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Ingevite Corporation (NYSE: NGVT) Third Quarter 2021 Earnings Conference Call, October 28, 2021, 10:00 AM Eastern Time
Hi. Welcome to the third quarter earnings report of Ingevite. At this point, all participants are in listen-only mode. After the official speech, there will be a question and answer session. [Operator Instructions] Please note that this meeting is being recorded.
I will now transfer the meeting to Bill Hamilton, the treasurer and head of investor relations. Bill, you can start now.
Bill Hamilton-Treasurer and Vice President of Investor Relations
Thanks, Rob. Good morning everybody. Welcome to the Ingevity 2021 third quarter earnings conference call. This morning, we published a presentation on our investor website, which you can use to follow today’s conference call. It can be found under Events & Presentations on ir.ingevity.com. Any forecasts or targets that may be included in our presentation today may involve the risks detailed in our earnings release, SEC filings, and the forward-looking statements you see in the second slide. I will also recommend to you our earnings releases and presentations to understand the disclosure and reconciliation of non-GAAP metrics that we use when discussing results. Our agenda is on the third slide. With me today are President and CEO John Fortson; Mary Hall, our CFO; Mike Smith, President of High Performance Chemicals; and Ed Woodcock, President of Performance Materials. First, John will comment on the highlights of the quarter. Mike and Ed will review the performance of our two market segments. Mary will comment on our current financial situation. Finally, John will discuss our revised annual guide.
With this, I will forward the call to our CEO John Fordson.
John Fordson-President and Chief Executive Officer
Thanks, Bill, good morning everyone. Thank you for joining us. If you move to the fourth slide, you will notice some highlights of the quarter. Overall, I am very proud of Ingevity's performance this quarter. In the face of raw material inflation and supply chain headwinds, we continue to develop many of our existing businesses while advancing our new product plans. Compared with the third quarter of last year, sales in the third quarter of 2021 increased by 14% to $377 million. Our third-quarter results were driven by significant growth in sales of high-performance chemicals, as well as engineering polymers and industrial specialty products, and were supported by rising prices across the sector. Sales of all product lines of engineering polymers increased in the third quarter. The business has shown strong growth throughout 2021. Our industrial specialty business performed well in the face of increasing demand. Sales of our road technology products were slightly higher than in the third quarter of last year.
The long-term effects of the global shortage of microchips continue to inhibit automobile production, which has a negative impact on our activated carbon sales in the high-performance materials sector. Therefore, compared with the third quarter of 2020, sales of high-performance materials and adjusted EBITDA have declined, which is a difficult comparable period. This was a quarter last year, and demand and production rebounded sharply from the pandemic low. Regarding Ingevity's comprehensive income, due to the impact of the decline in sales of our functional materials division, the profit margin has been compressed, and our adjusted EBITDA and adjusted EBITDA margins have both declined compared with the third quarter of 2020. However, compared with the more normal 2019, the EBITDA margin was basically flat, with an increase of nearly 5%. You will hear more from Mike and Ed, and we will continue to advance important initiatives across the company that enable us to achieve long-term sustainable growth. We will commercialize TOFA for the first time in the European biofuel market, and we expect that this application will bring us significant opportunities in the future. We have obtained the biofuel sales certification from the North Charleston plant and the process of extending it to DeRidder and Crossett is in progress.
We are working hard to increase the soy fatty acid production capacity of the Crossett plant, and the goal is to significantly increase production capacity in the second quarter of 2022. We are looking for more and more market opportunities for this alternative raw material. We are also expanding our Caprolactone monomer production capacity in Warrington to meet higher levels of demand for our products. We plan to increase polyol production capacity at our DeRidder plant in the second quarter of next year. Our products are even entering the electric vehicle value chain. Our Industrial Specialties team is selling products that support lithium mining. Our engineered polymer Capa products are used as key performance enhancing materials and electric vehicle battery pads to suppress noise and protect batteries. We are very happy to find ways to add value in these growth markets. Finally, we continue to see more testing of our ANG technology by utility fleets. Truck testing of our large on-site storage tanks is basically completed, and we are working with GreenGasUSA, our strategic partner for methane capture and storage.
