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Ingevity Corp (NYSE:NGVT)
Q3 2020 Earnings Call
Oct 29, 2020, 3:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the third quarter of 2020 earnings webcast and conference call. [Operator Instructions]

I will now turn the conference over to your host, Jack Maurer. You may begin.

Jack Maurer -- Senior Vice President, Public Affairs and Investor Relations

Thank you, Somali. Good morning, everyone. Welcome to indemnities third quarter 2020 earnings conference call. Earlier this morning, we posted a presentation on to 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 during the call. You can find it by visiting ir.ingenuity.com under events and presentations. For participants who are logged into our webcast, the slides should be visible in the online viewing pane and also available to download. On slide number two 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. Gemini undertakes no obligation to publicly release any revision to the projections forward looking statements made during this call, or to update them to reflect events or circumstances occurring after the date of this call. Throughout this call, we may refer to non-GAAP financial measures, which are intended to supplement not substitute for comparable gap measures. Definitions of these non gap financial measures and reconciliations to comparable gap 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 three. With me today are John Fortson President and CEO, and Interim CFO Mike Smith, President of Performance Chemicals, and Ed Woodcock, President of Performance Materials, and Bill Hamilton, Vice President of Financial Planning and Analysis and Treasure. First, John will comment on the highlights of the quarter and our impressive results despite the COVID weakened economy. Then Mike and Ed will review the performance hard two segments. Below we'll discuss our current financial status and our recent SR note offerings. And then John will comment on our revised guidance and provide an overview of what we're calling in 72.0 a strategic approach to growth under his leadership as CTO.

With that, I'll turn the call over to our CEO John Fortson.

John Fortson -- President and Chief Executive Officer

Thanks, Jack. Good morning, everyone. Thank you for joining us this morning. We appreciate your continued interest in in Gemini. If you turn to slide four, you'll note some highlights for the quarter. Overall, this was a great quarter, particularly when compared to the challenges we faced in the second quarter. revenues in the third quarter were 332 million down only 8% when compared to the previous year's quarter despite the economic impacts of COVID-19. Japanese third quarter results were driven by strong rebounds and automotive sales and production worldwide versus a weak second quarter. Along with a continued strong painting activity in both North America and internationally. Asked production actions and strong execution also had helped set several records in our performance. These positives were partially offset by a weakened economic environment due to COVID that particularly impacted our performance chemicals businesses, with the exception of payment technologies, which held up fairly well in this environment.

With respect to earnings, adjusted EBITDA were 128 million, up almost 12% from the previous year's quarter. This was an all time quarterly record. The cost reduction initiatives we put into place it resulted in a leaner cost structure. And our ability to effectively execute helps partially offset the declines in volumes on a consolidated basis. Our adjusted EBIT margin for the company was 38.5%. It was also an all time quarterly record. On the fourth quarter, we also generated strong free cash flow of 73.5 million. I want to thank everyone on the integrity team for all their work over the last six months we have navigated the ups and downs in both of our segments. The team in Waynesboro, Georgia, where we produce our honeycombs traverse continues to set production records. Recently, some of the leadership team and I visited our director Louisiana pine chemicals facility. They have not missed a beat despite having to deal with two hurricanes and tropical storm in an eight week period. The plant continues to run even as many of our employees without power their residences for several weeks. Our performance this quarter is a testament to their efforts across the company. You turn to slide five, you'll see the third quarter results for performance chemicals.

At this point, I'll turn the call over to Mike Smith. Mike? Thanks, john. As mentioned, our performance chemical segment, with the exception of our pavement technology business, was particularly impacted by a weakened economic environment due to COVID-19. Overall segments sales a third quarter were 188 million down 18% versus the prior year period. Sales to payment technology applications were slightly higher than the prior year and set a quarterly record. Well, paving sales in North America were essentially flat sales in China and Europe, Middle East and Africa, and they were up sharply, albeit from a smaller base. Projects planned by the majority of State Department's of transportation in the US continue to proceed as planned or expected to progress on schedule for the remainder of the paving season. China sales growth also benefited from low temperature recycling technology. We've been promoting there over the last few years, and growth in Europe was driven by our pavement preservation technology adoption in a number of countries. sales for engineered polymer products were down due to reduced industrial demand globally. Were in medical device sales were also down. Sales to bio plastic customers continue to show growth. While plastic growth was particularly strong in North America, as customer used Kappa based thermoplastics and specialty paper coatings and utensils. We anticipate improved sales to footwear and medical device applications. When the impact of COVID-19 on retail sales and medical procedures. We continue to be successful in sales of our derivatized, polyols and thermoplastics in this business. In fact, in the quarter polyols and thermoplastics accounted for approximately 80% of engineer polymers revenue, margins continue to remain strong. And given our raw material, petrochemical link of the benzene we are realizing some benefits due to lower input costs. As decreased industrial specialties across all end use applications for products in this area. These include adhesive printing inks, lubricants, rubber and paper chemicals. In addition, we continue to experience price pressure, or tolo rosin products. That says we are encouraged that the Chinese government and export price has increased over 10% during the last month, a positive signal of improving supply demand dynamics. Also, we're seeing positive potential in our agricultural chemicals business, or autistic and ultrasound technologies for sustainable agriculture applications are progressing and advanced field trials with a number of our major customers. Additionally, sales to oilfield technology customers were cut sharply in line with reduced drilling in North America. Sales and all production applications were down moderately. That said we are continuously wins in China in the Middle East as worked to diversify the geography of this business. Warmage chemical segment EBITDA for 47 million down 21% versus the prior year due to lower volumes produce volumes and plant throughput were partially offset by price mix impact and lower SGA costs. We continue to control costs and generated a good mix of higher profitability products, which resulted in our adjusted EBITDA margins remaining solidly in the mid 20s currently have an extended outage at a Warrington UK facility for a planned monomer production glassware replacement production and an upcoming outage in Q4 at our North Charleston plan, as opposed to this outage occurring in the third quarter of last year. With that, I'll turn the call over to Ed Woodcock to review the results for performance materials.

