Ingevity Corporation Stock

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.

Maybe 2 quick ones. So on the road paving side or Pavement Technologies, I think in the prepared remarks, you commented on rising asphalt prices and the potential that it may impact road spending. Is it fair to assume that anything that may get curtailed just because budgets are thin and things are getting a little bit tricky as people get to the end of the year because of raw material inflation and what have you, that spending likely gets pushed out just to the next year. It's not like the road is half paved and just is left there. Is that a fair way to think about it? Or is it just -- is this potentially an ongoing issue that may drag through 2027 as well if raws are difficult and budgets are still thin?

Yes, John. So first, thanks for the question. We -- despite the challenging environment, we also -- we actually saw growth in Pavement absent the Markings divestiture. In fact, Evotherm, the warm mix additive, grew 8% year-over-year. So we're encouraged by that, and we still think there's a long runway for penetration of that technology. We did start to see some of that impact from the Middle East. So the reality is, given the higher oil prices, asphalt prices are up almost 50%. We saw that most pronounced in the international opportunities.

So for example, China, although it's not a big part of our business, was down almost 80%. In North America, I think there's -- projects are still continuing to go through. But obviously, if the environment remains elevated, you could see that start to impact the business, and that's all comprehended in our outlook. So we saw it most pronounced in the international projects, less so in North America. Obviously, we're continuing to monitor that situation closely.

Got it. Okay. Fair enough. And then just a question in PM on the filtration initiative and in particular, the -- it sounds like you landed something for the use of filtering PFAS out. As part of that, did you find or did the customer find that your activated carbon solution is maybe better than the traditional carbon solution, I guess? Or is it just, hey, look, you're a new entrant, you're kind of more aggressively kind of going after business and really kind of chasing it down where maybe in the past, you hadn't in certain areas, and this is just the first win. I guess how should we think about that?

Yes. Thanks, John. We're really encouraged by that first win. We think it's a key milestone for us. It's a situation where we were not the low bidder for that opportunity. We were chosen because of the differentiation of our technology. And I think this is -- as most know, this is a really fast-growing market, especially in the U.S., where many municipalities are looking to reach those expected requirements for PFAS.

Our technology, as we continue in this discovery process, we believe, offers customers kind of an easy drop-in and it's lower cost as well. And it's obviously -- and it's really good for taking out some of the larger molecules associated with PFAS. And so there is definitely some technology differentiation. We're continuing our efforts there. The team is doing a great job, and we're really excited. We think this is just the beginning for us.

Your next question comes from the line of Daniel Rizzo with Jefferies.

So with the Road Markings business, you mentioned that North America is relatively strong despite some cost pickups, but I think you said you saw some weakness in China and South America. I guess how meaningful is that though? I thought that was -- you were mostly North American for this business, particularly after all the moves you guys have made.

Yes, you're right, Dan. Thanks for the question. So I think that was one of the reasons why we're able to grow despite those headwinds. International is not the biggest part of that business, but it represents growth opportunities. As a reminder, we recently were kind of regulated or got approval in Germany. So that was a good indication of the continued validation of the technology in Europe. I think what we'd say is that without those headwinds, the business would have grown even more strongly.

Okay. That's helpful. And then with just like looking at EBITDA margins kind of broadly. So you have maybe down the road some mix headwinds from activated carbon, but overall, it should continue to expand. But I guess my question is, is that coming from just improved mix broadly and improved cost absorption? Or are there other productivity moves you are making that are going to continue to bear fruit? Because you've done a lot already. I was just wondering if the cost cutting like aspect of it is kind of finished.

Yes, I'll let Phil take that one.

Yes, you're talking specific to Performance Materials. Is that right, Dan?

No. Or just -- no, just overall, actually.

Yes. Well, I mean, part of the margin uplift you're seeing is the removal of Road Markings, which we said was near 0 EBITDA. So that's a benefit there. We did -- I'd love to talk about it, but we did have some stranded costs that were left over from our Industrial Specialties sale as well as the Road Markings sale. So as a reminder, that was about $20 million. And what we said is we expect to eliminate at least $15 million of that. Happy to report through Q2, we've eliminated $10 million of that.

So there's some cost benefit that we're seeing. But really, what you're seeing a lot in the margin uplift is really the mix in Performance Materials and our ability to run the plants at really high throughputs.

This concludes the question-and-answer session. I will now turn the call back to Dave Li for closing remarks.

Thank you again for joining us today. As we conclude, I leave you with 5 key takeaways. First, our portfolio transformation is nearing completion and continues to improve the quality of our portfolio and sharpen our strategic focus.

Second, our core businesses continue to demonstrate resilient margins and strong cash generation across a dynamic operating environment.

Third, our first half performance demonstrates the durability and resilience of the business and the strength of our execution. This is reflected in our margin expansion, strong cash generation and increased full year guidance.

Fourth, disciplined capital allocation remains a priority. We're investing in high-return growth opportunities with minimal capital investment, strengthening our balance sheet and returning meaningful capital to shareholders.

To wrap up, we are delivering on the commitments we set out in our strategic portfolio update and remain on track to achieve our financial commitments. We are building a stronger, higher-quality Ingevity with a more focused portfolio, differentiated technology positions, expanded earnings power and financial flexibility to create long-term value for our shareholders.

Thank you again for your interest and support of Ingevity. And with that, we'll conclude today's call.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, everyone. Thank you for joining us, and welcome to the Ingevity First 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, and good morning. 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. Also throughout this call, we may refer to non-GAAP financial measures, which are intended to supplement, not substitute for comparable GAAP measures. Definitions of these non-GAAP financial measures and reconciliations to comparable GAAP measures are included in our earnings release.

We may also 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 as further described in our earnings release.

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 first quarter of 2026 from continuing operations and recent business highlights. We will take any questions related to the quarter during the Q&A session right after the prepared remarks. Dave, over to you.

Thank you, Mickey, and good morning, everyone. Please turn to Slide 4. This quarter marked another strong period of execution and results for our company. Starting with our strategic portfolio transformation, we were pleased to complete the sale of the Ozark Materials, Road Markings product line, on April 15 to PPG in an all-cash transaction valued at approximately $65 million. This follows the divestiture announced in January of our North Charleston CTO refinery and a majority of the Industrial Specialties product line for approximately $93 million of net proceeds. Together, these actions, along with the ongoing sales process for our APT business underscores our commitment to simplifying this portfolio, sharpening our strategic focus and reducing earnings volatility.

From a financial perspective, I'm proud of what our team delivered in the first quarter. Against the backdrop of global volatility and uncertainty, we achieved 4% sales growth and an industry-leading EBITDA margin approaching 36%. These results reflect disciplined execution and strong commercial performance across our businesses, particularly in Performance Materials and Pavement Technologies, and demonstrates the resilience of our business model. Importantly, this strength enabled us to repurchase approximately $52 million of shares in the quarter ahead of plan, as we opportunistically deployed capital amid market volatility.

Performance Materials delivered growth in net sales, segment EBITDA and margin, driven by price increases and a continued shift in consumer preference from battery electric vehicles towards hybrids. We remain confident in the long-term role of our activated carbon solutions will have in automotive applications, while actively investing to expand into filtration. Although we are still in the early stages of this effort, it is encouraging that we already have a presence in food and beverage, medical and pharma and consumer applications. Our focus now is to enhance profitability in these areas by leveraging our technical expertise, sharpening our commercial approach and strengthening our value proposition.

Turning to Performance Chemicals. Pavement Technologies delivered pricing gains and improved mix. However, overall results were partially offset by weaker operating performance from the now divested Road Markings product line. Advanced Polymer Technologies continue to face tough competition with a slight gain in volume, balancing out price weakness. We've also introduced surcharges in April to offset higher costs, mainly raw materials and energy related to the Middle East conflict. Our business remains resilient in the face of macroeconomic uncertainty, and I'm proud of our performance this quarter and encouraged by the stable demand trends that we are seeing early in the second quarter, which we believe will position us well for the year.

With that, I'll turn it over to Phil.

Thank you, Dave, and good morning. Please turn to Slide 5. Sales grew 4% to $258 million in the quarter, largely driven by annual price increases in Performance Materials and Pavement Technologies and further supported by favorable foreign exchange in Advanced Polymer Technologies or APT, for short. In the first quarter, we recorded a GAAP net income of $23.4 million, which included approximately $23 million of pretax special charges, $16 million of which related to the final litigation settlement payment to BASF.

For the remainder of my remarks, I will focus on non-GAAP financial results, which excludes special charges. Adjusted gross profit of $132 million increased 4% over the same quarter in 2025 with gross margin of 51%. Once you remove the noise for the inventory build in the first quarter of both years, the margin actually expanded in 2026 compared to last year.

Adjusted EBITDA of $92 million was similar to the first quarter of the prior year. The pricing actions I previously mentioned and higher volume in Performance Materials were partially offset by weaker operating performance in Road Markings and lower asset utilization in APT. In addition, the first quarter this year has a benefit of inventory build in Performance Materials, which I will discuss later.

Adjusted EBITDA margin was 35.5% compared to 36.8% in the first quarter of 2025. Diluted adjusted EPS improved 14% to $1.15 as lower borrowings reduced interest expense and our share repurchases, which we resumed in the third quarter of last year, reduced overall share count. Overall, it was a solid quarter with robust results from Performance Materials and Pavement Technologies, making for a strong start to the year.

Moving on to Slide 6. The top left chart shows free cash flow from the first quarter of 2026 compared to the same quarter in the last 4 years. As you can see on the slide, Q1 of 2025 is an outlier relative to the typical Q1 free cash flow. The prior year's first quarter benefited from a working capital release of approximately $15 million associated with the now divested Industrial Specialties product line. As a reminder, Pavement Technologies is predominantly North American-based with approximately 70% to 75% of its sales recognized in the second and third quarters of the calendar year. As a result, we typically build inventory in advance of the paving season, resulting in lower to negative free cash flow in Q1. In addition, in the first quarter of 2026, we built inventory in Performance Materials ahead of a planned outage in the second quarter. These 2 factors together resulted in free cash flow of negative $12 million in the quarter. Our free cash flow in the quarter does not include the $93 million of proceeds from the Industrial Specialties sale as we define free cash flow as operating cash flow, less CapEx.

We accelerated our share repurchases in the first quarter beyond the ratable cadence we had planned, deploying $52 million to repurchase approximately 775,000 shares. Proceeds from the Industrial Specialties divestiture and the volatility caused by the Middle East conflict have allowed us to pull forward our planned repurchases. Our remaining share repurchase authorization at the end of the first quarter was approximately $246 million. We remain committed to derisking our balance sheet and reducing net leverage to our target of 2 to 2.5x, while being opportunistic with share buybacks.

