Ingevity Corporation (NGVT) Q1 2022 Earnings Call Transcript

Ingevity Corporation (NGVT 1.41%)
Q1 2022 Earnings Call
May 05, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Bricka, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Q1 2022 Ingevity earnings webcast conference call. [Operator instructions] Thank you.

Mary Hall, chief financial officer, you may begin your conference.

Mary Hall -- Chief Financial Officer

Thank you, Bricka, and good morning, all, and happy Cinco de Mayo. Welcome to Ingevity's first quarter 2022 earnings call. Early this morning, we posted a presentation on our investor slides that you can use to follow today's discussion. It can be found on ir.ingevity.com under events and presentations.

Also throughout this call, we may refer to non-GAAP financial measures, which are intended to supplement -- definitions of these non-GAAP financial measures and reconciliations to comparable GAAP measures are included in our earnings release and also in our Form 10-K. We may also make forward-looking statements regarding future events and future financial performance of the company during this call, and we caution you that these statements are just projections, and actual results or events may differ materially from those projections. As further described in our earnings release. In addition to me, our speakers today, include John Fortson, our president and CEO, and Ed Woodcock, executive vice president and president of performance materials, and Rich White, senior vice president, performance chemicals, and president of industrial specialties and pavement technologies.

We also have presence, Steve Hulme, polymers, and Erik Ripple, chief growth and innovation officer, and they will be available for Q&A. I'm also pleased to introduce John Nypaver, our vice president, treasurer and head of investor relations, who joined us in April, and Meredith Breeden, our manager of investor relations. John previously worked with me at Eastman Chemical, and most recently was the treasurer and Head of IR for 3D Systems based in Rock Hill, South Carolina. Meredith has been with Ingevity for 10 years in finance and supply chain roles and spent two years with us in China.

She knows our business as well and is a great addition to our IR team. We will follow the agenda on slide three, and John Fortson will start us off with a review of key strategic themes for 2022. And with that, over to you, John.

John Fortson -- President and Chief Executive Officer

Thanks, Mary, and good morning, everyone. Before I begin, I also want to welcome John Nypaver to our IR efforts. I know they will be a terrific resource for all of you on the phone. I also want to recognize Rich White, who is a co-president of performance chemicals who will be speaking to the segment's results today.

We think the world of Rich and know he will do a great job leading and growing this business. Ingevity delivered terrific results this quarter. We achieved these levels of growth and profitability while focusing on our mission to purify, protect and enhance the world around us. First quarter 2022 was an all-time record quarter for revenue and a record for first quarter adjusted EBITDA.

Our products touch many aspects of daily life and sustainably improve the performance of materials all around us. We saw strong demand across all our businesses. Mary will shortly cover the financial results in more detail, but I want to thank the Ingevity team for all their hard work this quarter. If you turn to slide five, I'd like to discuss some of our key strategic initiatives in 2022.

We delivered strong first quarter results, in large part due to our ability to capture value for our products. Both segments saw their revenue growth drop through to EBITDA. In many instances, our price increases have been necessary to offset inflationary increases that are impacting energy, raw material, freight and logistics costs. We took quick action to optimize our mix of products, where possible, to address raw material constraints and/or logistics challenges, resulting in an improved mix of higher value derivatives products in our performance chemicals segment.

Performance materials benefited from a positive geographic mix shift, but also from increased demand for our process purification products. We continue to price all our products based on their performance characteristics. We sold in comparatively small quantities but deliver outsized performance in the form of durability, endurance, safety and environmental benefits. We continue to drive long-term organic growth of innovation.

We recently introduced new Involet wedding agents and Invadry additives to the oilfield market to enhance the emulsifiers used in drilling and production. In the upper right of this page, you can see a beaker with a clear liquid. That is AFA that was run last week at our Crossett, Arkansas biorefinery. Testing of production at scale is happening now.

We expect to ramp up sales over the rest of the year. The team in Crossett worked around the clock to get this process started out. This alternative fatty acid is very high quality, and we continue to work on this project. We should be able to drive revenue through product substitution and entry into new markets while continuing to drive cost down.

And every product substitution allows us to sell Mortofa. We will continue to work with other non-CTL oils to broaden our product offerings. This is a win across our value chain. The polyol expansion in DeRidder, while delayed a bit due to supply chain disruptions, is on track for completion in the next few months.

In performance materials, we have had considerable success in growing increasingly more profitable opportunities in our process purification markets. For customers, the addition of our carbon improves the efficacy of their processes which, in turn, lowers their manufacturing costs. Our sustainability profile is a competitive advantage, and we see ourselves as a leader in this movement. We saw products today with real sustainable value that generates strong economic profit now.

To demonstrate this and command higher prices in the markets, we need to generate the relevant data and research to achieve certain certifications. Few weeks ago, we announced the results of our latest product study. This one on an agricultural disbursement polypore H. The study was conducted by ESG consulting firm ERM and found that the greenhouse gas reductions obtained by our products more than offset the greenhouse gases generated in our manufacturer by more than 120%.