Ed Woodcock -- Executive Vice President and President, Performance Materials

Thanks, Mike. As you can see on slide six revenues for the segment were up 10%. automakers, particularly in the US and Canada rebounded sharply. As such sales over gasoline vapor emission control solutions have risen dramatically versus the second quarter. The industry continues to work to refill vehicle pipeline. In fact, US vehicle inventory has been at a nine year low for each of the last five months with relatively strong vehicle demand. OEMs are struggling to refill dealer lots, and we estimate that this will continue into Q4. In the third quarter vehicle sales in the US and Canada were down 8.7% and North American production was basically Flat the prior year at plus 0.4%. us mix of light duty trucks and SUVs versus cars has been at a record high mix of 77% since April. This high truck SUV mix is favorable as these larger vehicles typically have multiple honeycombs on their canister systems. This contributed to strong demand for our honeycomb scrubbers used to meet US and Canadian regulatory standards. The team at our wings were a GA facility continue to work hard, and in response, they set a quarterly record for honeycomb production. Sales and performance materials products in China continued to show strong growth sequentially. In versus prior July and August. Vehicle sales and production continued to trend that began in April, where both sales and production are at or above prior year levels. The wise vehicle sales and production were up 13.8% and 18.3% percent respectively. August continued the year over year trend with sales and production also up 9.5% and 3.8% respectively. September data has yet to be posted. Lastly, the implementation of China's six standard has been completed segment EBITDA worth $80 million up 48% versus the prior year period. Segment EBIT margin increased 1430 basis points to 55.9%. We've benefited from a strong improvement in volumes and volumes, leveraged our low variable costs, favorable price mix and plant spending and lower legal costs. All of our facilities are back to running at their normal rates, and we expect no furloughs for the remainder of the year. In October, we began a 35 day kiln replacement outage at our Covington Virginia facility. This completes the last of four kiln replacements at that facility.

At this point, I'll turn the call over to John.

John Fortson -- President and Chief Executive Officer

Thanks. Many of you on the call it met or spoken with Bill Hamilton, our Vice President of FP&A and Treasure. Hopefully you also saw that last week we priced a high yield bond at 3.875% and also amended and extended our bank deal. Bill was the architect of both of those transactions. So I would like him to speak to our capital structure at the end of Q3 and also what it looks like now going forward, Bill.

Bill Hamilton -- Vice President of Financial Planning and Analysis and Treasure

Thanks, john. I'd now like to discuss our capital structure that you will find on slide seven. Our borrowing rate at the end of the quarter, our revolver was 150 basis points. The borrowing rates of our term loans are libraryplus 100 libraryplus 150 basis points. Up to term loan 166 million has been hedged in euros to be fixed at 1.35%. The rate of the senior notes issued in January 2018 remains fixed at 4.5%. An $80 million industrial revenue bond borrowing rate remains at 7.67%. Resulting weighted average interest rate was approximately 2.6%. That is September 30, was 1.032 billion. Our net debt ratio was 2.73 times which is down from the second quarter when it was 2.96 times. Trade working capital for the quarter decreased slightly for the previous sequential quarter to 273 million, which is 23% of sales. With regards to our capital allocation, given recent events, and the impacts of the Coronavirus to our business, our priorities have shifted somewhat. We are focused on returning to our long term target net leverage between 2.0 to 2.5 times that said, If and when the market stabilizes, we will be opportunities to share repurchases going forward. For the full scope of the Coronavirus impacts. We're now in the first quarter. We did repurchase shares, and we have 467.6 million remaining at our current share repurchase authorization. We continue to examine M&A opportunities. We are weighing those in light of the above preferred uses of capital.

Additional information will be available in our form 10Q which we expect to file later today. Turning to slide eight, I'd like to provide some information regarding our updated capital structure. Last week on October 20, we undertook a two part transaction included an eight year $550 million senior unsecured notes offering at 3.875%, and an amendment an extension of our revolving credit facility. When evaluating our capital structure, which was heavily weighted toward secured debt 2020 to 2023 maturities, we took an opportunistic approach and waited until unsecured debt at a rate below 4% was available to us. The proceeds of the notes will be used to repay our inside term loan agreement due in 2022, and the remaining 170 million outstanding on our revolver. Additionally, we downsize the revolving credit facility from 750 million to 500 million and extended it by just over two years to October 2025. in aggregate, these moves extended our debt maturity schedule to 5.8 years, an extension of almost three years. Well, this transaction is slightly diluted earnings per share in six years low cost flexible capital structure for the next several years. Additionally, we have a call on our existing 2026 Senior unsecured notes in February 2021. By calling a portion of these notes, we can counteract some of the diluted nature of the new issuance.