And with that, now let's turn our attention to segment results, starting with Performance Materials on Slide 7. Sales of $155 million were 6% higher than the first quarter of 2025. We implemented our traditional low-single digit pricing actions at the beginning of this year. In addition, we continue to benefit from a shift in consumer preferences towards hybrid vehicles after the expiration of the EV credits in late Q3 of the prior year. As a reminder, hybrids use our more advanced and higher-value carbon solutions, which benefited segment results through our favorable mix.

Segment EBITDA increased 10% to $92 million from the higher prices and volume, along with the favorable benefit recognized in the quarter associated with an inventory build in preparation for planned shutdowns in the second quarter of this year. This also contributed to an EBITDA margin of 59% compared to 57% in the prior-year quarter. We expect this benefit to reverse in the second quarter, bringing full year EBITDA margins for the business back in line with our guidance of around mid-50s.

Moving on to Performance Chemicals on Slide 8. Performance Chemicals results presented here exclude the divested Industrial Specialties product line. You can access recast data for 2023, 2024 and 2025 on our website under Financial Information-Other. Additionally, first quarter results include Road Markings as the sale was not completed until April 15 of this year. Beginning next quarter, this segment will be renamed Pavement Technologies. However, because Road Markings divestiture does not meet the criteria for discontinued operations due to the materiality of that business, historical segment results will not be recast to remove Road Markings.

Segment sales in the first quarter of 2026 were comparable to the prior-year period. Pavement Technologies sales were flat as gains in price and mix were offset by lower volumes, reflecting minor shifts in timing to the start of the paving season. Sales in Road Markings declined 10%, driven by continued competitive pressure impacting volumes, while pricing remained stable. Segment EBITDA declined by $5 million and EBITDA margin reduced to 1%. This decline was driven by lower plant utilization in Road Markings. In comparison, the first quarter of 2025 benefited from approximately $4 million of favorable timing between production and sales. Also, this quarter had higher supply chain costs and SG&A related to the indirect costs from the sale of the Industrial Specialties business. As a reminder, we are on track to eliminate these costs by the end of the year.

Please turn to Slide 9. APT delivered 5% growth in sales in the first quarter, supported by favorable foreign exchange as volume growth was offset by lower price due to unfavorable mix. We are encouraged by the strong volume growth sequentially led by the Asia Pacific region. As a reminder, this segment faced headwinds from the indirect impacts of tariffs that began in the second quarter of prior year, as well as continued weak end market demand for most of the last year. However, the declining trend seems to have stabilized for now, and we are beginning to see some modest recovery.

Segment EBITDA of $7.6 million and EBITDA margin of 17.2% were meaningfully lower than the prior year due to the lower plant utilization. In the first quarter of last year, we benefited from favorable production throughput as we built inventory ahead of an extended planned shutdown in the second quarter of 2025 to install boilers. Almost all of the COGS delta you see in the red bar on the slide can be attributed to last year's inventory build. Outside of this, APT segment delivered steady performance in a depressed demand environment.

To wrap up, the first quarter demonstrated our ability to execute our portfolio simplification strategy, while delivering solid operating performance. Our teams remain focused on maximizing value through disciplined pricing and driving commercial and operational excellence with safety at the forefront of everything we do. Looking ahead, we expect to reach and maintain our target leverage ratio of 2 to 2.5x this year and to complete $300 million of share repurchases through 2027.

I will now turn the call back to Dave to share additional color on guidance for 2026.

Thanks, Phil. Turning to Slide 10. We are reaffirming our previous guidance shared in our last earnings call in February. The current full-year outlook excludes the contributions from the Road Markings divestiture beginning April 15 and is reflected in the bridge on the bottom left of this slide. We expect 2026 adjusted EPS to be in the range of $4.70 to $5.20, delivering meaningful growth over last year. Sales are expected to be between $1.05 billion and $1.15 billion, and adjusted EBITDA between $370 million and $395 million. Note that the exclusion of Road Markings is expected to lift Performance Chemicals margin to the high teens compared to prior projections of mid-teens.

Also, we are on target to eliminate the $15 million of indirect costs associated with the divestiture of Industrial Specialties, achieving run rate savings before the end of this year. We expect to generate free cash flow of $215 million to $245 million. This amount does not include approximately $113 million in pretax litigation-related payments to BASF in the second quarter. We plan to use the free cash flow to continue buying back shares, in line with our prior guidance of $300 million of share repurchases through 2027. We continue to be disciplined in our cash allocation strategy and have repurchased almost $15 million worth of shares already in the second quarter.

Additionally, regarding leverage, our plan remains to reduce and maintain net leverage within our long-term target range of 2 to 2.5x in 2026. Finally, the sale process for APT is progressing well, and we remain encouraged by the engagement and interest. We are working hard to bring the process to conclusion before the end of this year and we'll continue to provide updates as we advance the transaction.

Looking ahead, we expect to continue executing our portfolio transformation, while optimizing performance across core businesses. We remain disciplined in our capital allocation with a continued focus on share repurchases and debt reduction, and we are encouraged by our strong start to the year and are confident in our ability to deliver solid execution and results throughout 2026.

With that, I'll turn it over for questions.

[Operator Instructions] Your first question comes from the line of Daniel Rizzo with Jefferies.

I guess just to start with you -- you mentioned hybrids are driving growth or healthy growth for activated carbon in Performance Materials. I was wondering if that's exclusively a North American thing or if there is some -- if it's broader than that, if you're seeing increased hybrid sales elsewhere where they're outpacing EVs in other regions in the world like Europe and Asia?

Dan, thanks for your question. And as you mentioned, yes, hybrid -- the shift to hybrids is a positive for Ingevity, and I think it really -- just because of the smaller engine sizes, it requires more advanced carbon content from us. We're definitely seeing that shift in North America where the adoption of pure EVs has modulated. But I would expect that to be a trend that we see globally. I think even in places like China, the adoption of pure EVs has also moderated as those government subsidies has gone down. So I think hybrids are going to be a bigger and bigger part of the picture. And I think longer term, obviously, that's a positive for us, just requiring more advanced content from us.

And then you mentioned building up some inventory, but that was in response to potentially some planned outages. But I was wondering if you're going to keep inventories elevated just because of ongoing volatility, maybe some issues with higher logistic costs, higher raw material costs, if that's going to kind of change your short-term outlook for what you do with working capital.

Dan, this is Phil. No, I think what we would expect is our inventory to drop back down after those planned outage in Q2.

I'd say in general, Dan, obviously, there's a lot of uncertainty from a macroeconomic perspective. But we feel like maybe with the exception of APT that we're pretty well insulated, and so although we're watching the situation, monitoring closely, we feel like we're pretty well insulated.

Your next question comes from the line of Jon Tanwanteng with CJS.

Congrats on a nice quarter.

Thanks, Jon.

I was wondering if you could address or maybe give us a little more color on what your underlying assumptions are for inflation across each of your businesses? And number two, what's your ability to price through all of those are? I think my understanding is that a lot of your Performance Materials pricing is fixed, and I'm wondering if that's impacting your ability to be flexible or put things in place and surcharges?

Yes. If I heard your question, you were a little bit soft. Was it talking about inflation and our ability to flex pricing in our different businesses? Is that right?

That's right, yes.

Right. So a few things just to highlight. We mentioned that we went through with our typical annual pricing increases in PM. And I think those were successful, and I think they obviously reflect the value that we bring and obviously, the close customer relationships and the trust that we've built with that customer base over time. We did mention that we're putting in place some surcharges, particularly in APT to offset some of the energy and logistics pricing or cost increases that we've seen. I think we have some flexibility in the business, but obviously, we want to manage that closely. Phil, what else would you?

Yes. The only other thing is we have seen some small raw material price inflation. As Dave mentioned, we've been able to pass that along to customers in surcharges. We have seen some small upticks in logistics costs, but again, we expect and have been successful in being able to pass those along.

And I think, Jon, in general, obviously, we're a global company, but having a very strong focus in the U.S. market, producing in the U.S. as well, I think, has been a benefit to us, especially in this environment.

Okay. Great. I was wondering if you could also talk a little bit more about the APT sales process. How much progress you've made there, number one? And number two, if your overall expectations or if the most recent tone from potential buyers has shifted or changed at all over the last quarter, especially with the market volatility that's out there?

Yes. Thanks for the question. Again, it's part of our broader portfolio transformation. We've been pleased with the progress. So we announced 2 divestitures, one that closed earlier this quarter or in January and then one that was a signing close of Road Markings. And then the remaining business that we've talked about divesting is APT. We're encouraged with the progress there. So we continue to advance that transaction. We've had strong interest, and we continue to be confident that we'll announce something before the end of the year.

[Operator Instructions] Your next question comes from the line of Mike Sison with Wells Fargo.

This is Abigail on for Mike. So you noted volume growth in Asia in APT. But in past quarters, you said you've been facing competitive pressure, specifically in China. Has that changed at all? Or have other positive tailwinds more than outweigh that?

Yes. What we saw this quarter and the trend continues to -- we continue to see that trend in the early part of Q2 is our competitors in Asia are actually pretty impacted by the Middle East conflict, and so we've been able to step in and provide volume in the shadow of that. So taking advantage of what's happening in that region of the world to supply those customers.

And Abigail, just to remind you, obviously, APT was coming off a pretty prolonged period of demand weakness. So we are starting to see some of that come back. And as Phil mentioned, some of those costs and supply chain challenges have impacted some of our Asian competitors a bit more. So we're the beneficiary of that.

Okay. Got it. That makes sense. And then on Performance Materials, can you just give us an idea of the size of the EBITDA impact of the planned turnaround next quarter?

Yes. You can see it in the bridge. It's, what, $5.3 million on the bridge, but it's actually around closer to $6 million of an impact this quarter of a benefit that we expect to reverse in next quarter as those outages...

This concludes the question-and-answer session. I will now turn the call back to Dave Li for closing remarks.

Thank you again for joining us today. I'd like to close with a few key takeaways. First, we're making great progress on executing our portfolio strategy. Second, we continue to see positive momentum in our core businesses. Third, the resilience of our businesses is enabling us to deliver strong results consistently regardless of the macroeconomic environment. And finally, we remain disciplined, yet opportunistic, with our capital deployment strategy.

Thanks again to everyone for your support of Ingevity. And with this, we will close the call.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, everyone, and welcome to the Ingevity Fourth Quarter and Full Year 2025 Earnings Call and Webcast. [Operator Instructions]

I will now hand over to our host, Surabhi Varshney of Ingevity to begin. Surabhi, please go ahead.

Thank you. Good morning, and welcome to Ingevity's Fourth Quarter 2025 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 ir.ingevity.com under Events and Presentations.

Also throughout this call, we may refer to non-GAAP financial measures, which are intended to supplement, not substitute for comparable GAAP measures. Definitions of these non-GAAP financial measures and reconciliations to comparable GAAP measures are included in our earnings release and are also in our most recent Form 10-K.

