Ingevity Corporation (NGVT) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the Ingevity Second Quarter 2026 Earnings Call and Webcast. [Operator Instructions] I will now hand the conference over to Mickey Walsh, Head of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome again to Ingevity's second quarter 2026 earnings call. Last evening, we posted a presentation on our Investor site that you can use to follow today's discussion. It can be found on our website, ir.ingevity.com, under Events and Presentations. Throughout this call, we may refer to non-GAAP financial measures, which are intended to supplement, not substitute, comparable GAAP measures. Definitions of these non-GAAP financial measures and reconciliations to comparable GAAP measures are included in our earnings release. We may make forward-looking statements regarding future events and future financial performance of the company during this call, and we caution you that these statements are just projections and actual results or events may differ materially from those projections described in our earnings release. The agenda for today's call is listed on Slide 3. Today, you will hear from Dave Li, our CEO and President; and Phil Platt, our CFO. Our prepared comments will focus on results from the second quarter of 2026 from continuing operations and recent business highlights. Following the prepared remarks, we will open the line for a Q&A session. I will now turn the call over to Dave.

Thank you, Mickey, and good morning, everyone. Please turn to Slide 4. This quarter represents another period of outstanding execution across the company and further demonstrates the progress we are making in building a stronger, higher quality Ingevity. Our businesses delivered excellent commercial and operational performance. Excluding the Road Markings divestiture, sales increased 5% with growth across all 3 segments. More importantly, adjusted EBITDA increased nearly 14% and adjusted EBITDA margins expanded to 36.6%, demonstrating the earnings power of our portfolio and the discipline with which our teams continue to operate. Performance Materials once again delivered exceptional results with EBITDA margins approaching 54%. Beyond the quarter, we continue to benefit from a structural shift in consumer buying habits toward hybrid vehicles. Hybrid vehicles require our most advanced carbon solutions and contribute a higher-value product mix. We believe this represents a sustainable market trend that reinforces both the long-term earnings power and competitive positioning of the business. Pavement Technologies continues to build positive momentum, while Advanced Polymer Technologies delivered meaningful year-over-year improvement through pricing actions, product mix and operational execution. Both businesses performed well despite facing some headwinds from the volatile geopolitical environment. Along with the strong operating performance, we also continued executing our portfolio strategy. During the quarter, we completed the sale of our Road Markings product line. Combined with the Industrial Specialties divestiture completed earlier this year, these actions continue improving the quality of our portfolio while allowing us to focus resources on our highest return opportunities. In addition, the strategic alternatives process for Advanced Polymer Technologies continues to progress well and is now in an advanced stage. Our priority remains achieving the best outcome for shareholders while continuing to sharpen our strategic focus. Our disciplined and balanced capital allocation strategy also remained unchanged. During the quarter, we repurchased $35 million of shares and remain ahead of pace toward our $300 million share repurchase commitment by the end of 2027. We also continue to reduce leverage and invest in attractive organic growth opportunities. Together, these actions strengthen our financial flexibility and support our long-term value creation potential. Finally, we're beginning to see encouraging commercial validation of several organic growth initiatives, particularly filtration, where our carbon technology is demonstrating differentiated performance. I'll discuss these opportunities in more detail later in the call. Overall, I'm extremely proud of what our teams accomplished this quarter. We are executing with discipline, strengthening the business and building a stronger, higher-quality Ingevity with more durable earnings power while investing in long-term growth opportunities. And with that, I'll turn it over to Phil.