I will now turn the call back over to John.

John Fortson -- President and Chief Executive Officer

Thanks, Bill. Turning to slide nine, I'd like to review our revised guidance. We have narrowed our fiscal year 2020 guidance for sales from between 1.1 and 1.2 billion to between 1.15 and 1.2 billion and increased and narrowed our guidance for adjusted EBITDA from between 310 and 350 million to between 355 and 365 million. This indicates we are above what we previously characterized as the high scenario of our guidance toward material sales and margins will normalize in the fourth quarter. However, full year even tight margins for the segment will increase somewhat from last year. This will be offset by weakness in the performance chemical sector will be controlling our capital expenditures and still plan to spend about 85 million almost all that on maintenance. As such, we expect free cash flow for the year to be greater than or equal to 175 million. This exceeds the free cash flow of 161 million that we achieved in 2019. And which led to in the year at a net debt to adjusted EBITDA ratio of less than or equal to 2.75 times despite lower even down for the year. Remain we remain confident in our business to the end of the year, we may see continued weakness on the revenue line given the cost controls we've implemented and the favorable mix of sales across our segments. We expect our adjusted EBITDA and adjusted EBIT margins to remain favorable. While uncertainty remains regarding global economic strength. We believe in the strength of our strategy and our team's ability to execute on the opportunities.

Turning to slide 10, I'd like to step away from the numbers for just a moment in order to provide some perspectives on our future and share our plans for agenda 2.0 which is how we are referring to a refined approach to our growth moving forward. In order to understand what we mean by agenda 2.0 I think it's important for us to first understand what we've accomplished in the past or under in Germany 1.0 just late 2015, we focused on executing our spinoff from West rock as a stand-alone publicly traded company in May of 2016. In our first five years, we needed to ensure that we executed on the opportunity provided by the significant step up in automotive regulatory standards in both the US and Canada and then in China. And we did and the growth of our performance materials segment has been remarkable as a result. At the same time. On the chemical side, we've driven up margins for performance chemicals business from 13 to 23%. We've made substantial progress in organizing around our sustainable routes as a company are beginning to quantify the impacts of our products on the environment. We believe that in our first days as an independent company, we establish ourselves as a leading specialty chemicals company with top courtown financial metrics. Moving on a journey 1.0 we're not revising our fundamental vision, mission values or strategy. That's a 2.0 represents a new way of approaching our vision and strategy. We expect to do this by leveraging our inherent strengths and building technology based customer partnerships that deepen our relationships, great greater value and drive increased growth and profitability for our customers, ourselves and our stakeholders will continue to focus on high margin derivatized products that provide outsize performance and value to our customers.

Our hundred year history as a business we've developed a solid reputation for innovation. We have the opportunity to build on this to drive organic growth and while we inherently know that we are sustainable enterprise, we want to use sustainability as a competitive advantage. And lastly, there are a number of macro trends that we believe are in our favor going for. So turning to slide 11, let's take a look at those trends. First, we believe that the global focus on sustainability and quantifying company's total carbon footprints is only just forgotten. While we've inherently known we are sustainable company, we've not quantified or communicated that to degrees to the degree that we should either our customers or shareholders. That will change 77% of our products come from renewable resources. That is a staggering number for a chemical company. Our customers work to decrease their carbon footprints, we have a unique differentiated opportunity to work with them to solve their issues with our chemistry. So I can, more and more governments, both in the US and internationally are looking to regulate around environmental health and safety issues. And we believe our products in many instances are uniquely suited to solve those issues. One example of these archetypes of opportunities is in the area biofuels. Our assets, our people in our facilities are uniquely positioned to look at a variety of feedstocks that can be used in this market, as well as in other traditional chemical applications.

And lastly, we're going to leverage the trends related to renewable gas, and accelerate our work on as your natural gas or AG technology to provide alternate sources of demand for our carbon outside of our traditional focus on internal combustion engines. With that, let's turn to slide 12. where I'd like to focus on the three areas, we will strategically focus on growth moving forward. Placing greater emphasis on sustainability, customers interested in innovation, we expect to grow our company's revenue and profitability. For those of you who've been following us over the last year, especially earlier this summer as part of our sustainability focused investor webinar, and the release of our latest sustainability report August, you understand that sustainability isn't a new concept and the Japanese have a long history dating back to our predecessor companies of managing the business with environmental, social and governance and it's in mind and its inherent just by the nature of the products we make. As I mentioned, 77% of Germany's revenue comes from sustainable products. But more importantly, sustainability is woven into the fabric of our culture, and our mission to purify, protect and enhance the world around us. And we intend to continue to further quantify our brand promise. The initial greenhouse gas impact studies we recently completed for our new char evils, our products are only the beginning. Our goal is to complete an initiative to quantifiably evaluate societal benefit of our significant product lines by 2022.

We intend to embark on an aggressive certification program, whereby our products are recognized for their renewable nature by a variety of recognized third party experts. We believe this will be a value to customers. We also intend to take the success we've had in performance materials around gasoline vapor emission control, and expand our regulatory advocacy to the benefit of other product platforms such as repaving applications. In terms of customer centricity, we expect to broaden and deepen our already strong customer relationships. We work side by side with our customers on technologies that solve problems, we achieve a level of stickiness within our customers formulations. And as the world emerges from 2020, and its challenges, we see this as an opportunity to expand the use of our engineer polymer products. We also have significant opportunities around the world, in addition to the use of caprolactone, but also for our oilfield and pavement products, where we can expand. We are already investing in an SAP Hana upgrades and best in class technology that will enhance the efficiency of our interactions and transactions with our customers. Lastly, we will focus on innovation. We are looking across our businesses innovation opportunities. As I said earlier, we're going to accelerate our efforts on AMG. But in addition, we're going to focus on identifying applications beyond automotive that can benefit from our activity carbons unique ability to capture and release paper molecules. This is just one example where we think opportunities exist across our portfolio.

