Ingevity Corp (NGVT) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ingevity Second Quarter Earnings Conference Call. (Operator Instructions)

I would like to let you know that today's conference is being recorded.

I will now turn the conference over to your host, Vice President of Investor Relations, Mr. Dan Gallagher. Please go ahead.

Thank you, Trisha. Good morning, everyone. Welcome to Ingevity's Second Quarter 2018 Earnings Conference Call.

Earlier this morning, we posted a presentation onto the Investors section of our website. If you haven't already done so, I would encourage you to download this file so you can follow along on the call. You can find it by visiting ir.ingevity.com under events and presentations.

On Slide #2 of that deck, you'll see our disclaimer that today's earnings call may contain forward-looking statements. Relevant factors that could cause actual results to differ materially from these forward-looking statements are contained in our earnings release and in our SEC filings including our Form 10-K and our most recent Form 10-Q. Ingevity undertakes no obligation to publicly release any revision to these projections and forward-looking statements made during the call or to update them to reflect events or circumstances occurring after the date of this call.

Throughout the 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 financial measures are included in our earnings release and can be found on the Investor Relations section of our website.

Our agenda is on Slide 3. With me today are Michael Wilson, President and CEO; John Fortson, Executive Vice President and CFO. First, Michael will comment on the highlights of the quarter and then review the performance of our 2 segments. He will also discuss new developments for our Performance Materials segment. John will discuss our current financial status and our revised guidance. Then Michael will make some brief closing remarks before we open the line for questions.

Mike Smith, President of Performance Chemicals; and Ed Woodcock, President of Performance Materials, will join the call for Q&A.

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

Thanks, Dan. And good morning, everyone. Thank you for joining us this morning and for your continued interest in Ingevity.

If you'll turn with me to Slide #4, you'll note some highlights of the quarter. As you can see, we drove an outstanding second quarter performance. Our strong organic growth has been augmented by the Georgia-Pacific pine chemicals acquisition, and our profitability is being accelerated by excellent commercial and operational execution. Each of our businesses across all of our end-use applications is delivering to or exceeding our expectations.

Revenues in the first quarter were over $308 million, which is more than 18% higher when compared to the previous year's quarter. While volumes were by far the largest driver to the company's financial results, product price mix and strong productivity also continued to be solid contributors.

Adjusted EBITDA was over $89 million, up 33% versus the prior year's quarter. In addition to the revenue impacts, lower production costs, predominantly in the form of lower crude tall oil, the CTO costs, aided our results. These positives were partially offset by higher freight costs and increased SG&A, including research and technical expenses of $6.5 million. Yet as a percentage of revenue, SG&A remained nearly flat period-over-period. The primary drivers of the increased SG&A were higher legal costs, variable incentive compensation and cost incurred to support our growth.

Our first quarter adjusted EBITDA margin, 29%, was up 320 basis points from the prior year quarter margin, 25.8%.

On a pro forma basis, adjusting our historical financial results as if the G-P acquisition had been completed in 2017, our second quarter revenue increased by almost 9% and our adjusted EBITDA increased almost 23%.

As you can see on Slide #5, our Performance Chemicals segment posted another excellent quarter. Segment sales in the second quarter were over $212 million, up more than 24% versus the prior year. This was the first full quarter of results reflecting the Georgia-Pacific pine chemicals acquisition, which contributed to the sales in oilfield and industrial specialties applications.

Sales of Performance Chemicals products to oilfield customers were up over 49%, as U.S. drilling activity continued to increase. We expect this growth rate, which has benefited from both drilling and production, to moderate later this year.

The U.S. rig count according to Baker Hughes climbed to 1,047 in the second quarter, up from 993 at the end of the first quarter of 2018 and 940 in the second quarter of 2017, representing a year-over-year increase of 11.4%.

The second quarter exhibited a very strong start to the paving season in North America and abroad. Sales to pavement applications increased by about 18% versus the previous year's quarter, when the paving season started late. And what is typically a seasonally strong quarter in addition to North America, we experienced volume gains in almost every other region in the world, particularly in Asia Pacific, Brazil and in Europe.

In addition to strong demand, we were successful in implementing modest price increases in North America, South America and China. Sales to this application were not impacted by our G-P acquisition. So the 18% revenue growth is purely organic.