You may have recently seen GreenGas announce a 10-year offtake agreement with Enviva. This is their second collaboration with Duke University. In addition, we released the 2020 Sustainability Report Update last week, emphasizing Ingevity's continued commitment to sustainable operations, providing the market with customer-centric high-performance solutions, and playing an important role in the global race to reduce emissions. Our renewable raw materials and the significant environmental benefits of our technology give us a competitive advantage. I encourage you to read the update, which can be found on the homepage of our investor website. I want to thank the entire Ingevity team for continuing to work hard during this challenging time. The motivation and determination of our entire team left a deep impression on me, especially in these severe market conditions, their operations and supply chain employees who work smart and safe day after day. Last quarter, I was able to visit our engineered polymers site in the UK and thank them for their extraordinary story of supporting the recovery of the existing market and driving the adoption of new technologies. We are all excited about the opportunities they have in the future.
With this, I will forward the call to Mike to see the results of Performance Chemicals.
Michael (Mike) P. Smith - Executive Vice President and President of High Performance Chemicals, Strategy and Business Development
Thanks, John. On the fifth slide, we will see that our performance chemicals division’s third-quarter sales were $259 million, an increase of nearly 38% over the same period last year. In all of our businesses, we have achieved growth by adopting many sustainable and highly profitable derivative solutions that we provide to our customers. We are very pleased to see the continued growth in demand for the products in our engineered polymer portfolio. Due to the increase in sales of all product lines worldwide and the significant increase in demand for automotive and industrial equipment applications, the quarterly sales of engineered polymers increased by more than 100%, reaching the highest level in history. In the automotive sector, we have achieved strong technology adoption and sales growth in protective coatings and electric vehicle battery mats. In addition, our sales in bioplastics applications continue to grow, and more and more customers are using these Capa solutions to achieve their sustainable development goals, which makes us deeply encouraged. In addition to sales growth, we have also achieved a strong increase in engineering polymer prices, which is very important to offset inflation and raw material costs.
Sales of industrial specialty products increased by 47%. Sales of adhesives, oil fields and lubricants all increased by more than 60%. Sales of packaging adhesives and adhesives for safe road strikes grew strongly. We saw the benefits of the second quarter price increase in the third quarter, and the business also implemented additional price increases for tall oil rosin and tall oil fatty acid products that took effect in the fourth quarter. The price of rosin in China continues to be higher than the level of the past five years, and the supply and demand dynamics of rosin products and fatty acids remain strong. In this quarter, we saw continued sales of soy-based fatty acid derivatives and pure soy-based fatty acids. These are important steps as we expand our product portfolio for potential end-use applications by using raw materials other than CTO.
We have also commercially sold TOFA to European biofuels for the first time, and it is expected that the demand for this application will increase significantly in the future. As we continue to adopt environmentally-friendly overall recycling technologies, sales of road technology applications increased slightly compared with the previous quarter. Outside of North America, we achieved strong sales growth in Europe, but this was offset by a decrease in sales in China, which we believe was due to a temporary reduction in local government infrastructure spending that led to reduced paving activities. Due to sales and price increases, partially offset by continued inflation in raw material and logistics costs, the EBITDA of the high-performance chemicals division in the third quarter was $63 million, an increase of 34% over the same period last year.
I will now turn the call to Ed to discuss the performance materials results for the third quarter.
Ed Woodcock-Executive Vice President and President, Performance Materials
Thanks, Mike. As you can see in the sixth slide, sales in this segment dropped by 18% to $118 million. Compared with the third quarter of 2020, the sales of our automotive activated carbon products have declined because the shortage of microchips continues to have a negative impact on global automotive production. The shortage of microchips is disrupting the global automotive industry. During the quarter, North American light vehicle production fell by 27% and has been declining sequentially since the third quarter of last year. North America's production remains at a favorable combination of 81% trucks and SUVs to 19% sedans. Since the beginning of this year, the combination of trucks and SUVs has been in this range because OEMs use their limited amount of microchips for the most profitable cars, pickups and SUVs. These vehicles also benefit Ingevity because they usually have larger tanks and multiple honeycombs as part of their evaporative emission control system.
As of the end of September, U.S. light vehicle inventories fell 64% to less than 1 million units, compared with 2.7 million units in September 2020. Compared with the 3.6 million inventory before the COVID, the decline in September 2019 inventory is even greater. Car sales in the United States and Canada fell by 13% this quarter, reflecting the lack of car production and the availability of cars for consumers. In addition, China's light-duty vehicle production in the quarter fell 15% year-on-year, and sales fell 14% year-on-year. According to IHS data, we estimate that the impact of microchip-related production losses on Ingevity in the third quarter is approximately $22 million to $28 million in revenue. We expect microchip supply problems to continue until the rest of 2021 and 2022. Finally, the implementation of Tier 3 in the United States and Canada is underway, as some 2022 model platforms are delayed due to the pandemic. The remaining three levels of implementation should be completed by the end of this year or early 2022. Departmental EBITDA was US$56 million, a 30% decrease from the same period last year. Despite low revenue, we maintained a strong EBITDA margin of 48% during the quarter.