We may also 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 projections, and actual results or events may differ materially from these projections as further described in our earnings release.

Slide 3. Today, you will hear from Dave Li, our CEO and President; and Phil Platt, Senior Vice President, Finance and Incoming CFO. Mary Dean Hall, our outgoing CFO, will also be joining us for Q&A.

Our prepared comments will focus on full year total company results and will include both continuing and discontinued operations, which refer to the divested Industrial Specialties product line. We will take any questions related to the quarter during the Q&A session right after the prepared remarks. Dave, over to you.

Thank you, Suri, and good morning, everyone. Please turn to Slide 4.

Before we discuss the financial results, I'd like to remind everyone that in early December, we shared the findings of our strategic portfolio review through a virtual event. During this presentation, we laid out our plans for growing adjusted earnings per share by 10% and free cash flow per share by 5% through 2027. We also announced the decision to initiate sales processes for our Advanced Polymer Technologies segment and Road Markings product line.

If you've not had a chance to listen to the webcast, I would highly recommend reviewing the materials on our website under Events and Presentations.

I'm also pleased to confirm that on January 1, 2026, we completed the sale of our North Charleston CTO refinery and the majority of the Industrial Specialties product line to mainstream pine products. With this transaction complete, we have reduced our portfolio volatility, strengthened our profitability and cash flow profile and enhanced our strategic flexibility.

Looking at our 2025 results, we are incredibly proud of the strong execution by our teams globally that enabled us to grow total company adjusted EBITDA by almost 10% over 2024, along with delivering industry-leading margins of over 30%. These results generated $274 million of free cash flow, slightly exceeding our commitments. We used the cash to pay down debt and reduce leverage to 2.6x and to buy back over 1 million shares.

Performance Materials continue to generate EBITDA margins above 50% and held revenue flat despite lower global auto production, which was impacted by tariff uncertainty and supply chain challenges, delivering another year of near record level sales. This strong performance is a testament to the differentiated value that our activated carbon technology delivers to customers globally. The momentum from continued adoption of hybrids and fuel-efficient ICE vehicles is encouraging and supports our view of a long runway for this business. We also continue to be encouraged by the optimization of our filtration business and see a bright future and good fit for the company in this application space.

Within the Performance Chemicals segment, we meaningfully lowered CTO exposure ahead of the Industrial Specialties divestiture. Also, Pavement Technologies grew year-over-year as our innovative solutions facilitated the extension of the paving season into late fall to allow catch-up of projects delayed by adverse weather earlier in the year.

Advanced Polymer Technologies continue to face tough market conditions due to tariff uncertainty and competitive pressure, which we are addressing with disciplined commercial actions and productivity initiatives. Overall, we start 2026 with confidence and optimism as we continue to drive performance in our core businesses.

And with that, I'll turn it over to Phil.

Thank you, Dave, and good morning, all. Please turn to Slide 5. Consistent with last quarter and with our November 2025 outlook for the full year, I'll focus my comments on total company results, which will include both continuing and discontinued operations.

As previously noted, beginning in the third quarter of 2025, the results of Industrial Specialties product line have been reported within discontinued operations. As Dave has mentioned, we completed the sale of that product line earlier this year. Total company full year 2025 sales of $1.3 billion declined 8% compared to last year.

Performance Materials sales remained flat versus 2024 despite lower auto production driven by industry volatility from tariffs and supply chain disruptions.

Performance Chemicals sales declined by $86 million, primarily due to our repositioning actions within Industrial Specialties.

We also continue to see weakness in demand from indirect tariffs and competitive pressures in Advanced Polymer Technologies.

In 2025, we recorded a GAAP net loss of $167 million, which included $337 million of pretax special charges. These charges primarily consisted of a noncash goodwill impairment of $184 million in Advanced Polymer Technologies and a noncash asset impairment of $109 million in road markings.

For the remainder of my remarks, I will focus on the non-GAAP results, which exclude these special charges. Reconciliations of our non-GAAP financial measures to the most comparable GAAP measures are included in the appendix to this presentation.

Adjusted gross profit of $556 million increased 6.8% year-over-year, with gross margin expanding by 610 basis points. Total adjusted EBITDA increased 10% year-over-year to $398 million, with margins expanding 500 basis points to 30.8%.

Total diluted adjusted EPS improved 30% to $4.55. This improvement in profitability reflects the successful execution of our PC repositioning actions, which has also resulted in lower overall raw materials, supply chain efficiencies and plant footprint optimization.

SG&A increased primarily due to higher variable compensation expense, driven by improved business performance. We delivered industry-leading margins, and this performance is a clear testament to the resilience and strength of our business model.

Moving on to Slide 6. In the top left chart, you'll see how our strong earnings performance and disciplined capital management translated into free cash flow of $274 million, the highest level that we have generated in the past 5 years and exceeded our updated guidance from November. The $220 million increase from 2024 was driven by the absence of approximately $180 million in cash outflows related to the Performance Chemicals repositioning, higher overall earnings and a working capital benefit in Industrial Specialties.

With this free cash flow, we resumed share repurchases in 2025, deploying $56 million to repurchase approximately 1 million shares. At year-end, our remaining share repurchase authorization was just under $300 million.

At the beginning of 2025, we committed to derisking our balance sheet and reducing net leverage from 3.5x to below 2.8x. Through our disciplined capital management, we exceeded that target, reducing net leverage to 2.6x, nearly a full turn improvement versus the prior year. Importantly, this reduction does not include any of the proceeds from the sale of our Industrial Specialties product line, which closed in early January.

With that, let's dive into segment results, beginning with Performance Materials on Slide 7. Sales of $607 million were in line with the prior year, which is a strong result given that 2024 was a record year for that business. Throughout 2025, the automotive industry faced significant disruption from tariff uncertainties, fires and chip shortages. Against that backdrop, the resilience of our Performance Materials business becomes evident. While these dynamics led to slightly lower volumes, disciplined pricing actions helped to offset that impact, allowing us to hold year-over-year sales essentially flat.

Segment EBITDA declined 2% year-over-year due to lower volume and higher SG&A. Despite this, EBITDA margin remained strong at 53.8%. Looking ahead, we remain confident that this business will maintain margins north of 50%, supported by its technology-leading position and proven high-quality solutions that provide a compelling value proposition for both automotive and filtration customers.

Moving on to Performance Chemicals on Slide 8. The combined Performance Chemicals results presented here include both continuing and discontinued operations, which means results from the divested Industrial Specialties product line are in the numbers. A reconciliation of Performance Chemicals results on a continuing operations basis to the total segment results is provided on this slide. As you'll note, the sales of the previously reported Road Technologies product line have been split into, Pavement Technologies and Road Markings, which together represent Performance Chemicals continuing operations segment.

Since we have initiated the sales process for Road Markings, we are now presenting its sales separately. Upon completion of that process, the segment will be renamed from Performance Chemicals to Pavement Technologies.

Total segment sales declined primarily due to the execution of the repositioning actions of the Industrial Specialties product line. Pavement Technologies 2025 sales remained flat to 2024 as volume growth in NAFTA region was largely offset by lower infrastructure spend in South America. Pavement Technologies also benefited from pricing and favorable mix shift. While adverse wet weather impacted results in the first half of 2025, demand shifted into the second half and a combination of good weather and our season extending technology enabled many projects to be completed within the year. Road Markings continue to experience price pressure from competition, although volumes grew slightly.

Total segment EBITDA increased by $45 million over prior year, driven by the successful execution of our PC repositioning actions, which have resulted in lower overall raw material costs, improved logistics costs and a more efficient manufacturing footprint. These actions helped to improve Industrial Specialties EBITDA by $40 million year-over-year.

Performance Chemicals continuing EBITDA, which includes Pavement Technologies and Road Markings, increased by $7 million or 12%, supported by improved pricing, favorable mix and lower raw material costs, partially offset by volume declines and higher SG&A. As a result, combined segment EBITDA margin expanded to 13.5%, up from 4% last year.

Please turn to Slide 9. During 2025, APT faced headwinds from the indirect impact of tariffs and continued weak end market demand, primarily in automotive, footwear and industrial end markets. In addition, competitive dynamics in China continue to pressure sales, most notably in the paint protective film markets. As a result, sales declined 15% and segment EBITDA was 18% lower year-over-year due to volume declines that more than offset improved operating efficiency. Despite these pressures, we held pricing and maintained a stable mix. The team remained focused on operational discipline, which drove more reliable plant production and reduced operating costs. These efforts, combined with favorable foreign exchange, enabled a strong EBITDA margin of 20%.

Overall, 2025 was a great year. Our focus on execution generated solid earnings, driven by operational improvements and footprint optimization despite weak end market demand, tariff uncertainties and supply chain disruptions. We generated robust free cash flow, which enabled us to meaningfully reduce leverage and resume returning cash to investors via share buyback.

Looking ahead, we expect to reach and maintain our target leverage ratio of 2 to 2.5x this year and complete $300 million of share repurchases through 2027.

I will now turn the call back to Dave to share additional color on guidance for 2026.

Thanks, Phil. Turning to Slide 10. Please note that the 2026 guidance includes a full year of APT and Road Markings. But excludes the divested Industrial Specialties product line. Sales processes for both APT and Road Markings are underway and we are encouraged by the interest shown in both. We will provide updates as they advance and revise our outlook accordingly.

We expect 2026 adjusted EPS to be in the range of $4.08 and to $5.20 in a year where we do not expect meaningful recovery in the global economy. Sales are expected to be between $1.1 billion and $1.2 billion and adjusted EBITDA between $380 million and $400 million.

Performance Materials sales are expected to grow low single digits supported by price increases in automotive, while delivering margins consistent with 2025.

Sales in Performance Chemicals, including Road Markings, are expected to grow mid-single digits with EBITDA margins in the mid-teens, reflecting our strong industry leadership and strategic advocacy efforts.

In APT, we expect flat to low single-digit growth with margins around 20% as recent commercial and productivity actions offset competitive pressures and weak end market demand.

CapEx should be consistent with 2025 and be in the range of $40 million to $60 million. We expect to generate free cash flow of $225 million to $250 million. This amount does not include approximately $95 million in pretax litigation-related payments to BASF in the second quarter.

We plan to use the free cash flow to continue buying back shares in line with our prior guidance of $300 million through 2027. So far in the first quarter, we've repurchased almost $20 million worth of shares. Additionally, we plan to reduce and maintain net leverage within our long-term target range of 2 to 2.5x in 2026.

In 2025, we focused on stabilizing the business and optimizing our portfolio. That translated to total shareholder return of 45%, highest amongst our specialty chemicals peers and top quartile among the Russell 2000 materials companies.

We entered 2026 with good momentum and we'll continue to execute the portfolio strategy, drive performance in our core businesses and build Ingevity into a premier specialty materials company.