Sales into industrial specialties applications, and these include printing inks, adhesives, agricultural chemicals, lubricants and others, were up over 23%, versus the prior-year period. This marks the first year-over-year increase since the first quarter of 2017 for sales into these applications. Rise in sales and production increase is a result of a new business gain in road-marking application versus a hydrocarbon resin alternative. As a result, tall oil fatty acid, or TOFA, production in sales also increased, with sales benefiting from both increased volumes and prices.

You'll recall that we currently run our CTO refineries to rise in demand. In addition, we saw excellent increases in sales to some of focused markets, specifically agricultural chemicals, adhesives and lubricants.

Performance Chemicals segment EBITDA of almost $47 million was up 48%. In addition to the revenue impacts, the increase was the result of improved price mix benefits, lower cost for crude tall oil and our acquisition of Georgia-Pacific's pine chemicals business. These were partially offset by higher freight and SG&A costs.

Overall, we drove an improvement in EBITDA margins of 360 basis points to 22%.

On a pro forma basis, again assuming we had only G-P pine chemicals in 2017, our second quarter 2018 revenue increased more than 9%, and segment EBITDA increased almost 26%.

Generally, the integration of our G-P acquisition is ahead of schedule. Our synergy capture has accelerated versus our initial expectations. Thus, we will likely reach our committed $11 million synergy target earlier than originally indicated.

As you can see on Slide #6, our Performance Materials segment once again turned in a strong performance. Segment sales in the first quarter were $96 million, up more than 7% versus the prior year's quarter. This was despite a 2% reduction in North American light vehicle production and a comparison to what was a strong year-ago quarter.

U.S. light vehicle sales were up 2%. In addition, the move toward trucks and SUVs in the U.S. is continuing. According to Wards, the split between cars and trucks moved to 32% cars and 68% trucks in the second quarter from 37% and 63% in the previous year's quarter. As a general rule, larger vehicles have a positive impact on the demand for our product.

We continued to see strong sales for our honeycomb scrubber products used to meet U.S. environmental protection agency, EPA Tier 3 and California LEV III standards.

Performance Materials adjusted EBITDA, approximately $43 million, was up almost 20% versus the prior year quarter. This translated to a record 44.4% adjusted EBITDA margin, which is up 450 basis points from the year-ago quarter. This was driven by the strength in honeycomb sales, improved price and product mix and very strong performance at our manufacturing facilities.

At this point, I'd like to discuss 2 recent developments that are significant in relation to our Performance Materials business.

Turning to Slide #7, earlier this week we were pleased to announce the acquisition of the remaining 30% interest in the joint venture Purification Cellutions, LLC from our partner Applied Technology Limited Partnership. The joint venture manufactures the honeycomb scrubbers at our facility in Waynesboro, Georgia. The purchase price is approximately $80 million.

It's important to understand that Purification Cellutions is a manufacturing joint venture only. The patents and intellectual property associated with our Tier 3/LEV 3 solutions are the primary drivers of value and are the sole property of Ingevity. We are pleased to have been able to reach a fair and mutual beneficial terms that serve both companies business objectives and our partners personal goals. The acquisition is expected to close in the third quarter and will provide us with greater control and flexibility and ensure that we capture 100% of the return on future technology and capacity investments.

The transaction will not have any impact to our revenues or adjusted EBITDA as they are currently fully consolidated. It will, however, eliminate the noncontrolling interest entry in our financial statements and add to our earnings per share.

The second item is in regards to some news from China.

Turning to Slide #8. As you know, China has announced its national China 6 regulation, which will require U.S. Tier 2 type systems on all new gasoline vehicles in the country by midyear 2020. That said, several provinces and cities are implementing these standards earlier.

Mid last year, we indicated that the Hebei province confirmed a January 1, 2019, early adoption date. Last quarter, we informed you that Shenzhen city announced their intent to also implement the new standard on January 1, 2019, and that Hainan province was also evaluating early adoptions. Since then, Hainan province as well as the Henan province and Guangzhou city have all announced intentions to implement the standard by January 1.

In addition, and more recently, the China State Council has directed many major cities and areas to adopt the China 6 standard by July 1 of 2019. This includes the provincial cities of Beijing and Tianjin; the Yangtze River Delta region, which includes the provincial city of Shanghai; the Fenwei Plain region; the Pearl River Delta region; and the Chengdu-Chongqing region, including the cities of Chongqing and Chengdu. We estimate, based on vehicle sales and insurance data that of adoption procedures announced approximately 19% of all new vehicles sold in China from January through June of 2019 will be expected to be compliant with the new standards. Similarly, in the period from July through December 2019, 62% of new vehicles sold will be expected to meet the new regulations.

