologies, Capa polyols in parts strength and durability and provide a high-quality finish to coding parts. And in some applications, these polyols can be used in small amounts based on the application need and still be highly effective in solving our market, our performance -- our customers' challenge. At the top right, you'll see a Venn diagram that is intended to demonstrate the performance versatility Capa offers our customers when formulating. Although all competing technologies have specific positive performance attributes, they also have shortfalls. Capa has no major performance gaps and is, therefore, the preferred material when processing, and our performance cannot be compromised. On the bottom portion of the slide, we focus on our thermoplastics that can substitute or be blended with various materials you see listed here. While our thermoplastics are used in each of the 3 application columns, I'll draw your attention to the right column, the growing space of bioplastics. When Capa is added to any of these 3 materials, PHA, PLA and TPS, the formulations benefit from significantly improved biodegradability, flexibility and strength, in utensils, paper coatings and bags. In the medical and health space, thermoplastics are valued for their low melting point and the fact that they're safe for skin contact, making them ideal for radiation masks or thermoplastic cast for treating broken bones. Lastly, thermoplastics are key ingredients and adhesives for Shoot components and other low-temperature hot melt adhesives. Capa is much easier to process and apply, simplifying and speeding manufacturing. So with the business overview as our foundation, I'll turn the call over to Steve to discuss our business strategy in greater detail. Steve?

