Ingevity Corporation (NGVT) Earnings Call Transcript & Summary

Hello, and welcome to the outlook for pine chemicals and the rosin industry with a focus on Industrial Specialties Conference Call and Webcast. [Operator Instructions] It's now my pleasure to introduce your host, Bill Hamilton. Please go ahead.

Thank you, Kevin. Good morning, everyone. Welcome back to Ingevity's 2021 Webinar Series. We've held these webinars as a way to continue to inform and educate the financial communities about our businesses. Today, we'll be discussing our Performance Chemicals segment, particularly the outlook for pine chemicals and the rosin industry with a focus on our Industrial Specialties business. This morning, we posted a presentation on our investor site that you can use to follow today's call. It can be found on ir.ingevity.com under Events and Presentations. Any projections or goals we may include in our presentation today are likely to involve risks we've detailed in our earnings release, our SEC filings and the forward-looking statement you see here on Slide 2. I'll also refer you to our earnings release and presentations for disclosures and reconciliation of non-GAAP measures we use when discussing our results. By presenters today are Mike Smith, Executive Vice President and President of Performance Chemicals; and Rich White, Vice President of Industrial Specialties. Many of you already know Mike well and may remember Rich from our 2020 webinar on the Industrial Specialties business. Their bios are on Slide 3. Our agenda is on Slide 4. Mike will begin by discussing the strategy regarding our Performance Chemicals segment which, as you know, is a strong legacy in pine chemistry. They'll then provide an overview of the Industrial Specialties business wherein most of our pine chemicals products are sold. Rich will discuss market dynamics for the 2 more prominent chemical platforms within Industrial Specialties, those being tall oil rosin and tall oil fatty acid. He'll review some of the market dynamics for these products and take a deeper look at some of the larger end-use applications. He will then talk about some emerging uses for Industrial Specialties products all of which bode well for the future growth of the business. After the presentation, we'll open the line for questions. In addition to Mike and Rich, John Fortson, our President and CEO, 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. And with that, I'll turn the call over to Mike.