In mid-September, we announced our intention to challenge the unfavorable jury verdict of the U.S. District Court for the District of Delaware. Due to the multi-year automotive design cycle of OEMs and Tier 1 suppliers, we do not expect to have a direct impact on commercial sales, and do not know that there are competitive certifications or test cells that can immediately replace the sales of Ingevity products. This decision has nothing to do with the '649 patent family we have obtained in the United States, Europe and China to reduce emissions and advance low-purge engine technologies, such as start-stop, turbo and sub-hybrid changes. We believe these technologies can be applied anywhere , From 25% to 60%, the future is close to zero fuel system design. Also in September, the U.S. Patent Trial and Appeals Board recognized the validity of the patents in our newer '649 patent portfolio. Prior to this, a competitor initiated a post-grant review that examined the patents and the use of our standards and uses Certain related claims were challenged. Professional honeycomb products. As we continue to add next-generation emission control technologies to our high-performance material IP portfolio, this victory is a good result for Ingevity. It recognizes our continued investment in research and development of automotive emission control solutions using special honeycomb and carbon canister designs. As a global leader in this field, we are committed to continuing to leverage our expertise in complexity, low purification, and engine innovation to help our OEM customers meet increasingly stringent emission targets.
I will forward the call to Mary for more detailed information on our third quarter financials and indicators.
Mary Dean Hall - Executive Vice President, Chief Financial Officer
Thank you Ed and good morning everyone. Please go to slide seven. Here you can see the healthy growth of income, which has increased by nearly 14%. However, you also see a decline in both gross profit margin and adjusted EBITDA margin due to the decline in sales of functional materials and significant changes in revenue compared to the third quarter of last year. Revenue from functional chemicals increased by 38%, while functional materials Revenue fell by 18%. In addition, our SG&A increased year-on-year as we resumed more normal business operations, including recruitment to fill vacant positions, increased travel and investment, and growth and innovation resources. We remain focused on prudent cost management while ensuring that we can respond to the rebound in business activities. Interest expenses for the quarter were US$11.6 million, a slight increase from last year, as we replaced the floating rate revolver borrowings in the fourth quarter of 2020 with 8-year fixed-rate bonds. Our adjusted income tax provision for the quarter was $16 million, a year-on-year decrease, reflecting lower income and our income mix in different regions.
Our adjusted tax rate in the third quarter was 19.8%, and we estimate that the adjusted tax rate for the full year of 2021 will be between 22% and 24%. Diluted adjusted earnings per share were US$1.62, which was lower than the US$1.79 in the third quarter of last year, reflecting a lower profit margin. Go to slide eight. You will see that we generated a steady free cash flow of approximately $75 million during the quarter because we are still focused on strict working capital management. As the forecast for automobile production deteriorated throughout the quarter, we did see a rebound in the inventory of high-performance materials in the third quarter, and we are managing factory operations to optimize production and inventory as we sail in this dynamic environment. As we said before, we will continue to speculate on stock repurchases. In the third quarter, we repurchased approximately US$32 million in stocks, and the total repurchase year-to-date is approximately US$100 million or 1.3 million shares. This allows us to spend approximately US$312 million on our stock repurchase authorization. At the end of the third quarter, our leverage ratio of net debt to adjusted EBITDA was 2.1 times, which was unchanged from the previous quarter and lower than the 2.7 times at the end of the third quarter of 2020. Our average cost of debt is about 3.6%, and we have no meaningful debt maturity date until August 2023. All in all, our balance sheet is strong. We maintain balance and discipline in capital allocation because we have sufficient liquidity to support our inorganic and organic growth plans.
Now, back to John.
John Fordson-President and Chief Executive Officer
Thank you, Mary. On slide 9, I want to review our updated guidance for 2021. Our guidance for the remainder of the year reflects a easing of expectations for high-performance materials and confidence in continued strong demand for products in our high-performance chemical portfolio in the fourth quarter. Our updated guidance for the full year of 2021, sales are between 13.2 and 1.36 billion U.S. dollars, and adjusted EBITDA is between 405 and 420 million U.S. dollars. For the rest of this year, we expect the continued shortage of microchips and continued logistics raw material and energy inflation to develop westward. We are also paying attention to any other issues that may affect car production. We will continue to monitor the supply and demand situation in the market and will pass on costs to ensure that we extract the best value for our products. Despite these challenges, our team is still operating very effectively and we will continue to execute our strategy. We are aggressive in the market, not only to realize the value of our products, but also to find new applications. We are determined to take advantage of opportunities to maximize today's and future value in this rapidly changing situation, and our results reflect this. Finally, I thank our employees around the world for their continuous hard work and hard work, and we thank them. We hope you can share our enthusiasm for Ingevite.