We're confident that our technological leadership and the investments we've made in manufacturing capacity located in China will serve us well as the region accelerates its implementation of these regulations.

At this point, I'll turn the call over to John Fortson, our Executive Vice President, CFO and Treasurer, for a more detailed review of our financial status and our guidance for the balance of 2018.

Thank you, Michael. Good morning, everyone.

First, I will provide some additional color on our financial performance in the quarter and over the first half of the year. I will also review our cash generation and capital structure, and last, I'll provide some additional details on our revised guidance.

As Michael mentioned, the second quarter was very strong. On Slide 9, you'll see some key income statement metrics for the quarter and first half of the year.

Revenues of about $309 million in the second quarter and about $544 million for the first half were up about 19% and 14% each from their prior year periods, respectively.

Adjusted EBITDA of over $89 million and almost $157 million for the second quarter and first half of the year, respectively, are each up 33% from their prior year comparable periods.

Second quarter adjusted EBITDA margins increased 320 basis points compared to the prior year quarter and 430 basis points when compared to the first half of the prior year.

As Michael discussed, the Performance Chemicals segment had another outstanding quarter. Net sales were up over 24%, and segment adjusted EBITDA was up over 48%, resulting in an increase in segment adjusted EBITDA margin of 360 basis points from the quarter a year ago.

And looking at the half, the segment drove a sales increase of 15% and a segment jump in segment adjusted EBITDA of almost 52%. As a result, segment adjusted EBITDA margin was up 490 basis points from the first half of last year.

Clearly, we are benefiting from the Georgia-Pacific pine chemicals acquisition. In addition, as industry dynamics have improved for many of the Performance Chemicals applications, our team has done a remarkable job in leveraging the positive environment into impressive results. Also, we have continued to see the benefits of our reduced cost structure in the segment.

In Performance Materials, the second quarter net sales were up over 7%; and segment adjusted EBITDA increased almost 20% versus the year-ago quarter, resulting in an EBITDA margin of 44.4%. This is an all-time high and represents an increase of 450 basis points.

And looking at the half, sales were up almost 11%. Segment adjusted EBITDA was up almost 21%, and the segment adjusted EBITDA margin for the half was 44.3%, an increase of 370 basis points. Given these impressive margin numbers, it's clear that our activated carbon plants are running well and with high efficiency.

I would like to acknowledge in particular the strong efforts of our operations teams. They have really performed well as we have a ramped up production globally.

For the second quarter of 2018, we recorded interest expense of $7.8 million. And the borrowing costs on our term loan at the end of the quarter were 3.59%.

Our provision for income taxes was $12.7 million, reflecting an adjusted non-GAAP tax rate for the quarter of 19.3% and year-to-date 20.3%. The GAAP tax rate was 19.2% for the quarter and 20.1% year-to-date.

I would note that with the full consolidation of Purification Cellutions our full year tax rate will increase approximately 100 basis points due to the joint venture's U.S.-centric sales.

Net income attributable to Ingevity was $47 million. This translated to diluted earnings per share of $1.10 and adjusted diluted earnings per share of $1.12. This represents a 44% increase in diluted adjusted EPS on a year-over-year quarterly comparison as well as a 49% increase from comparing the first half of 2018 to 2017.

As of June 29, Ingevity had 42.1 million basic shares outstanding and 42.6 million diluted shares outstanding. Over the past 3 months, consistent with our commitment to offset employee stock award dilution, we purchased 75,800 shares of our common stock at a weighted average cost per share of $79.28. Approximately $84 million of our current share repurchase authorization remains available to us.

Turning to our balance sheet on Slide 10.

As of June 29, we finished the quarter with $83 million of cash and an additional $72 million in our restricted cash account for the Wickliffe IDB obligation.

Total debt was $755 million, including our capital lease obligation amount of $80 million related to the Wickliffe IDB.

As of June 29, our net leverage ratio was 2.1x, and we have $548 million of our revolving credit facility available for our use.