Thank you, Dave, and good morning, everyone. Please turn to Slide 5. As Dave mentioned, our second quarter results highlight the continued improvement in the earnings quality of our businesses and demonstrate the benefits of our portfolio transformation strategy. Sales for the quarter were $314 million, while reported sales declined 5% due to the divestiture of the Road Markings product line on April 15, sales, excluding Road Markings, increased over 5% with growth across all 3 segments. Adjusted EBITDA increased 14% to $115 million, while margins expanded over 600 basis points to 36.6%. These results were driven by higher pricing, a favorable product mix, improved asset utilization and disciplined operational execution across the company. Adjusted earnings per share increased to $1.74, benefiting from a stronger operating performance, lower interest expense and a reduced share count from our ongoing share repurchase program. Turning to Slide 6. These charts highlight our continued focus on strengthening the balance sheet and generating cash. Beginning with the chart on the left, free cash flow, excluding the litigation settlement payment made this quarter, was approximately $89 million, and free cash flow per share increased to $2.52. Compared to the prior year, the improvement was driven by stronger earnings, lower interest expense resulting from debt reduction and reduced restructuring spending. Capital expenditures remained disciplined at approximately $10 million. Turning to net leverage. Trailing 12-month adjusted EBITDA increased to approximately $403 million, while net leverage improved to 2.5x. As a result, we have reached the upper end of our target leverage range outlined during the strategic portfolio update. We also repurchased $35 million of shares during the quarter, leaving approximately $211 million available under our current authorization. As Dave mentioned, we remain fully committed to the $300 million share repurchase plan that we announced last December while continuing to maintain our leverage objectives. Now let's turn to the segment results, beginning with Performance Materials on Slide 7. Performance Materials delivered another strong quarter and remains a highly differentiated business with industry-leading profitability and growth opportunities in both automotive and in higher-value filtration applications. Sales increased 4% to $161 million, driven by higher volumes, favorable mix and annual pricing actions. The continued shift in consumer preference towards hybrid vehicles, which utilize more advanced and higher-value carbon solutions further supported both growth in revenue and profitability. Segment EBITDA increased 6% to $86 million. And EBITDA margins expanded to 53.6% as higher volumes, improved price and mix and stronger plant utilization more than offset higher SG&A spending. Demand remained solid throughout the quarter, supporting efficient plant utilization and inventory levels that remained largely unchanged from the first quarter. For the remainder of the year, we expect plant utilization to normalize, reflecting lower expected auto production as well as the execution of planned maintenance outages. While this dynamic benefited second quarter profitability, it represents a timing shift that is reflected in our expectations for the back half of this year. Let's turn to Slide 8. Beginning this quarter, we have renamed the Performance Chemicals segment to Pavement Technologies, following the completion of the Road Markings divestiture on April 15. Reported sales declined 22% as a result of the divestiture. Excluding Road Markings, sales increased 3% as favorable pricing and volume growth drove stronger performance in the remaining business. Growth was led by North America and was partially offset by softer demand in China and South America as higher asphalt prices impacted project costs and drove project delays. Segment EBITDA declined by $3.4 million due to the absence of approximately $6 million of Road Markings earnings included in the prior year period. Segment EBITDA decline was partially offset by improved pricing and volumes in the core Pavement Technologies business. Overall, excluding the impact of the Road Markings divestiture, both sales and EBITDA increased year-over-year and EBITDA margin expanded 300 basis points to 24.4%, highlighting the improved earnings profile of the remaining Pavement Technologies business. Let's turn to Slide 9. Advanced Polymer Technologies delivered meaningful year-over-year improvement during the quarter, reflecting the benefits of a more favorable product mix and higher asset utilization. Sales increased 14% to $49 million, benefiting from pricing surcharges and improved mix towards higher-value derivative products. As a reminder, the pricing surcharges were implemented in response to higher raw material and energy costs following the conflict in the Middle East. Segment EBITDA increased to $11 million from $2 million a year ago, and EBITDA margin improved to 22.7%. The improvement reflects a favorable product mix, higher plant utilization and the absence of the operational downtime associated with the boiler insulation project that impacted results in 2025. Results also benefited from competitor supply disruptions resulting from the Middle East conflict that began in the late part of the first quarter of this year. In summary, we continue to demonstrate our ability to execute our portfolio simplification strategy while delivering solid operating performance. We are focused on maximizing value through commercial and operational excellence and remain committed to our capital allocation strategy. And with that, I'll turn the call back to Dave to discuss our updated outlook.