At this time operator, we will open the phone to ask questions.
Thank you. At this time, we will conduct a question and answer session. [Operator Instructions] Our first question comes from the route between John McNulty and BMO Capital. Please continue with your question.
Caleb - BMO Capital - Analyst
Hey. Good morning. This is John's Caleb [Phonetic]. I just have a quick question about the PC pricing dynamics that you saw in the fourth quarter. Maybe it will be a bit further by 2022, especially what you see in Chinese gum? Thank you.
Michael (Mike) P. Smith - Executive Vice President and President of High Performance Chemicals, Strategy and Business Development
Yes. thanks. At this point, we are very optimistic that our ongoing price increase will continue to be successful. The market is supporting it. As you mentioned, we are still very favorable to China's chewing gum supply and demand situation. It is almost as good as the past five years. Therefore, we fully believe that we will continue to receive additional price increases in the fourth quarter, and we are definitely optimistic that we will have more opportunities into the next year.
Caleb - BMO Capital - Analyst
OK. Thank you. Then I just want to know if you can provide up-to-date information on some of the long-term plans you are dealing with, which involve methane capture and transportation, renewable energy, etc.?
Ed Woodcock-Executive Vice President and President, Performance Materials
Well, we talked a little at the beginning of the conversation. I mean we are very excited about all the work that I call the 2.0 project, right? We did announce that GreenGas did announce two offtake agreements, but the most recent major agreement was within Enviva. They are a company that produces wood pellets used as a substitute for petroleum. Most of these pellets are sold in Europe. They produce methane. We will not accept that. The good news is that the tank technology we have been using has now been recycled for enough time, and we think it is completely commercially feasible. So we have talked with many different customers and many different parts of the methane value chain in the market, and we will continue to develop this. Then we talked about a little bit about fat assets. Our focus is to make soybean processing in place next year so that we can start to increase sales, but we are also looking for other raw materials, and we are focusing on soybeans in the short term. Hope this answers your question.
Caleb - BMO Capital - Analyst
Your next question comes from the line with Jon Tanwanteng of CJS Securities. Please continue with your question.
Jon Tanwanteng - CJS Securities - Analyst
Hi. good morning everyone. Thank you for answering my question. I would like to know how much room do you have for growth in the engineering polymer business, considering the demand and type, before your production capacity goes online later next year?
Ed Woodcock-Executive Vice President and President, Performance Materials
We have enough capacity to meet any anticipated demand. As you may have seen, we recently announced that we will expand monomer production at the Warrington plant by 20%. Next year we will produce more polyols in DeRidder, which means that the production capacity of polyols will increase by about 35%. Therefore, we are very satisfied with the growth of the business and the prospects for future growth, and we are committed to ensuring that we have all the capabilities needed to support it
Jon Tanwanteng - CJS Securities - Analyst
OK. great. Then as far as the automotive business is concerned, I just want to know your discussions with customers. Do you see any relief coming soon? When we go through the first and second quarters of next year, are they particularly looking forward to it? Do you expect production to increase continuously as we did in the fourth quarter?
Ed Woodcock-Executive Vice President and President, Performance Materials
Yes. You may have seen that this is Ed. You may have seen and heard some announcements made by General Motors, Volkswagen and Ford. In fact, their view is that this will continue until 2022. Our view is that we expect the first half of the year will be roughly the same as our third and fourth quarters, with improvements in the second half. Ultimately, when these improvements occur, it will make sense, but the market is so opaque at this time that it is difficult to truly understand when these additional chips will be in short supply.
Jon Tanwanteng - CJS Securities - Analyst
OK. understood. If I can make another one. Just on the ANG offtake agreement you mentioned with your partner. I just want to know how much carbon you can sell to support these quantities?
John Fordson-President and Chief Executive Officer
So for this particular situation, this is not good. I wouldn’t describe it as material, would I? I think the way we look at it is to verify or confirm that the business model or methane capture is good and profitable. It will validate the technology, and then the technology can be used by many different potential customers for many different applications. So this will not be a huge revenue boost, but it is a beginning.
Jon Tanwanteng - CJS Securities - Analyst
OK. very fair. thank you all.