As we have discussed, we are building inventory to prepare for the accelerated adoption of China 6 standards. This build-up, coupled with an increase in receivables that is customary in our second quarters as the pavement season ramps up as well as the inclusion of our newly acquired facility in Crossett, Arkansas, has led to a significant increase in our working capital. While we view this inventory build and activated carbon as an investment, we remain focused on controlling working capital by managing all of our materials, raw, in progress and finished, across the company. As China 6 is implemented, there will be an aggressive focus by management to reverse the inventory build and return working capital to more normalized levels.

We generated strong cash from operations of $71 million year-to-date as we benefited from the impressive performance of both segments. Our capital expenditures year-to-date were $30 million. As a reminder, our capital spending is weighted towards the back half of the year due to the timing of major planned outages. Free cash flow year-to-date was $41 million.

Additional information will be available in our Form 10-Q, which we expect to file next week on August 2.

Turning to Slide 11. As Michael said earlier, we have improved line of sight to our 2018 outlook, both its opportunities and risks. Over the next 2 quarters, we anticipate continued sales and margin growth in both our Performance Chemicals and Materials segment when compared to last year's comparable periods.

In Performance Chemicals, we expect [global] Markets to remain strong, although we expect moderating revenue growth versus what we saw in the first half of the year. We anticipate a strong finish to the paving season globally.

As Michael said earlier, the industry dynamics remains favorable in our industrial specialties applications. Additionally, we are benefiting from our cost reduction initiatives, CTO tailwinds, accelerated synergies from the Georgia-Pacific acquisition and both plant and supply chain efficiencies.

In Performance Materials, as previously communicated, we expect a second half slowing of growth due to the lack of a mandated U.S. and Canada (inaudible) regulatory step-up for 2019 model year vehicles. We expect this to be followed by increased market demand in the beginning of next year due to increased demand in Europe and the next step-up of U.S. regulatory requirements to 80% for 2020 model year vehicles.

In addition, as Michael discussed, we anticipate some early adoption of China 6 standards in certain regions, provinces and cities. And this should have some fourth quarter benefit, which has already been included in our revised guidance. Both segments will be impacted by previously discussed planned maintenance outages at many of our facilities, which occur in the back half of the year. Several of these are fairly substantial. These outages come with associated downtime, lower fixed cost absorption and increased maintenance spend.

We will likely experience modest inflationary pressures as well as normal seasonal impacts including the end of the paving season and end of year order production slowdowns, which results in lower sales and profitability in the fourth quarter.

In total, we expect double-digit EBITDA growth in both segments.

When thinking about the year in total, most of you are probably aware that the first and second halves of our year are fairly symmetrical, with the second and third quarters being similar as well as the first and fourth.

For 2018, the second half of this year will look a lot like the first half, adjusting for a full 6 months of contribution from the Georgia-Pacific pine chemicals acquisition less what we feel would be about $10 million of expenses related to the maintenance outages in the third and fourth quarters.

In light of all this, if you turn to Slide 12, here is how we are adjusting our guidance. We are maintaining our revenue guidance of between $1.1 billion and $1.13 billion. We are raising the midpoint and narrowing the range for our guidance on adjusted EBITDA to between $302 million and $314 million, reflecting improved profitability in both segments as well as better mix in the Performance Chemicals segment.

We are maintaining our estimated tax rate of 22% to 24% to reflect what was previously discussed.

We are maintaining our outlook regarding our capital expenditures of between $80 million and $90 million but are raising our free cash flow outlook to between $105 million and $115 million.

Inclusive of the acquisition of the remaining interest in Purification Cellutions, we still expect to finish the year with a net debt-to-EBITDA ratio of below 2x.

I will now turn the call over to Michael.

Thanks, John. In summary, we're confident we are in a midst of another strong year of performance for Ingevity.

I appreciate the work and efforts of our 1,600 employees worldwide. They're a distinct competitive advantage for us.

We continue to believe very strongly in the long-term potential for our company, and we hope you share our enthusiasm for Ingevity.

At this point, operator, we'll open the call up to questions.

(Operator Instructions) And we will open the line of Roger [Spitzer], Bank of America.

Firstly, regarding the $80 million buyout of 30% of Purification Cellutions. How do you plan to finance that [simply] from -- cash from your balance sheet, cash flow from operations?

That's right, Roger.

Very good. And thanks very much for giving the GPPC sales and EBITDA for Q2 '17. Would it be possible to provide for us the prior 3 quarters, Q3 '17, Q4 '17 and Q1 '18, of sales and EBITDA so that we can, among other things, do a good pro forma LTM sales and EBITDA?