Thank you, Mike, and hello to everyone on the call today. If you please turn to Slide 10. Our commercial approach is underpinned by strong product leadership and customer-focused partnerships. We provide innovative technologies developed in collaboration with customers to deliver tailored benefits and solutions. The business sells more than 70 products today with higher value derivatives, representing over 80% of our sales. The top 10 products account for 2/3 of revenue, with the remaining 1/3 of the business being made up of approximately 60 additional products. This really shows the high degree of customization we can offer. We currently have in excess of 20 projects in the innovation pipeline with a very healthy potential value [indiscernible]. We also leverage customer segmentation that helps us selectively focused technical and commercial resources, winning customers to ensure we grow faster than the market, and we partner with highly innovative customers at the forefront of their industries where we can collaborate on novel projects. This helps us ensure our products are firmly embedded in our customers' development activities and formulations. The schematic at the bottom right describes our value creation process. In other words, how we collaborate with customers? Across the globe, a highly skilled and educated technical marketing team is 40 members strong. These individuals wear multiple hats and work to develop critical touch points within our customers' organizations, particularly in the areas of technical service, application development and R&D. These various relationships inside our customers means new product ideas are generated both internally and requested by customers during the collaboration process. Ideas are scoped and proposed by market development teams and once approved and prioritized, our R&D teams go into a deeper discovery phase. And once we've met our objectives, we then strategically engage our customers, R&D teams for approvals. When customers are fully on board and commercial negotiations are finalized, we will scale up the new products and deliver them to market. Cycle time from idea to commercialization can be short as 3 months to as long as 3 years, depending on project complexity. So how do we build on this foundation of industry-leading customers and healthy markets to drive growth? On Slide 11, you'll see the strategic pillars at the core of our continued growth. We remain focused on executing each of these 5 key areas. And after a strong rebound in 2021, we are confident we can achieve a 6% to 8% compounded annual growth rate between 2022 to 2026. Let us take a closer look at each of these pillars in more detail. Moving to Slide 12. I'll focus on the first pillar and the ways we are able to maintain market leadership in monomer manufacturing, whilst prioritizing sales of our derivative polyol and thermoplastic products. On the top left portion of the slide, you'll see that Ingevity is clearly the global leader in monomer capacity, with Daicel of Japan and BSF in the U.S. being the 2 other predominant players. Our global capacity is almost 3x larger than the nearest competitor, Daicel, and we cover almost 2/3 of the capacity in the global market. An important point to note here is that Ingevity is the only supplier operating a dedicated plant or monomer production at our Warrington, U.K. facility. We manufacture caprolactone monomer to remain a reliable source to the global merchant market and also to serve our derivative polyol and thermoplastic customers. Since 2018, we have successfully shifted a larger portion of our sales into derivatized products. We do this primarily to benefit from higher margins on these value-added products as well as make the business more defensible as the derivative products are more difficult to replace wanting customer formulations. Moving to Slide 13. I'd like to discuss our second pillar. Here, we tried to provide the cleanest, simplest visual to highlight the 6 induced markets we're targeting. In Industrial equipment, our largest end use, representing 28% of sales. This end-use market is one of the more established markets to polyurethane elastomers for items such as seals and gaskets, wheels, rollers and mining screens. These areas tend to grow with the market at 3% to 4%, but there are areas such as windmill blade coatings, where we're still penetrating by replacing other materials. Any major growth in this market above market rates may be driven in future by opportunities linked to sustainability drivers. In footwear and apparel, which represents 19% of 2020 sales, we expect growth at market rates of 4% to 5%. Our thermoplastic products can replace thermoplastic polyurethanes in shoe counters, a piece of material giving form and strength to the back of a shoe. And our polyols can be used in specialty shoe sole systems where premium performance requirements were entire value Capa materials. Apparel represents an opportunity in the high growth market as more sophisticated materials are being explored. Automotive and transportation represent around 20% of 2020 sales, and our strategy here is to grow significantly above the estimated 3% to 4% market growth as we help enable opportunities for polyurethane materials to grow within this space versus other materials. The unique performance attributes of Capa are enabling growth in paint protective films, jounce bumpers and EV battery pads and will be described in greater detail shortly. The consumer packaging market represents 14% of 