We are not constrained by our current or historical products or customers. Other stair are looking at where technology, regulatory and market changes are creating opportunities. Own capital allocation standpoint, our focus remains on growth. With more emphasis on extracting maximum value from our current assets. We intend to remain a high margin high free cash flow generating company that will provide us the opportunity to both invest in our future, but also return capital to shareholders if appropriate. Hopefully, this gives you better insight into what we need to say and Gemini 2.0. And where we intend to take this company our next phase of growth. Continue to be unprecedented times from a business standpoint, and we are incredibly pleased performance this quarter and year today. More importantly, given our track record on guidance and meeting guidance, we remain optimistic and confident in our guidance for the full year. We also believe that we're well positioned for value creation in the long term. As a market leading global specialty chemicals company, we can send you to leverage our technical expertise to the benefit of customers. Combined with a strong balance sheet and experience management team, we believe in the soundness of our strategy and our ability to execute on the many opportunities and products. In closing, I appreciate the work and efforts of our 1850 employees worldwide. They are a distinct competitive advantage for us, we continue to believe very strongly in the long term potential for our company. We hope you share our enthusiasm foreign Javis.

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

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Ian Zaffino from Oppenheimer. Please proceed with your question.

Ian Zaffino -- Oppenheimer -- Analyst

Great, thank you very much. Thanks for doing this call. Why did maybe focus on materials? And I guess you saw some really nice pricing there? You know, where was that pricing? maze? What region? You saw that in? Maybe what was the driver of that? And then I have a follow up? Thanks.

John Fortson -- President and Chief Executive Officer

A good question. Thank you. price was a global mostly focus with our larger markets of NAFTA in China. Okay, and is that is that type of pricing has not now reached kind of a baseline? Is there additional opportunity to continue to take place there? And then also, you know, if we were to look at the demand side of the equation, how much of the demand or the volumes was, let's just say refilling the pipeline's versus, you know, underlying demand? I guess for your first question, you know, we historically have been putting price into our products over over many years, you know, typically averaging anywhere from two to 5% on an annual basis. And, you know, we feel we'll continue to move price each year, and, obviously, try to capture price wherever we can around the globe. From a demand perspective, you know, volume was increasing in China, as they fully implement the China six. So we saw good year over year demand in that region, in addition to the strong growth of sales that are happening in that region, and then NAFTA as well, with the rebound from Q2, we saw good good demand, solid demand for our products and you know, solid demand for the OEMs products, which cascades down to us as well.

Ian Zaffino -- Oppenheimer -- Analyst

Okay, thank you very much. Appreciate the the colors. Thanks.

Operator

Our next question is from Jon Tanwanteng from CJS Securities. Please proceed with your question.

Pete Lucas -- CJS Securities -- Analyst

Yes, hi, good morning. It's Pete Lucas for Jon. Just one on the pavement side? how dependent Are you on federal stimulus shoring up state budgets in terms of your outlook for 2021 there?

John Fortson -- President and Chief Executive Officer

Well, federal spending clearly get very important, and there has been a, you know, a one year continuation on that. And, you know, like a lot of areas of the federal government. There's certainly some uncertainty in terms of the priorities and execution as we get into next year. But, you know, we're very optimistic that with all of the focus on infrastructure projects, across the board of federal government that, you know, they're going to get behind further increasing infrastructure spending. And I think that, you know, in time that should be continued to be a favorable tailwind for our payment technology business.

Pete Lucas -- CJS Securities -- Analyst

And just one more for me. In terms of the outlook for oil field at this point, how that figures into your margin earnings growth story over the next year or so.

John Fortson -- President and Chief Executive Officer

So Pete, you know, at this point, you know, we are like most people just you know, looking at what the Industry experts are indicating for future oilfield pricing and level of drilling activity in this current weak demand market. So, you know, we are not at this point projecting a significant turnaround in that, you know, until we start to see overall global demand pickup for oil, the oil linear oil industry, so, it will come but we're not, we're not calling the time that yet.

Pete Lucas -- CJS Securities -- Analyst

Great, very helpful. Thanks. And congrats again on a great quarter.

John Fortson -- President and Chief Executive Officer

Thanks.

Operator

Our next question is from Mike Sison With Wells Fargo. Please proceed with your question.

Richard Hamilton -- Wells Fargo -- Analyst

Hi this is Richard on for Mike.

John Fortson -- President and Chief Executive Officer

Hello, Richard.

Richard Hamilton -- Wells Fargo -- Analyst

Hi, yes. So great performance on the margins side. This quarter. Just wanted to get give some color on performance materials, and see percent statistics percent margin. How much was that related to the return of facilities back online versus cost cuts? And then price and mix? And how's all that play into it?