Thanks, Bill, and good morning, everyone. Thanks for joining us. Our objectives for this webinar are threefold. First, for those of you who are perhaps new to Ingevity's businesses, we want to introduce you to our legacy pine chemicals business. Secondly, for those of you who are familiar with us, we want to provide you with information on what drives demand, supply and pricing, the 2 major building blocks within Industrial Specialties. And third, we want to leave you with a sample of the kind of new markets and opportunities that exist within the business. If you'll turn to Slide 6, and I want to just give you some perspective on our strategy for Performance Chemicals and how Industrial Specialties fits within Ingevity. Throughout Ingevity, we have strategically focused on high value-added products and markets. To this end, we work with our customers in varying ways. In some instances, as basic materials providers are providing essential ingredients or as a true technology partner. Most of our revenues and value for that matter, come from the latter 2 categories of downstream derivatives. Since the spin, we have made significant progress on structurally improving our Performance Chemicals segment. Our strategy has been to move to the right. By focusing on higher value-added products and markets, we've been able to significantly improve the bottom line, driving an 800 basis point improvement in segment EBITDA margins of 21% over the last 5 years, the pandemic included. The addition of Engineered Polymers played a major role in this profitability shift as has the growth of our higher-margin Pavement Technologies business. Industrial Specialties has also played a key role in the segment's improved profitability profile. Over the past several years, the business has implemented a series of initiatives to align on profitable performance by shedding less profitable accounts and improving product mix, driving innovation and focusing on high-margin niche applications. We are now turning more of our attention to driving top line growth in Industrial Specialties, and we're optimistic about our ability to do that. Given the range of end-use markets we serve, the variety of challenges we help customers solve every day, the outstanding sustainability profile of the business and the rapidly changing landscape of opportunities for these products, we are very upbeat and confident about the future for our Industrial Specialties business. At this point, let's review the product spectrum that serves as the basis for the business. Turning to Slide 7. You'll see that we start with renewable raw materials, namely pine trees, which gives us the sustainability advantage over some other petroleum-based resins. We use co-products from the pulp production process as our key input materials. The primary raw material is crude tall oil, or CTO. We have a very solid position with this key material. We have long-term contracts with WestRock in Georgia-Pacific that ensure the vast majority of our supply needs. And while we expect CTO inflation over the next 4 to 5 years, we believe we can temper that with price improvement and growth in higher-margin applications. As you know, we take CTO and fractionate it in our network of buy refineries in Charleston, South Carolina, DeRidder Louisiana and Crossett Arkansas. The 2 primary building blocks from which the majority of our products are further derivatized, our toll oil rosin, or TOR, and tall oil fatty acid, or TOFA. The process also results in biofractions. We react these inputs with a wide range of other chemistries in a variety of manufacturing processes to derivatize them into many specialty additives. These products provide critical functionality for various end-market applications. In addition to CTO, we also use lignin another product from the pulping process. Lignin dispersions are used in some important applications within Industrial Specialties, such as agricultural chemicals and dyes. With the exception of a moderate amount of TOFA used to manufacture our Pavement Technologies products, the bulk of products made in our biorefineries is sold through our Industrial Specialties business. Turning to Slide 8. Here's an overview of the core part of Ingevity. The Industrial Specialties business, which we referred to as InSpec is committed to driving value from pine-based chemistry in 3 product segments. As you can see from the pie chart in the lower right, this is a highly diversified business serving many different end uses. The biorefinery produces TOR and TOFA in roughly equal proportions. It's interesting to note that adhesives, one of the second largest end use for our rosin, has displaced inks and now represents 15% of the revenue in Industrial Specialties. This is now approximately twice the size of our printing inks business, which has shrunk over the last several years. While the majority of the InSpec business is within North America, we continue to pursue business accretive to our portfolio around the globe as evidenced by the 45 countries we serve. We experienced revenue decline in this business in 2019, primarily due to efforts to improve profitability and in 2020, primarily due to the pandemic. We expect to see an uptick in revenues in 2021, driven not only by economic recovery, but also by our efforts to capitalize on improving dynamics for TOR and TOFA. In fact, we expect sales in Industrial Specialties to grow by over 15% this year. Turning to Slide 9. Our strategy in Industrial Specialties is designed to create and capture value through the excellent product portfolio and technology we have developed over our history. It's a mosaic of businesses that have varying degrees of growth potential that each require different strategic approaches, whether it be leveraging trends and sustainability, driving price and value through technology partnerships and innovation, introducing new products, entering new markets, improving our product mix or financial performance of the business through operational excellence. It's a complex business that requires a multifaceted approach. First, we're going to continue to focus on an overall higher value position. As the trend towards sustainability increases, we will leverage our inherent sustainability profile based not only on our raw materials but on the impact that many of our products have on the environment through their use. We intend also to strategically value up our revenue by continuing to shift to higher growth and differentiated products to improve our mix and margins. As Rich said last year during our webinar in this business, we're going to derivatize, derivatize, derivatize. Second, we are continuing to bring new products to commercialization. We're capitalizing our strong relationship with customers to work collaboratively with them to solve problems. Our approach is simple. Rather than developing products in the lab and trying to push them, we want to understand what our customers need and pull them through the development process. We'll utilize our strong technical service capabilities and invest in R&D to launch and commercialize new products that provide solutions our customers value. Third, we have a strong network of production facilities, and there's always things we can do to improve efficiency. We want to continue to focus on lowering costs and optimizing our manufacturing to make room for expanded product offerings into new markets. With that, I'm going to turn this over to Rich, who is going to walk us through TOR and TOFA and share some of our initiatives in emerging markets. Rich?