Stay tuned for more of these studies as we continue to certify our products and their benefits from the plan. We also recently received certification from TUV Austria for marine biodegradability related to our Capa thermoplastic products. This is potentially a huge opportunity for Ingevity. I'm sure you are all aware of the issues associated with plastics in our oceans.

Biodegradability will play a large part in solving this for future generations. In addition, in the first quarter, we joined the UN Global Compact as a participant in working to advance important social and environmental goals to improve our world and begun the lookout for our next sustainability report, which we expect to issue in the coming weeks. Lastly, we continue to maintain our focus on operational excellence. This takes the form of first safety but also resource out efficiency and cost reduction.

This is particularly important when there is uncertainty regarding raw material energy supply costs. As I've often said, we work on controlling what we can control, and we remain flexible and adaptive in an environment where so much is influenced by economic and geopolitical distractions. Auto production issues, the war in Ukraine and COVID issues in China are all a part of a dynamic operating environment. However, these types of environments present opportunities for us to differentiate ourselves from our competition by providing better and more consistent support to our customers.

As we move forward into 2022, we continue to focus on both near-term execution and long-term strategy. Our future is a best-in-class specialty chemical company remains bright. Our performance chemicals segment has many secular tailwinds tied to the sustainable nature of our products. Our increasing use of alternative polyol-based chemistries, coupled with the important opportunities in engineered polymers that they have in traditional and bioplastics markets, presents Ingevity with great opportunities to grow revenue and profits.

Additionally, in performance materials, we are continuing to find promising alternative uses for our carbon while we support the auto industry transition to electric vehicles. We will continue to grow the business regardless of the exact rate change in the auto transition. We continue to develop and supply technologies to eliminate gasoline emissions on ICE autos and our products will be a critical component in hybrid electric vehicles as that market grows. Across Ingevity, we also are using Capa products for noise reduction challenges in EVs and our pine-based materials are increasingly being used to support lithium mining.

I have more confident than ever that Ingevity will continue to grow and thrive. With that, I'll turn the call over to Mary to discuss our strong results for the quarter.

Mary Hall -- Chief Financial Officer

Thanks, John. Please turn to slide six. Here, you see our impressive top line improvement with record sales of nearly 20% year over year as strong end-market demand enables our sales and commercial -- costs we experienced in the quarter. For example, we saw increased logistics costs across all modes in transportation, particularly in ocean freight, where we saw some routes up as much as 60%.

Our gross profit was up over 9% year over year while our gross margin declined due primarily to the mix shift in revenue from performance materials to performance chemicals. This quarter, performance chemicals represented 61% of sales as compared to 56% last year. We were able to hold our core SG&A spend flat versus last year despite record inflation. This helps us support adjusted EBITDA, which was up about 13% year over year to $119 million, which is a record first quarter results.

Diluted adjusted earnings per share of $1.62 was up nearly 28% over prior year, reflecting primarily our increased sales and good cost management supplemented by a lower share count as we repurchased about 1.5 million shares in the last 12 months, with 610,000 shares in its first quarter. Turning to slide seven. We've laid out certain key financial metrics and highlights. In the top left chart, you see our trend in revenue growth over the past few years.

Our record $383 million of sales this quarter are largely due to continued strong end-market demand for our products and our ability to pass through cost increases and upgrade our product mix, where possible. And we're happy to note the paving season is off to a good start. Free cash flow was slightly negative at quarter end, reflecting working capital increases primarily in accounts receivables driven by the strong sales. Our leverage is stable at 2.2 times within our target range, allowing us to focus our capital allocation on growth initiatives and opportunistic share repurchases.

As you can see in the bottom right chart, we spent approximately $28 million on capex in the quarter, with over 40% of that funding growth initiatives including the debottlenecking of the caprolactone monomer line in Warrington, U.K. and our alternative fatty acids project in Crossett, Arkansas. Also, we spent $40.4 million to repurchase the 610,000 shares I mentioned earlier at an average price of $66.26 per share. We have approximately $262 million remaining under our existing board share repurchase authorization and expect to continue to repurchase shares as a core element of our balanced capital allocation strategy.

In summary, our financial results continue to be strong and we have the balance sheet and liquidity to support our organic and inorganic growth initiatives while continuing to return cash to shareholders. And now I'll turn it over to Rich for more color on our performance chemicals segment results.

Rich White -- Senior Vice President, Performance Chemicals, and President of Industrial Specialties and Pavement Technologies

Thanks, Mary, and hello, everyone. I will continue on slide No.8. Our performance chemicals segment saw strong revenue growth versus the prior year's quarter on solid end-market demand and continued price improvement, particularly in Internet power and industrial specialties. These increases were necessary to keep pace with the dramatic increases we are experiencing related to energy, raw materials and shipping.