The next question comes from Daniel Rizzo and Jefferies. Please continue with your question.
Daniel Rizzo-Jefferies-Analyst
Hi, everybody. Thank you for answering my question. Therefore, given the apparent slowdown in automobile production and its impact on high-performance materials. I just want to know why you pointed out in Performance Chemicals that, at least in terms of engineering polymers, automotive production helps drive growth. I want to know why there is some difference, so I think it will also be under pressure.
Ed Woodcock-Executive Vice President and President, Performance Materials
Thanks, Dan. I think we really encountered two very different situations. At Performance Chemicals, everything is related to the adoption of new technologies. So when you think about our new business, it does get a lot of penetration in the protective film, it comes from a very low base, and as our customers actively adopt the technology, we have achieved strong growth there. On the other hand, we have additional business in electric vehicles. Therefore, the business of microporous polyurethane type applications for electric vehicle battery mats is new. Sales of electric vehicles continue to grow, and we are pleased that many customers choose to use Capa technology in these growth areas of automobiles.
Daniel Rizzo-Jefferies-Analyst
OK. Then there is something else. So you point out that it’s obvious that SUV sales or I think you say 81% sedans 19%. This is-a lot-some of it is because of chip shortages causing automakers to produce more trucks because it is more profitable. But when chips When the shortage eases, can we see a shift, I guess, and more cars will be produced as a result of catching up? If you follow, will this affect you in any way?
Ed Woodcock-Executive Vice President and President, Performance Materials
Yes, Dan, this is Ed. I don't think it will have an impact on recovery. We provide fuel tanks for SUVs, trucks and cars. They should be relatively similar according to the size of the fuel tanks. Especially in North America, they should be relatively similar. Obviously, there will be more content on light trucks with extra honeycombs. superior. But from our overall point of view, OEMs will stick to profitable portfolios for as long as possible.
Daniel Rizzo-Jefferies-Analyst
Our next question comes from the series of Vincent Anderson and Stifel. Please continue with your question.
Vincent Anderson - Stifel - Analyst
Yes. Thank you. Therefore, when I look at the planned capacity investment for biodegradable plastics such as PLA, it is clear that there are some good growth plans in the Western world where you are now, but China's forecasts are starting to become very aggressive. So I just want to know whether you are satisfied with your geographic footprint relative to this difference in regional growth? Or do you think there may be opportunities in the next few years to use the knowledge you have learned from investing in the United States and carry out similar activities in Asia?
Ed Woodcock-Executive Vice President and President, Performance Materials
Yes. thanks. So yes, we are satisfied with our footprint and we will ensure that we can support customers all over the world. As you have already seen, we are constantly evaluating where the best new uses for capital expenditure and capacity expansion should be. Our first step is to produce polyols in North America. I hope that over time, we will continue to diversify our capabilities. But by working closely with customers outside of Warrington, we have been able to achieve growth in Asia and North America, and we will continue to balance and make the right investments in the right regions to support the growth of our business.
John Fordson-President and Chief Executive Officer
Yes. What I mean is to make it clear that Vincent we want to participate in this market, and we will ensure that we have the appropriate resources to support this.
Vincent Anderson - Stifel - Analyst
excellent. Thank you. Then this may be a bit to the left, but when we think of batteries, we usually think of graphite, but among some of the alternative chemicals that appear here, they use so-called hard carbon, but to me it seems to be activated by you. The products are very similar. I'm just curious if you have explored the opportunities there internally, or even had any conversations with potential new suppliers in the field.
Ed Woodcock-Executive Vice President and President, Performance Materials
Yes, Vincent, this is Ed. Obviously, for anything that has the word carbon, we will try to find opportunities for us to use. We have studied hard carbon, in-
John Fordson-President and Chief Executive Officer
We are studying hard carbon.
Ed Woodcock-Executive Vice President and President, Performance Materials
Yes, we have and will continue to evaluate whether we have the opportunity to introduce our technology to these applications
Vincent Anderson - Stifel - Analyst
OK. excellent. If I can steal another one in. It's really fast. When I think of soybean oil investment, I am just curious, have you produced enough products at this proof-of-concept level to start building commercial relationships for these products? Or, before you are fully up and running, will this really not really start?
Michael (Mike) P. Smith - Executive Vice President and President of High Performance Chemicals, Strategy and Business Development
We have already started commercial arrangements. We have already provided initial commercial quantities to many customers from the products produced in our Charleston facility. Therefore, this work has already begun. Therefore, we want to ensure that when the Crosett plant has the ability to increase production capacity in the second quarter of next year, we are ready to strengthen support for the sales and production of derivatives and soy fatty acids. Over time, this will continue to grow, but we have not prevented the beginning of those initial commercial activities in preparation for next year and beyond.