Ed Woodcock -- Executive Vice President and President, Performance Materials

Yes, Richard, is I talked during my script, and there's a, you know, a good mix of vehicles in North America right now that is driving additional honeycomb demand. And so we're also seeing, you know, a good, you know, trucks SUVs with multiple honeycombs, helping to push that price mix for us. And then the other. The other mix is, again, in China, where, you know, they're implementing the China's six standard, and previously with a much smaller canister with lower content of granular carbon in those canisters shifting to a higher content, higher volume, and also shifting the pellets. So we had a good strong mix change there as well.

John Fortson -- President and Chief Executive Officer

The thing, Richard, I think you should, sometimes I think investors don't fully appreciate is just a high fixed cost major of this business, right. And when you compare sort of two to two to three, it's a great window into the nature of that, right? I mean, this is a business that was down four. And depending on how you think about it, six to eight weeks of a global auto shut down, kind of had 25% margins, those are pretty good. But you know, by the standards of that business, you can see how it took a hit, but the end versus when you're going to quarter like Q3, where everybody's going full gangbusters. And you don't really have anything shut down during big outages in that quarter, you can see what the potential is right. It's just the benefit of the high fixed cost nature. And that's why we look at margins in this business on a year to year basis rather than our quarterly basis. That's right. But and keep in mind in Q4 that we you know, there will be some outage time in Q4. And and you know, it's all the data was looks good. You know, we do expect it to somewhat normalize. But to have Simon margins increase year over year in an environment where we were down for six or eight weeks globally is pretty remarkable.

Richard Hamilton -- Wells Fargo -- Analyst

Definitely. But I guess in terms of longer term, what would you say are normalized margins? Or is any of that cost reduction coming back next year? I mean, 41% was, you know, the margin last year, but...

John Fortson -- President and Chief Executive Officer

We're not really giving 21 guidance yet. Right. But what we have said, and, yes, we've got some sort of unusual shocks running through the system and 2020. So I don't want to necessarily compare 2021 to 2020, or what have you. But, you know, over the horizon, we expect our margins to continue to accrete. So, you know, we're not ready to talk about 2021, you know, plus, but if you look at us as we started this journey in 2016, we've kind of shown a pretty consistent movement up into the right, and we don't see that necessarily falling off over the next couple of years, just recognizing that 2020 system. kind of unusual, right?

Richard Hamilton -- Wells Fargo -- Analyst

Okay, Diana nonperformance chemicals, obviously, still seeing some weakness, engineer polymers and industrial specialties. You know, how much of this was COVID related specific? Is there any way to quantify that?

John Fortson -- President and Chief Executive Officer

Thanks, Richard. Well, I don't have an exact quantification of it, but the COVID impact on those two business has been very significant. And we just take each of them, you know, a little bit because there are somewhat different, I think, you know, in engineer polymers, you know, we saw a particularly kind of large drop off in the third quarter, as there was, you know, a lot of inventory removed, I think, throughout the value chain, from you know, our customers and they're coming We didn't see anywhere near the drop off in the second quarter as a lot of businesses did when COVID first got hit. And that said, you know, we're, you know, optimistic, you know, the recent orders as we exited September and got into October on engineer Palmer side are really trending positively and an exam direction. So we look forward to that continuing in industrial specialties, the COVID, impact has been broad in a lot of areas, we have general industrial weakness, and then we have certain areas, and I'll just, you know, bring up inks as a specific example where the COVID impacts on the retail market and malls being down and therefore, companies not printing up circulars that use the types of things that we have has been extremely dramatic in the second and third quarter. So as as situation updates, and people get out to a more normalized life, you know, that situation will be nearly as as dramatic.

Richard Hamilton -- Wells Fargo -- Analyst

Great, thanks, guys.

Operator

And our next question is from John McNulty from BMO Capital Markets. please proceed with your question.

John McNulty -- BMO Capital Markets -- Analyst

Hey, thanks for taking my question. So, you know, you highlighted that the strong cash flows that you guys have really generated kind of does put you in a position to actually kind of refocus capital, maybe away from debt reduction and into either m&a or buybacks. Again, I guess. Can you speak to? If you have a preference at this point? I mean, obviously, your stocks been under a lot of pressure yet at the same time, you know, there does seem to be a focus by the market on growth and growth can come in organically as well as organically. So Can Can you speak to kind of how you're how you're thinking about that capital deployment? And also, can you give us a little bit of color as to as to what you see in terms of in terms of the m&a pipeline that you may have been developing?

John Fortson -- President and Chief Executive Officer

Yeah, so, you know, John, I appreciate the question, right? I mean, look, it doesn't take a rocket science, just to kind of sort out that we will probably be in our target, two to two and a half times leverage ratios at some point, early to mid next year. Right? We're on that trajectory, right? I think we do view ourselves as a growth company. We are looking at growth opportunities, I would sort of suggest that in this environment, they're more internally, organically focused than m&a. You can never stop looking at M&A. But I think in this environment, the challenge is trying to get a buyer and a seller to agree on a five year forecast, and then also figure out what multiple you're gonna pay. Right. I just think the types of typical sort of deal flow that you see is just it's pretty hard right now. Right. And most of the deals I think you're seeing being announced or stuff that's been in the works for a while, right. So I, you know, but I so I think, you know, look, I kind of do our swapping out a little bit of, you know, money that might otherwise have gone for, you know, M&A being more plowed into our internal organic growth, we do, obviously have the flexibility to buy back shares, we have demonstrated that we will buy back shares, we have the authorization. You know, it's always on the table when we kind of look at our cash generation versus other places to deploy it. But we've always said from the beginning that if we don't have a use for it that will return that capital. So you know, both things are being looked at very carefully.