With that, I'll turn it over for questions.

[Operator Instructions]

Our first question comes from John McNulty of BMO.

Maybe we can start out. Just can you give us an update as to the progress you may be seeing regarding the potential asset sales and I guess somewhat related to that on the $300 million of buybacks that you expect to do between now and the end of '27, does that come regardless of the asset sales? Is it dependent on the asset sales? I mean it looks like it generates really solid free cash anyway. But I guess if you could help us to put that into context, that would be helpful.

Yes, thanks. I'll provide an update on the processes, and then I'll let Phil talk to sort of the cash flow. We're very encouraged, obviously, with the cash flow generation of the business. So for both processes for APT and Road Markings, they continue to progress. We're encouraged by the interest shown in both assets. Obviously, we're going to be focused on value, and we continue to expect that we'll announce something before the end of the year. And so things continue to progress, we'll obviously also update our guidance as things go along, but seeing good interest for both assets, and we'll be focused on value.

Yes. And with respect to the share buybacks and the proceeds, John, as Dave mentioned during the prepared remarks, the outlook does not include any of the proceeds associated with the APT or the Road Markings potential sales. So we would expect to continue to execute those buybacks of $300 million over the next 2 years. And the way you could think about it is take a ratable cadence throughout the year is how we're thinking about it in our guide.

Got it. Okay. Fair enough. And then maybe just as a follow-up, on the $15 million of stranded costs that you expect to exit by the end of the year. I guess, can you help us to think about how much of that's pretty much locked in stone at this point? And also maybe how to think about the cadence as that flows throughout the year? Is it pretty much even like each quarter? Or how does -- is it lumpier? I guess how should we be thinking about that?

Phil, why don't you take that one?

Yes. So as we said, we definitely have a clear line of sight to eliminate that $15 million by the end of the year. I think the way to look at it is it's going to be accumulating throughout the year. More so in the back end of the year than the front end of the year. Some of those costs are tied in the TSA that we expect to hopefully wrap up midyear. So that's how you can kind of think about the cadence throughout the year.

[Operator Instructions] Our next question comes from John Tanwanteng of CJS.

It's actually Lee Jagoda for Jon. So I guess David, can we start on the Performance Materials business? And maybe talk through some of your assumptions on the auto production volume side. And if you can get into some geographic commentary, that would be helpful. And then also in terms of just the seasonal cadence, just given some of the headwinds we've seen in the U.S. coming out of Q4 into Q1, that would be helpful.

Sure. So just as we think about the guidance that we just provided, what we sort of comprehended from an auto backdrop is stable, not predicting any very strong recovery. But if you pull back and think about what the auto industry has faced, it's -- in 2025, it's been remarkably resilient. So -- and Phil had some comments in the prepared remarks about the tariff uncertainty and supply chain challenges. But overall, we see it as a very resilient market.

And then -- and if you also think about the recent trend, especially in North America, where you've seen the pace of EV adoption really slowed down. And I think there was just an announcement today by Stellantis of really leaning into some of their more ICE efficient hybrid product lines, and you've seen similar remarks by Ford. So especially in the key North American market where we have obviously the largest portion of our business, we see a positive trend there. But just to be clear, for 2026, what we've kind of baked in is a pretty stable environment.

And then talking about the fourth quarter that we just reported, we did see some of those supply chain challenges, whether it was the aluminum fire affecting Ford F-150. I think they've been pretty public about how they think about that and that production delay, or Honda with the chip shortages. I think they're still working through those. And our assumption and understanding is that production and demand would be made up this year.

Ford mentioned more second half based. But we think of it as a pretty stable environment with potentially some upside if those supply chain issues abate as well as in the backdrop of this reduced EV adoption trend that we're seeing in North America.

Great. And then I know at the investor event, you sort of talked about the ability or the want to grow outside of automotive in Performance Materials in a margin-accretive fashion. Is any of that -- any of those new products, new programs assumed in guidance? And just from a bigger picture standpoint, how long should we expect it to take to start to see some of the progress that you are making in the reported results?

Yes. Thanks, Lee. So what I think you're referring to is our focus in the near term, or kind of nearing on filtration. And we're definitely encouraged by what we see there. Our focus is on the higher-value applications in filtration. So we are already participating in a pretty significant way. We sell millions of pounds of our activated carbon into the filtration markets and the opportunity is just to optimize that volume into the higher value applications. So those are -- we're definitely in the discovery process, thinking about where we have technical capabilities.

Early on, we've identified, obviously, water as an area of focus, but also pharma and food and beverage. So if we think about where we have technical advantage over other activated carbons, it's about the speed of the separation that we're able to provide, the selectivity. So we're good at taking out large molecules. Good at taking out flavor and odor. There's also a mouth feel to some of our technical competence. So we're trying to -- we're definitely in the discovery process, but we're encouraged, and we've seen some good support from some of those end markets. So stay tuned.

The filtration aspect is built into our guidance, but it's a pretty small base right now. We expect it to expand over the next couple of years. And then further out, we've talked about our interest to expand into energy solutions. So those are investments like Nexeon and CHASM. Those are not reflected in our next 2-year financial outlooks, but we're also encouraged by our participation in those areas.

Our next question comes from Daniel Rizzo of Jefferies.

So if we think about the 3 different segments as they are now, what -- how should we think about peak or mid-cycle margins for both the new Road Markings business or the new Pavement business and APT once a recovery occurs? And in Performance Materials, is this kind of are we at peak or maybe even -- I mean, a little bit below the peak of what we would expect, particularly given the moves you guys expect to make over the next couple of years?

Yes. Dan, let me start and then maybe Phil can provide some more color. So for the 3 segments, Performance Materials, we're in the 50s. We've been in the 50s. That's a pretty heady space to be in, and we expect to maintain that. We will continue increasing prices in the automotive aspect area as we've done in the past. So there could be some upside as well as when we get traction in filtration. But obviously, 50%, it's a good place to be. So I'd assume somewhere north of 50% for Performance Materials.

For Performance Chemicals, when and if we transact Road Markings, we would expect some uplift to the margins there. So -- and even in our investor update, we said sort of the higher teens or 18% that continues to be our expectation. APT has been in the 20s before. I think it's a very healthy profitable business for us and obviously, assuming we don't transact, we see some upside there as well as we go in some higher-value applications, but assume sort of kind of low to mid-20s for that business. But Phil, why don't you some more color.

Dave, I think you pretty much covered it all. The only thing I would add is in the guide for Performance Chemicals for the full year, we're guiding mid-teens as Dave mentioned. That's a composition of both the businesses, Performance Technologies as well as Road Markings. Obviously, Road Marking is a lower-margin business and currently, diluting some of those margins. But also embedded in that is some of the stranded costs that are carried over into this year. So -- but as Dave just mentioned, looking further out in 2027, we would expect that segment Pavement Technologies by itself to put up around 18% margins.

Okay. And then with the sale of Industrial Specialties and the new Pavement and Road Markings business, should we expect all the EBITDA for those 2 segments I say, almost all in the second and third quarters, just given the weather-related aspect of those businesses?

Yes, Dan, that's actually a great question. We've always talked about the Performance Chemicals segment as being very seasonal Q2, Q3. It was muted in prior years by the Industrial Specialties business, which was pretty steady across all 4 quarters of the calendar year. Now that Industrial Specialties is gone from that portfolio, you'll be able to see the numbers in the 10-K when we release that later today. But about 90% of the annual EBITDA for that business is going to be recognized in Q2 and Q3 and 75% of the sales will be in Q2 and Q3. So it will become more prominent from a seasonality perspective.

[Operator Instructions]

Our next question comes from Mike Sison of Wells Fargo.

Nice quarter and outlook. Could you remind me for Performance Materials, I recall the fact that you use wood to create your activated carbon, gives you a pretty big edge in the auto side. Does that sort of technology or base help you in the other areas and maybe more chemistry-wise, why would that help you get a more premium area in other areas like water treatment and such?

Thanks, Mike. We're definitely early in that process of identifying where we're actually adding value. Just to remind, this is a business that as an area of filtration that we've been participating in for many years. So the opportunity now is to spend more time with those end customers and understand exactly your question, where can -- where we actually differentiate in adding value. And we have, in many areas identified that this hardwood-based activated carbon, the way we engineer it has unique separation properties that are valued by our customers.

So in certain application, we actually understand that our activated carbon is combined with a lower grade activated carbon because we're actually able to provide that key separation technology. So again, early on, but the sectors that we're going to be focused on are water pharma and food and beverage. Those we think we have a technical advantage on. And again, this is just also a benefit of having that simplified portfolio, having the ability to focus more resources in these high potential growth areas is something that we're excited to do and expect to hear more from us in the future.

Got it. And then could you remind us any major regulation over the next couple of years, to even decade that could sort of sort of generate some growth for Performance Materials. I think China may be going to a Tier 3 at some point? And maybe any other areas? And then just kind of the mix of the outlook when you talk to customers? I mean, hybrids have been good. Any thoughts on sort of more of that versus EVs or anything else?

Sure. So I mentioned, I think, in the first question, North America, we feel really good about that, and that's obviously our core market, especially in the backdrop of this reduced EV adoption which we think will continue for the foreseeable future.

You mentioned regulation. So the next most significant piece of regulation will likely be China 7. So that's China moving to essentially a Tier 3. Our teams are working closely with the folks in China. We continue to expect that to be adopted towards the end of the 2020. So 2028, 2029, you could see some buildup of inventory ahead of that. But that would be a pretty significant upgrade and more stringent emissions requirements that would require things like honeycombs, which obviously would be good for Ingevity.

Another region, I think, to pay close attention to is India. So India is a growing and mobilizing population, and they also have a pretty significant pollution issue. They also have very hot summers there. And so they're going to need to do something from an emission standard perspective. We're also working closely with them in terms of the emissions, regulatory bodies there and would expect to see something there. They're obviously earlier on in their journey of emissions requirements.

So I think that's been a positive. And then the last one, I mentioned North America. But recently, there's been some changes by the administration. Things like the Endangerment Act. We actually think that's going to be a positive for Ingevity because without getting into too much detail in the previous regulations that have now been taken away for an automaker to be in compliance, essentially a larger and larger portion of their mix would have to be EV. So now without those gone away, it really clears the runway for more ICE -- fuel-efficient ICE and hybrid parts of their portfolio, and you see them leading into that. So the North America backdrop also seems to be very promising for us as we look forward.

And one quick last one. For Pavement Technologies, are there opportunities for acquisitions? Your balance sheet is in pretty good shape. Maybe to add that as some growth over time? And maybe talk about some regions that could be a good area for you? Or are there other sort of technologies or product lines that would fit well?

