Venator Materials PLC
Q4 2017 Earnings Call Transcript

Published: 23 Feb 2018

[Operator:]

Hello, and welcome to the Venator Materials Q4 Earnings Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Murdo Montgomery. Please go ahead, sir.

[Murdo Montgomery:]

Thank you, operator, and good morning, everyone. I'm Murdo Montgomery, Director of Investor Relations for Venator Materials. Welcome to our Fourth Quarter and Full Year 2017 Earnings Call. Joining us on the call today are Simon Turner, President and CEO; and Kurt Ogden, Senior Vice President and CFO. This morning, before the market opened, we released our earnings for the fourth quarter and full year via press release and posted it to our website, venatorcorp.com. We also posted a set of slides on our website, which will use on the call this morning while presenting our results. During this call, we may make statements about our projections or expectations for the future. All such statements are forward-looking statements. And while they reflect our current expectations, they involve risks and uncertainties and are not guarantees of future performance. You should review our filings with the Securities and Exchange Commission for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan on publicly updating or revising any forward-looking statements during the quarter. We will also refer to non-GAAP financial measures such as EBITDA, adjusted EBITDA, adjusted net income or loss, free cash flow and net debt. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted to our website at venatorcorp.com. I will now turn the call over to Simon Turner, our President and CEO.

[Simon Turner:]

Thank you, Murdo. Good morning, everyone. It's my pleasure to welcome you to our 2017 fourth quarter and full year earnings call. I'm going to start on Slide 3. We're pleased to be reporting a strong set of results which underscore that 2017 was a very successful year for Venator. We reported adjusted EBITDA of $118 million for the fourth quarter. This represents a threefold increase over the prior year quarter, driven by significant price capture and accelerated gains from our $90 million business improvement program. We saw excellent cash generation with the business generating $212 million of free cash flow in 2017. We exited 2017 on a great trajectory and have real momentum in our business for continued growth. Turning to Slide 4 in the Titanium Dioxide segment. Our Titanium Dioxide segment delivered another great quarter, with TiO2 pricing and business improvement benefits driving the results. Pricing was up 5% compared to the prior year quarter, in line with our expectations. Volume growth, adjusting for the impact of the Pori fire increased by 1% compared to the prior year quarter reflecting tight supply conditions. We see positive underlying demand across the market continuing for our specialty, differentiated and functional products and expect further meaningful price improvement in the first quarter. We will continue to manage appropriate pricing actions with our customers in a way that is consistent with our measured and tailored approach. Looking ahead, the market environment remains positive for TiO2, with seasonal demands pick up expected in the first half of the year. The inventory days remain low across the industry and utilization rates remain high and we expect this to continue. We are manufacturing at full capacity and the industry fundamentals continue to drive an elongated cycle. We are well positioned to manage all cost inflation in 2018. We have contracts in place covering effectively all of our ore costs for the year, so are well hedged. We continue to benefit from our sulfate ilmenite cost advantage and expect to see TiO2 selling prices outpacing our ore costs in 2018. Turning to Slide 5 on Performance Additives. Revenues were up 5% over the prior year period with higher selling prices driving the increase and sales volumes flat. Improved prices reflect a pricing actions earlier in the year in our higher-value functional additives and color pigment applications. Successfully offsetting higher raw material costs. We expect the first quarter to show sequential growth with seasonal improvement in sales volumes. We are well underway with efforts to restructure our Performance Additives business and it's encouraging to see the improvement in year-on-year segment EBITDA to $15 million. This signals the improving earnings trajectory of this segment with more to come. Our color pigment facilities at Easton and St. Louis have been closed successfully. The impact of these site closures will have a meaningful positive impact on segment earnings in 2018. Moving on to Slide 6 and the business improvement program. We captured $24 million of additional EBITDA benefit in 2017, including a further $9 million realized in the fourth quarter. This is well ahead of where we expected to be at this stage of the program. Clearly, it's encouraging to be reporting this acceleration with the related benefits to our bottom line for 2017. Going forward, 2018 will see a further $30 million of EBITDA improvement from this program, and we remain on course for the full $90 million run rate to be captured by the first quarter of 2019. We continue to evaluate all opportunities to further improve our competitiveness. Turning to Slide 7. We estimate our TiO2 facility in Pori, Finland, is one of the most profitable in Europe. It is designed to use low-cost ilmenite ores and produce up to 60% of its capacity as high-value specialty and differentiated products. We are keen to restore this portion of this valuable asset as quickly as possible as it provides approximately 75% of site EBITDA. Construction on the rebuild of the specialty products portion of the facility is on pace. We expect it to be complete by the end of 2018. However, we are paying a fast-track premium. Current TiO2 business conditions are favorable and provide compelling economics for the rebuild of the commodity products portion of the facility as well. The rebuild of the commodity portion of the facility however, does not merit paying a fast-track premium. We intend to rebuild this commodity portion over a normal construction timeline and reintroduce it into the market no sooner than 2020. These large capital projects are inherently challenging. We have staged the Pori reconstruction in sequential phases, starting with portions of the facility that were damage the least. Estimates on a different phases have progressive accuracy as a function of detailed engineering and elapsed time. The combination of fast-track premium cost for the specialty products rebuild and the need to replace more equipment than previously estimated have increased our construction costs. In addition, our current plan to rebuild the commodity products portion of the facility on a normal timeline will consume more of our insurance proceeds in the form of business interruption. We currently estimate the total cost to rebuild the facility, including the commodity products portion will exceed the limits of our insurance proceeds. Though, we do not have final cost estimates, we anticipate the cost could be -- exceed our insurance proceeds by as much as $325 million. Furthermore, applying additional contingency for the upper limits of design and our current construction cost estimates, the uninsured portion of the cost it could be as much as $375 million. These are estimates based on assumptions, so the uninsured costs could exceed these estimates. Based on current and anticipated market conditions, we currently expect our business interruption losses to be fully reimbursed within our insurance policy limits, though it will consume much of the proceeds. If, however, the TiO2 market strengths us more than we currently forecast, it will have the effect of increasing our uncovered cost estimate by increasing our business interruption losses beyond the limit of our insurance coverage. We expect to account for any over-the-insurance-limit costs as capital expenditures. We are aggressively pursuing options to reduce the estimated over-the-insurance-limit costs, and will keep you updated as the material developments. With that, I'll pass over to Kurt to give you the financial review.