Thank you, Mike, and thank you all for joining today. We'll start by taking a look at our tall oil rosin business. If you turn to Slide 11, you'll note that TOR, or tall oil rosin, accounts for approximately 40% of the global rosin market, with a greater percentage being made up of gum rosin, primarily from China and Brazil. The Brazilian proportion of gum rosin is up about 1,000 basis points since our last webinar last year. Due to a sharp reduction, almost half in the volume of Chinese gum rosin, partially offset by a doubling of gum rosin from Brazil, this led to a strengthening of prices for gum rosin, which we'll discuss in a minute. Rosins are used in a variety of applications globally with adhesive, road striping, inks and rubber, representing the lion's share. It is important to understand the difference in the way that Chinese and Brazilian gum rosins are produced as opposed to TOR. Gum rosin is harvested in China by workers who essentially go up into the forest and tap the trees using rudimentary tools and process, a tin cup and hammer. Depending on the region, gum rosin harvesting season typically runs from July to November. And after those workers bring the unrefined tree sap down from these forests, it is further processed into rosin in turpentine. Because of the way it is harvested in process, there are a number of factors that can affect the production and price, including weather, the length of the harvesting season, the availability of workers for the harvest, land leases and quality. In addition, Chinese gum rosin is first used to satisfy domestic demand, which can affect the amount of material exported. The availability of gum rosin also impacts pricing -- Brazil gum rosin pricing. Brazil gum rosin is produced in much the same way as Chinese gum rosin, only they're harvest from managed farms rather than natural forest. As we saw at the end of 2017, the demand for turpentine, either natural or synthetic, can have a dramatic effect on the gum rosin market. Lastly, exchange rates and tariffs also clearly have an impact. So what does all this mean for TOR? Please turn to Slide #12. TOR is in the minority position versus Chinese and Brazilian gum rosin. Our pricing directionally follows CGR typically with a time lag. When Chinese gum rosin prices go up, we can gain pricing leverage in about half a year. When they go down, we lose that leverage. Generally speaking, our customers are not inclined to switch out of formulation to accommodate different rosins unless there is significant price gap. Recently, prices for Chinese gum rosins have rebounded due to -- due in part to a correction of artificial supply glut caused by the response to a late 2017 turpentine outage and a reduced harvest in 2020. Chinese gum rosin prices are up approximately 50% since early 2020, but down somewhat during the last few months due to supply from the current harvest season. As a result, we have been implementing price increases for TOR approaching about 50% throughout 2021. These increases have enabled us to achieve strong revenue increase in Industrial Specialties year-to-date. Clearly, the demand dynamics of the end-use application rosins also play a role. Turning to Slide 13. The ongoing shift in adhesives market have impacted our TOR business. As Mike mentioned earlier, adhesives is now the largest end-use application for our TOR, and it's a large and growing rosin market with approximately $1 billion in global sales. Innovation in the adhesive market has driven a need for new products. Our customers are demanding lower color, lower odor and greater sustainability benefits. This has driven us to develop tackifiers that meet both the performance, requirement and sustainability profile of competitive material. The reason is simple. With explosive growth of e-commerce, further fueled by COVID, customers are requiring more flexible and sustainable packaging. This creates a preference for bio-based adhesive versus petrochemical-based hydrocarbons and our products are 90% bio-based. Road striping, which we'll highlight on the next slide, is becoming a more significant portion of the adhesives market and is, in fact, growing at a faster pace the adhesive average. Growing infrastructure investment and future safety mandates related to autonomous vehicles will spur growth in this application. Our strategy for adhesive is to leverage these key trends by developing new and innovative solutions providing low color and low odor solutions that are bio-based. In addition, we will grow our business in EMEA and Asia. On Slide 14, we've highlighted the opportunity for Ingevity's products in safety road striping adhesive. The U.S. spends roughly $2 billion annually on market material. Prevention of lane departures due to distracted driving or difficult driving conditions as well as additional expectations for increased use of autonomous vehicles on roads has transportation agencies increasingly focused on solutions to enhance the adhesion and visibility and size of safety marking. This attention on high-performing road striping adhesives will continue to drive the need for our WestRez products. Representing 50% of our adhesive sales today, WestRez portfolio is over 90% bio-based. Because our rosin adheres to glass beads and formulation more effectively than competing hydrocarbon resins, our products provide better resistance to vehicle residue, superior reflectivity and driver visibility. Turning to Slide 15. We are continuing to support the printing inks industry. Clearly, this business has decreased in size due to the secular shift away from printed advertising as well as the intentional steps we've taken to enhance the margin profile of the business. The same trends that drive e-commerce and adhesive also pertains to inks. Despite what is expected to be flat demand over the next several years, we see the use of our bio-based products increasing as customers seek to achieve their sustainability goals. We've introduced a new phenol formaldehyde-free product that we believe will enable us to be successful in this market. In fact, we believe these products will broaden our position in some of the geographies, namely Europe that we exited a few years ago due to lack of profitability. Our energy is to focus on maintaining and building our market by continuing to diversify our customer base, drive cost out of the system and promote our new phenol, formaldehyde-free products. Let's turn now to tall oil fatty acid, or TOFA, on Slide 17. TOFA makes up a very small percentage of the total global fats and oil segment. As many of you are aware, palm oil, soybean, rapeseed, sunflower, tall oils, tallow and the like are huge commodities, most of which are used in edible food applications. Even when you focus on nonfood applications, TOFA is a small portion of the market. Generally, TOFA is in a good position to serve the more industrial uses, especially in highly derivatized products. So some of the factors that impact TOFA supply and pricing include the degree to which these other fatty acids participate in nonfood markets. This, in turn, is influenced by the harvest for these markets -- these materials, the acreage, weather, inventories, labor is also -- labor availability is also a factor. Again, if customers are focused on