We continue to see strong demand across all of our business segments and are selling everything that we can make. Segment sales were up 30% quarter over quarter to $234 million. Our engineered polymers business grew 34% as business increased pricing to offset inflationary costs for raw material, logistics and especially energy despite Q4 '21 and has remained at a high level. From a regional perspective, sales in Asia for caprolactam products were robust in the quarter due to demand in automotive and UV coatings applications.

This was offset by a decline in the Americas where some polyurethane customers experienced availability issues with key raw materials. As mentioned earlier, Steve Helen will be available for Q&A. Industrial specialties sales increased 29% versus the prior year quarter with strong performance across all markets particularly in the oil fit adhesives. Solid end-market demand and price increases drove a significant portion of the growth.

The supply/demand dynamic for Chinese gum rosin continues to be favorable as the market for gum rosin continues to be tight and price remained 50% above levels in late 2020. The last two are [Inaudible] of all our oil rosin products. The increase was supplemented by an improved mix shift to high-value derivative products as growth in higher-end additives to oil and indeed markets outpaced growth in merchant TOFA sales. We also saw a sharp increase in sales in customers.

Payment technologies had a record Q1 with sales up 30%. While we did implement some price increase, most of this growth was driven by improved volumes. The business has commenced the payment season is strong, with much of the volume increases in Americas and Europe. Performance chemicals -- versus prior year quarter.

While our adjusted EBITDA margin remained relatively flat, this speaks to how critical it is for us to react to inflationary pressures with Dow king pricing to maintain margins. I want to thank not only our sales and commercial teams but also supply chain, logistics, customer service, sourcing and operations for their excellent work in this difficult environment. I'll now turn the call over to Ed to discuss performance materials results.

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

Thanks, Rich. If you'll turn to slide No. 9. Sales for the performance materials segment were up 5.5% at $148 million versus the prior year's quarter.

This is the second best quarter ever for the segment. And the comparison to last year's quarter is a tough one. If you'll recall, the first quarter of last year was quite robust as the auto industry rebounded from the pandemic lockdowns. The impact of the chip shortages began to take place shortly thereafter.

In the quarter, demand for our automotive carbon and honeycomb products continued to be strong. Prices were up versus the prior year. And while volumes were generally flat, ordering patterns are stable. Growth through these products continue to be constrained by lower vehicle production globally driven by ongoing supply chain challenges and the global microchip shortage.

North American vehicle production of 3.46 million units was down 3.9% in the first quarter versus last year. And U.S. light vehicle inventories remain very low. In fact, at the end of March, they were almost half of what they were a year ago.

However, our sales were up due to price increases and product mix, with an increased proportion of sales in North America offsetting lower volumes in China where COVID-related shutdowns impacted production. Our sales in South America grew dramatically in the quarter as Brazil has launched the implementation of its ProcOnVY-L7 emission standards. We expect revenue will grow progressively during the three-year phase-in as they move to higher capacity onboard refueling vapor recovery canisters while continuing to meet the stringent diurnal emission standards that will benefit from honeycomb systems in some cases. In other regulatory news, we are encouraged by the recent comments from the European Commissioner for the internal market.

We indicated the new regulations proposal would be prepared for release in July. With this, we're anticipating implementation of new regulations in the EU in 2025 or 2026. Also, the outlook for a near-zero standard in China or what may be termed China 7 is still on track. We're anticipating implementation of a regulatory package that would benefit from honeycomb systems beginning sometime in 2027.

Our sales to process purification customers grew in the quarter based on volume and price increases. The efficacy of these products and use is well regarded and we're able to leverage our long-standing relationships to place volume when we need to. Our results in this business also reflect our ability to adapt our manufacturing network to changing market conditions. We are pleased with our performance in a very turbulent environment.

For the quarter, our segment EBITDA of $78 million was up almost 6% versus the prior year's quarter, and our adjusted EBITDA margin has remained steady at over 50%. Based on IHS data, we estimate the impact to our first quarter from the chip shortage was approximately $8 million in revenue, which is less than what it was a year ago. However, we also estimate the new disruptions, such as other parts shortages and COVID-related shutdowns, had negatively impacted revenue such that the overall impact of supply chain and operational disruptions was similar to last year. We expect microchip supplies to continue to be constrained throughout 2022.

Despite the challenges, we had a very strong quarter, and our operational and commercial execution was excellent. I'll turn the call back to John to discuss our guidance for 2022.

John Fortson -- President and Chief Executive Officer

Thank you, Ed. On slide 10, I'd like to review our outlook and guidance for 2022. We are adjusting our guidance for 2022 by increasing the top end of the range for sales to be between $1.525 billion and $1.65 billion and adjusted EBITDA to be between $430 million and $470 million. These adjustments reflect that one quarter end, we're off to a great start for the year.

Demand across the company is strong. Road paving has commenced, and it looks like it should be a good season. We have been successful in reacting quickly to and keeping pace with inflation. If we stay on this trajectory, it will be a very good year.