[Kurt Ogden:]

Thanks, Simon, and good morning, everyone. Let's turn to Slide 8. Our adjusted EBITDA improved $79 million in the fourth quarter this year to $118 million compared to the prior year period. The majority of this improvement came through higher selling prices. More specifically, an improvement in TiO2 selling prices contributed approximately $90 million. As Simon mentioned earlier, we also delivered $9 million of higher earnings from our business improvement program. Costs were higher as we saw some modest raw material inflation, and we are now incurring the full weight of corporate stand-alone costs. Compared to the prior quarter, our adjusted EBITDA declined by $16 million. As expected, seasonally softer volumes more than offset the strong price capture from our announced TiO2 price increases in the fourth quarter. Let's turn to Slide 9. At the end of the fourth quarter, we have liquidity of $481 million. Our cash balance was $238 million, and the undrawn availability under our asset-based revolving lending facility was $243 million. At the end of the fourth quarter, our net debt decreased to $519 million from $565 million in the third quarter. Importantly, our net debt leverage decreased to 1.3x last 12 months EBITDA. Structurally, we continue to enjoy relatively low tax rates. In 2017, our adjusted effective tax rate was 18%, with a cash tax rate of only 9%. We have approximately $1 billion of net operating losses, from which, we expect to benefit for several years to come. Looking forward, we estimate our long-term adjusted effective tax rate will be approximately 15% to 20% with a cash rate of 10% to 15%. We believe the impact of the recent U.S. tax reform will not have a material impact on our business, given the low percentage of our global taxable income in the United States. In December, we entered into a cross-currency interest rate swap that converts $200 million of our debt into euros. This has the effect of reducing our weighted average cost of debt from 5% to 4.4% and utilizes more effectively our euro denominated profits. Annual interest savings will be approximately $5 million. Turning to Slide 10. We expect to generate more than $200 million of free cash flow in 2018, excluding any capital expenditures in excess of our insurance proceeds to rebuild of our Pori, Finland facility. This schedule outlines our estimated cash uses for 2018, which are approximately $250 million to $280 million before cash taxes. Beyond 2018, certain cash uses should decrease as we repay our debt and restructuring cash payments wind down. Our cash interest includes increased assumptions consistent with the yield curve. As we have previously indicated, our prioritization of cash uses will be focused on the following, first, reconstructing our Pori, Finland facility to improve future long-term earnings; second, strengthening our balance sheet by paying down our debt, management and our board believes that a robust balance sheet and favorable credit rating to cope with any future industry cyclicality will enhance long-term shareholder value. We are targeting net debt of approximately $350 million within the next few years; third, after our net debt approaches our target of $350 million, we expect our board will consider returns to shareholders through share repurchases and dividends. As we implement this prioritization of cash usage, we will be opportunistic and pursue compelling strategic transactions and investments that create long-term shareholder value. Simon, back over to you.