Yes. Roger, we have that information, and we will probably put it out (inaudible).

Okay. And lastly, again, any sense of the uplift from sales and EBITDA for -- in Q2 from GPPC?

Yes, I'm -- you're talking about...

Is it the -- is it simply in the bar chart for the acquisition, is that number? Okay. $8.5 million.

Yes, if you look at the contribution on the slide for Performance Chemicals.

And we will go to the line of James Sheehan with SunTrust.

On the outlook for China and growth in that market, you've got some new jurisdictions, territories that are adopting early, and I think you probably had some more dialogue with customers for that market. What is your latest thinking on what your likely market share in China?

Jim, this is Michael. We don't comment specifically on market share. We said that historically that we did have the majority of share in the Chinese market and that because of the more rigorous standard going in place that we expect the share to increase. We think, ultimately, it should approach the share that have in other markets around the world.

Great. And then in terms of thinking about future growth after the U.S. and China finish implementing their standard, your understanding is (inaudible) out there that might be within [Tier 3/LEV III gasoline] vapor emissions standards, and you pointed to Japan and Brazil in the past. Have they made any new commitments?

Yes. I guess the first one I would mention is Europe, which has already passed a new regulation and will be adopting a standard that needs to be in place by -- I think it's third quarter of 2019. Ed, am I correct on that? In terms of the other countries that you mentioned, I know in Brazil there is some regulation that's being developed, but nothing has been promulgated at this point.

Terrific. And in terms of the JV consolidation, this obviously highlights the importance of your patents. Can you comment a little further and give us some more color on the patent infringement suits that you filed recently?

Yes. I mean we became aware that the 2 parties of which we filed complaints against were in fact, in our opinion, infringing upon our current existing patent, which goes through 2022. The 2 cases are a little bit different. In the case of BASF, it is our belief that they were working on an activated carbon honeycomb that was intended to be part of a canister solution for the Tier 3/LEV 3. And based upon patent and our rights, companies aren't allowed to begin to develop or market those kinds of systems until patent expiration. So in our opinion, that was a bit of what we called gun something.

With respect to MAHLE, it became to our attention that they actually had been producing systems some of which that are on current year model platforms that also infringe our patent. And we became aware of this by procuring those systems and testing them, multiple ones of those in order to get confirmation.

And we will open the line of Ian Zaffino with Oppenheimer.

I know you guys mentioned some of the synergies at the G-P side and the acquisition there. Can you give us an idea of maybe the sources of the synergies or what kind of surprised you that there may be tracking better than expected? And then I have a follow-up.

Sure, and I'm going to let Mike Smith take that.

Thanks, Ian. Yes, I think that, as we had indicated when we first announced the acquisition, we have both freight and logistics savings and also manufacturing saving. So we have been able to accelerate some of those freight savings. And in a market where freight costs are going up and freight sourcing is tougher, in fact those synergies and accelerating has been even more valuable.

I'd say the other part that has been a positive surprise that our team has done a great job working on, with the business conditions strong in both oilfield and pavement, where we would normally need to spend money externally tolling, we have been able to utilize some of the underutilized derivative capacity in the Crossett, Arkansas, site and keep those costs internal and therefore saving money that we would have had to spend externally. So really pleased about accelerating those synergies into this year.

Okay. And also on the chemical side, can you just give us an idea maybe where margin stand currently? I know you gave them for the quarter and for the 6 months, but there's some obviously mismatches with pro forma basis and non-pro forma basis. So can you give us maybe an idea of where margins are in that business now on an annualized basis?

And has your view of maybe -- I think in the past you've said that you expect margins on the pro forma side to be better than 20%. I think that those are your words. Where are you now, again, and where can that get to, just given where the business is right now?

Thanks for the question, Ian. This is Michael Wilson. I'm going to be consistent with what I said at the end of the first quarter. Based upon the post G-P acquisition and the way market dynamics have progressed, we felt that for the full year 2018 we'll probably realize margins that are in the 20% range, plus or minus. So that's getting us to that first hurdle that we began talking about probably 2 to 3 years ago.

In terms of where margins can get to. If you think back to the February Investor Day that we did that we said that over the planning horizon, which goes to 2022, we thought we could drive those margins into the mid-20s.

Okay. And now that you own G-P, you feel the same?

Yes. Absolutely.

We will open the line of Mark Weintraub with Buckingham Research.