However, uncertainties do remain out there that could temper our performance in the year. Auto production issues, the situation in Ukraine and COVID in China all could impact the rest of the year. Regardless of how things play out, we are ready and will be flexible to best serve our customers and maximize our profitability. I'm confident that Ingevity with our team focus on operational excellence will deliver a strong performance this year.

In closing, I appreciate the ongoing hard work and efforts of our employees worldwide. It's really inspiring to be a part of this great team. We hope you share our enthusiasm for Ingevity. And at this point, I will take your questions.

Questions & Answers:

Operator

[Operator instructions] The first question comes from John McNulty of BMO Capital Markets. Please go ahead when you're ready, John.

John McNulty -- BMO Capital Markets -- Analyst

Yeah. Good morning. Thanks for taking my questions and congratulations on a strong start to the year.

John Fortson -- President and Chief Executive Officer

Thanks, John.

John McNulty -- BMO Capital Markets -- Analyst

Sure. I had a question regarding the commentary around some potential new European regs. I guess, can you give us any insight, if you have any, as to the kind of level that that might push Europe to? Would it get us as high as kind of the tier two that we all kind of referred to? Is that kind of in the cards? Is it less? Then I guess, is there any way to kind of level set us on that?

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

Yes, John, this is Ed. What we're expecting from Europe is an ORVR standard, which was a U.S. tier two type standard where you're capturing the refueling vapor emissions and returning those refueling emissions back into the engine. We're expecting potentially some overall vehicle emissions requirement as well that could drive the addition of activated carbon honeycomb on those systems.

And we are obviously eagerly anticipating the outcome and what they decide to do in July. And obviously, we'll be able to respond to the capacity that's needed to be able to meet that demand. And the other side is that it's a big uptick in revenue. If you think of the diurnal canisters that they're using today, we may have $1 to $2 of content on it.

With the ORVR requirement, it would be anywhere from $6 to $9.

John McNulty -- BMO Capital Markets -- Analyst

Got it. No, that will be huge if it comes out that way. OK. No, that's great.

And then, I guess, the second question was more about capital allocation. So your balance sheet is looking clean and it looks like you've got a really strong year ahead, assuming kind of the cash flows work out in the back half of the year, the way I think they will. You'll have enough flexibility for as much as $900 million or so of balance sheet flexibility, if you figure whatever a leverage level up to three times or so, which I think in the past kind of the peak of what you've looked for. So when I think about opportunities in terms of deploying capital, whether it's for buybacks or whether it's for a larger scale M&A or smaller scale M&A, I guess how do you kind of lay out those opportunities? Do you -- in your future? Or should we kind of stick to what we've seen over the last year or two, which is little onesies and twosies investments in some of your existing business and buybacks.

How should we think about that?

Mary Hall -- Chief Financial Officer

Good question. And I'll start with that one, and John or others can chime in. So we said long term, our target is about two to two and a half times net debt to EBITDA. So we're consistent there.

We have elevated that net debt to EBITDA when we found acquisitions that makes sense for the company and expect we would do that again. When I think about our deployment of that free cash flow. So for example, we did say in our last call that cap organic capital expenditures would be elevated this year into that $150 million to $175 million area. As we've talked about, we have a number of very exciting, we think, organic growth projects from the expansion of DeRidder in engineered polymers, various debottlenecking to continue to successfully meet demand, etc.

And then as you'll note, if you look at our share repurchases over the last couple of years anyway, we've deployed better than $100 million a year through that avenue as well. So we continue to have a robust M&A pipeline. We intend to be active in that space and are looking at bolt-on acquisitions, which to me are kind of that small to medium size but also, as you kind of indicate, we do have the capacity to look at some larger things if we believe the strategic merit warrants it. John?

John Fortson -- President and Chief Executive Officer

I think that was very well said. I mean, the only thing I would add is it does feel, John, after a year, a year plus, of some a very active M&A market, it feels like the valuations are to a better place for a strategic to really be able to create some value. So we're looking and we're going to continue to look. And as Mary said, if we find the right opportunity, we're in a good position to do it.

John McNulty -- BMO Capital Markets -- Analyst

Got it. No, that's all helpful color. Maybe I can sneak in one last one. Just with regard to the Chinese gum rosin situation where it does seem like things are tight and it's a good environment, can you speak to the impact of China lockdowns on that, what that might be doing to the market as well, like if it's either exacerbating things or it's actually helping things? I guess, can you help us to frame that with a little bit of color?

Rich White -- Senior Vice President, Performance Chemicals, and President of Industrial Specialties and Pavement Technologies

Yes. Thanks, John. This is Rich. And thanks for your write-up yesterday evening.

We are seeing this governing market continue to be tightening and the lockdowns in China are not helping. The folks can't get out and fail to do the harvesting, and we all know that the harvesting is due to start later this month. So we expect that the market will continue to be tight there throughout this season, primarily because of the lockdown, not because they're not trying to harvest the product. But it's everything associated with the lockdown.

John McNulty -- BMO Capital Markets -- Analyst

Got it. Thank you very much for the color. Appreciate it.