John McNulty -- BMO Capital Markets -- Analyst

Got it. Fair enough. And then I guess, you know, on on one of the the trends that you're looking for in terms of growth opportunities, one of the one of the comments you put down was on the natural gas containment side? Is that tied into some of that some of the I believe you're running a couple pilot programs for fleets and that type of thing around using natural gas for vehicles? Is that kind of what you're getting at? And can you give us an update as to as to how some of those pilot programs are working? And if if we can see this actually start to start to really kind of ring the cash register, as we look out over the next 12 months or so.

Ed Woodcock -- Executive Vice President and President, Performance Materials

Hi John this is Ed. We do have a number of pilot programs under way, principally a number of them going on in Pennsylvania based on some credits and a fake credits that are available for natural gas vehicle conversions. Those credits, I mean, those pilot programs are expanding. And you know, I don't want to get ahead of the business itself, but we see good demand, good, good efficacy of the product as a whole. And we continue to look at that whole business is favorable for creating another business segment for us over the long run. In the short term, we still have investments to do and we're working genuinely to drive greater commercialization across the platform, just a little early to kind of declare success on it. But you know, we feel it's got a lot of great legs in front of us.

John McNulty -- BMO Capital Markets -- Analyst

Got it. And and if I can maybe ask one just last question, you know, in terms of some of the big focus from an ESG perspective, you know, from the regulators, it does seem like things have kind of accelerated at a pretty quick clip over the last six to nine months. And a lot of stimulus is tied to more green initiatives, things like that. I guess, when you look at when you look at the opportunity for new gasoline vapor emission standards, do you have any greater competence in terms of in terms of potential new standards coming in, whether it's in Europe or China? Or is it too Is it too early to tell at this point? Can you can you speak to that force?

Ed Woodcock -- Executive Vice President and President, Performance Materials

Yeah, not not a problem. You know, we talked about this a little bit over a webinar over the summer, we do see regulatory changes impacting us over the next five to seven years. Obviously, Brazil has already been promulgated. And they'll be moving forward with that starting around 2020 to 2023. China of looking at a china seven, which would be more tier three, like with the US that likely around 25, plus or minus a year, and then Europe as well, looking at regulatory requirements where they would start controlling refueling emissions. You know, there was a large outcome from COVID. As they looked at the environmental issues in Europe, when the industry was shut down, NOx increased substantially. But VOC's increased substantially. And those VOC's were basically caused by all the gasoline using vehicles that were sitting around idle, and having multiple days of parking emissions going into the atmosphere. So it's, we feel it's kind of driven the European Organization to take some actions to capture those view sees and we feel it's going to drive an additional regulatory component into that market.

John McNulty -- BMO Capital Markets -- Analyst

Great, thanks very much for the color guys.

Operator

Our next question is from Daniel Rizzo with Jefferies. Please proceed with your question.

Daniel Rizzo -- Jefferies -- Analyst

Good morning, guys. Thanks for taking my questions. You mentioned piwik technology's doing well, in China, in Europe, I was just wondering how much of how much of the how much of sales are from that region within that sub segment?

John Fortson -- President and Chief Executive Officer

So, in general, we've got 8% are still in, in North America. And so, you know, the the remainder 20% is is largely from, from from Europe, and obviously, Asia and within Asia, China, is the largest piece of that.

Daniel Rizzo -- Jefferies -- Analyst

Is this evil arm helping drive the growth in those regions? Or is it just more just more traditional products?

John Fortson -- President and Chief Executive Officer

I see in in the global markets, evil firm, about gaining traction and starting to be adopted is not really significant yet, like it is in North America. You know, it's an area that we're really optimistic about in the coming years to promote those those benefits. But as yet, the the growth that we're demonstrating here are more from the traditional products, mostly on the pavement preservation site or some emulsifier technology that's been adopted for for China in cold recycling.

Daniel Rizzo -- Jefferies -- Analyst

Thanks. And then just one final question. You mentioned some, some kiln replacements and some outages, I think in in the third quarter. And I don't know if this is said before, I was wondering if how much of that is it is pulled forward from 2021. Whereas you're doing it now because of the current environment. And it won't be necessary for next year or the year after?

Ed Woodcock -- Executive Vice President and President, Performance Materials

Yeah, then we actually had that kill now the gender Covington facilities scheduled for two two, and due to COVID. We've delayed it to q4. So that would be as we talked about the last kill outage for that facility. So you know, we effectively got 15 to 20 more years before we have to replace kill to that plan.

John Fortson -- President and Chief Executive Officer

And Dan, on the chemical side, the Warrington upgrade for glassberg project was originally planned for q2 due to COVID. We've moved that and that's under way currently. And the outage in the North Charleston plant has always been a cue for planned outage is a little counterintuitive, Dan, but I mean part of the challenge. These are obviously two different situations each segment but in a code environment where you've got contractors running around your plants, interacting with your people. It slows things down a little bit right?

Daniel Rizzo -- Jefferies -- Analyst

Got you. Now that makes sense now. All right. Thank you guys.

Operator

And our next question is from Chris Kapsch with Loop Capital Markets. Please proceed with your question.