With all the noise about trade wars and in particular with China and, obviously, you have an important business there, can you just provide what can cause concerns and reasons why perhaps one shouldn't be too concerned vis-à-vis your business to China?

Yes, Mark, this is Michael. I think based upon the tariffs that have been announced so far we actually have quite little exposure. I would call it immaterial at this point. We have a couple or a few raw materials that we actually import from China that could be impacted. I think the positive thing for us on the Performance Materials side is the fact that we have invested in China to manufacture to support the growth that we see in China. So again, we don't see that that's going to have a great deal of exposure either.

And then you had a lot of success with the Georgia-Pacific acquisition that your buying in the residuals stake on the JV of the honeycomb. What does the M&A pipeline look like at this stage? Are you still seeing opportunities that could be of significant potential interest that could come to bear in the next 12, 18 type months?

I would say yes, definitely. I mean without giving into the specifics, we have an active portfolio of projects in the pipeline. We've over the past 12 to 18 months really enhanced our capability for screening and doing due diligence on those opportunities, and we are optimistic that there's further value adding acquisitions that we can complete.

And recognizing you're not going to get too specific, general areas of interest?

Well, we look at -- we're looking at things that are both on the chemicals segment of the business as well as the materials segment of the business. I've said from the beginning I think the opportunity set is a bit broader on the chemical side just because of the nature of our materials business. But the reality is there's projects that could fit into either segment. And in terms of our priorities, we've always said that we would look at things that are close to what we currently do or post adjacencies before we begin looking further afield. And that's still the case. We've seen a lot of projects come along that fit that criteria. So again, I think we're optimistic about the opportunities.

We will go to the line of Jon Tanwanteng from CJS Securities.

Can you just confirm my math? Under the new Chinese mandates that you just talked about, 20% -- around 20% by January 2019, 62% by July. That sounds like about 8 million to 10 million cars over the whole year. Is that about right?

Your math is pretty good. Let me just give you a couple of other comments. First of all, we're not going to provide guidance for 2019 on what that means. I think -- also remember that in anticipation of this early adoption we've built a significant amount of inventory. And in doing so, we've absorbed fixed cost into that inventory. So margins initially may not be quite as high as we turn the inventory.

I think you should also remember that engines tend to be a bit smaller in China, and canisters are proportion to the engine size and the fuel tank size. And that -- the numbers that you're talking about is the total addressable market. We obviously have some competition in China. So I would just caveat you to be a little careful getting too far ahead of the numbers. And again, these are estimates based on what we're hearing in the press out of China. And so we're just kind of reporting the news.

Okay. That's fair. Thank you for the color. And can you actually discuss the rationale behind the new headquarters that you announced? What are the returns on that or intangibles that it provides to you guys?

The reality is, Jon, we're just out of space. Currently today in North Charleston, we have 2 existing facilities. Our headquarter is actually at our technical center, and then we have another office that's about 5 miles away. So we've got our business people separated from our supply chain people, our business people separated from customer service and some other things. And so the objective here is to get everybody back into one building, and the reality was is that we were going to be leasing additional space one way or another. So we saw this is the most cost-effective solution.

We had some significant incentives provided by the county and the state in order to locate our headquarters here, and we're taking advantage of those as part of this process. I mean you have to realize we're 1 of only 3 public companies headquartered in the Charleston region, and we're the largest by revenue.

So having us here was important to the county and the state. So -- and I know that it's being touted or in the press as Ingevity is building a new headquarters. In fact, a developer is building a building, and we're going to be entering into a lease for part of the space in that building.

Got it. That's helpful. And John, finally, just the legal spend for the -- how much comp was that? And does that (inaudible)?

We spent about $1 million in the quarter. I think -- you kind of divide that over the 3 months and you get kind of a run rate. I would tell you that it is possible that it may increase a little bit, and it'll be pretty lumpy, right, depending on the puts and takes of -- these cases proceed. Yes, but it's in our guidance, Jon, so -- for the year anyway.

And we will move to the line of Daniel Rizzo with Jefferies.

I'm sorry if I missed this, but the growth in (inaudible) technologies overseas in Asia and Europe, was that led by Evotherm?

Well, it was really led by a broader suite of our products. Evotherm predominantly is a U.S. (inaudible) market. In the markets abroad, we do sell those products. We also sell probably a higher portion of products (inaudible).