2020 sales. We are targeting the promotion of our capo thermoplastics into bioplastic applications. Published market growth rates for bioplastics range from 10% to 15%, but again, our expectations are to grow at much higher rates based on customer projections. Again, we will provide more details in later slides. Medical and health represents 7% of 2020 sales. We participate here with our Capa thermoplastics to make splinting and patient mobilization systems, for radiation oncology, which is a space growing at 7% to 8% and where we believe we are well positioned to maintain growth. Finally, electronic devices, which represents 8% of sales, and where our market typically grows at 45%. We believe the penetration of PU materials into gaskets and coatings is growing above the market, and our Capa materials continue to penetrate with share gains. Our third pillar can be found on Slide 14. We are leveraging strategic CapEx initiatives to maintain and grow our market-leading positions through a commitment to best-in-class assets, laboratories and people across the globe. We are and intend to remain the largest supplier of caprolactone solutions to the marketplace. And in order to do that, we will invest when and where appropriate to ensure we have the available monomer supply necessary to both supply the market and to derivatize and that we have the facilities available to support our customers' development in a timely manner. Back in February, we announced the addition of polyol production at our facility in DeRidder, Louisiana, will increase our global production capacity by 40%, enable us to meet demand and better serve customers. As part of this investment, we will also install monomer storage to support manufacturing of polyols and streamline monomer shipments to customers in the U.S. construction in DeRidder will begin this summer and is expected to be operational by the first quarter of next year. I'll also mention here that we are evaluating further monomer and thermoplastic expansions to meet that growth. Second, we recently announced plans to open a new innovation center at our plant in Warrington, U.K. And located adjacent to our existing central laboratory, this new center will be dedicated to accelerating innovation and application of Capa technologies, housing state of the art equipment and testing capabilities. We expect the innovation center to be operational in Q4 of this year. We have already added technical staff as we prepare for the opening and are further considering additional technical and innovation staff to support customers in the U.S. and Asia. Lastly, besides adding technology resources to support our innovation projects, we are also establishing a new marketing function to drive new business development and speed to market. We also needed to grow our supply chain and customer service functions to meet growth and have recently added new project engineers is to enter multiple future capacity expansions required to grow. [indiscernible] will enable us to maintain and grow the leadership position. On Slide 15, I'll turn our attention to our fourth pillar and discuss how sustainability is embedded in the Capa portfolio. Sustainability is deeply rooted in all we do with at Ingevity. And while the production of Capa utilizes traditional feedstock as opposed to being prime-based chemistry like the rest of the Performance Chemicals businesses, make no mistake, our caprolactones directly impact and enable many equal friendly processes and end-use products. Ingevity's commitment to making a positive global impact also drives our approach to product development, helping us further enable the success of our customers. To this end, we have aligned our innovation efforts and corporate sustainability contributions, security nation's sustainable development goals you see here. You will see these small icons as we move into the final section of our presentation and highlight exciting growth opportunities and new end uses for our Capa products, all while directly or indirectly contributing to customers and consumers' ability to meet sustainability goals and preferences. Turning to Slide 16. With the background of the 4 pillars behind us, we'll dedicate this last section to the fifth pillar and really bring to life our innovation and new business developments are fueling the growth of the Engineered Polymers business. Slide 17 shows a summary of the exciting example we'll use to discuss the myriad of challenges our customers face and how our polyols and thermoplastics have been able to solve these issues. The first example is on Slide 18. The world's plastic problem is a secret to no one. The continued trend in regulatory and consumer circles is a shift away from traditional single-use plastics that are filling our landfills and polluting our oceans at astonishing rates, never to biodegrade and instead breaking down into microplastics that further disrupt the food chains. We firmly believe biodegradable plastic technologies have a bright and important future. We've seen many recent announcements on capacity investments into bioplastics such as PHA, PLA and PBAT. Our focus with Capa is as a complementary additive to PHA, PLA as well as thermoplastic starch. Bioplastics formulated with PLA, for example, one of the most common homopolymers used today, have little and intend to break easily. Capa thermoplastics can be easily added to PLA for improved performance. Capa thermoplastics can be used in most type of single users [Technical Difficulty]