Operator

Thank you. We now have a question from in Vincent Anderson of Stifel. Please go ahead. Your line is open.

Vincent Anderson -- Stifel Financial Corp. -- Analyst

Good morning and I'll echo congratulations on the quarter, for sure. I couldn't help but note your commentary around adhesives growth has seemed to pick up more and more since Kraton was acquired. Given a lot of their historical strength in that market was driven, at least in part, by the DSP derivative portfolio, can you maybe discuss how and the why now of your push into adhesives and what incremental investments you may be willing to make to support that growth?

John Fortson -- President and Chief Executive Officer

Yes, I'll start it, and then I'll let Rich kind of add comments. But I would not correlate that to the sale of Kraton, it is an opportunity that, frankly, we'd be pursuing, whether they were still operating as an independent company or in their current configuration. The reality is they have historically been a much larger player in the adhesive market than we have, but that's changing. We saw it is a high-growth market and opportunity for us to be aggressive and provide value to customers.

So you're going to see us to continue growing there, but I wouldn't relate it to the situation with Kraton.

Rich White -- Senior Vice President, Performance Chemicals, and President of Industrial Specialties and Pavement Technologies

And thanks for that question. And I'll just follow up a little bit. If you've been listening to us, which I know you have over the last couple of years, our participation in this market has continued to increase. We have active innovation in this space and we continue to promote our products in this space.

So it's just an area that there's plenty of room and there's plenty of demand, and we're looking to participate in that.

Vincent Anderson -- Stifel Financial Corp. -- Analyst

OK. All right. Perfect. Just really quickly, these comments that you've now started to make on the purification process market.

I guess is any of that enabled by maybe higher prices on traditional activated carbon grades that have helped kind of lift the margin difference between automotive and process purification? Or is this really just focused on being able to maintain stable asset utilization rates in a volatile auto market?

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

Yes, Vince, it's full of both. We obviously have a more premium activated carbon, then I would say what a bituminous carbon or lignite carbon would be able to do. While they do have lower margin profiles in our automotive product if it allows us, as you suggested, where we could flex in and flex out as auto volumes fluctuate. And as you said, it does help us keep our fans running at full capacity.

Vincent Anderson -- Stifel Financial Corp. -- Analyst

OK. Excellent. If I could sneak in just one quick one. You mentioned high chemicals going into lithium mining, I believe.

Is this in kind of a surfactant capacity -- OK, is this just kind of like in a surfactant capacity, maybe related to some of the more unique ore bodies that are being developed? Or maybe more simply, I guess, would you describe the demand as a rising tide? Or is there something differentiated about your product into those applications?

John Fortson -- President and Chief Executive Officer

Yes. Great question, Vincent, and thank you for that. Our products are used in flotation technologies primarily in Australia but all over the world, and we see that trend continuing to increase with the increase that you are seeing with regard to the demand for lithium better.

Vincent Anderson -- Stifel Financial Corp. -- Analyst

All right. Excellent. Thank you.

Operator

Thank you. The next question comes from the line of Ian Zaffino of Oppenheimer. Sir, please go ahead, Ian.

Ian Zaffino -- Oppenheimer and Company -- Analyst

Thank you very much. I just wanted to touch on China one more time. Are you able to determine how much may lost sales you had in the quarter and then maybe what your expectations are going forward with the Chinese lockdowns in the material side? I have follow-up. Thanks.

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

Yes, Ian, it's Ed. We did see a decline in the back half of March as lockdowns began to kind of propagate. Obviously, you're aware that that lockdowns have propagated as well into April. So in May, most likely we'll likely have some impact to our revenue in China due to those issues.

That being said, there are a lot of incentives that the government is putting in place. Their expectation and my team's expectation in China is that they will make up the lost production in the back half of the year.

Ian Zaffino -- Oppenheimer and Company -- Analyst

OK. Good. Thank you. And then can you guys give us maybe some of your updated thoughts on the infrastructure bill kind of winding through the system right now? What do you expect what areas in our paving should do well, but anywhere else that you would kind of point out and what kind of your updated expectations are? Thanks.

Rich White -- Senior Vice President, Performance Chemicals, and President of Industrial Specialties and Pavement Technologies

Yes. Thanks, Ian. This is Rich. Certainly, we know that that infrastructure bill is rather large, $1.2 trillion.

We do know that $110 billion have been directed toward highway bridges and roads and expect that the second half of this year, we'll see some positive impact across our pavement business. It's still a bit too early to tell. But as you know, this bill will be in effect between now and 2026. But primarily, within pavement, not so much in the other segments that we participate in.

Ian Zaffino -- Oppenheimer and Company -- Analyst

All right. Thank you very much.

Operator

Thank you, Ian. The next question comes from the line of Jon Tanwanteng of CJS Securities. Your line is open.

Jon Tanwanteng -- CJS Securities -- Analyst

Good morning and thank you for taking my question. Again congrats on an excellent quarter.