Okay. And then with the [continue] to do the China 6 ramping in 208 -- 2020, 2019, is it like the U.S. in a sense that the new 2019 model are available in the fall, so they have to meet new standards by the fall? I mean does that work like that? Or am I thinking about it wrong?

It works a little bit differently, Dan. Let Ed Woodcock.

Yes. Dan, it's a little different. Obviously, the U.S. follows a model year phase-in requirement. Outside of the U.S., it's typically done (inaudible). So China, Europe, for example -- effective for Europe as an example (inaudible) [2019] all the vehicles need to be sold with the new standard. And likewise for China, with these dates that they've fixed, the sales of vehicles starting January 1 or July 1, 2019, they'll need to be compliant with (inaudible). It's not a phased in. it's a fixed point in time.

And we move to the line of Paretosh Misra with Berenberg.

So first question, on your maintenance outages in the second half. Is most of the $10 million that you guided to, is that the fourth quarter item or it could split to 3Q also?

It's really split across Q3 and Q4. I would say a bit more heavily weighted to Q4. If you want to go with 60%/40%, 70%/30%, that would probably work. And split pretty evenly between the 2 businesses.

Got it. And second -- I'm sorry if I missed that, but how much synergies you have left to realize?

Well, we committed at the time of the acquisition to $11 million in synergies. We really haven't updated that number, but we are running ahead of the capture rate in 2018.

Got it. And lastly, on the Performance Chemicals businesses. Any more color on what you're seeing in the substitute products? And if you think there could be more price hikes in the second half of this year?

Michael, I'll let you take that. For Performance Chemicals for pricing.

So we've had very good price realization in TOFA through the first half of the year, including the second quarter, and have announced rosin price increases. And we believe that starting in the third quarter we're optimistic that we're going to be able to get some further price increase on rosin and rosin derivatives in the second half of the year.

The second -- the thing that I would add is that we're not really seeing any impact because of the capacity to come on in the hydrogenated (inaudible) process.

We'll open the line of Mike Sison with KeyBanc.

There's been some folks talking about [autobills] kind of slowing a little bit. And when you think about as far as materials and all the regulatory [types of things], particularly in China, the growth rate that you should see over the next couple of years, you still feel pretty good about the cadence of what you said at the Analyst Day?

Yes. Absolutely.

Great. And then in terms of the ramp-up in China, it does seem like that is maybe progressing a little bit ahead of schedule. Can you remind us where you're at on capacity? I recall, I think they're good to go but just wanted to make sure that (inaudible) you have the capacity to support that growth.

It's a great question, Mike, and we think we're in great shape to support the demand that's coming. We had anticipated that early adoption might occur, and that's, unfortunately, why our working capital sits where it is today. But again, as John pointed out, as China starts to adopt, we'll get the working capital back down. But we have the Zhuhai facility that is not producing anywhere near capacity today, so that's going to be the first to ramp up. We had announced in last year's third quarter an extrusion capacity investment in Changshu. That plant is looking to be mechanically complete in the first couple weeks of August. We expect it to be producing qualified product by late September, early October.

Then in the first quarter call, I think we announced the brownfield expression for activation capacity at our Covington, Virginia, facility and ranged that in the $35 million to $40 million of capital.

So we probably have 1 more capital investment that we will do in Covington to support this growth that'll be upcoming for approval in the next couple of quarters. It's probably magnitude terms half of what the activation capacity project is. And then I think we're largely done probably until we get out to the 2021, 2022 time frame. Ed, would you concur with that?

Yes. I agree.

Great. And then 1 quick follow-up for Performance Chemicals. It looks like the G-P acquisition is making really good (inaudible). Your EBITDA margin out longer term is even better than I think we thought initially, so -- are other opportunities to help consolidate the industry? I think maybe part of the improvement is having less players out there. So just curious if that's something that you could do or want to do going forward.

I guess that's not something I really want to get into, Mike. I mean there -- as you know, I mean, I think it's a relatively concentrated industry in the U.S. There are a number of pine chemicals refineries and producers in other regions of the world. But in terms of whether any of those are targets or intentions, I'm going to stay silent on that.

And we'll go to the line of Chris Kapsch with Loop Capital Markets.

So I had some follow-ups on the Performance Chemicals business. If I heard your formal comments correctly, I think you sort of dialed up the production rates at the refineries in order to get a little bit more TOR to address some account wins or adoption and, I think, you said the pavement end markets. So curious a couple of things. One, did that benefit your unit cost at all to help enhance the margin profile? And then also, the extra TOFA that comes along with those higher rates at the refineries, did -- were you able to sell those without really any effect on sort of the otherwise strong TOFA pricing dynamic?