Yes. We love the technologies that we have. We see a lot of runway for growth, especially with Evotherm. So converting that hot mix asphalt to a warm mix with significant value and technology advantages for our customers. Never say never, but I think we've been pretty public about for the next at least a couple of years, acquisitions are not going to be a priority for us. Instead, we really want to focus on generating that cash flow and reducing the leverage on the balance sheet as well as buying back shares.

We have no further questions registered on today's call. So I hand back over to Dave Li for any closing or final comments.

Thanks. And as we wrap up, I would just like to remind our investors that new Ingevity is a simplified, more predictable and extremely profitable specialty materials company. The company is highly cash generative, and we are committed to returning cash to investors.

Our focus in 2026 will be the continued execution of our commercial and operating strategies so that we can deliver growth year-over-year on every metric from sales to EPS.

And lastly, as we close the call, I would like to again thank and congratulate Mary Hall, our outgoing CFO, on reaching this milestone in her career. This will be her last earnings call with us, and we are grateful for her years of service and contributions at Ingevity.

Thanks everyone for their interest. And with that, Charlie, you can close the call.

Thank you. Of course. Ladies and gentlemen, this does conclude today's call. Thank you so much for joining. You may now disconnect your lines.

Good morning. My name is John Nypaver, Head of Investor Relations at Ingevity, and it is my pleasure to welcome you to Ingevity's Strategic Portfolio update.

Earlier this morning, we posted a presentation on our investor site that you can use to follow today's discussion. It can be found on ir.ingevity.com under Events and Presentations. Also, throughout this discussion, we may refer to non-GAAP financial measures, which are intended to supplement, not substitute for comparable GAAP measures. Definitions of these non-GAAP financial measures and reconciliations to comparable GAAP measures are included in the appendix to the slide deck and are also in our most recent Form 10-K.

We will also make forward-looking statements regarding future events and future financial performance of the company during this presentation, and we caution you that these statements are just projections and actual results or events may differ materially from those projections.

Our speakers today are Dave Li, our CEO; Mary Hall, our CFO; and Phil Platt, our incoming CFO and current SVP of Finance. Dave will walk us through the strategic update, then turn it over to Mary and Phil for the financial discussion. Dave will then provide closing comments before opening it up for Q&A. With that, over to you, Dave.

Good morning, everyone, and thank you for joining us. Before we begin our strategic update, I'd like to share some exciting news on the future leadership at Ingevity. As we announced this morning, Mary Hall will be departing the company in May of 2026, after an exceptional career in the chemicals industry and tremendous contributions to our company. Mary has been an outstanding partner to me and a steady hand during a period of change and transformation. Mary, congratulations on reaching this milestone, and thank you for everything you've done for our company.

I'm also very pleased to announce Phil Platt as our next CFO. Phil spent more than a decade at Ingevity in critical leadership roles and brings deep financial discipline, strong operational experience and a clear commitment to our strategy. The Board and I have full confidence in his leadership, and I look forward to welcoming Phil to our executive team. As mentioned, we expect this transition to be completed by May of next year, leaving ample time for a seamless transition between Mary and Phil.

Now let's turn to the focus of today's discussion, the New Ingevity. Many of you know my background, more than 30 years in the specialty materials industry, including nearly a decade as CEO of CMC Materials. After stepping away for several years, the question I heard most when I joined Ingevity over a half a year ago was why here and why now? The answer is simple. I saw a company with a deeply meaningful mission to purify, protect and enhance the world around us. I saw world-class businesses with resilient demand, technology depth, industry leadership and a strong organizational culture.

I also saw a significant opportunity to unlock value through focus, discipline and strategic clarity. Today, we will show you why the New Ingevity is positioned to become a best-in-class specialty materials company, built on strong operational fundamentals, supported by market tailwinds, which together, create a long runway for profitable growth.

There are 3 key messages I'd like you to take away from our discussion today. First, portfolio transformation. Our strategic review of the portfolio is complete. We previously announced the sale of Industrial Specialties, which is on track to close by early 2026, and today, we are announcing that we are initiating sales processes for 2 additional businesses, Advanced Polymer Technologies and road markings. These are good businesses, but ultimately, we've determined they are not aligned with our core competencies.

Second, we are excited about its focused, stronger New Ingevity. Our future is built around 2 industry-leading segments: Performance Materials and Pavement Technologies. These are our highest value businesses with durable demand, technology leadership and strong competitive moats. We believe this will create a focused, less volatile, more profitable portfolio poised for future growth; and third, capital allocation. Over the next 2 years, we expect to generate nearly $1 billion in deployable cash, supported by our core business and divestiture proceeds. We intend to deploy this cash towards fueling organic growth reducing our debt and returning meaningful capital to shareholders through share repurchases.

Let's take a closer look. New Ingevity is made up of 2 industry-leading segments, Performance Materials and Pavement Technologies, both focused on high-value, mission-critical applications that benefit from sustainable long-term demand. On a pro forma basis, New Ingevity today has around $900 million in revenue, generating EBITDA margins of around 37%. As a more focused company, we retain our global scale, maintain a strong financial profile and provide a much more stable, simplified specialty materials portfolio poised to deliver profitable growth with best-in-class EBITDA margins and we also wanted to provide some more background on how we conducted our portfolio review.

Throughout this process, one key question guided us, where is Ingevity the best owner, not just today but for the future? Performance Materials and Pavement Technologies share 3 competitive strengths, which we consider unique core competencies. First, unique technology. Our technology, patents, and know-how allow our teams to solve complex problems for our customers with engineered materials, and additives that are extremely difficult to replicate.

Second, unparalleled applications and technical support, our deep customer relationships, strong applications and technical support combined with our decades of experience in both industries, create sustainable and significant barriers to entry.

And third, strategic advocacy. We help, shape and often write the standards and regulations governing our industry. I believe this is an unappreciated aspect of our business and leadership. Some recent examples of this advocacy include our work with Chinese regulators on future emission standards, including the upcoming new standard called China VII, which will drive more demand for advanced Ingevity content. And our collaborations with U.S. transportation authorities to advance Pavement Technologies towards warm mixed asphalt solutions where we are the clear leader. Few companies can shape their industries to the degree we can. These strengths supported by operational excellence worldwide create sustainable businesses with strong returns.

This slide highlights our evolution from pre-2023 today, and where we are headed. From our beginnings as a diversified specialty chemicals provider, we are becoming a more focused, more profitable, more resilient company anchored in high-value applications and our IngeviWay culture of operational excellence and continuous improvement.

Let me walk you through our 2 segments. Performance Materials is our crown jewel. We engineer and manufacture hardwood-based activated carbon used primarily in automotive emission control systems, capturing gasoline vapors in internal combustion engines and hybrids. Our technology prevents the release of an estimated 8 million gallons of gasoline emissions globally every day.

Going forward, we see emerging and stricter emissions regulations as well as the continued growth of hybrid and more efficient ICE vehicles driving more demand for advanced Ingevity content over the next decade.

Beyond automotive, our activated carbon supports high-value filtration applications, including food and beverage, water treatment, and chemical purification, areas where we see significant long-term growth potential.

Durable demand in automotive, combined with emerging opportunities in filtration, and Advanced Materials makes this a highly attractive long-lived business. Performance Materials is a $600 million business with exceptional EBITDA margins above 50%. Sustained profitability at this level and at scale is something I've personally never seen in a Specialty Materials business in my many years in the industry. And more importantly, we believe reflects the value and criticality our solutions provide to our demanding customers in automotive and advanced filtration.

Now let's take a deeper look at the automotive industry and why we believe there are positive trends that should benefit us at Ingevity. Two years ago, global industry forecasts expected a rapid transition to battery electric vehicles as well as a return to peak automotive production. Today, that consensus has shifted significantly.

First, global auto production remains around 6 million units below prior peaks, with the return to peak still expected in the future. And second, expected BEV penetration is meaningfully lower, resulting in more than 3 million additional ICE and hybrid vehicles over the same time period.

All of this translates into more vehicles requiring Ingevity solutions, not just in the next 2 years, but well into the future. Beyond automotive, we are repositioning our participation in filtration and purification, where our unique activated carbon provides strong technical advantages.

Historically, this business was opportunistic and margin dilutive. We're now executing a strategic shift to focus on high-value demanding applications so that we expand our role in mission-critical filtration markets and achieve margin expansion with no additional CapEx.

We already sell meaningful volumes into these markets today, upwards of 20% or more of our activated carbon capacity by optimizing our approach we expect to deliver revenue growth, material EBITDA contribution, and optimize a long-term platform for growth in the filtration market. Expect to hear more on this exciting initiative in the future as we continue building Ingevity into a leading name in the filtration market.

We're also excited to talk about our broad pipeline of emerging opportunities across energy storage, renewable gas and other advanced materials, all aligned with our core competencies, which we expect, can become pathways for growth in the future. These initiatives are not reflected in our near-term financials, but represent future option value and long-term strategic growth.

To sum up Performance Materials, our first priority is to maintain our leadership position in automotive with our highly engineered activated carbon solutions supported by sustained consumer demand for ICE and hybrid vehicles and our strategic advocacy efforts.

Second, we plan to broaden and strengthen our business by expanding beyond automotive and pursuing high-potential adjacent markets, particularly advanced filtration, where we are well positioned and already participate meaningfully today.

And third, we will continue to execute with discipline through continuous improvement, operational excellence and industry-leading product quality, the foundation of what's made Ingevity successful now and into the future. There's a reason we call this our crown jewel. It's a uniquely positioned business with global leadership in automotive activated carbon, sustainable 50-plus percent margins, and strong demand tailwinds that give us a very long runway. And now with future growth in high-value filtration markets, this segment becomes an even more powerful engine for New Ingevity.

Pavement Technologies is another business where Ingevity is clearly the best owner. The vast majority of North American roads use asphalt, and we participate in nearly every critical layer through our technologies in pavement preservation and pavement construction. This business is built on proven technology, strong industry leadership, and benefits from tailwinds in infrastructure spending.

At a glance, Pavement Technologies is a $300 million business with mid- to high-teen margins, mid- to high single-digit growth and primarily focused on North America with international reach.

We see this as a growing, profitable, technology-driven platform with clear room for expansion as infrastructure needs grow, and we continue to grow our participation, particularly through our warm mix solutions.

As we look deeper into Pave Tech, you can see just how broadly we participate across all layers of the road, essentially everywhere. Our competitive advantages include highly agile formulation teams that respond quickly to customer needs, strong technical service support, and the advocacy capabilities that are rooted in deep industry know-how.

On the left, you see our additives for pavement preservation and repair. This part of the business represents roughly half of segment revenue, where we hold a clear market-leading position. It's a stable cash-generating operation that grows roughly in line with GDP.

On the right, our products used in new road construction, which account for about 1/3 of segment revenue today and offer significant room for expansion. This is where our flagship Evotherm platform comes in. Let me share why we're so excited about Evotherm.