[Simon Turner:]

Thank you, Kurt. Moving to Slide 11. We are pleased with the strong fourth quarter results which were driven by continued industry supply tightness, good underlying demand and price capture, augmented by the accelerated delivery of our business improvement program. We've started 2018 with tremendous momentum. We see further price improvement in TiO2 and are encouraged by the progress we're making with our Performance Additives businesses. We're ahead of page with our improvement program with additional EBITDA captured in coming 2018. Feedstock inflation is manageable for us given our ore cost advantage and we're confident TiO2 price improvement will outpace feedstock inflation for our business in 2018. At Pori, we remain on track with our fast-paced project to restore the higher profitability, 60% specialty capacity by the end of 2018 through our original plan, fitting both the midyear and end-year milestones. The economics to rebuild the remaining 40% of capacity are compelling, and these more commodity products will be reintroduced to the market at a more normalized pace but not before 2020. In summary, our underlying business performance is very strong, and industry fundamentals continue to drive an elongated cycle with no new supply immanent. In the first quarter, we expect our EBITDA to improve by more than $25 million compared to the $118 million reported in the fourth quarter. From the combination of higher selling prices, seasonal volume uplift and our improvement program. This strong start in the first quarter will lead to another successful year in 2018 for Venator. And with that, we'd now like to open the call for questions.

[Operator:]

[Operator Instructions]. And the first question comes from Dave Begleiter with Deutsche Bank.

[David Begleiter:]

Simon, Kurt, just on this Pori cost. What happened between the November call and today to increase the cost estimate here?

[Simon Turner:]

Well let me take an answer to that please, David. I mean, I think it's important to realize from our perspective that these updated cost estimates only pertain available to us this past month. As you're aware, some parts of the plant were more worst impacted than others. So in effect, we have not got a normal sequential schedule for these projects, but rather, we have to think about design, procurement building startup and where possible, we wanted to try and rapidly restore these to meet the strong customer demand. So we've got some complexity there in a way these projects are run. This fast-track approach, just -- does make it more challenging to accurately estimate the costs. And we are paying premium prices where necessary to attain equipment and services, to hit back to fast-paced approach. So I think that what we're seeing here is the complexity and speed, leading to extra cost. We are recovering where we needed to replace equipment where we thought we could repair. And those are some of the factors that over this last period of -- led to this escalation.

[David Begleiter:]

Very good. And just on your Q1 price increases. What's the expected realization? And what are you thinking about for Q2 from a TiO2 price increase perspective?

[Simon Turner:]

Well, I would be very reckless to talk about Q2 at this time, David. I think, in TiO2 here, we look at our visibility, we're in quarter one here. I think a way to think about quarter one price capture was a similar type of capture as Q4.

[Operator:]

And the next question comes from Aleksey Yefremov from Nomura.

[Matthew Skowronski:]

This is Matt Skowronski on for Aleksey. When we think about the business improvement program, what should we think about cadence and split between the segments in 2018?

[Kurt Ogden:]

Yes, sure, why don't I take that one off. As we look into 2018, we've indicated that we will pick up an incremental EBITDA benefit of $30 million. Although, less than $10 million of that will be coming from our Performance Additives business. And then, the remainder will be in our TiO2 segment. A small piece of that is going to be coming out of the corporate segment, although, less than $5 million of the $30 million is coming from the Corporate and other segment.

[Matthew Skowronski:]

Okay. And split pretty evenly between the quarters?