Hello, I think we have lost your audio.

Ladies and gentlemen, please standby.

I'll just take it for here. Thanks, Steve. So Capa thermoplastics can be used in most types of single-use plastic products from rigid packaging to straws, plastic films and bags, paper coatings and plastic cutlery and can make each of these 100% compostable at home or in industrial settings, often within 40 days. Competing products typically achieve less than 50% in that time. Products formulated with Capa create no negative impacts to the environment once discarded. Plastic simply break down into CO2 and water with no toxic chemicals or microplastics left over. Our thermoplastics are versatile, process stable and offer benefits such as over 500% increased flexibility and over 300% increased impact resistance. You'll find our second example highlighting polyols in automotive space on Slide 19. The automotive industry continually faces challenges to provide more durable vehicles while focusing on the environmental impacts of various manufacturing processes. Here, we highlight 3 applications where Capa polyols are enabling superior performance. First, paint protective films are not a new application and been around for many years, historically focused on high-end cars. Recent developments in the Asian markets and adjustment spot price positioning throughout the value chain have caused a major surge in demand for such films in the mid-tier of the automotive market. Furthermore, TPU is taking share versus PVC due to environmental concerns surrounding PVC, and TPUs significantly improve durability. These multilayer films benefit from the incorporation of Capa to improve resistance to scratches, puncture from stone chips, corrosion and ultraviolet rays, allowing end users to guarantee their products for over 5 years versus 2 years for existing PVC products. Second, polyurethane dispersions are finding applicability in artificial and genuine leather surface coatings for high-quality automotive interiors, replacing traditional solvent-based processes. Again, although multiple polyol technologies exist, Capa helps formulators improve resistance to abrasion, chemicals and UV, while at the same time, being able to sustain a soft, comfortable feel. Lastly, jounce bumpers, also commonly referred to as a bump stop, are an integral component to vehicle suspension design. Jounce bumpers made from microcellular polyurethane foam are growing compared to other materials due to their improved dynamic performance and ride comfort. Improved dynamic performance is especially required in electric vehicles as weight of the battery increases overall weight and therefore, requires enhanced performance of suspension systems. Capa polyols are the best-in-class for dynamic performance and durability ensuring a smoother, more comfortable ride throughout the lifetime of the vehicle. On Slide 20, you'll find a second focus on polyols for automotive, but this time in the EV space. EV battery packs are made up of multiple cells that must be kept stable during challenging conditions such as charging and movement when driving. Battery designers have turned to the use of microcellular polyurethane foams to provide the high-performance foam cushioning that holds the stacks in place that allow it to expand and contract during its lifetime. Failure to provide this cushion and support can result in battery failure, leading to expensive recalls and/or endangering passenger safety due to fire risk. Homes incorporating Capa polyols are more durable in this operating environment, and this directly leads to the improved working life of the battery. Furthermore, Capa polyols eliminate the need for expensive flame retardants, which has also challenged volatile organic compound specifications. Turning to Slide 21. Here, we showcase Capa polyols for industrial coatings where extremely high durability is required to withstand harsh weather and chemical exposure. The coatings sector is also very focused on eliminating VOCs as they seek to comply with increasingly stringent air quality legislation. Capa polyols can be designed to have low viscosity, which allows the formulator to eliminate solvents and improve the VOC profile of the coating. Furthermore, Capa functionality can be tweaked to optimize durability in the form of improved abrasion and impact resistance that enable longer-lasting coatings and the ability to avoid expensive resprays and recalls. Capa polyols are used in very demanding end applications such as windmill blades, high-speed trains and oil and gas tanks. You'll find a further technology adoption example on Slide 22 that highlights the use of Capa polyols and thermoplastics to enable more sustainable and efficient adhesive solutions for automotive, electronic devices and furniture needs. Many adhesive manufacturers in these industries must improve their environmental footprint and reduce VOCs. In recent years, reactive polyurethane hot melt adhesives have proven to be a viable option because they don't compromise performance or hinder manufacturing speed. The use of Capa polyols in reactive hot melt adhesives can improve adhesive durability, ensuring it doesn't fail in extreme temperatures and continues to resist wear and tear from everyday use. Our last product feature is on Slide 23, where we showcased sustainable and biodegradable adhesives for packaging using our Capa lactide polyols. This copolymer technology is relatively new and expands the toolbox we have to solve customer problems. Packaging provides both visual appeal and protection for products. To address the environmental concerns around disposal options, there is a growing demand for multilayer films that are preferably renewable and/or biodegradable and still perform well. The use of our Capa lactide polyols enables adhesive manufacturers to meet these demands. Capa lactide polyols are low viscosity, allowing for solvent free formulating. The renewable content can be tailored between 25% and 50% and also have the potential to biodegrade under composting conditions. Furthermore, the high polarity of the molecule ensures strong adhesion to substrates that are typically difficult to bond together. We hope these 6 slides highlighting customer adoption of our innovative capital products have been helpful. We'll close with Slide 24. We are confident the Engineered Polymer business is well positioned for future profitable growth and value creation. Ingevity is the clear global market leader in caprolactone technology and products. We have a strong defensible competitive advantages within these niche chemistries and a targeted strategy to operate in markets with strong growth rates and significant upside based on additional market penetration. Our organization is adept at leveraging its strong relationships, delivering value technology and solutions to customers. In addition, we will continue to leverage sustainability as a competitive advantage in the markets where Capa can enable biodegradable more environmentally friendly end-use applications and directly impact our customers and consumers' sustainability preferences. Lastly, we will continue to invest in strategic assets, technologies and personnel to support growth across the globe. With that, we'll turn the call over to the moderator to begin the Q&A session.

[Operator Instructions] Our first question today is coming from Vincent Anderson from Stifel.

Very nice presentation. When you're contemplating new monomer capacity, as you alluded to, do you think either you or the market or at a place where it's more of a build it and they will come attitude, given the historic lack of kind of total global supply? Or are there certain internal targets from a contract and product mix perspective that you would like to reach first to mitigate the market impact of new supply?

Yes. Thanks, Vincent. And I would say it's much more the former. We have a strong belief in the technology adoption in this market. And naturally, although our focus, as we've always indicated, is on the derivative products for polyols or thermoplastics as we believe they offer defensible and high-growth positions, we're going to have to have monomer to support that capacity. And we also believe from a strategic standpoint that having and participating with monomer is the best thing for the business and the best thing for our customers globally. So we're going to ensure that we make all the capacity investments to support the growth of this business. As we've seen already through the first quarter and continuing this year, we're very optimistic on the future growth of this business, and we're going to do everything we need to, to support that growth.

All right. And then I guess then to follow-up on that. Where -- if you're willing to share maybe the estimated replacement value of your existing monomer business or maybe more to the point, are you contemplating brownfield or maybe greenfield in the U.S.? And any kind of round numbers for the capital investment, if you're willing to share it?