Evotherm is a unique warm-mix technology that enables asphalt to be produced at significantly lower temperatures. Why does that matter? First, it reduces paving costs for our customers by cutting energy consumption. Second, it delivers superior road performance. Evotherm can extend pavement life by up to 30%; and third, lower production temperatures allow contractors to extend the paving season, enabling more projects to be completed within a calendar year.

The market opportunity is substantial. Today, roughly 80% of North American asphalt is still made using traditional hot mix processes. That leaves a large conversion runway for warm mix technologies. Combining our unique technology, compelling value proposition, and strong advocacy efforts, we believe we can accelerate adoption of this $400 million revenue opportunity as the clear leader of the warm mix application space.

As warm mix becomes a larger share of North American asphalt production, we believe we are exceptionally well positioned to lead that transition and expect this will contribute meaningful growth in the future.

Given our competitive advantages and the significant addressable market opportunity, we expect to generate mid- to high single-digit revenue growth and double-digit EBITDA growth over the next 2 years. Our focus will be on the North American market and the $400 million opportunity to drive greater warm mix adoption through our technology, strong application support and advocacy efforts.

To summarize, here's what defines New Ingevity. First, we are a focused, high-performing specialty materials company built on 2 industry-leading businesses with lasting demand and sustainable positions. Second, a business model that will deliver best-in-class margins and strong free cash flow, which we intend to utilize towards deleveraging and meaningful capital returns. And third, a trajectory that supports double-digit EPS growth over the next 2 years.

Investing in New Ingevity today means investing in a disciplined industry leader with scale and a long runway for value creation.

With that, I'll turn it over to Mary and Phil.

Thanks, Dave, and good morning, all. New Ingevity is a leaner, stronger, more focused company expected to generate superior, consistent profitability and best-in-class free cash flow. We are committed to using our robust free cash flow to delever and return significant capital to shareholders.

On the next slide, the hard work we've done over the past 2 years to reposition Performance Chemicals is evident in our improving free cash flow and leverage. New Ingevity is a cash flow juggernaut, expected to generate strong and consistent free cash flow of greater than $200 million per year and growing.

We heard you loud and clear about reducing our leverage and have made significant progress towards our target of 2 to 2.5x. As we noted in our Q3 earnings call, we expect to finish this year at about 2.6x.

For the next couple of years, we are committed to achieving and maintaining leverage in the 2 to 2.5x range, and that range is our target leverage for the longer term. Our balance sheet is strong with excellent liquidity, and our nearest debt maturity is in 2027, when our revolving credit facility expires. We plan to amend and extend this facility in the next few months.

Now let's talk more about capital allocation. On the left-hand pie chart, you can see that over the past 3 years, we have deployed about $1 billion across M&A, CapEx, debt reduction, and a relatively small slice towards share repurchases.

Over the next 2 years, we expect to generate almost $1 billion of deployable cash from operations and divestiture proceeds. Our priorities, as shown on the right pie chart are clear. One, we will invest in the business, including strategic initiatives that advance our next-generation growth pathways; two, reduce debt and maintain our target leverage; and three, return cash to shareholders. In fact, we expect to use our remaining $300 million of share repurchase authorization over these next 2 years.

Please note that there is no hard line between the blue and purple on the right pie chart. This is to reinforce our disciplined approach of balancing debt reduction and share repurchases, as we generate excess cash. As we noted in our Q3 earnings call, we repurchased $25 million of shares in Q3 and have repurchased over $30 million of shares so far in Q4.

The most striking difference you can see between the 2 pie charts is that M&A is not a priority these next 2 years, freeing up significant cash flow to delever and return cash to shareholders.

Now I'll turn it over to Phil, who will dive into the financials of New Ingevity in more detail.

Thank you, Mary. As you can see on the right-hand side of this slide, over the next 2 years, we are targeting annual revenue and EBITDA growth of over 3%, with EBITDA margins at the midpoint above 37%. Performance Materials remains the foundation of New Ingevity, delivering strong, stable margins well above 50%.

As Pavement Technologies continues to take share, of the hot mix paving market, we expect 6% annual growth and about 300 basis points of margin improvement. We are providing greater transparency in our cost structure, by introducing a new corporate segment for reporting purposes.

As Mary just covered, we will be a cash-generating juggernaut by deploying excess cash to share repurchases when combined with expected operating performance. We expect annual EPS growth above 10% and annual free cash flow per share growth of nearly 6%. As you can see on the left, New Ingevity will continue to be best-in-class in our key operating performance metrics of EBITDA margin and free cash flow margin, placing New Ingevity clearly in the top quartile when compared to our specialty chemical and material peers.

On the right side of this slide, you'll see Ingevity today. Our current free cash flow yield and current enterprise multiple compared to our peers. Today, we are clearly trading at a discount, which is why we believe New Ingevity offers a compelling value proposition. As we executed our strategic portfolio review, our focus was on enhancing shareholder value.

We believe that through maintaining our leading market positions, optimizing our margins, generating strong free cash flow, and being disciplined in our capital deployment, New Ingevity is positioned for both immediate and long-term value creation.

We are confident in our ability to execute over these next 2 years. And that New Ingevity will be a predictable value creation engine with significant compounding future value. Thank you for your time.

And now I'll turn it back to Dave for closing remarks.

Thanks, Phil. To wrap up, New Ingevity will be focused on high margin, less cyclical, low-capital intensity businesses. We're delivering best-in-class free cash flow with disciplined capital allocation, and we're accelerating debt reduction, and are committed to returning cash to investors. We're confident that New Ingevity will deliver significant value to all our shareholders, and I'm very excited to have you join us on this journey. And with that, we'll open up the call for questions.

[Operator Instructions] Your first question comes from John McNulty with BMO Capital Markets.

This is Caleb on for John. I was just hoping you could provide a little more detail on how you're thinking of balancing the high-margin Performance Materials business while also expanding like this -- the noncore pieces of that.

Yes. Thanks, Caleb. Thanks for your question. So I think you're talking about our efforts to expand PM beyond automotive and into filtration. First, I would say, we're really excited about filtration. It's not a new opportunity for us. Actually, we are already selling upwards of 20% or more of our activated carbon today into those filtration markets and pretty much at negligible margins. So our efforts going forward, the strategy is very different.

We've brought in a new leader. We've brought in some more resources. And what we're trying to do there is really identify high-value applications in areas like chemical purification, food and beverage and water treatments, where we can add value and, in turn, get the value back for activated carbon. So if you think about it this way, today, PM is at 50-plus percent EBITDA margins. That already includes the 20% of our volume that we're selling at pretty negligible margins.

If we're able to top-grade those opportunities at all, that should go actually be accretive in and flow directly to our bottom line. We're early on in those efforts, but we've actually seen some encouraging validation. We've recently won a few bids in the water treatment area where we were not the lowest bidder, but we were selected because our product was differentiated. That's an example, and we got there with a higher price.

So that's an example of us validating that in certain markets, we can become really a differentiated provider in the filtration space. So expect to hear more from us about filtration and Ingevity in the future. And the other thing, just to follow up on your question is, one of the things we wanted to do this time around is affirm our expectation for margins for PM for the foreseeable future will be 50-plus percent. So you can see our confidence not only in growing in filtration, but maintaining that profitability.

Got you. Okay. I appreciate the extra color. And then also on like Slide 13, you highlighted some like other opportunities, which I believe you had said are not included in your 2027 numbers, but maybe just, can you talk like, where you see like, where is the greatest opportunity for Ingevity here to kind of further expand PM?

Yes. For those of you that may not have this slide in front of you, that was kind of a portfolio of strategic initiatives in areas like energy storage and advanced materials. I think my opinion would be the energy storage area actually holds the most potential. That includes things like our partnership with Nexeon. You may have also seen our recent press release about our partnership with CHASM.

So obviously, as we think about where is growth in the future, energy storage is one of those really interesting areas. But I would say, as you mentioned, Caleb, it's early on. So we haven't included any of those in our 2-year projections, but expect us to update those -- that progress as we go forward.

Your next question comes from the line of Daniel Rizzo with Jefferies.

So I guess just with the filtration applications. I mean, have you given the size of what the tangible addressable market is and how fragmented it is, I mean, how competitive it is? How should we think about just the broader opportunity there in terms of what you can attack?

Yes. Thanks, Dan. And again, I kind of mentioned this in my previous comment, but worth revisiting. That -- we're very excited about the space. As you know, the filtration application is a huge market, and we are already participating there in a meaningful way. We just have not identified those opportunities where we think we're adding the most value. So for example, water treatment, we're already selling millions of pounds into those filtration applications.

So it's really just about identifying, which applications can we provide value and really get that value back in terms of the profitability for the business. Today, we're not selling -- we're pretty much selling at negligible margins. So in the future, as we upgrade that business, that just flows to the bottom line. I'd say water treatment is probably one of our top priorities. As I mentioned, we've already had some early wins in that space.

And then if I think about Pavement Technologies and activated carbon, are there -- I mean what are the production or manufacturing synergies that exist there? Or is it more just like kind of more just general corporate stuff that -- where the cost synergies exist.

Yes. So your question was really, what are the synergies that go across the 2 core businesses going forward? So we're very excited about both Performance Materials and Pavement Technologies. The way we thought about it, Dan, was really, what are we really good at? What are our core competencies? So things like the differentiated technology, the high customer touch and application support that's needed, and the advocacy, both those businesses share those core competencies, and we're able to leverage those across both businesses.

And in the prepared comments, we took a little bit more time this time to go through the advocacy part because I think that's a little bit of an underappreciated part of our business. And certainly, both of those businesses today, where we're leaders and expect to grow faster than the market, benefit from our technology, but also our advocacy efforts.

All right. And then final question. I assume the dividend is just not being considered. At this point, you're more focused on growing the business and share repurchases. Is dividend something you guys have talked about in the past? Or I don't know.

Well, why don't I start, and I'll let Phil chime in. Our Board and management, we obviously understand that all options are things that we should discuss, especially given the profitability of our business. But at this point, we're not talking about a dividend, but you can be assured that our Board and management think about all options for shareholder return.

And we think we have a very compelling story today to talk about from a shareholder return perspective. But Phil, anything you want to add?

Yes, not much more than that. Obviously, dividends is one form of cash back to shareholders. We evaluated that as an option. It's always on the table. We think sitting here today that buying back shares is the best option for us.

Your next question comes from the line of Jon Tanwanteng with CJS Securities.

If you could talk about the $1 billion in deployable cash target for '27, $300 million, I think you're targeting for buyback, $120 million-ish for CapEx. Could you talk about the plans for the remainder of that other $480 million? I assume that you won't need as much to remain in that 2% to 2.5% EBITDA range continue to be pretty close right now. So what is the plan for the excess cash?

Yes. I'll let Phil tackle that. I would just like to use the opportunity that both Phil and Mary both said cash flow juggernaut. So I wanted the opportunity to bring that into the Q&A, but go ahead, Phil provide some more color.

