Hello, and thank you for joining this WTR Insights conference session with Ingevity Corporation. I am Peter Gastreich, Managing Director of Energy Transition and Sustainable Investing in Water Tower Research. I am very pleased to welcome David Li, who is President and Chief Executive Officer of Ingevity. Dave, thank you for being with us, and welcome to the WTR Insights conference.
Thanks, Peter. Great to be here.
We have a few quick items here before we begin. Ingevity's safe harbor statements can be found on the investor tab of the company's website. Investor questions are very welcome, so please submit them through the chat box and we will make sure that those are delivered to Dave and his team during or after the chat. Anyone wishing to request a meeting with Ingevity management can indicate that through the conference portal. With those items covered, let us get started here. Dave, this is the first time that we are hosting you for a fireside chat, so we will have some people in the audience who might be new to the story to Ingevity. Starting with, you took over as CEO the previous year in spring, and the company does look quite different today than it did then.
Could you give us a high-level picture of Ingevity as it stands now, and the transformation that you have been executing since joining?
Yes. Thanks, Peter. It's been a wonderful journey. I started April of last year, and as you mentioned, we've been embarking on really a transformation of the company. How we started is really looking at the portfolio, taking a deep look at where our core competencies are, and then making some sometimes difficult decisions on what are truly our core businesses. We've done that and as you mentioned, we are well underway with that strategic portfolio transformation. Last December, we hosted an investor day where we announced the future Ingevity. In that future Ingevity, we also announced that we'd be divesting three businesses. To date, we have successfully divested two of them, and the last one, which is our Advanced Polymer Technologies business, is also in what we'd characterize as advanced stages.
We're well underway with the portfolio transformation, which I think is really providing a lot of strategic clarity, both internally and externally. At the same time, we've had a focus on stabilizing and strengthening the balance sheet. Because of the high quality and profitability of our businesses, we generate a lot of cash. What we've used with that cash is paying down debt, returning capital to shareholders. We've been buying back a lot of stock. We've reduced our leverage from almost 4- 2.5 now, so a much healthier level. We feel like we've got a lot of extra additional capacity to fuel future growth. Going forward, the two businesses that we consider core are Performance Materials and Pavement Technologies.
Those are areas that we're leaders in both spaces, and we're also looking at future growth pathways coming from both of those businesses. It's an exciting time for the company.
Stepping back across the markets that you serve, from automotive emissions control to water treatment to road infrastructure, which of these do you see as the primary driver of Ingevity's growth over the next several years, and what is the company's strategy for capturing that growth?
Right. As we've become a more focused company, that's allowed us the bandwidth to really focus on those future growth pathways. First, I'd look within our core business and Performance Materials. We're seeing an exciting transition to hybrid vehicles, I think driven by consumer preference. That's actually a positive for Ingevity because it requires our most advanced carbon solutions. Even though it's potentially lower content, it's higher dollar value. That's a driver of growth. We've also been disciplined in terms of pricing, so that could be another driver of growth. Then within Performance Materials, we're very excited about filtration. I'm sure we'll talk about it later, but we announced our first PFAS win where a customer was able to use our activated carbon to address the really challenging PFAS issue that many municipalities around the U.S. and around the world are facing.
We think that's an exciting growth pathway. A little further out, energy storage, we've got some investments there that we think are exciting. Then lastly, in Pavement Technologies, we have a very disruptive technology that allows our customers to basically build better roads, and we think there's a lot of growth potential in that business as well.
We'll come back to PFAS and the other opportunities in just a moment here. Just continuing with the shift to hybrids. In your recent earnings call, you described this consumer move toward hybrids as being a structural phenomenon. What is it about a hybrid that drives more demand for your products than a conventional gasoline vehicle? What gives you the confidence that this trend has staying power?
Sure. First, we're not the only ones looking at the auto industry. We, of course, use industry analysts like S&P and others, and all of them have kind of calling out this hybrid transition as something that is structural and sustainable. I think what's really happening there is, whether it's the Middle East or just customer preference, the hybrid really hits a sweet spot for the consumer because obviously it allows an efficient use of energy. For Ingevity, what that means is, again, our most advanced carbon solutions, so lower carbon content, but because of the technology and the advancements we've put into these solutions. For example, just to get into the technical aspect a little bit more, hybrids have a little bit less start and stop, which allows the purging of gas vapors.