Well, as we've indicated, we're going to be expanding the polyol capacity in DeRidder, Louisiana. I think that it is likely, in the future, we'll give some strong consideration to thermoplastic production outside of the U.K. And when it comes to monomer, that's still under evaluation to determine how and we want to approach increasing monomer capacity.

Very fair. If I could sneak one more in on bioplastics. Certainly, a fast-growing industry. But I'm curious for your perspective, having tried to commercialize kind of into that value chain, how would you describe the landscape in terms of where the innovation leadership is right now? Are you working more with OEMs to push the benefits of Capa? Or is it going out to the individual biopolymer developers and producers? Do you feel like maybe there's a gap in leadership for kind of optimal bioplastic formulations that you could fill?

I would say our primary relationships are with the customers that will be using Capa-based products to enhance the performance of bioplastics. Naturally, we are in touch with and making sure that we are keeping up with trends with end users. But when it comes to really interacting with how to provide the technology and the specifications that the customers are seeking, we're working much more directly with those producers that will end up making those improved bioplastics and selling them to the final end users.

Perfect. So like maybe a compounder would be maybe a simplistic way of characterizing your primary customers?

Well, it could be a compounder or other manufacturers of bioplastics that are incorporating and utilizing Capa technology in order to make their products throughout the value chain.

The next question today is coming from John McNulty from BMO Capital Markets.

So when you think about the customers and maybe some of the more traditional markets for Capa and maybe not necessarily the new or emerging ones, where they're not using your technology and they're using something else, what's the rationale for that? Is it cost versus performance? Is it just product availability? Like how should we think about that? Because you make some pretty compelling arguments as to why it's a better solution. So how should we think about while you're not necessarily in all of those applications as fulsomely as you'd like to be?

I'll take an initial comment on that and then turn it over to Steve for some more specifics. I believe he's back on the line. But it is primarily a performance-driven and naturally, the cost element with that performance has to come into place. We are not going to allow, if you will, a high-performing product that is highly valued in the market to be limited by our capacity, given our leadership in the industry and our belief in the strong growth prospects. So Steve, I don't know if you want to make a couple of additional comments on competitive product interaction.

Yes. I think you framed it. Well, Mike, I strongly believe the value proposition of Capa but ultimately, there are some lower-cost materials out there. And our customers will obviously optimize the balance between performance and cost. I think we have work to do both in the traditional markets as well as the new markets in making sure that Capa can be used even as not the full solution but a partial solution. So I think that gives us some further room for growth, and that will only be driven in the marketplace as we intensify our technical service and application efforts, which was that enough to do so. So there's a little bit more runway there even in traditional markets.

Got it. No, that makes sense. And then when you think about the 40% increase in Louisiana, I guess, how should we think about that may mean in terms of a margin impact? And also, how quickly do you think that's something where you'll be able to load it?

Yes. So just for clarification, and that's a 40% increase in our polyol capacity. And as you've also seen, we are having a very strong ramp-up this year with significant growth that we'll deliver this year. And then we're going to -- if you take that -- the range of growth that we've outlined, you can see -- you can kind of get an estimate that capacity ought to be sufficient for a number of years to come. And I'd also say that while we don't have to face that decision now, the DeRidder, Louisiana facility, if we choose to utilize it as such, we could likely do some very capital and cost-efficient increases at that site in North America once we get this initial polyol production up and going by the end of first quarter next year.

Next question is from John Tanwanteng from CJS Securities.

This is Brendan on for John. Just want to ask real quick on just ESG trends and regulations and just the overall consumer demand. How has that driven the business from a biodegrade by degradability perspective? And are customers who do care about that growing as a portion of sales or pipeline activity at this point?

Yes. Once again, I'll turn it over to Steve. But as you may have heard during our recent calls, we were really pleased with the type of technology adoption we're seeing in bioplastics throughout the course of last year as we headed into this year. There's also very significant increases and focus on more capacity and customer uptake in that. So we're naturally doing everything we can to support that. So Steve, if you want to add any more specifics to that, feel free to.

Yes. I think the thermoplastics for the bioplastics area speaks for itself. I think in the traditional markets, the pull from the market has not really been there, even though we have some existing technology in our portfolio, for example, the Capa Lactide technology. But certainly, in the last 6 months since I've joined the business, there's been a significant increase, probably over the last 6 to 12 months, there's been a significant increase in the number of inquiries we've had from customers, which is creating a bit of a pull again now. So again, we have more to do, but that is a very important part of the portfolio.