Chris Kapsch -- Loop Capital Markets -- Analyst

Hey, good morning. A couple of questions focused on the pm segment, you mentioned lower legal cost is one of the contributors to the higher margins in the quarter. So I'm curious, I assume it's right to assume that 100% of patent litigation costs are allocated to the pm segment. and wondering if the lower legal expense in three quarters does that reflect any shift in strategy? Or is it merely just a timing consideration tied to the dispute board? Or the I guess, the process timeline, the litigation process timeline?

Ed Woodcock -- Executive Vice President and President, Performance Materials

Yes Chris this is Ed it's more around the timeline of litigation, you know, we are expecting a little bit higher legal costs into force we get to a trial occurring into one.

Chris Kapsch -- Loop Capital Markets -- Analyst

Okay. And then, I guess, you know, this is a patent dispute over is that the IP that's expiring, and I guess a couple years now, with respect to when those patents expire, and then speaking in this has focused on the patents around the honeycomb application. For tier three emission standards, you've provided some scope about how, you know if you extrapolate what the automotive end market is going to look like, in that, you know, a few years from now, there's this shift toward low purge engine technology. And that could comprise be covered under new patterns, maybe I think, I think the metric is as much as two thirds of you know, auto sales, just at this point, if, if we're still going in that direction, that if the automotive OEMs are still going in that direction, you probably have some visibility on that platform. So I'm just wondering if there's any sort of visibility on updating us and if in fact, that anticipated shift to these turbocharged low purge engines is indeed happening, which would, therefore make you less vulnerable to a post patent environment if you if you end up getting competition.

Ed Woodcock -- Executive Vice President and President, Performance Materials

Yes Chris, we do see that trend continuing toward our new low, low pap purge pattern patents. A particular product we sell kind of gives us a good indication of need for capturing VOC emissions from the canister and low purge environments. We still think that those low purge candidate platen systems are going to capture anywhere to 30 to 70% of the vehicle market. But you know, as you stated, as we continue to see go through each month and each quarter, we're continuing to see greater use of a particular products of ours, that indicate that that low purge strategy is coming into effect.

Chris Kapsch -- Loop Capital Markets -- Analyst

Okay, and then just finally, one one quick one on on the fourth quarter suffered killed turn around in Kentucky. So just Is there any way to quantify the impact that may have on the on that segment in the fourth quarter in terms of costs?

Ed Woodcock -- Executive Vice President and President, Performance Materials

Yeah, Chris, we does make somewhere between four to 5 million.

Chris Kapsch -- Loop Capital Markets -- Analyst

Got it. Okay, thank you guys.

Operator

And our next question is from Paretosh Misra from Berenberg. Please proceed with your question.

Paretosh Misra -- Berenberg -- Analyst

Thank you. Good morning. Can you just remind us as to where we are in terms of us tier three adoption that is it? Is there any incremental that left for next year? And then also, what's the latest that you are hearing on the new regulations in Brazil?

John Fortson -- President and Chief Executive Officer

A paradox for a for us we they are effectively required to have 100% implementation by 2022 model year. And so if you think of it, they're actually making those 2022 model years out. So we're seeing, you know, continued continued kind of purchases of honeycombs, but also completions of platforms so that they'll should finish it up within the next several months.

Paretosh Misra -- Berenberg -- Analyst

Got it. Okay. And then just a quick follow up on this outage at Covington. Can you remind me what exactly you make there? And while that factory is down, are you can you make those volumes elsewhere? Or are you just the inventories in anticipation?

Ed Woodcock -- Executive Vice President and President, Performance Materials

Yeah, no, we built into inventory in anticipation of that outage. It was a cold outage for basically 35 days. And so is that Playing comes back online will obviously be restocking our inventories.

Paretosh Misra -- Berenberg -- Analyst

And the third and last one for me. How are you affected by exchange rate? is weak dollar a good thing for you?

Ed Woodcock -- Executive Vice President and President, Performance Materials

Yeah, a weak dollar is better for us.

Paretosh Misra -- Berenberg -- Analyst

Got it. Thank you.

Operator

Our next question is from Jonathan Love with Equal Capital Partners. Please proceed with your question.

Jonathan Love -- Equal Capital Partners -- Analyst

Hey, guys, thanks for taking my question. And first of all, John, congrats on the new role. I think that board made a great decision. Named you CEO.

John Fortson -- President and Chief Executive Officer

Thank you.

Jonathan Love -- Equal Capital Partners -- Analyst

So my first question. And maybe if you could just talk a little bit about the competitive environment in performance materials? Are you seeing anyone new or any new emerging competitors? In the US? Or, more importantly, in China?

Ed Woodcock -- Executive Vice President and President, Performance Materials

Yep Jonathan this is Ed, I'd say it's kind of relatively the same as it has been over the last five years. So nodo entrance and current current players are still in the marketplace.

Jonathan Love -- Equal Capital Partners -- Analyst

Okay, great. And, john, I was hoping you could talk a little bit more about the ability for injury to use sustainability as a competitive advantage. Is it something you know, what specifically Are you trying to address there? And that's something that customers are coming to you? Or is this your own initiative? How does this benefit?