Mary Hall -- Chief Financial Officer

Thanks, Jon.

Jon Tanwanteng -- CJS Securities -- Analyst

Yeah. No problem. My first question is just looking at the Q1 results, I know you can't just annualize them and expect to get a full year number, but that would get you to the high end. I know you have your pavement quarters.

Just tell me what you're seeing directionally as you enter Q2, if there's any incremental headwinds to be thinking about that gives that caution. I know there's lockdowns in China. But maybe break it down by what you're seeing in auto. If there's any -- anything else is happening out there in input costs that we should be aware of that keeps you from doing better than you did in Q1 and what should you be doing in the quarter.

John Fortson -- President and Chief Executive Officer

Yes. No. Look, I'll address this, Jon. I mean, we do the same math you do.

And it is true that typically, Q1 for this company is about 20%, plus or minus, a little bit north of 20% of our sort of overall year EBITDA contribution, right? And look, pavement was good. If the current environment remains, I think we are going to have an incredible year, right? The issue is we're one quarter in into a year, and it's kind of been this way the last couple of years where there's just a lot of volatility and a lot of unpredictability, right? I mean, I don't think anyone, December 31, thought that there would be a war in Ukraine, right? No one really knows exactly how that's going to play out, right? It feels like it's a little bit of a stalemate, but it's hard to know, right? And the same is kind of true with COVID in China. For the last two and a half years, COVID has not really been an issue in China because they haven't been locked down, but they've locked the country into -- they sort of encircled themselves in a moat, right? And so we're just being -- look, we're a quarter in, it's going to be -- if things continue, it's going to be an incredible year. But as Ed alluded to, I mean, there's a little softness right now in China this month.

I think if things shake themselves out, then it will snap back and we'll get there. But we've also never seen COVID in China like this, right? And it does seem that they're trying to have sort of a zero COVID policy. They're very aggressive about locking this stuff down. So we'll just have to see how it plays out.

But you can tell, hopefully, sitting here today, we feel pretty good, but we just got to -- we're early in the year.

Jon Tanwanteng -- CJS Securities -- Analyst

OK. Fair enough. I understand that. My second question is, the marine biodegradable recertification interest me.

Can that be a stand-alone raw material for CPG products? Or how would it be used sold? And kind of what does the market potential that you're looking at?

John Fortson -- President and Chief Executive Officer

It's not stand-alone, right? But it is an important certification because as people work on plastics that are biodegradable, particularly in an ocean environment, our product offers them an additive that provide efficacy and all the things that capital provides to someone. But they know that it will the grade in the ocean, right? It potentially could be huge for us because this is a big challenge for the plastics industry at large. So you can talk about recyclability on land. But once something goes in the ocean, you're not going to catch it all, right? So this is a huge opportunity and opens up a pretty broad range of technologies that are working to solve this problem.

It puts capital to the fore of that.

Jon Tanwanteng -- CJS Securities -- Analyst

Great. Thank you for that.

Operator

Thank you. Your next question comes from Daniel Rizzo of Jefferies. Your line is open.

Daniel Rizzo -- Jefferies -- Analyst

Hi, everyone. With the new standard in Brazil that's going to be implemented over the next three years, is that going to be more like a tier two standard or something different?

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

Yes. Dan, you're spot on. There's four years of the [Inaudible] changes. So the first year is 2022 when it is effectively a diurnal requirement.

It's a rather strict diurnal requirement. It's more strict than what China has and probably equal to what the U.S. EPA tier two was at 0.5 gram emissions. So that basically has to be on all vehicles going forward from this point.

In 2023, our VR systems will begin phasing in. It's a 20% phase-in in 2023, 60% phase-in in 2024 and then 100% by 2025. And similar to what we talked about with Europe, Brazil going from a small diurnal canister with granular carbon with potentially 50% to 100% increase in capacity by going to additional size of canister but also a shift from granular carbon to pellets. And we do think because of the diurnal requirements, there may be some opportunities for honeycombs in the Brazilian market as well.

Daniel Rizzo -- Jefferies -- Analyst

OK. And then, I guess along the same lines, with the -- I mean, I know it's a few years away, but the new I think you called it China 7 that's potentially on schedule for 2027, that would be, I assume, full tier three and will require a honeycomb scrubber or something else? I was just wondering if you could provide color on that.

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

Yes. With the U.S. tier three requirement, it would require honeycombs on all internal combustion engine vehicles.

Daniel Rizzo -- Jefferies -- Analyst

And that's what they're proposing?

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

Yeah. It's going to be basically mirroring the U.S. tier three requirements.

Daniel Rizzo -- Jefferies -- Analyst

All right. Thank you very much.

Operator

Thank you, Daniel. Your next question is a follow-up question from Chris Kapsch of Loop Capital Markets. Please go ahead.

Chris Kapsch -- Loop Capital Markets -- Analyst

Yes. Good morning. My question is focused on the performance chemicals segment. Obviously, it seems like there's strong demand there, partly because of this gum rosin situation and tightness there.