[Kurt Ogden:]

Yes. As we look into the quarters, the cadence picks up a little bit more heavily towards the end of the year. You saw the $9 million that we captured in the fourth quarter. And so, looking forward into '18, of course, we pick up momentum as we go through the program. But I think that parsing it out evenly is a reasonable approach on the $30 million.

[Operator:]

And the next question comes from Laurence Alexander with Jefferies.

[Laurence Alexander:]

Could you help me on a couple of things. Can you characterize inventory levels at your customers? And also on the specialty grades, can you characterize whether there any noticeable differences in how tight different specialty grades in the market are?

[Simon Turner:]

Yes. I can have a go at that Laurence, and thank you for those questions. Start with the second one, I think. As it applies to specialty and differentiated products, as you know, that they are by very definition, less vendors of these materials. So I think that clearly, if one were to look at something like inks, and clearly, there are some players in that industry there that have a capability. And a way to think about those is, those vendors preferentially making and supplying those kind of products. So I would characterize the availability of those types of products potentially as the same as the more functional type of products in the industry. As we go into the very specialized niche products around fibers, clearly, we are being able to keep pace because most of that is out of our Duisburg facility. But when it comes to some of the Pori grades, what we're seeing their is customers -- let's just say make do and mend, they are struggling to attract different vendors, they are using mix and other types of products to get through. So I would characterize it as tighter. But that is, by far, in a way the smaller part of the market. Across the broader market and to respond to your first point, I would say that, in a normalized inventory, at or slightly below normal at this time of year, I would say. And we're not seeing some kind of run up in stock. And as you're well aware, we are fully sold, so it would be kind of somewhat harder for us to see in any event spirit. Typically, the end of the year and seasonality kicks in, there is some accumulation at year-end, but we don't see anything out of the ordinary here. And it's at the lower end, because as we said earlier, the industry continues and I'd like to make this point a number of times is that, the elongated cycle here is unfolding before our eyes, and we expect this industry tightness to continue.

[Kurt Ogden:]

Laurence, so I'll just add to that. As we look at the TiO2 industry stocks and in inventories, we think, the industry has inventory days on hand somewhere around 60 days or so. Our levels are well below that. But that's consistent with the seasonal build that you would expect as we head into the paying season.

[Laurence Alexander:]

And then, if you can forgive us, a last -- a follow on. The question about -- you've said a few times about the elongated cycle. Often when we see those, there's an R&D response that translates into, like those delays, ripting dynamic. Are you seeing anything along those lines? Are you seeing any changes from customers in terms of the morphological or contaminant specification? That might give you a hint that they are changing. How they're using the -- your TiO2 in their products?

[Simon Turner:]

Laurence, you know, this is a big difference from the last cycle back in 2011, that's why we saw a range of these type of measures. I can tell you, that we are seeing nothing of the nature that you described.

[Operator:]

And the next question comes from Bob Koort with Goldman Sachs.

[Robert Koort:]

Just wondering on the cost lift to the -- up to $375 million. Will the distribution of that cost mirror the construction timeline? So are you going to see roughly 20% of that, for that first leg, 20% for the next, 40% for the commodities, that the right way to apportion the costs? And then, also wondering, as you get your ore contracts with longer duration, are you looking to match your customer contracts in a similar manner in order to protect your margin structure?

[Kurt Ogden:]

Bob, why don't you let me take the first one here, as we think about how the spending for the rebuild is going to be coming through our financials. I think you'll be able to see in the earnings release today in the tables that we have spent, at least in 2017, approximately $94 million of CapEx, associated with the Pori rebuild. Of course, we've incurred some additional cash outflows for site cleanup as well. As we look forward, let's just remind ourselves that our current estimates are $325 million to rebuild the entire site. We've added that additional contingency simply out of a measure of prudence and conservatism to give you an upper limit to understand that there are still some material assumptions that are feeding into our estimates. But we do think that the most likely case, based on the information we have available today is $325 million. We will be spending the bulk of the remaining capital here in 2018. So if you think about that over the limit of $325 million, more than half of that will be coming in 2018, with the remainder then to fall into '19 and perhaps just a small slug falling into 2020 as a function of delayed accounts payable functions, as we pay for the rebuild. But the rebuild will be complete right now by the end of 2019.