Vincent Anderson - Stifel - Analyst
OK. thanks. This is all I have.
Your next question comes from the series of Ian Zaffino and Oppenheimer. Please continue to answer your questions.
Ian Zafino-Oppenheimer-Analyst
Hi. great. Can you guys talk about it-I'm trying to think about car space in general. Is there any inventory of your products in the channel? Has all this been resolved? As business starts to recover, how long will it take you to see the ramp when it recovers? Then, again, when we only look at the fourth quarter, what should we expect from the third quarter sales of the automotive sector? thanks.
Ed Woodcock-Executive Vice President and President, Performance Materials
Yes. Thanks, Ian. If possible, I will talk about Q4 first. If you look at the IHS data, the chip loss in the third quarter was about 3.5 million units. Looking ahead to the fourth quarter, IHS has already estimated that it will lose 1.6 million vehicles, but they also give the loss range for the quarter, ranging from 2 million to 4 vehicles-approximately 2.5 to 4 million losses. So our view of the fourth quarter is, I think, you will easily exceed 2.5 million, because we have entered a month of three months. But I think we will eventually be between 2.5 and 4 million. But in the end, as we said before, improvements will begin in the first half of 2022, and obviously we are monitoring what OEMs are talking about. Just to get a feel for how opaque this market is, we did use IHS as our focus indicator, but we also contacted OEMs and our customers to better understand when they think demand will start to increase.
Mary Dean Hall - Executive Vice President, Chief Financial Officer
So if I can mark it. So in general, if I am wrong here, Ed and-add-ons, but Q4 is similar to Q3, but we also have some interrupts, kind of, the normal interrupts we did in Q4. Therefore, we have taken power outage measures, and OEMs have taken holiday outage measures. There are endless debates about whether these outages will be extended, which makes us a little cautious. Is it fair?
Ian Zafino-Oppenheimer-Analyst
Yes. OK. Then, as for-I'm just comparing material sales with your sales, I think your sales can be said to have fallen less in this industry. So just want to know if there is inventory in the channel?
Ed Woodcock-Executive Vice President and President, Performance Materials
We obviously continue to operate our facilities. We have slightly increased our inventory. But I think all suppliers in the automotive industry have established inventories in order to be able to cope with any surge that may occur in the supply of chips. But in the end we will manage our plan to optimize our inventory, we just need to make sure that we-our inventory is in balance with the needs of the car company.
John Fordson-President and Chief Executive Officer
Ian, some of them are also mixed, right? Because as their absolute output declines, they are turning to and continuing to produce SUVs and trucks. They are our larger users of carbon fiber and honeycombs, right? So this is it-when I saw it, it explained many of the differences between our sales and the original equipment manufacturer, right?
Mary Dean Hall - Executive Vice President, Chief Financial Officer
We also hope that OEMs will build up inventories when the chip shortage is eased or as Ed mentioned.
John Fordson-President and Chief Executive Officer
Ian Zafino-Oppenheimer-Analyst
perfect. thank you very much.
Our next question comes from the series of Paretosh Misra and Berenberg. Please continue with your question.
Paretosh Misra - Berenberg - Analyst
Thank you. Good morning. Can you talk about the patents that will expire next year? As you approach the March deadline, do you see competitors bring new capacity? Will this be a risk next year, I think this is what I want to achieve?
Ed Woodcock-Executive Vice President and President, Performance Materials
Yes, Paretosh, this is Ed. We don't think this is a risk. For 20 years, we have been expecting the '844 patent to expire in March, but we are fully prepared for this. At this point, we have not seen competitive products that have been certified or tested that can immediately replace our cellular sales. Similarly, it is mainly due to the design cycle of many years, but it also requires a lot of work and effort to obtain product certification. Therefore, at this point, we just haven't seen any competitive products that will affect our future income.
Paretosh Misra - Berenberg - Analyst
Thanks, Ed. Then, recently acquired one of your competitors in pine chemicals. So I'm just wondering if you expect any changes in the landscape because of this, or is this largely a neutral event for you?
John Fordson-President and Chief Executive Officer
I mean, looking at Paretosh, I mean we have to treat it as a neutral event. But obviously, we are always looking for opportunities in the market, and we intend to take advantage of it there if the transaction may cause any interruption.