Thanks, Phil. Turning to Slide 10. The strength and consistency of our first half performance gives us confidence to raise our outlook for the full year. Performance Materials continues to deliver exceptional profitability, supported by healthy demand and favorable product mix. As I mentioned earlier, we continue to benefit from the structural shift toward hybrid vehicles, which requires increasingly advanced carbon solutions. Pavement Technologies continues to perform well and Advanced Polymer Technologies has improved meaningfully from last year. Collectively, these results reinforce our confidence that the business we are building is capable of delivering more durable and predictable earnings, stronger cash generation and attractive returns across a variety of market conditions. Our updated outlook reflects the strength of our first half execution and financial results across the company. As we project our second half outlook, there are a few factors that we expect to influence the cadence of results. First, we will execute planned maintenance outages at 2 of our Performance Materials facilities. Second, auto production in North America is expected to be weaker in the back half of the year. And lastly, the macroeconomic environment remains dynamic. As a result, we are increasing our adjusted EBITDA and EPS guidance. We now expect adjusted EBITDA of $380 million to $400 million and adjusted earnings per share of $5 to $5.45. The EBITDA outlook represents a 5% increase over prior year at the midpoint, which is in line or slightly ahead of expectations discussed at our strategic portfolio update in December. Additionally, we are raising the low end of our free cash flow guidance. Our free cash flow range is now $220 million to $245 million as improved earnings are partially offset by higher inventory levels to support our customers amid strong demand in automotive end markets and seasonal inventory build in Pavement. Advanced Polymer Technologies remains included in our reported results and guidance. As I noted earlier, the sale process continues to progress well and is now in an advanced stage. And our guidance does not assume any proceeds from a potential transaction. We are also encouraged by the progress of several organic growth initiatives that leverage our technology leadership in advanced carbon materials. During the quarter, we secured our first municipal water treatment contract for PFAS filtration. This represents an encouraging early milestone and provides commercial validation that our technology can deliver meaningful customer value and clear differentiation in the attractive water treatment market. While still early in its development, we believe filtration has the potential to become an important long-term growth driver for Ingevity. We expect to share more over time as we continue advancing both the technology and commercial development of this opportunity. Beyond filtration, we continue advancing attractive opportunities in warm mix asphalt technologies and energy storage, further diversifying our long-term organic growth profile. In closing, we are building a stronger, higher quality Ingevity, one with a more focused portfolio, more durable earnings, multiple organic growth vectors and disciplined capital allocation. We believe those characteristics position us to create sustainable long-term shareholder value. And with that, I'll turn it over for questions.

[Operator Instructions] Your first question comes from the line of John Tanwanteng with CJS Securities.

It's actually Lee Jagoda for John. So I guess a couple of questions on Performance Materials and then maybe one on the other segments. In terms of the Performance Materials, were the planned outages factored into the prior outlook in terms of the timing being in Q3?

Yes, I'll let Phil take that one.

Yes. Lee, thanks for the question. Yes, those planned outages are already baked into the outlook that we previously provided.

Okay. Perfect. And then just on the margins in that segment in general, a couple of questions. Obviously, really impressive performance in the quarter. How do we think about the short-term kind of margins relative to Q2, assuming that the U.S. auto stuff is supposed to be down, so the geographic mix changes a little bit. And then kind of medium term, as we think about margins starting to include some of the positive benefits from potentially this PFAS opportunity and/or other opportunities, how does that change the margin structure in Performance Materials more structurally over time?

Yes. Why don't I start, and then I'm sure Phil can peer in some more details. So first, we're really encouraged by the strong first half, and we saw both all the segments performing well. As to your question on the second half, yes, so we're watching all the industry forecasts and sort of the cadence of auto production is expected to be a bit softer in the second half. And obviously, our sales would follow that. One of the things that we talked about and called out that I think is really going to be a more structural and enduring positive for us is this transition to hybrids. So we saw that in the first quarter. We saw that continue in the second quarter. It seems like the hybrids, especially in North America, are really hitting a sweet spot for the consumer. Obviously, hybrids also require our most advanced carbon solutions and also produce a higher value product mix. So that's a real positive for us. And then as you mentioned, we saw some early commercial validation of our filtration opportunity. All of that, we think, is in the midterm, very positive for the Performance Materials margins. But in the second half, we would expect likely some step back just given the kind of cadence and planned outages that Phil mentioned. But what would you say, Phil?

Yes. Lee, I'd point you to our commentary on Slide 10 of the deck, where our expectation for the full year of '26 is around mid-50s for that segment. Obviously, to Dave's point, that would imply a slight pressure in the second half compared to the first half.

Sure. Great. And then one more on APT, if I can slip it in here. So the $11 million of quarterly EBITDA, really strong, nice improvement. And I know it's being influenced by a couple of different factors. Can you kind of talk about or remind us if there's any seasonality in that business? Or if that's the sort of run rate that, that business is capable of in the environment that we're in right now going forward?

Yes, there's not really seasonality. We are coming off a trough in the last couple of years in terms of industrial demand. The team is doing a great job in a pretty volatile environment. We mentioned earlier, I think, last quarter that we actually saw some benefit from the Middle East conflict because there -- some of our fellow suppliers had some supply challenges. So we're able to step in there and fill that supply need. I think that's normalized now. And what we'd expect to see is sort of more normalized trends going forward. The business has performed very strongly, and we're encouraged by that. But I think there's not really seasonality, and we'd expect some more normalization through the year.

Your next call comes from the line of John McNulty with BMO.