sustainability, they may be less inclined to use products based on palm oil produced in certain countries due to the issues related to deforestation and child labor. Naturally, pricing is influenced by the actions of our direct TOFA competitors, and the market supply is tied to demand and production of TOR since TOFA and TOR are producing equal parts coming out of the refinery. Duties and tariffs also play a role. Lastly, demand and pricing will be influenced by regulatory initiatives which favor certain fatty acids over other in certain applications. Later in the presentation, we'll discuss as many -- we'll discuss biofuels. As many of you know, the European RED II initiative has created a preference for TOFA and biofuels application. Long term, while this may impact the cost of CTO, we believe it creates opportunities for us to enter what we think will be a large and profitable end-use application. On Slide 18, the use of TOFA-based derivatives in lubricants -- in the lubricants industry is one that we don't talk about much, but has continued to grow, albeit from a very small base -- or from a small base. Lubricants market is important in automotive as well as other industrial applications. It has typically grown at a pace above GDP. Advances in technology related to electric vehicles, the regulations related to vehicle weight have increased the demand for specialized greases that impart lubricity to lighter, high-strength alloys. This, combined again with the preference for sustainable products, especially the wind energy and heavy equipment sectors, are key trends that we believe will benefit us. Our strategy is to build from a strong base and expand geographically by increasing our presence with larger multinational companies. We want to innovate beyond our strength in metalworking fluids into other applications and leverage our sustainability profile within the transportation market as it electrifies. On to Slide 19, as many of you know, beginning this year, we have consolidated reporting of our sales of oilfield customers into InSpec. Yet this is an important and attractive business for us, and we remain committed to serving our drilling applications -- our drilling and production customers around the world. The oilfield business continues to rebound. Our business is responsive to the price of oil only to the degree that price impacts production. In fact, a better proxy for our business in North America is linear feet drill, which actually dropped 40% from '19 to '20 -- 2019 to 2020 and is rebounding this year. It was up 23% in Q2 2021 versus Q2 2020. Recently, our sales are outpacing the somewhat slow recovery in North America drilling at a fairly significant pace in large part due to our position to production. And the forecast for next year looks very positive, up 15%, above current '21 forecast. And then in this end use, we continue our initiatives to diversify the geographies in which we serve. Projects with customers in the Middle East and China continues to show promise. That said, recent logistics and shipping challenges, which many of you are seeing, have made this more difficult. One key trend among exploration and production companies you guessed it is sustainability as oil companies are pressured to reduce emissions. This calls for higher efficiency and green products, which we at Ingevity can offer. Beyond expanding our geographic reach, our strategy also includes leveraging our technical service and increasing our ability to bring innovation to this market. If you turn to Slide 20, here is an example of the type of innovative products we're bringing to the oilfield industry. Our EnvaDry powder emulcifier additives enhance performance in offshore and cold weather drilling environments. It also reduces drum cleaning and storage costs. This new technology is not only efficacious but environmentally friendly as well. We had our first commercial sale of this product in the second quarter of this year, and customer response has been excellent. Slide 21. As you've heard it said several times this morning, innovation is a key component to our strategy. And in many regards, our InSpec business acts as an incubator for new ideas. I'd like to share a few examples of emerging markets we're exploring as we continue on Slide 22. As the agricultural landscape continues to grow, Ingevity's business in support of this market also grows. We offer a broad portfolio of products in crop protection and plant health. Our strategic focus is to expand our portfolio, leverage our customer focus as the market consolidates and expand geographically. Our AltaHance, AltaOil and AltaSolv products improved the effectiveness of pesticides, insecticides and herbicides. AltaHance is a product that provides stickiness or rainfastness, it ultimately enhances the effectiveness of the active ingredients by allowing them to stay on the plant longer. The AltaSolv product is a bio-based product that improves pesticide performance and enables easier handling. AltaBio is a dispersing product for low water use and high-efficiency biological formulations. In the area of plant health, we are focusing on biodegradable fertilizer coatings that are longer lasting and extend nutrient absorption time and other products that are safe for plants and nutrients and add UV light protection. Approvals within the agricultural space move slowly, but we are excited about the robust pipeline of innovation that we are working on for this market. Turning to Slide 23. As I mentioned earlier, we are working diligently to capitalize on the products on what we believe to be opportunities in biofuels and alternative fatty acids. Initiative to replace or reduce hydrocarbons as a transportation fuel are gaining traction based on regulatory frameworks that have begun in Europe. The RED 2 initiative will likely increase demand for CTO. But at the end of the day, what most biofuel producers are looking for is a TOFA component. As global demand for biofuels increases, demand for TOFA will undoubtedly increase, and we're positioned to make sure we're ready to serve this growing market. First, we began by working with some key customers to gain approval of our TOFA. We have received the necessary certification for our North Charleston plant with DeRidder and Crossett underway. We are also progressing our entry into non-CTO-based fatty acids and derivatives. We've begun initial production of alternative fatty acids for our biorefineries. As a result, we've had our first sale of ALTAVEG, vegetable-based fatty acid and 2 different alternative fatty acid derivatives during the first half of this year. We are continuing to work on broader commercialization at the same time. We continue to evaluate [ feedings ] for other fatty acids. Our biorefineries technology capabilities are well suited to accommodate the growth of these new products. At this point, we have yet to determine what the balance between TOFA, now the fatty acids and the inherent production may look like in the future, we are excited about the prospects and the ability we have to cost, efficiently utilize our installed capacity. Much of what we are doing in this space is in the preliminary stages, we look forward to keeping you updated as we progress. With that, I'll turn the call back over to Mike.