Paretosh Misra - Berenberg - Analyst
understood. Maybe it's the last one. I think you mentioned some electric vehicle products in your high-performance chemicals department. Do these products also have an aftermarket or are they mainly used for OEM business?
John Fordson-President and Chief Executive Officer
This is an OEM business. Yes.
Ed Woodcock-Executive Vice President and President, Performance Materials
Mostly all-there are-when we talk about protective films, some people in the United States will at least talk about wrapping their cars for protection, which can be seen as an aftermarket application.
John Fordson-President and Chief Executive Officer
For electric cars and interiors.
Ed Woodcock-Executive Vice President and President, Performance Materials
Yes. Any cars you choose to pack choose to pack early-before they are sold, while others choose to apply this protective coating after purchase.
John Fordson-President and Chief Executive Officer
I mean Paretosh, look, we called it out because it is an example of a new application. I think the broader high-performance chemicals sector is very active in trying to find new markets and new applications. Obviously, electric vehicles have put aside their relationship with high-performance materials. These are attractive high-growth markets. We have multiple entry points in this market segment, right? Inspec is studying lithium mines, and Capa is studying automotive applications. We will continue to look for areas that can participate in this market, right?
Paretosh Misra - Berenberg - Analyst
understood. thank you all. wish all the best.
John Fordson-President and Chief Executive Officer
Ed Woodcock-Executive Vice President and President, Performance Materials
Our next question comes from the collaboration between Michael Sison and Wells Fargo. Please continue with your question.
Richard-Wells Fargo-Analyst
Hi. This is Mike’s Richard [Phonetic]. The first question is that you have done a good job of pushing prices up to offset raw material cost inflation. Can you see the impact on raw materials, availability and logistics in which areas and how should we consider it? Has the situation worsened and stabilized in the fourth quarter?
John Fordson-President and Chief Executive Officer
I think we haven't seen it yet. I mean it's hard to answer. I mean each market segment has its own set of questions, right? But the reality is that what we see is raw materials, and we just see a full-scale headwind, right? I mean the cost of transportation. Everyone knows that you can turn on the news at night and see that all the ships are backing up. But we paid more, right? Our raw materials have expanded across the board. So we are trying to offset this. We are no different from any other company out there, and we will continue to do what we need to do.
Richard-Wells Fargo-Analyst
Okay, great. Then there are high-performance chemicals. If you can talk about industrial specialties and oilfield technology, I think you mentioned last quarter that it has increased by 40% year-on-year. Do you still see continued growth there? What is your outlook for the rest of 2022?
Ed Woodcock-Executive Vice President and President, Performance Materials
Yes. In fact, we saw very strong growth in the third quarter. Now it is important to remind yourself that the oil field’s performance in the third quarter of last year was quite low, but this is an application of industrial specialty products, with sales increasing by more than 50%. When we look ahead and look at the prospects predicted by industry experts, the prospects for drilling activity in North America next year looks set to grow in a fairly steady manner. Therefore, we will ensure that we support the business and the work we are doing. We have to expand our geographic footprint beyond North America, especially in the Middle East and China. These two markets provide us with good opportunities to utilize our oilfield technology.
Richard-Wells Fargo-Analyst
great. Then finally the road technology was relatively flat compared with last year. Maybe you can talk about how we should consider the growth of this business in the next 12 months?
Ed Woodcock-Executive Vice President and President, Performance Materials
Well, over time, our road technology business has shown solid medium to slightly high revenue growth. If this year-to be frank, even in this quarter, if not because of China's economic downturn, we would talk about growth rates similar to this. So I think we have a good opportunity to continue adopting technology in Pavement. We have more and more opportunities to globalize the business more comprehensively, so we certainly hope to achieve this goal. We are very concerned about infrastructure and highway bill expenditures. We certainly hope to invest heavily there. Although we do not expect this to be any major turning point in the near future, it can only be a very positive tailwind for the business. So a great company, I think the opportunity to continue to develop it is very reliable.
Richard-Wells Fargo-Analyst
Thank you. Our next question comes from the collaboration between Chris Kapsch and Loop Capital Markets. Please continue with your question.
Chris Kapsch - Loop Capital Markets - Analyst
Yes. Good morning. So my question is about the sales of TOFA in the European biodiesel market. Curious about whether these replace other TOFA sales or are they essentially incremental? Assuming the latter, is there any way you can quantify the scale you really get-whether these quantities are enough to allow you to sustainably operate your domestic refinery at a higher speed, I guess this in turn will allow you to generate more Travel, given the chewing gum situation in China, it seems that demand exceeds supply. I think this also helps the unit cost? So look for some colors there.