[Simon Turner:]

Bob, it's Simon here. I'd like to respond to the second portion of your question. That being the notion of matching of -- as I understand titanium dioxide kind of prices to raw materials or ores, specifically. Maybe in the case of that, I'd like you to encourage you to think about the other way around. I mean, we have got a wide range of ore vendors, probably, one of the widest ranges in the industry. We are well contracted for 2018. So we are more predictable in our buying cost there. And we believe that from our perspective, this is still a cyclical industry. We do have a -- we are fully sold, we see a range of flexible, more fluid price measures undertaken by ourselves, tailored and managed with each and every customer, large customer, we see differences between regions, within regions and between applications. So it's definitely more fluid around how we go through our pricing discussions. But at the end, the predominance and by far away, the dominant structure for us is contracts, that are set within the 3- to 6-month window. And I don't know if that's helps you with the rest of your question.

[Operator:]

And the next question comes from P.J. Juvekar with Citi.

[Eric Petrie:]

This is Eric Petrie on for P.J. Your TiO2 prices for the year were up 18% year-over-year. Do you expect any moderation into 2018? And are you seeing any interest from your customers to do longer-term contracts with fixed pricing?

[Kurt Ogden:]

Yes. I'll answer that again, it's a somewhat responsive to the earlier points. I think that this is about visibility. In the near quarter one, one quarter, we're quite prepared to tell you that we see a 5% kind of similar trajectory to what we saw in the fourth quarter. So that's because, clearly, we're in the quarter, we have more visibility. In the second quarter, frankly, we're not going to get ready to share with you how we see that coming out. We have said, we continue to see pricing outpace rewards through the year. So in the second half, I think what we'll be prepared to say so far is that's a bit more -- bit further out. And we're not prepared to kind of make any disclosures or characterizations around trajectory in that sense. But I would point you back to our statement that, we believe that the evidence around this elongating cycle continues to unfold via on the availability of product via on the synchronous and strong demand we see around the -- we'll bid on the deepening arguably of the Chinese dynamic. So that should give you some guidance to how we're seeing the remainder of the year.

[Eric Petrie:]

Okay. And just going back to the cost estimates for the Pori restart sort of range of $325 million to $375 million, versus $100 million to $150 million buyer. You noted that, part of it was due to the fast-track premium, but I don't think you've changed your timeline for the restart of the specialty grades. So I'm just wondering, why such a higher -- over 70% above your $500 million insurance policy, why is that? And then going forward, is your -- contracts are working on a turnkey fixed basis? Or could this be cost-plus?

[Simon Turner:]

Okay. So from the first part of your question here. I think, I said earlier in response to the first question from David that, as we see it, the specialty portion of the 60% rebuild that we are going at a fast pace to restore, in which we are on pace, that's a very demanding timeline. And ordinarily, and to think we had a fire at roughly 12 months ago and we'll bring on the first pounds and the second quarter of this year. That's a very fast-paced recovery. And that's because, the first part of the specialty project was in the less -- badly but less impacted zone. The second portion of the specialty is in the more heavily impacted zone. And that accounts for the difference in the cost profile for the rebuild. So I hope that kind of like helps you out there with the reason why there's some difference even within the 60%. And frequently here we are having to order main-power items even before design is complete. It's a very challenging timeline.

[Eric Petrie:]

And then, just your EPC contract terms. Is it fixed or cost-plus?

[Simon Turner:]

So our construction contracts are set up for fast track, so you should think about those as fixed.

[Operator:]

As the next question comes from Stephen Byrne with Bank of America.

[Steve Byrne:]

Can you provide how much the insurance proceeds were in the fourth quarter in -- and then also for the year, how much flowed through the income statement? And what do you expect in 2018? And do these assume Pori is operating at 100% or at 60%? Is there a potential law between when these expire and when that plant is up and running?