Thanks, Rich. I would like to wrap up by again looking at our strategy for this business on Slide 24. As I said at the beginning, our pine chemistry-based InSpec business isn't simple or commodity based. It includes a wide variety of sustainable growth opportunities that we are working to exploit on many fronts and in a variety of ways. 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.

So I had a few questions. I know it's early innings on the alternative fatty acids, but if you'll humor me, you started with SOFA that went well. But when you look at the kind of sea change in U.S. renewable diesel right now and its impact on feedstock prices, where do you think the best opportunity will probably end up for feedstock arbitrage if you were able to kind of leave capital costs out of the equation?

Thanks, Vincent. As you say, we are really excited about the opportunities for alternative fatty acids. At this point, I think it would be a little premature to try to talk about future other non-soy-based fatty acids and where they may end up. We're evaluating a number of them. We think we have the technology capability to use various streams, which is important, and we're testing to make sure that we diversify into as many options as possible. But for the time being, we think that the approach using soy is a good one. We've gotten that out into the marketplace and are broadening our derivative base. So it's -- as I said, it's tough to speculate where that's going to end up. It's going to be determined somewhat by the individual cost and availability of some of these other vegetable fatty acids. But we want to make sure that we're positioned to be as flexible as possible to take advantage of either the raw material source or what we can do in different market opportunities.