We had to come up with something even more advanced than what has traditionally been used for ICE vehicles. That has allowed us to, again, work closely with our customers on new platforms, provide them with those advanced solutions that are needed to address the evaporative requirements for hybrids, and in turn, that turns to be a higher value or higher product mix for us at Ingevity. We are excited about that trend. I think it is good for the consumer, and it ends up being also good for Ingevity.
That is, of course, housed within your Performance Materials business, which is your biggest business segment, and it earns very strong margins. For investors who are trying to size up that landscape, what is it that defends that position, and how do you characterize the competition overall?
Right. You are right. It is a remarkable business. In my 30+ years in specialty materials, I have never seen a significantly sized product segment with 50+ % EBITDA margins. It is really remarkable, and I think it is a testament to the technology and the leadership. We are a pioneer in the space. We work closely with our customers there. Obviously, working in automotive is a very demanding industry. They have long qualification times, really stringent quality requirements. For example, our technologies, our products have never had a recall, which is also very important. We have invested a lot in both our operations and our technology, and it is also an evolving product line. This is not the same product that we were selling several years ago. We have continued to advance and evolve the products as our customers' needs have also become more stringent.
It is a very dynamic product line as well. I think lastly, if you look at the value being provided by our product, and we have a little bit more information in some of our investor materials, but you are talking about a $20, maybe up to $40 part within a $90,000, $100,000 vehicle. The amount of value that the automaker and the consumer are getting versus the value that we are providing, I think, is overall in the cost of the vehicle pretty de minimis. It is a once in a lifetime part. This part is required through the regulatory requirements, but it also lasts for the lifetime of the vehicle.
Turning to PFAS, you recently announced your first municipal water treatment contract. I believe on the earnings call, you mentioned that Ingevity was not the lowest bidder, but that you won based on the technology. What did the customer see in your activated carbon, and what does that tell you about how Ingevity can compete in this water treatment market?
Yeah. First, we are very excited about filtration generally as a space for us to grow into. I would say we are definitely in the early stages of that kind of identification and value discovery. We are not new into filtration, and we are not new into water treatment. Our products have been used there for many years. More recently, we have put a dedicated team in place to really identify where our technology can provide differentiated performance, kind of the same analogy to what we do in automotive. PFAS is one of those spaces, and one of the reasons why we are so excited about it is obviously it is a challenge that needs to be addressed in terms of remediation for us all to have clean water. The space is rapidly growing. It is rapidly evolving. Next year, it is widely expected that the PFAS levels will be reported in most municipalities in the U.S.
In fact, the entire U.S. will be required to report. As a result of that, a lot of municipalities are kind of struggling or really working quickly to see what are the most effective and cost-effective solutions. That is where our powdered activated carbon comes into play. We think powdered activated carbon, or they call it PAC, has an important role to play within PFAS. One, the type of powdered activated carbon or PAC that we produce is especially good at filtering out the large molecules, the PFOA and the PFOS, and those are actually the ones that will be reported out starting next year. Second, the municipalities and water treatment centers can basically drop this in. It does not require capital investment and is extremely effective. We are getting a lot of interest from customers. Again, we had our first win.
We expect to report more in the future, but it is an exciting space, and what is really encouraging to us is that, as you mentioned on the onset, Peter, we are winning because of technology, not because that we were the lowest price bidder, for example. We are really encouraged. It is still early days within filtration, but we think it could be an exciting growth pathway for us.
We've mentioned the Performance Materials. You've got a very strong margin there to begin with, and now you're looking at the water filtration. As that scales, how should we think about the impact on you financially? Will that volume be displacing some existing activated carbon production, or is this something that's supplementary that's going to raise your utilization? How should we think about that?