John Fordson-President and Chief Executive Officer
I will start, but then Mike can-we want-the current situation allows us to run our refinery at a very high speed, no matter what happens in the biofuel market, right? I think what will happen to Chris, I mean it really-as the market develops, from a profit point of view, it becomes valuable relative to other places where the car may be parked in TOFA, and then it just Become a bigger market. But I won’t say that we need this kind of production to run our factories at a higher utilization rate.
Michael (Mike) P. Smith - Executive Vice President and President of High Performance Chemicals, Strategy and Business Development
John is exactly. We will-we have to balance biofuels in total production. I think it is very encouraging to have a new and important source of demand for TOFA. So over time, I think this bodes well for TOFA's supply demand and pricing. Our path of execution will be to optimize the profitability of the business. If European biofuel opportunity pricing represents the best opportunity for Ingevity, we will put TOFA there. If there are other better markets, we will continue to do so. But we want to make sure that we are ready to supply this market from a logistics and customer relationship perspective, so this is what we did. We achieved the first sale for a major customer of TOFA in the third quarter, and we will see the progress in the future.
Chris Kapsch - Loop Capital Markets - Analyst
This is very helpful. If I explained your answer correctly, then as a follow-up, it sounds like the basic principle of Chinese rosin enables you to increase the rate to get more travel products. Just want to know if there are any managers in your refinery utilization rate, such as the availability of CTO? Or, should we expect at least in the short term that these utilization rates will show an upward trend along with overall strong demand? thanks.
Michael (Mike) P. Smith - Executive Vice President and President of High Performance Chemicals, Strategy and Business Development
Well, I think we have an outlook and we will continue to see some growth in the future. But we—as we have also said, the availability of CTOs may be restricted, and we always ensure that regardless of the CTO we buy on the market and on-site, we can accept and change it into a profitable business. At present, we have obtained enough CTO to realize our plan for next year. So I think from this perspective, we are in a good state. Therefore, between input and good output demand, we will obviously continue to operate the business and optimize its profitability.
John Fordson-President and Chief Executive Officer
Yes. I mean, Chris, I mean, to be clear, our CTO for next year has been determined, so we will not be restricted by the CTO. Part of the long-term strategy surrounding TOFA is that by running these processes in parallel, we will actually gain incremental benefits. If we can replace TOFA in some of our products, we will actually have more TOFA that can be sold in the market, right? Therefore, what we are actually trying to do is to increase the revenue of the entire network, so relative to the security CTO we know, the deviation in your Lexicon will be upward.
Chris Kapsch - Loop Capital Markets - Analyst
Our next question is a follow-up report from Jon Tanwanteng of CJS Securities. Please continue with your question.
Jon Tanwanteng - CJS Securities - Analyst
Hi. I want to know if you can talk about your ongoing legal fees and your views on it? Only in terms of future strategy and litigation costs?
Ed Woodcock-Executive Vice President and President, Performance Materials
Yes, Jon, this is Ed. We are likely to return to a more normalized level. So think of it as a third of what we spend.
Jon Tanwanteng - CJS Securities - Analyst
OK. My impression is about $5 million per quarter, right?
Ed Woodcock-Executive Vice President and President, Performance Materials
Yes. 15 million US dollars per year, 5 million US dollars in the future.
John Fordson-President and Chief Executive Officer
Ed Woodcock-Executive Vice President and President, Performance Materials
Jon Tanwanteng - CJS Securities - Analyst
understood. OK. thank you very much.
Thank you. At this point, we have reached the end of the question and answer session. Now I will transfer the call to Bill Hamilton for the closing remarks.
Bill Hamilton-Treasurer and Vice President of Investor Relations
Thank you for your time this morning. We are still very optimistic about our long-term business prospects and look forward to talking with you again in the next quarter.
Bill Hamilton-Treasurer and Vice President of Investor Relations
John Fordson-President and Chief Executive Officer
Michael (Mike) P. Smith - Executive Vice President and President of High Performance Chemicals, Strategy and Business Development
Ed Woodcock-Executive Vice President and President, Performance Materials
Mary Dean Hall - Executive Vice President, Chief Financial Officer
Caleb - BMO Capital - Analyst
Jon Tanwanteng - CJS Securities - Analyst
Daniel Rizzo-Jefferies-Analyst
Vincent Anderson - Stifel - Analyst
Ian Zafino-Oppenheimer-Analyst
Paretosh Misra - Berenberg - Analyst
Richard-Wells Fargo-Analyst
Chris Kapsch - Loop Capital Markets - Analyst
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