And so, I was curious if therein lies an opportunity to increase your refining network throughput. What I noticed following you guys and Kraton for years is that the governor of the optimal rate is how much demand there is for TOR so as not to overproduce TOFA given the fixed fractions in the CTO feedstock. But it seems like with your commentary about strong toward demand, that there may be some headway for higher rates. And it seems like there's ample demand for both TOFA and TOR derivatives.

So wondering how you're thinking about this dynamic and what's sort of baked into your guidance around that situation. Thanks, and I have a follow up.

John Fortson -- President and Chief Executive Officer

Chris, yes. No, it's a good question. So look, I thought Rich said it best in his commentary. We sold everything we could make, right? And we sold them at very attractive prices.

As you know, because of the sort of continuous production nature of these refineries, you're in a game of what I would call sort of value profit maximization on an ongoing basis, right? So you're looking at how much you run through the refinery, you're looking at what the end markets are and how you sort of optimize that mix. It is true that historically, we run the ride, and that's the term we use, right? But that dynamic is even somewhat flexible depending on the relative pricing relationship between TOFA and TOR, right? So all of this kind of goes into our mix. To answer your question, we will continue to be aggressive in sourcing our raw materials and running the refinery as hard as we can. I do think Chinese gum rosin is obviously helping vis-a-vis where we've been in years past, but I would not over emphasize that relative to the aggregate demand in the marketplace, right? It definitely helps that they're had a tough couple of years.

But I think the bigger opportunity for us is really the core strength of the demand in our end markets, right? And as we shift to things like adhesives and in our minds, kind of up-tier our end markets, you're going to see that performance hopefully continue to improve.

Chris Kapsch -- Loop Capital Markets -- Analyst

Got it. And sort of a follow-on on the on the PC segment and a higher level one and one that you could certainly put back on the security analyst's judgment. But I'm curious, your thoughts on the improvement in just the business cadence, the outlook for the PT segment. If your view is that this is truly structural improvement in the industry driven by things like ESG and end-market demand for certain applications or some of it's more cyclically oriented given maybe even the gum rosin situation.

Obviously, the former would underwrite a stronger valuation for these pine chemical assets than what we've seen in the past. And the latter might say, well, we should discount what could be a peak earnings cycle in the business. So curious about your view of structural versus cyclical improvement. Thanks.

John Fortson -- President and Chief Executive Officer

No. I believe in the former, I believe that what is different about this industry -- and I think it has permanently changed is there because of the advent of biofuels, you have formed or that now exists a step function change in the level of demand that will exist for our end products, right? And what's going to happen is, is that our traditional products there are more sort of chemistry oriented, if you will, are going to have to compete for TOFA and TOR if they want to use that, right? So we do see this as -- I mean, look, there are obviously elements of cyclicality in all businesses. Oilfield is really doing great, and that's because oil is back up in the north of $100, right? So there are elements of that, but I think what's different is the macro level, it's probably missed by some people, is this sort of step function in demand that's occurring across our products. Yes, gum rosin, if it has a gangbuster year, could impact us.

But ultimately, we've got a lot of new places where we can put our products. And I just think we're in early innings of what's going to be a multiyear sort of transition that we intend to benefit from. So --

Chris Kapsch -- Loop Capital Markets -- Analyst

That's very helpful. Thank you, John.

Operator

Thank you. We now have Paretosh Misra of Berenberg. Paretosh, your line is open.

Paretosh Misra -- Berenberg Capital Markets -- Analyst

In the performance chemicals business, your EBITDA margins were almost flat, but prices were up probably a lot. So just curious how your reserves look on an EBITDA per ton or EBITDA per pound metric? Were they up on a year-over-year basis?

John Fortson -- President and Chief Executive Officer

They were pretty flat, so to speak, or stable, we would like to say. Certainly, the price benefited our overall performance in the business, and we expect that to continue throughout the remainder of the year.

Paretosh Misra -- Berenberg Capital Markets -- Analyst

Got it. And just a follow-up. I don't know if you've commented on that earlier, but how is your maintenance outage schedule looks like for the rest of the year for the two segments?

John Fortson -- President and Chief Executive Officer

Yes. We have -- you're right, Paretosh, we can put that out for you guys, but maybe you can pull out each of the segment has to go through their different businesses.

Rich White -- Senior Vice President, Performance Chemicals, and President of Industrial Specialties and Pavement Technologies

Yes, we have some small plants shutdowns in both Crossett, DeRidder and Charleston during the second half of the year, and those are the scheduled maintenance outages that we're going to be at.

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

Yes. And then for the materials segment, our biggest facility is Covington, Virginia, and we've got an outage scheduled in May for that one.

Paretosh Misra -- Berenberg Capital Markets -- Analyst

Got it. Thanks.

Erik Ripple -- Chief Growth and Innovation Officer

In Warrington -- just a quick bit on that one. In Warrington, we have scheduled outages for both May and October.