It's a great question. Actually, and somewhat surprisingly, we think that, especially in the near to midterm, filtration wins like the one in PFOS will actually be accretive to segment margins. How does that work is because in the past, we've essentially been outletting excess volume that we could not sell into automotive into other applications and primarily filtration. We are doing that primarily almost at zero margin. If you think about the opportunity for us and why we're so excited about it, is to take that incremental volume, which we estimate to be upwards of 20% of our volume today or more, and we're basically, in the past, have been outletting that through distributors and just being the lowest bidder in filtration at essentially zero margin. So there's the opportunity.
What we can do is, as I mentioned, we've got a dedicated team in place. We've put a new leader in charge of growth. We've brought in some subject matter experts, some consultants to work with us in this value discovery phase, and then really target applications like PFOS. Others that we're excited about are food and beverage and biopharma and pharma, see where we're differentiated, and then upgrade that volume. By upgrading that volume, taking it anywhere above zero is actually accretive for our segment margin. So what we should expect to see when we're successful in this space is actually growth in both EBITDA dollars and EBITDA percent. Now, moving that forward into the future, if we are successful as we believe we'll be in filtration, I think the really good scenario and the exciting one comes when we've used up that excess capacity.
We've upgraded that to something more like a specialty materials margin. Think about it as sort of high teens EBITDA percent. Then we're looking at reinvestment economics. Should we add more capacity into this space, meaning we're growing, we're winning, we like the profitability. I think that's in the future, and I think those are really exciting conversations to have.
Moving on to the Pavement Technologies part of your business. Evotherm has been growing despite asphalt cost pressuring project activity. Investors who are unfamiliar with it, what does a warm mix additive actually do for a paving contractor or for a state DOT? How are you working with those agencies and regulators in Europe as well to accelerate that adoption?
Yeah. Thanks. This is also a really interesting business where we are the leader. Again, within the Pavement Technologies business, about two-thirds of it is pavement preservation. Think about road resurfacing and things like that, and additives that go into the road. What we are really excited and what we think will drive growth is really our warm mix additive, as you mentioned. The value proposition we think is very compelling. For example, for the DOTs, what we are able to provide using our warm mix, what essentially you do is if you are an asphalt maker, you add this additive into your existing process, so no real additional CapEx is needed.
There is a little bit additional upfront cost for the additive, but as a result of using that additive, you see longer road life, you see lower pollution, you see lower energy cost in terms of transporting the material. You actually get a longer paving season because of the temperature that you are able to pave at. All of those tend to be very compelling, again, versus the relatively small cost of the additive. Today, we think warm mix has only penetrated about 20% of the asphalt market in the U.S. So we think there is a sizable opportunity to continue to grow. By the way, within that warm mix additive space, we are the clear leader, so we expect to continue to win new business there. You mentioned how do we promote that value proposition. For the DOTs, we are talking about longer road life, the environmental benefits.
For the pavers, it is really extending the paving season, which usually slows down during the colder weather seasons, so you are actually able to extend that, as well as lower energy costs. So there is different value propositions that we advocate for different types of decision makers. It is an exciting business. We think we are well positioned to continue to grow, despite, as you mentioned, some more recent headwinds because of the higher oil prices. We have seen asphalt prices go up. Obviously, oil is a key raw material for asphalt. But despite those headwinds, actually last quarter, we reported growth. We would have grown even more if it was not for those higher oil prices leading into higher asphalt prices.
I'm going to come back to or get to capital allocation just a moment because that's been an important part of your strategy. But just one more question related to your growth outlook. You mentioned those sort of other options beyond filtration and Pavement. You mentioned energy storage, next generation carbon materials as those longer term options. How should investors think about those today, and what needs to happen to turn those into a real business?
Right. We do have investments in alternative spaces like energy storage. I think those are a little farther out. For example, back in December when we did our first or most recent investor day, we presented two-year financial views for 2026 and 2027. It did not include any contribution for energy storage. That being said, I think it's a really important and growing space for us to participate in. For energy storage, we've put a few investments out there. One is an investment with a company called Nexeon. They're a leader in silicon anode technology. The opportunity there for Ingevity over the long term is to be a potential partner there for them, supplying our activated carbon as well as operational know-how into their space. So it's an emerging technology for energy storage, and they're a leader in that space.