Great. And then just -- can you just talk to your ability to stay ahead of inflation in the current environment? How are the input and sales contract structure? And what does the lag time look like in terms of pass-through?

So any sales contracts that we have today that have a cost formula is obviously passing through any raw materials that we see -- raw material increases we see today. And then for the rest of the business, I think we all you can see the world around us, raw materials are increasing, and we're having to move with those increases.

Next question today is coming from Roger Spitz from Bank of America.

What percent of your caprolactone you consume internally? I assume it's less than 80%. If you said it during the prepared remarks, I didn't catch it.

Well, the internal consumption, yes, would be just based on the product mix would be slightly below the 80%.

Okay, okay. I think it's further below because presumably, it has a much lower price point than polyols in thermoplastics. But okay. The other is in caprolactone polyols, are there other major competitors besides Daicel and BSF? Meaning, perhaps someone who's buying caprolactone from 1 of the 3 of you and in the polyols business?

Yes. So I'll take that one. We do have some of our larger system house clients that may make a limited amount of polyols internally. But the biggest clients where we sell monomer are really focused in the thermoplastic polyurethane market, not actively selling their polyols into the marketplace to use those polyols to further make thermoplastic polyurethane pellets.

Next question today is coming from Paretosh Misra from Berenberg.

Is there any color you could provide as to how the pricing as in price per pound varies across your product portfolio? Is it varies, depending on the different applications, different end markets that you talked about, how different are these on a unit basis?

So if we look at...

Again, it's sort of a directional comment -- go ahead.

Yes. So obviously, within the monomer market, there's not a huge spread. Within the Polyol product line, there are quite big differences depending on application. There's also different chemistries in there, so you have quite a big range there. And then again, in the thermoplastics, there are some deltas in that depending upon the formulations of those products. And if you look across the business as a whole, our spread on pricing is sort of 2x the minimum.

Got it, got it. And I'm guessing the margins accordingly vary also based on how the pricing is?

Yes, that would be pretty much in line with the previous statement.

Understood, understood. And just as a follow-up regarding the -- your -- the TPU paint predictive films applications that you described versus the PVC substitution opportunity in the automotive, any thoughts on how big of an opportunity this could be? In other words, are there other materials or technologies that you're also competing against besides PVC?

So I mean, overall, the TPU film opportunity, it's a relatively small market today. We know we talked about automotive being about 20%. And automotive is not just the TPU films. But that the business is about $25 million today in automotive, and we think that can probably double over the next 5 years and TPU films themselves. There's a handful of companies trying to grow this market at the moment and the range that you hear from them is anywhere to taking the market to threefold what it is today to sixfold. So it could be an interesting market for us over the next few years.

Our next question today is coming from Richard Garchitorena from Wells Fargo.

My first question, I was impressed by the guidance for the segment to get to your 2018 level this year. I was wondering, what are your operating rates currently? And can you give us any guidance in terms of how to think about 2022 and 2023, given the 40% expansion of polyols that's coming?

Yes. Well, thanks. And first off, at this point, we don't give guidance. We just are giving a reference point based on the strong first quarter and our outlook for the second quarter. And it seems like we'll be in that, let's say, as we said, sort of similar range to 2018. But the year has to unfold as it unfolds. But we would consider that level, the type of rebound we're looking for, that's kind of in -- around a 30% level for this year. And then off of that, let's call it, a newly established base with the market penetration, technology adoption, especially with the derivative products. We believe that will deliver the 6% to 8%, and we're going to have the capacity to deliver it. We -- as I said, we're really pleased with how quickly things have rebounded. The technical adoption the teams have been working on for the last few years have come across and come through well at a similar time where we've seen some general market demand rebound. So that's been terrific for the business. And in fact, puts the pressure on us to, frankly, accelerate some of the expansion opportunities that we have planned to do. And they're currently underway, and we'll make sure that we've got the product to support the market.

Okay. Understood. And then on sustainability, bioplastic, how much of thermoplastics is bioplastics? And then just thinking about growth rates for that business, obviously, a lot of interest and demand. How much would you need to invest to sort of grow that business in line with sort of market trends you're seeing?