John Fortson -- President and Chief Executive Officer

Anything else, Paretosh?

Paretosh Misra -- Berenberg Capital Markets -- Analyst

No, that's all I had. Thank you very much.

Operator

We now have a follow-up from Vincent Anderson of Stifel. Your line is open.

Vincent Anderson -- Stifel Financial Corp. -- Analyst

Yes. Thanks. I just wanted to ask, since you alluded to larger strategic M&A not being off the table, I'm curious that maybe a larger oleochemical portfolio would make -- would fit that strategic build just given the early success in your alternative fatty acid. Or would something larger really have to meet a higher hurdle in terms of specialization or business mode like what Capa provided you?

John Fortson -- President and Chief Executive Officer

Well, look, we're not going to comment about individual targets. But obviously, it's very -- it should be clear to everyone that we're very focused on oleo-based chemistries and we will look at both organic and inorganic opportunities as they present themselves.

Vincent Anderson -- Stifel Financial Corp. -- Analyst

All right. That's helpful. Thank you.

Operator

Thank you. We have another follow-up question from John McNulty of BMO Capital Markets. Your line is now open.

John McNulty -- BMO Capital Markets -- Analyst

Yes. Thanks for taking a follow-up. I got one or two just left. So first would just be on the pavement side.

So it's off to a really strong start. Would you say that's a function of, hey, weather was great. And so, we made, hey, while the sun was shining. Or is it more a function of the stimulus dollars finally kind of getting to the finish line and actually states and municipalities kind of putting that to work.

Rich White -- Senior Vice President, Performance Chemicals, and President of Industrial Specialties and Pavement Technologies

Hey, John, thanks for the follow-up question. No, the stimulus dollars haven't made a weigh into any of our demand. And as I mentioned earlier, we expected in the second half. So this was just strong demand driven by both America and Europe.

It wasn't prebuy. It was just the earlier demand because of the weather, as you alluded to. They're off to a great start. But as you know, the majority of that business or that season comes in the second and third quarter.

John McNulty -- BMO Capital Markets -- Analyst

Got it. No, that makes sense. And then the only other question I had was, when I look at the performance materials segment, I look at the price mix, and that was whatever 2.1 in terms of a contributor to EBITDA and then the COGS was actually bigger than that. It was a 2.3 hit.

So it kind of implies that the pricing didn't necessarily keep up with inflation. I guess, first, is that a proper read on it? And second, how should we be thinking about how that may change as you push through the year? Do you have more pricing to kind of keep up with inflation? Or how should we think about that?

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

Yes. So we do have prices coming into the market for the year. We also are heavily focused on the mix shift that we're seeing through Brazil, but also obviously closely monitoring what's going to happen with China because that will ultimately be a hopefully, a good swing in the back half of the year. And with the logistics issues that we have, we've just got to make sure that we're able to supply in China so that they can meet that surge in the back half.

Vincent Anderson -- Stifel Financial Corp. -- Analyst

Got it. Thanks for the color. Appreciate it.

John Fortson -- President and Chief Executive Officer

Thank you very much. As you know, John, you have to be careful on a quarter-on-quarter look in this company, right? So just be mindful of that. Every individual quarter, in every given year, particularly the last couple of years, has just been very unique, right? So there's a lot of noise in these. When I look at these charts, it's hard.

John McNulty -- BMO Capital Markets -- Analyst

Yes. No, that's fair. I mean, maybe putting it just a different way, do you feel like you've got enough pricing in the business to offset some of the inflationary pressures yet? Or is there more work to be done?

John Fortson -- President and Chief Executive Officer

In performance materials, for sure, right? And as you know, I mean, the changing mixes in geographies can be quite impactful on that business, right, because you've got very different requirements in each regime, right? So yes, I mean, we're in a good spot.

John McNulty -- BMO Capital Markets -- Analyst

Got it. Thanks very much for the color. Appreciate it.

Operator

Thank you. There are no further questions at this time. So Mary Hall, I turn the call back over to you.

Mary Hall -- Chief Financial Officer

Yes. Thank you, Bricka. That concludes our call. Thank you for the great discussion and for your interest in Ingevity.

And we will talk with you again next quarter. Thank you.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Mary Hall -- Chief Financial Officer

John Fortson -- President and Chief Executive Officer

Rich White -- Senior Vice President, Performance Chemicals, and President of Industrial Specialties and Pavement Technologies

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

John McNulty -- BMO Capital Markets -- Analyst

Vincent Anderson -- Stifel Financial Corp. -- Analyst

Ian Zaffino -- Oppenheimer and Company -- Analyst

Jon Tanwanteng -- CJS Securities -- Analyst

Daniel Rizzo -- Jefferies -- Analyst

Chris Kapsch -- Loop Capital Markets -- Analyst

Paretosh Misra -- Berenberg Capital Markets -- Analyst

Erik Ripple -- Chief Growth and Innovation Officer

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