All right. That's totally fair. So then if we go downstream, if we think about the consumer markets for fatty acids that you don't participate in today, are there materially different price points between those markets at the level of derivatization that you can kind of provide in the near term? Or would you eventually want to move incrementally downstream to fully unlock any added value there?

Yes. Well, as you could imagine, there are certain end markets just -- let's use personal care as an example. The pricing and margin profiles in the personal care area for derivatives of fatty acids is higher than in a lot of industrial areas. So we view that as a very interesting area. It is not one that we have a lot of historical expertise in, but we're working on that. The other thing that we want to do is ensure that we've got really high-quality products that we can make in a very consistent manner so that as we look to explore and evaluate different derivatives and different markets, we're positioned to seek whatever high-value opportunities we can. As I think you know, we're -- it's very consistent with our overall strategy and performance in Chemicals and Industrial Specialties to seek the highest value opportunities for our raw materials. The teams do a terrific job from a manufacturing supply chain standpoint, technology and application standpoint to do that. And now we've got an opportunity to sort of widen our aperture and be in some areas that kind of the CTO input may not have enabled us to take advantage of.

Great. And then if I can ask one more to tie it together, and I'll give somebody else to turn. Maybe just thinking about how your CTO fractionation plants actually operate. If you were to transition an entire plant to an alternative fatty acids, what kind of stranded assets would there be left within the facility? And what kind of carrying costs would there be if they're material at all?

Gosh, I wouldn't really look at it that way, and that's not the way we're looking at it here at Ingevity. We see the opportunity to expand with alternative fatty acids to be highly complementary to what will continue to be a strong CTO-based business. And so what we're ensuring that we do is have the capability at our biorefineries to utilize different raw material sources. So that's exactly what we're doing. And in fact, as we've done further evaluation on our biorefineries, we can actually, for some various inputs, we can run those refineries harder and faster with certain fatty acids than we can with CTO. So as opposed to having an issue with stranded capacity, our goal is to utilize the installed capacity that we have and in a very capital and cost-efficient way, diversify. So we've got, as I've said, as many options as possible, continue to expand and grow and focus on our core CTO business. But on an additive basis, look at alternative fatty acids and importantly, the derivatives that we can make from those.

Yes. Vincent, just to add on that, it's John, taking the sort of former CFO finance angle on that question. There really aren't stranded assets here. What this is, is a yield-enhancing exercise, right? If you were to talk to our engineers, it is true that in some of these processes, we might -- our stuff may be overengineered for what we're trying to accomplish, right? But the point that Mike is trying to make that's very critical to understanding this is that, by being able to run these multiple fuels oftentimes in parallel, we're going to get a better yield and a better return out of our assets than we actually get today.

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

So it looks like you kind of have a lot of puts and takes when it comes to the outlook for margins over the next few years where you've got some kind of higher value applications you're looking at, but you also see some inflation potential around some of the raw materials. So I guess when you kind of parse through all of it, I guess, how should we be thinking about the margin trajectory, say, over the next 2 to 3 years for the InSpec business?

So thanks, John. And look, on today's call, we're not going to try to get into a lot of detail with future margin projections. As we've noted and as often happens, we have expectations on some inflationary cost pressure in some areas, and we're going to continue to work on enhancing with high-margin products. And importantly, as we've had really good success this year, and we continue to drive that forward for the rest of the year and into next year on pricing for our products. So we're really pleased. You've seen the type of progress we've made in Performance Chemicals over the last 5 years. And we're focused on both driving the top line where we can, but making sure that we've got good sustainable Specialty Chemical markets.

And I would say, John, when you're looking at this, right, I mean, you have to appreciate the mix shift that the business has undertaken over the last several years, right? I kind of take a step back. And when we sort of started this in 2010 and early 2016, we had large, large footprints in the inks business and large, large footprints in the oilfield businesses. If you kind of flash forward where we are today, our sort of move towards derivatization that marks towards higher value add that's continued. And we do expect raw material inflation, but we also expect to get the value for our products, and we're in the business of trying to be a top quartile, top performing Specialty Chemical business. So we will push price and other factors to be the best performing we can be. But we're in a different position than we were the last time we sort of saw this.