Ed Woodcock -- Executive Vice President and President, Performance Materials

Yes, No I mean, look, if you if you think about it, right, and and take a step back. I mean, our products come from an oil, right? It's not crude oil, right. But it's an oil that, you know, comes from trees, right. And historically, we've always competed really in the marketplace based on price and performance characteristics, right? versus, you know, hydrocarbon oil based products and a lot of instances, right, they're kind of substitutes. And we obviously also compete against GM, rosins, and others. But, you know, at least for the first time in my professional career, clients and customers are now starting to ask questions around the renewable nature of the input, because if they want to reduce their own GHG footprints, they have to use raw material inputs that are renewable, right. And now, we're just in a lot of ways, we're kind of at the right place at the right time with regards to our products, because of where they come from. Right. And we've always known that what we've learned, though, to Jonathan is that if you don't go through the processes of certification, you don't really get the credit in the marketplace. Because, as we kind of alluded to in our prepared comments, I mean, it's kind of intuitive, right? You can walk around here and right next to a paper mill and edge products come from sawdust. But all that's great, but you don't get any credit in the marketplace, if you don't go ahead and get those official certifications, right. So we're in the process of doing that, that will allow and they're not really expensive. They're a little time consuming. But that will allow us to have more engaged conversations with our customers around the sort of benefits and doing a lot of ways I think you're going to see, for lack of a better term, the renewable nature become one of the performance characteristics with which they might evaluate products, right? versus smell and just coloration, etc. Right, some of the other things that that they evaluate on so we're pretty optimistic about our opportunities really across a lot of different products.

Jonathan Love -- Equal Capital Partners -- Analyst

It seems like a nice tailwind. Thanks so much for taking my question.

Operator

[Operator Instructions] Next question is from Chris Kapsch from Loop Capital Markets. Please proceed with your question.

Chris Kapsch -- Loop Capital Markets -- Analyst

Yeah, I had a follow up and focus on the buying chemicals side more. You mentioned that Chinese gum rosin prices have have increased in last month, they had increased a little bit when you get sort of after turpentine prices normalized. And so the producers weren't going after that turpentine. So production came off a bit. I'm just wondering, this latest improvement in GM rising prices, do you have a sense for if it's more supply driven? Like is there fewer trees being tapped because of COVID? Or is it that turpentine dynamic or Is this more a function of improving demand? Just any sense for what's driving the improvements there? And, and the sensor, you know, the sustainability of that, that improvement? Thanks.

John Fortson -- President and Chief Executive Officer

Yes, Sure, Chris. Is it primarily supply driven, there has been a reduction in production in China. And, you know, that has been an ongoing trend, as you know, the work of going out and tapping trees is highly labor intensive. And, you know, well, turpentine prices were high, there was an incentive to do that. And now that that supply has been curtailed, and also, you know, they had, you know, there was a lot of inventory, I'd say, throughout the chain, either of these the resin or, or the rosin. You know, that's been worked through. And, and we've actually seen, you know, quite a nice increase, it's actually over six weeks, it's 15%. And the pricing is now back to levels we have not seen since the end of 2018. So it's been been a kind of a long slog, and we're quite encouraged with the turnaround. We do know that, you know, Brazilians are also out and competing in that market. And so we're hopeful that the, you know, the entire market will get back get on the train of getting back to those more acceptable prices. And, you know, they're given that they are, these prices are more consistent with with prior long term trends. You know, I would view these as as sustainable price improvements. And that's what we hope happens with any type of, you know, demand improvement as we move out of COVID. And more normalized in the overall pricing environments should certainly be the optimistically.

Chris Kapsch -- Loop Capital Markets -- Analyst

Got it, and then the follow up, I guess, would be just, you know, extrapolating on those comments is, is this environment or those conditions is enough to, to anticipate in maybe an upward bias, and then what's been an otherwise sort of beleaguered, you know, poor rising price environment over the last couple years? Thanks.

John Fortson -- President and Chief Executive Officer

Well, the, you know, the tour market, you know, at this point, it's still still tough, but the Chinese gum rosin has always been a pressure on this market. And we can see that from our customers. And if Chinese gum rosin prices stay high, we should be able to get that pricing turned around, it may not be instantaneous, but you know, we're gonna, we're we're working on it now a conditioning of the market and as we get into next year, and with it with an ongoing and sustainable supply demand picture, we hope that as we get into next year, and by the middle of next year that you know, that market should be hopefully turned around again in a positive direction.

Chris Kapsch -- Loop Capital Markets -- Analyst

Thank you.

Operator

And we have reached the end of the question and answer session and I'll now turn the call over to Jack Maurer for closing remarks.

Jack Maurer -- Senior Vice President, Public Affairs and Investor Relations

Thank you for dialing in everybody, we appreciate your interest this morning. We remain very positive about our long term business outlook and we look forward to talking with you again next quarter.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Jack Maurer -- Senior Vice President, Public Affairs and Investor Relations

John Fortson -- President and Chief Executive Officer

Ed Woodcock -- Executive Vice President and President, Performance Materials

Bill Hamilton -- Vice President of Financial Planning and Analysis and Treasure

Ian Zaffino -- Oppenheimer -- Analyst

Pete Lucas -- CJS Securities -- Analyst

Richard Hamilton -- Wells Fargo -- Analyst

John McNulty -- BMO Capital Markets -- Analyst

Daniel Rizzo -- Jefferies -- Analyst

Chris Kapsch -- Loop Capital Markets -- Analyst

Paretosh Misra -- Berenberg -- Analyst

Jonathan Love -- Equal Capital Partners -- Analyst

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