Yes. Yes, Jon. So when you think about our priorities, our #1 priority is obviously organic growth. And so we called out the $60 million of traditional CapEx. We also called out the strategic initiatives such as Nexeon that we've done in the past, or CHASM that was just recently announced. That's incorporated in that, although we didn't provide that granularity of dollar value associated with those strategic initiatives.

Second in the priority list is debt paydown. And then last in the list is the $300 million at a minimum that we expect to buy back over the next 2 years.

So Jon, we'll have a lot of flexibility, but I would expect the majority of the remaining cash generated to go towards debt repay down.

Understood. And then if you could just help us with the EPS target for '27. $6.40 at the midpoint in EPS, I think the consensus estimate is closer to $5.70, but EBITDA is going down, assuming you sell some businesses. So what's the math to get there? Is that all buybacks and lower interest expense? Or is there something else in there that we're -- that we should be thinking about?

I throw that one to Phil as well.

Yes. You got it right, John. Obviously, as we delever a significant pullback on interest expense, and when we're thinking about a minimum of $300 million of share buyback, that's about 15% of our outstanding float today. So it's a combination of the 2 plus the operating performance over that 2 years period.

Exactly. Let's not forget earnings increasing as well.

Yes. So Jon, I think both Mary and Phil said it well. But one of the reasons why we're so excited to talk about New Ingevity today is that expectation of double-digit EPS growth over the next few years.

Got it. And then if I could ask one more, just the expectation to sell or, I guess, explore strategic alternatives for APT and the Road Markings business, how confident are you in getting a good price for both of those businesses? I know there's an implied price in the cash that you're expecting. But given both of them have faced a little bit more competitive challenge recently, can you just tell us what you're expecting there? And kind of how do you expect to reposition them or restructure them in order to get better pricing? Or do you think the recovery is in cards for both of those businesses in the future?

Yes, thanks. So regarding the 2 businesses that we talked about for initiating sales processes. So one is our Advanced Polymer technologies business, the other is road markings. We actually think both of those are really good businesses. They're just businesses where we're not the best owner. I think we will find better owners for those businesses, but we're early on.

We've just started those sales processes, and we're going to be focused on value, right? Just as we were with Industrial Specialties and the CTO refinery, where we're able to find a really great partner to work with us and eventually own the business, by the way, that's on track to close by early 2026. In the same way, we're going to be focused on finding the right owners for APT and markings for those good businesses, and we'll be focused on value. We're just getting started, Jon. So we'll look forward to updating you as we make more progress on both of those initiatives.

And we have no further questions over the phone.

Thanks, Krista. Well, we have some questions that people have submitted online. So we'll turn to those. The financial projections are only for 2 years. Why only -- why are you only taking a 2-year view? And where does the growth come from?

Yes, thanks. So the 2-year outlook was actually quite intentional. I've been at Ingevity for over 6 months now, and we thought it was an important moment to talk about this intermediate phase of our journey. And that intermediate phase is really about simplifying the portfolio and sharpening our focus on delivering. So really margin expansion we talked about in our prepared comments.

And really, if you think about -- as we think about the next 2 years, that focused execution. We've talked about the $1 billion of cash we expect to generate, which will deploy towards cash -- share repurchases and debt paydown. Also, while we're seeding growth in the business, in areas like filtration and energy storage. So we thought this first 2-year update was really a great opportunity to talk about why we're so excited about New Ingevity, and we'll continue to provide updates in the future.

Great. And then this is a bit of a follow-up to that. So M&A was notably absent from our capital allocation priorities, given the amount of deployable cash, the $1 billion at our disposal, and the need to find additional growth opportunities, why would M&A not be a higher priority?

Yes. I think, and Mary and Phil mentioned it in their prepared comments, M&A for the next 2 years at least, is not going to be a priority for us because we recognize we've got to get the company in a more stable position financially. That means paying down debt. We'll also buy back a lot of shares. We mentioned, we already bought back 30 million of shares this quarter, we expect to buy at least $300 million of shares over the next 2 years. That will provide significant EPS growth.

And given our business model and really best-in-class EBITDA margins, we'll have plenty of firepower for M&A in the future. It's just not going to be a priority for us for the next couple of years.

Given the ongoing volatility in the auto market, how are you feeling about the results for this quarter and the back half of the year?

Yes. I was going to anticipate that question. So even though this is a strategic update, what I would say on the quarter is, at this point, we don't see any reason why our results will be any different than within the guidance range that we mentioned in Q3. One of the things we're obviously closely monitoring is all the volatility in the auto production area, so things like the aluminum fires, the chip shortages since we released in Q3, there's -- I think there was another aluminum fire. The chip shortage has also not been resolved.

The way I think about those is really if auto production is delayed or interrupted in any way. That's more of a timing issue rather than a structural issue. And what we've seen is that, that production gets made up in subsequent periods. So although we're closely monitoring it, we don't see our results, we're affirming our guidance essentially saying that results will come in within that guidance range that we provided in Q3.

Okay. Thank you. How should we think about the bridge from the current EBITDA range to the future range that you provided for New Ingevity.

Phil, why don't I give you that one? Thanks.

Yes, we -- actually, in the prepared materials that are available on our website, in the appendix is actually a bridge from the midpoint of our current guidance to the pro forma 2025 estimated EBITDA of New Ingevity of $335 million. And that provides the earnings that we'll be pulling out as a part of the 2 businesses that we will divest as well as some costs that will be stranded.

I will remind you that even that $335 million, we expect EBITDA margin to be in excess of 37%. And in fact, when we think about our guide for 2027, we expect New Ingevity to have return on invested capital in excess of 25%.

At this point, there -- it appears there's no additional questions we've hit on many of them. So I'll turn it back over to you, Dave, for closing comments.

Thanks, John. Thanks for everyone's interest. I would just say a few closing remarks. First is we think the company is firing on all cylinders. We're really excited today to talk about a simplified portfolio and a sharper focus on what we think really drives value. This was a 2-year update. So really, what we're focused on in the next 2 years is really execution and delivering margin expansion and really driving value through. There's a lot of ways you can drive shareholder value.

This next 2 years is really going to be focused on margin expansion and delivering growth through bottom line performance. So expect us to deliver double-digit EPS growth generate $1 billion of deployable cash, which we'll use towards share repurchase and debt repay down, that includes the over $200 million a year that our core businesses will generate. And so we see a very exciting future for New Ingevity, and we hope that many of you will be along for the journey with us.

Thanks. Thank you. Thank you, Panel. Thank you all for joining us today. We really appreciate your interest in Ingevity. And have a great rest of your day. Thank you.

Hello, and welcome to today's Ingevity Third Quarter 2025 Earnings Call and Webcast. My name is Bailey, and I will be your moderator for today. [Operator Instructions]

I'd now like to pass the conference over to John Nypaver. So please go ahead when you're ready.

Thank you, Bailey. Good morning, and welcome to Ingevity's Third Quarter 2025 Earnings Call. Earlier this morning, we posted a presentation on our investor site that you can use to follow today's discussion. It can be found on ir.ingevity.com under Events and Presentations.

Also throughout this call, we may refer to non-GAAP financial measures, which are intended to supplement, not substitute for comparable GAAP measures. For example, we are presenting the pending divestiture of our Industrial Specialties business for the first time within discontinued operations. In the appendix to our slides, we provide details that reconcile the total operations. Definitions of these non-GAAP financial measures and reconciliations to comparable GAAP measures are included in our earnings release and are also in our most recent Form 10-K.

We may also 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 as further described in our earnings release.

Our agenda is on Slide 3. Our speakers today are: David Li, our CEO; and Mary Dean Hall, our CFO. Dave will provide introductory comments. Mary will follow with a review of our consolidated financial performance and the business segment results for the quarter. Dave will then provide closing comments and discuss 2025 guidance.

With that, over to you, Dave.

Thanks, John, and good morning, everyone. It was a highly productive quarter of strong execution for Ingevity.

First, we achieved an important milestone in our strategic portfolio review with the announcement of the sale of our Industrial Specialties business for $110 million. We expect this transaction to close in early 2026 and will likely use the majority of the proceeds towards further debt reduction.

Second, we were pleased with our business segment results. Performance Materials delivered another strong quarter within a dynamic global auto environment. Going forward, we are encouraged by the adoption of hybrids and fuel-efficient ICE platforms, which should drive demand for advanced Ingevity solutions and content. Road Technologies also had a great quarter, highlighted by record sales for our pavement business in North America.

Finally, APT delivered strong margins as the team prioritized operational improvements against the backdrop of continued weak end market demand. Overall, these contributions reflect our team's disciplined execution as well as strategic repositioning actions, which drove best-in-class EBITDA margins of 33% reflecting our sixth consecutive quarter of year-over-year margin expansion. Strong cash flow generation and disciplined capital allocation enabled us to reduce debt, achieve our leverage target ahead of plan and return capital to shareholders through share repurchases.

And third, I'm very excited to announce we hired Ruth Castillo to lead our Performance Materials business. Ruth is a strategic and experienced leader with a deep understanding of how to navigate complex businesses and unlock new growth opportunities. I look forward to her leadership in guiding Performance Materials into its next phase of profitable growth.

Before I turn it over to Mary for more details on the financials, I'm pleased to share that we will host an Investor Update on December 8. This will be a virtual event where we'll share the results of the strategic portfolio review and provide an assessment on what we believe the company will look like over the next 2 years. More details on how to register for the event will be forthcoming.

And now I'll turn it over to Mary.

Thanks, Dave, and good morning all. It's nice to have some good news to share in this unsettled economic environment. Our Q3 results reflected continued growth in adjusted EBITDA, margins and free cash flow despite pressure on the top line, affirming the resilience of our businesses and the successful execution of our repositioning actions in Performance Chemicals.

As previously noted, with the announced sale of Industrial Specialties, we're now reporting the results of that business as discontinued operations, with the sale expected to close by early 2026. Given our close proximity to year-end and the full year guidance is based on total company performance, I'll focus my comments on total company results so that comparisons to prior periods are apples-to-apples. I'll provide more color on continuing and discontinued operations when we discuss the Performance Chemicals results.

Please refer to Slide 5. Total company sales of $362 million in Q3 were down about 4% as increased sales in Performance Materials and Road Technologies were more than offset by decreases in Industrial Specialties and APT. Gross margin improved over 600 basis points, reflecting significantly lower raw material costs, primarily in Industrial Specialties and the successful execution of our repositioning actions.

SG&A increased due primarily to higher variable compensation expense on improved business results. Adjusted earnings improved significantly, up almost 500 basis points to $56.3 million, driving adjusted EBITDA margin to 33.5%.