Got it. Fair enough. And then maybe when you look at some of the growth opportunities, it seems like a lot of these can be done with almost no capital just given kind of the footprint that you've got or no incremental capital. Is that a fair assumption like -- or are we missing something on that?

John, I think that that's broadly accurate. We do intend to have some modest additional capital as we, let's say, retrofit to some degree our biorefineries so we can efficiently and effectively use larger quantities of alternative fatty, other inputs for alternative fatty acids and derivatives. But you can think about that in terms of piping and tanks as opposed to distillation columns and significant investments in reactors.

Our next question today is coming from Ian Zaffino from Oppenheimer.

This is Mark Zhang on for Ian. Thanks for the presentation. So maybe a bit on the lubricant side, can you guys maybe give us a sense of how much of your TOFA are still into lubricants today? And then sort of what's the long-term targets and opportunities there given strong key trends and favorable tailwinds? Anything there would be very helpful.

Okay. Let me start and then I'll turn it over to Rich. But just to take the first part, you could see on Slide 8, the size of our lubricants business. And this is a derivatized product line, which uses TOFA as only one of its inputs. And we've got quite a good margin profile on that. So while it is a TOFA-based product and a really good TOFA derivative, it's not consuming a very significant amount of TOFA. So you could take that 7% of total sales and cut that well down in terms of the percentage of TOFA that we actually manufacture to source it. And then I'll turn it over to Rich. He can talk a bit about some of the dynamics for lubricants and some of the areas that we see going forward look really interesting.

Thanks, Mike. Yes, Ian, that's a great question. Thanks for that. We continue to see, as we mentioned in the presentation that lubricants market is continuing to grow. We've seen some rebounding, particularly as we see the lubricants in automotive vehicle uses for greases, what have you, as well as other industrial lubricant applications. But as we also mentioned, our technology team is working pretty aggressively on the specialized -- highly specialized greases for the electronic vehicles that we know that will be coming on the market and are having a lot of interaction with our specific customers in that space. So that, as Mike mentioned earlier, it's more of a customer pull than a product push as we provide products for that industry.

Okay. Great. And then maybe just a quick follow-up. What's the application into the vehicle electrification and higher call grade of your products? Can you give a sense of what the competitiveness of TOFA is within the market versus what's currently in the market today? And anything there on the competitiveness would be helpful.

I'm not sure I exactly understood your question, but if I got it right, what is competing -- competitive price -- competitive products with what we see today? It's also similarly TOFA-based products. But as we talk about the electronic vehicles, we didn't necessarily say they're going to be TOFA-based. There could be a lot of different things. So we continue to work that angle as we move forward.

Our next question today is coming from Paretosh Misra from Berenberg.

I believe you said that there's a preference for TOFA in biofuel in Europe. Can you elaborate on that a little bit, please? Do they allow in Europe a higher percentage of TOFA as feedstock? And does it also show up in higher domestic pricing of TOFA in Europe versus, say, other geographies?

Okay. Let me unpack that question just a little bit. First, so there's no misunderstanding. We wanted to reference TOFA specifically a little bit in contrast to CTO because we don't want people to be thinking that it's essentially CTO going into biofuels. That's not what's happening. It's in that product sort of line, they're primarily looking for the TOFA in order to be put into the biofuel pool, if you will. Within that biofuel pool, there are a lot of different products. There are other vegetable-based products, there is unused cooking oil that gets used. So there's a lot of different bio-based products. TOFA just being one of them. And frankly, within it, TOFA is relatively small compared to a lot of the other biofuel inputs that get used in Europe. So hopefully, that provides a little bit of context and no confusion versus some of the script comments.

The only other thing, Paretosh, is to add, TOFA really is sort of a global market, right? So you will see exports from North America to support European demand, right? So think of it as global and not regional.