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Ingevity Gains on Cost Actions Amid Weak Industrial Demand

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We issued an updated research report on Ingevity Corporation (NGVT - Free Report) on Oct 1.

Ingevity, which is among the prominent players in the specialty chemical space along with Ashland Global Holdings Inc. (ASH - Free Report) , Axalta Coating Systems Ltd. (AXTA - Free Report) and W. R. Grace & Co. (GRA - Free Report) , is expected to gain from its cost-saving actions, the acquisition of the Capa caprolactone business and growth in its applications driven by regulations and technology adoption amid demand weakness in certain businesses.

The company is taking certain cost-reduction measures in the wake of the coronavirus pandemic to boost profitability. These actions include reduction of headcount through an early retirement program, streamlining of manufacturing processes and reduction of traveling expenses and plant spending. Ingevity saw benefits of these initiatives in the second quarter. The company expects these actions to deliver $35 million of savings this year.

Ingevity is also benefiting from higher sales in China as automakers in the country have essentially completed the implementation of the China 6 standard. It saw higher demand for its automotive activated carbon products in China in the second quarter on the back of the China 6 implementation. The momentum is expected to continue in the third quarter.

Moreover, Ingevity is seeing healthy growth in pavement technologies on strength in North America. It is seeing continued adoption of the Evotherm warm-mix technology.

The company is also gaining from the acquisition of the Capa caprolactone business. Capa has a strong and market-leading business that focuses on high-growth end-use applications. The buyout enabled Ingevity with a new technology platform to drive revenue and earnings growth.

However, Ingevity is exposed to weakness in industrial specialties applications. In the second quarter, its Performance Chemicals unit was affected by lower demand in industrial specialties applications including printing inks. The company witnessed a roughly 24% decline in sales related to industrial specialties applications in the quarter, hurt by weak demand in industrial markets due to the impacts of the pandemic as well as the exit of an unprofitable distribution deal. Pressure in industrial specialties is likely to continue in the third quarter.

The company also faces challenges from lower sales to oilfield technology customers. Sales from its oilfield technologies business tumbled around 52% in the second quarter on lower drilling and production in North America. Drilling and production have been impacted by a global glut of inventory. Weakness in oilfield technologies is likely to continue amid lower demand.

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