Please turn to Slide 6. As a result of strong earnings and disciplined capital management, our free cash flow of $118 million enabled us to repurchase $25 million of shares in the quarter and accelerate deleveraging. We ended the quarter with net leverage of 2.7x, already beating our previous year-end target of 2.8x. We now expect net leverage to be approximately 2.6x by year-end. This does not include the benefit of any proceeds from the sale of Industrial Specialties, which is expected to close by early 2026, as I mentioned earlier.

Turning to Slide 7. Performance Materials sales increased 3%, primarily due to volume growth, reflecting improved global auto production. Segment EBITDA and EBITDA margin were down a bit as the benefit from increased volumes and price was more than offset by increased variable compensation expense and a negative impact from foreign exchange.

Q4 is looking solid, but we do expect Q4 to be a bit softer coming off of a strong Q2 and Q3. So on a full year basis, we expect PM revenue to be flat to slightly down year-over-year with EBITDA margins over 50%. Our results demonstrate the resilience of this business in the face of unprecedented uncertainty caused by the dynamic tariff environment.

Please turn to Slide 8 for APT results. Sales in APT declined year-over-year for many of the same reasons we discussed last quarter. The indirect impact of tariffs continues to weigh on already weak end market demand, especially in footwear and apparel, delaying the upturn we otherwise expected to see. In addition, competitive dynamics in China are continuing to impact sales in the paint protective film markets.

The team did a great job holding on to price where possible and managing costs and posted an EBITDA margin of 26% for the quarter, which also reflected a tailwind from foreign exchange. Near term, we see no indications that the current market conditions or competitive dynamics will improve. We now expect full year revenue for APT to be down by mid-teens on a percentage basis with full year EBITDA margin of 15% to 20%, down from their more typical 20% area margins due to the extended plant outage in Q2.

On Slide 9, Performance Chemicals. The left side presents a combined view of Performance Chemicals results, including continuing operations and discontinued operations. As I mentioned earlier, with the announced sale of Industrial Specialties, accounting rules require that we separate results of the product lines being divested into discontinued operations. However, because the sale is not yet completed and our guidance is for full company results, we're showing the Q3 results on a combined basis. As you can see, combined sales were down almost 5% due to Industrial Specialties and our repositioning actions in that business.

Road Technologies posted sales up 5% as the pavement business delivered a record Q3 in North America, which is our largest and most profitable region. Road Technologies as part of continuing operations includes the lignin-based dispersants business previously included in Industrial Specialties. Combined segment EBITDA and EBITDA margins improved significantly year-over-year due to lower raw material costs in Industrial Specialties and the successful execution of repositioning actions.

On a continuing operations basis, Performance Chemicals EBITDA margins were down slightly, primarily as a result of pricing decisions made in the road markings business to maintain volumes. Please refer to Slide 27 in the appendix of the slide deck for a reconciliation of Performance Chemicals segment EBITDA on a continuing operations basis to the combined segment EBITDA, inclusive of discontinued operations.

On the right-hand side of Slide 9, we've added some detail regarding the impact of the divestiture on the combined results. There is noise in the Q3 numbers, so we believe it's most useful to look at the estimated impact on a full year basis. As you can see, we expect the divestiture to contribute approximately $130 million in sales for the full year with an EBITDA margin of approximately 6%, inclusive of indirect costs. Please note that these indirect costs related to the divestiture, often referred to as stranded costs are included in continuing operations for reporting purposes.

On a full year basis, we estimate these indirect costs will be approximately $15 million, which we expect to eliminate by the end of 2026. In addition, the divestiture is expected to contribute approximately $40 million to free cash flow on a full year basis, primarily due to lower working capital.

In summary, we continue to focus on delivering results in a very challenging environment and are proud to report our sixth consecutive quarter of year-over-year adjusted EBITDA margin expansion. In addition, with our strong free cash flow, we have strengthened the balance sheet and resumed share repurchases.

I'll now turn the call back over to you, Dave, for update on guidance.

Thanks, Mary. Please turn to Slide 10. We are very pleased with our third quarter results and are on track for a strong finish to the year. Our results reflect sustained execution, the durability of our business model and our leadership in the industries we serve. We are raising full year free cash flow guidance and now expect net leverage to be around 2.6x by year-end. We will continue to be disciplined in how we allocate capital and look forward to closing the sale of our Industrial Specialties business soon.

Lastly, given the ongoing tariff uncertainty and slower industrial demand primarily impacting APT, we're adjusting our full year outlook to narrow the top end of our sales and EBITDA range. In closing, we look forward to hosting everyone virtually on December 8 for our investor update when we will provide the results of our strategic portfolio review and our expectations for the future.

0With that, I'll turn it over for questions.

[Operator Instructions] Our first question today comes from the line of Jon Tanwanteng from CJS Securities.

Nice job in the quarter. My first question is just regarding the full year outlook. I noticed that you're taking down the top line for APT, which makes sense. I was wondering if you could actually speak to the Performance Materials segment and to the publicized aluminum plant fires in North America, the chip shortages that are going on in China and just how that's impacting your outlook there and what's implied in the guidance and if you've accounted for that?

Yes. Thanks, Jon. Yes, with respect to those challenges you mentioned, obviously, if you zoom out, it's been a pretty dynamic year for the industry. I think it actually speaks to the resilience of the auto industry in general. I mean, we've been through tariffs, some macro uncertainty. And as you mentioned, some more recent supply chain challenges. And our results and outlook would reflect any impact from those.

But I think overall, if you look at the results we've delivered for Performance Materials, it demonstrates the -- also the durability of our business, the continued leadership we have in that space. And I think quarter-over-quarter, we've continued to deliver strong results. But to answer your question, on those 2 supply chain challenges, our results and outlook do reflect any impact to those going forward.

Got it. That's helpful. And then just on the discontinued ops, you mentioned -- or I guess you gave metrics for what you expect from the year in the [ Inspect ] business. Could you kind of tell us what's implied in the Q4 just because we don't have the first half results in there and then you broke out the Q3 in terms of EBITDA contribution?

[Indiscernible] this is John. We do show full year for that discontinued ops. It should be easy for you to get to that, I would think. But we can talk offline if you need help on that.

Yes. And Jon, I kind of just in terms of sizing the business, on an annualized basis, think of it as about a kind of mid-single-digit EBITDA business. And so we've reported 3 quarters of it. So kind of extrapolating that out to the fourth quarter, I think, would make sense.

Our next question today comes from the line of Daniel Rizzo from Jefferies.

You mentioned working capital and free cash flow. I was just thinking -- wondering how we should think about working capital post the divestiture as maybe as a percent of sales or just how you plan to kind of manage that?

So you're really thinking looking forward into 2026, Dan?

Right. Well, just -- I mean, not for just 2026, but just how it changes at all once the business is divested.

Yes. Dan, this is Phil. I think if you look at our balance sheet, which is included in the press release schedules, we broke out the impact of the discontinued ops on the balance sheet and pulled them out as separate line items. So it will give you a really good clear indication for what we're thinking working capital looks like for the business going forward.

Okay. And then you mentioned that I think net debt-to-EBITDA is going to be about 2.7x at the end of the year. And then you get $110 million roughly from the sale. I mean, that's going to be used towards debt. So I guess my question is, what is the net debt-to-EBITDA target? Because that seems like you would be relatively low.

So Dan, just for clarity, we finished the quarter at 2.7x. And as a result of beating our year-end target already, we're reducing our target for year-end to 2.6. (sic) [ 2.6x ]

Right. And then in terms of use of proceeds, Dan, we mentioned or I mentioned in my comments, we'd likely use the majority of the proceeds when received to further pay down debt. I want to hold off a little bit because we'll also talk more about capital allocation as one of the major topics on December 8. But obviously, if you look at primary use of the proceeds as debt reduction, you can do that trajectory down. But we're really pleased with our achievements so far ahead of plan.

We had targeted 2.8x or below by end of year. So we finished the quarter, as Mary mentioned, at 2.7x, and we think we've got a glide path to 2.6x without any proceeds -- use of proceeds to pay down further debt.

[Operator Instructions] We have no additional questions waiting at this time. So I'd like to pass the call back over to John Nypaver for any closing remarks.

Actually, Bailey, I believe someone is in the queue, if you wouldn't mind, double checking.

Perfect. Yes, we will take our next question, apologies, from John McNulty from BMO Capital Markets.

Yes. Sorry about the last second question there. So I guess I just wanted to understand Performance Materials a little bit better for the full year sales to be kind of flat to slightly down. I mean when we look at kind of the overall auto forecast out there, they're roughly in line with that. But I assume normally, you're getting some reasonable amount of price.

So I guess, is it -- is there some negative mix that we should be thinking about on the auto builds that may be contributing to this type of a result? Or is pricing maybe more modest than it's been where maybe it's taken a little bit of a pause after the last few years? I guess, can you help us to think about that?

Yes, John. So as we mentioned earlier in the year, we've taken pricing as we typically do. I think there's -- when you look at the auto forecast as we do as well, they're calling for sort of flattish to slightly down. That's similar to our PM business. But in terms of the overall mix of those vehicles -- obviously, we've had a lot of volatility, for example, for EVs throughout the year. So when you look at the overall trend for automobiles may not reflect just ICE and hybrids.

We think we have a very strong position in that market. Market continues to be healthy. Actually, still inventory levels are pretty low and the fleet remains pretty aged. So we're thinking that we're even not back to a healthy level of production. But given that, I think that's how sort of the math would shake out for us. It's just not taking into account the portion that's EVs. But Mary, what else would you add?

Yes. Maybe just another little point of clarity. focusing on North American production, which, as you know, John, is where we're most profitable, while the forecast has improved again, actually for the full year for North America, in particular, it's still down. So it's the latest forecast information we have is that even North America is still down a couple of percent year-over-year, albeit an improvement over the prior forecast.

So I think that, in combination with some of the noise that we're also, as we mentioned, factoring in the fire at Ford, chip issues, et cetera, that are making noise in the supply chain system of automotive, we feel comfortable with our current guide.

Got it. Okay. Fair enough. So it sounds like it's really a mix thing more than anything else. And then I guess the other question is just any update on the Nexeon platform and that venture and how things may be going there?

Yes. So as we mentioned, with Nexeon, that's kind of a far out R&D type of initiative. We do expect their plant to be up and running in the next few months. As a reminder, that's not using our activated carbon for this first generation, but continues to be a strong partnership and an exciting space that we look forward to participating in with them.

Thank you. [Operator Instructions] As we have no additional questions waiting at this time, I would now like to pass it back over to John Nypaver for any closing remarks.

Thanks, Bailey. That concludes our call. Registration for the strategic portfolio update is now open on our investor website under Events. We will also issue a press release with more details later today. If there are any questions, please feel free to reach out to me directly. My contact information can be found in the earnings release and slide deck. Thank you for your interest in Ingevity.

This concludes today's call. Thank you all for your participation. You may now disconnect your lines.