Another investment we've made is a licensing agreement with a company called CHASM to produce carbon nanotubes. Carbon nanotubes, or CNTs, are already widely adopted within the energy storage space. The opportunity there is to, again, leverage our operational understanding and experience to really accelerate the volume production of CNTs within North America. So right now, there is not at volume a capable CNT supplier within the U.S. Obviously, energy storage being one of those strategic areas for us, having an established domestic supplier is important, and that presents an opportunity for us. And then lastly, we have our own internal innovation in areas like hard carbon. We think of energy storage as an important. It's obviously very dynamic, it also is a very competitive space, but we think it's important for us to be there, and we think it can drive growth in the future.
In looking at your results quarter by quarter, you've really been moving faster than planned on both share repurchases and also on your balance sheet deleveraging. How are you thinking about the balance between returning capital, further debt reduction from here, and investing behind those growth prep platforms that we've talked about?
Well, the great thing about our business model, Peter, and for investors, is we'll have plenty of flexibility given the cash flow generation of the business. I think we'll continue to be disciplined with capital allocation. What we mentioned, and we are pretty declarative about, is that acquisitions will not be part of the capital allocation priority, at least in the near term. I think acquisitions in the mid to longer term will be part of the Ingevity story. I think what you'll see us do is first, of course, we'll be very excited to deploy capital to accelerate organic growth, as we've talked about in areas like filtration or energy storage or Pavement Technologies, for example. Second, I think we take a look at leverage and share repurchase. Between the two, we're at a pretty healthy point. We're actually within the target range for leverage.
I think we announced we're at 2.5x . I think we like to be within 2- 2.5x , so we're right in that right zip code. Share repurchases, as you mentioned, we're kind of ahead of schedule, and that doesn't even count any proceeds that we might get from the divestment of that third business that we talked about, Advanced Polymer Technologies. So a lot of flexibility within capital allocation. If we look mid to longer term, I do see us potentially looking at things like bolt-ons that could accelerate growth in areas like filtration. That would be something that we'd also be interested to look at. But a lot of flexibility given the profitability and cash flow generation of the business.
If we're looking out over the next, say, several quarters or whatever timeframe you think would be relevant, what would you suggest that investors focused on in terms of key signposts or milestones as evidence that you're executing on the strategy?
First, the strategic portfolio transformation, we're nearly complete, so reaching the end of that, getting to those two core businesses and continuing to drive performance. I think our results have been very strong. I think that's also a benefit of having a more focused company. We talked about the hybrid transition, so that's a milestone that we can continue to track, and that should be a positive for Ingevity as well as for the consumer. I think those growth areas that we talked about, so things like filtration. Are we talking about more wins, more penetration into that space? I think that's an exciting growth pathway for us. Kind of marking our progress in converting within Pavement Technologies the hot mix to warm mix. That's another thing that we're excited to talk about.
All those would be indications that the strategy is being executed well and that we're performing well.
David, I'm afraid we're getting close to running out of time here. This has been very comprehensive today, I'd say. That having been said, is there anything you think we might have missed today, or would you like to offer any closing remarks for investors?
Well, thanks, Peter. It's been great to be part of this conference. I would just say Ingevity today is really a company that is undergoing transformation. We're a more focused leader in specialty materials. I think we have unique profitability, as we've talked about, and we're excited about the growth pathways ahead of us in areas like filtration, Pavement Technologies, and then we have a very strong business within Performance Materials in the automotive space. A lot of exciting things happening within the company. Then for our investors and shareholders, thank you for your support. You're investing in a company that's a leader in the spaces that we participate in and have a very disciplined capital allocation program that we think will benefit the company as well as investors.
Okay, great. Fantastic. Dave, again, thank you very much for your time today. This was a great first discussion, and we'll look forward to having you back for future events to have another check-in.
Thanks, Peter. It's been fun.
Thanks as well to everyone who joined us for this session. Additional research and content on Ingevity is available at www.watertowerresearch.com. As a reminder, if you would like to submit further questions or arrange a meeting with Ingevity management following the session, please indicate that through the conference portal. For those tuning in, we have another session beginning in just a moment, so please stay with us.