Go ahead, Steve.

Yes. So the bioplastics, as we said, was roughly $10 million of sales last year. And the overall thermoplastics sector, that's currently about half of it. So I would say 1/3 to half [indiscernible]. In terms of investment for the future, I think we've already talked about debottlenecking options and investment in more thermoplastic capacity, and that will be part of the overall CapEx plan that we intend to spend over the next few years to support the business growth of circa $35 million to $45 million of CapEx that we plan to spend.

Next question today is coming from Chris Kapsch from Loop Capital Markets.

Thanks for the nuances around this business and the evolving dynamics. If I look at Page 13, where you discuss the growth characteristics by end market, just doing some simple math, it looks like the markets that you address are growing roughly 5% to 5.5%. So if I think of your 6% to 8% growth objective for the business, it looks like the most important markets where you called out outsized growth would be further adoption in both the automotive and consumer packaging. I'm just wondering what the visibility is around the increased penetration into those end markets? And what the -- just what the commercialization and sales cycle is like? And is it those markets that -- where you're -- that's really underwriting the capacity expansions?

Well, thanks for the question. But go ahead, Steve.

Yes. So I mean, again, let's start with the bioplastics. I mean we've said the market is growing at 10% to 15%. But if you look at some of the announcements of PHA, PLA and capacity being put out in the press, they're significantly higher in that 10% to 15%. And those are the markets that we are targeting as part of our strategy. So depending how those materials go in their penetration of the overall bioplastics market you could see bioplastics sales growing 3 to 4x within the next 5 years, not double with the 15% CAGR. So bioplastics, certainly very important part of the future growth. And then again, we've talked multiple times about the various automotive applications that we've showcased today. And as previously said, I can see the automotive and transportation sector, doubling over the next 5 years. So again, significantly higher CAGR than the underlying market.

Okay. And if I could just follow-up on the comments about the bioplastics market. You had mentioned in response to a different question how this -- how there wasn't much pull from this market and then in last 6 to 12 months that's changed. I'm just wondering is it more a function of entering the pandemic, there wasn't as much focus on single-use plastics that given sort of the essential nature of the economy during the lockdowns and so forth? Or is it more to it? Is there -- is the industry coalescing around these PHA and PLA technologies that are just superior to alternative biodegradable plastics? And if you could just highlight what the advantage -- the true advantages of that technology over competing technologies is?

So again, the bioplastic market where we're selling the [Technical Difficulty]

So let me back up a second to the question. I think that in relation to the adoption of those bioplastics, those were really underway and not necessarily impacted by anything that has to do with COVID. These technologies have been developed for a number of years. People have put in plans for asset increases for these technologies over a number of years. And so I think that it's more of a meeting between the technology capability of those products. And in many cases, those can be enhanced, as we've described by Capa-based products, with the increased requirement from the overall market. And that market is driven by a clearer need across the globe to address plastics. So I think that, that trend and that need was well understood and on track prior to COVID. You can look at single-use plastics and adhesives that may have had some dynamic changes during COVID, but our sense is that, that market trend and societies, acceptance and need to make a change is more the primary driver the growth that we and others believe will happen in some of these bioplastic markets.

Do you hear me again, Mike?

Yes, you're back on, Steve.

Okay. Sorry about that. So let me build on that a little bit. There may have been a small misunderstanding because when I said there wasn't the market pull, that's nothing to do with bioplastics. Bioplastics has got momentum. And although it slowed down a little bit during the pandemic because of our customers' markets, events, hotels, universities, not using as many single-use plastics, that market has momentum, and we'll go at the rates we've discussed. When I talked about the market pull or lack of market pull for sort of biodegradable materials, renewable materials, sustainable materials, that is in our traditional markets of polyurethane, elastomers, et cetera. And even in those markets in the last year, we've seen a lot of interest for renewable content or biodegradability in PU materials for multiple applications.

We have reached the end of our question-and-answer session. I'd like to turn the floor back over to Bill for any further closing comments.

I'd like to thank everyone again for joining us today for your continued interest in Ingevity, and we look forward to speaking to you again next month on our next webinar. Thank you.

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