Yes. It's a great question, Chris. So first of all, as you recall and as I said in the prepared remarks, we do run our refineries to rosin demand. So one of the great things that happened is we've seen an increase in rosin demand. Part of it is coming from this application in line -- road line striping that we referenced in the prepared remarks. But because rosin demand is up, we naturally get more TOFA production, so that's actually been something that we've thought. So the increase on the rosin side in terms of volume has given us more TOFA volume, has increased sales in both product categories or areas. So it's a favorable and symbiotic thing.

And what about the unit cost? I mean just -- intuitively, it sounds like there's some benefit there?

Yes, sure. Anytime you increase capacity utilization you're going to get better absorption of the fixed cost and better flow-through of profitability, and that's exactly what's occurring. And I think that's why you're seeing EBITDA margins on the Performance Chemicals side that may be a bit ahead of where we felt they might be.

Okay. Right. And then also -- I mean since the -- you're ratching up your TOR production effectively to address this application in the paving, but there's seasonality to that market. So will you -- is it likely that you'll adjust the other way, call it -- in the winter when the seasonal strength isn't there for that end market?

Yes. Well, 2 things, I mean, one, this is something that we manage every year, and we will continue to run the refineries to rosin demand because we have other outlets for TOFA. And I think the thing you need to remember about pavement is that while it is TOFA based those are generally all derivatives. So the actual percentage of TOFA in the end product is much less than it might be in a different kind of application. So it's not huge volumes of TOFA.

Okay. And then just 1 follow-up. You parsed out sort of the pro forma look of sales for the overall segment with and without the Georgia-Pacific acquisition. But what did the oilfield technologies business look like in terms of growth excluding the contribution from Georgia-Pacific? That would be helpful.

Sort of midteens.

We will open the line of Jim Sheehan with SunTrust.

When you guys initially provided an outlook for 2018, I think you were assuming crude oil in the range of $45 to (inaudible) per barrel. What's your updated (inaudible)?

For the balance of the year, we're sort of assuming $55 to $65. As you know, WTI has bounced around quite a bit.

Got it. And then on Performance Materials margins, you've said pretty consistently that you thought that those would (inaudible). Can you talk about what the upside might be from here given that we've just had a record quarter for EBITDA margins in that segment?

Well, I think our view continues to be that they will gradually accrete. I don't -- I still think you have to look at this on a year-by-year basis and not any 1 quarter. We had a very strong quarter, and that was a big jump in terms of the EBITDA margins we saw in the segment. But again, I think as we sell more honeycombs, which are high-margin products, and the U.S. gets to its next wave of adoption, as we have these assets that we put in place and we began to run those full out and get greater drop-through and profitability, again, this is a business that's 70% fixed cost, 30% variable cost. We expect those things will contribute to higher margins.

And we'll go to the line of Christopher Hillary with Roubaix Capital.

I just wanted to ask, on the narrative in China, after years of a lack of enforcement on the standards, the tables have turned, and we're seeing this much more rapid enforcement and adoption. And -- do you think that's going to lead to a more rapid adoption of the next standard? And could you remind us of what that benefit would look like in terms of the pollution reduction?

Yes. I think, Chris, it's a little premature to begin thinking about a China 7, though, clearly, they're already -- they're always looking towards the next step of regulation. Whether that's something ultimately that would look like Tier 3/LEV 3 in the U.S. or something in between, we don't know. But I accept your premise that China has gotten serious about cleaning up its environmental issues.

Okay. And are there any other geographies where you're seeing a bit of a step change in the attitude towards these products?

Well, as we talked about -- I mean Europe is stepping up their regulation. In our opinion, they're going to be well behind where China is once China adopts, so I think there's more work to be done there. And really after the U.S. and Canada get to Tier 3/Lev 3 and China gets to what is really a U.S. Tier 2 type standard, you still have basically the rest of the world with average emission standards that are where the U.S. was in the late ['70s and early '80s. Like 50% -- I mean 50% of the globe still at 1980 kind of standards.

There are no other questions in queue. Please continue.

Okay, operator. If there's no further questions, we certainly appreciate your continued interest in Ingevity, and we look forward to talking with you again next quarter. Have a great day.

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