[Kurt Ogden:]

Yes, Steve, why don't I start off with that. Let me address the operating rates to begin with. So as you can see in the slides that we've given you, we expect to have 60% of the plant back up and running by the end of 2018. And then, the full 100% of capacity by the end of 2019. Now, what we have said is that the size of our insurance proceeds, it's a $500 million abetment, that will be able to provide for all of our -- and offset all of our business interruption losses. Such that, as we extend all the way through 2019, there will not be any hole in our earnings associated with the downtimes that we have from Pori itself. Now to the first part of your question, what were the insurance proceeds? I can tell you that in 2017, we received a little less than half of the U.S. dollar proceeds over the course of that year. We do have a certain amount of prepaid elements included in those proceeds that we will be carrying with us as we move into 2018. And just to be a little bit more clear on the accounting here, as we look at 2018, it is our expectation that from -- all future capital expenditures will be accounted for precisely as that and any additional insurance proceeds will be accounted for under our business interruption to offset our earnings.

[Simon Turner:]

And Kurt, maybe I could sign in here. I just want to jump in and take you back to Eric's question earlier from Citi. I spoke about the nature of the contract with the contractor. I spoke about a fix, as how to be reminded that there is some portion that is on a cost-plus basis. Just wanted to clarify that.

[Steve Byrne:]

And one question on volumes. In the fourth quarter, they were roughly flat year-over-year. Would you say the mix has shifted for you in that? If you're running flat out, have you been able to shift the mix at any of the other plants to pick up some of the loss volume of the higher-margin products from Pori? And thus, there has been a bit of a mix shift?

[Simon Turner:]

Yes, I'm Simon here, I can comment on that. At the plant level, you're quite correct, at some plants that we have been able to kind of shift on the portfolio basis to supply part of that. But obviously, recognizing at the aggregate overall Venator segment level for titanium dioxide of course, that is -- we have taken a step backwards there on that mix because of the hole left by Pori.

[Operator:]

And the next question comes from Jim Sheehan with SunTrust.

[James Sheehan:]

Could you remind us, what would be the normalized EBITDA for Pori in 2018? Were there no outage?

[Kurt Ogden:]

Jim, it's a very good question. It is one that for commercial reasons, we have not given explicit transparency to. Suffice us to say, we believe that Pori is one of the most profitable facilities in Europe. It's certainly one of, if not the most profitable manufacturing site that we have within our manufacturing network. Just to remind you, it brings in low-cost ores and it sells very high-value specialty products, notwithstanding, it does have a portion of its capacity that is a commodity. In addition to that, it has the benefit of the economies of scale associated with being a large facility, at 130-kiloton facility, that is a world scale facility. And that is, in part, why we are so keen to rebuild the entire facility rather than just stop with the specialty portion of the facility.

[James Sheehan:]

And can you comment on what you're seeing in China in terms of environmental curtailments? Do you see another step up in those type of actions in 2018? Or is it more or less staying flat with last year? And related to that, are you seeing any increase in imports to the European TiO2 market from China as facilities come back online?

[Simon Turner:]

Yes, I can take that Jim. So I think we've often said here, that we quite -- we're want to be quite cautious around China. We certainly saw a net capacity reduction and those are being well trailed. I think at the back end of last year, we observed that, that dynamic had tightened even further. Now will that continue to tighten even more during '18? Our assumption is that even if it stays that, there is and probably is a good assumption for us. Still going to keep it very tight. So I think that's a way we think about China. We would remind you that the stronger of the Chinese producers were also onboard cost as a results of these scriptures, which we see, obviously, in TiO2, but we know our customers are seeing, we know we've seen a cost of range of other industries and so forth. So that would be, however, characterized. As regards to second part to your question, we do see an increase in exports from People's Republic into Europe, we expected to see such an increase. And that was because, when we divested our remedy of an inks grade in Calais, France, to a Chinese competitor, it was clear, particularly with the Pori situation in 2017, that some of those products would then come into Europe to fill up that supply situation in Europe. So we are seeing it go up. It still is in historical and in absolute terms -- a relatively small number in absolute terms. But we'd certainly acknowledge that it is higher than it was due to predominantly this inks grade phenomena.

[Operator:]

And the next question comes from Matthew DeYoe with Vertical Research Partners.

[Matthew DeYoe:]

I was wondering if you can kind of hash out of the $325 million of cost, how much is due to the possible better earnings profile to the company? And does the insurance claim drawn out on business interruption versus just the higher than prior forecasted cost?

[Kurt Ogden:]

Yes, Matt, why don't I take that one. Just to characterize the increase. What still bridge here, our previous estimate was -- best case, well not best case but our most probable case, last time we spoke to you was $150 million. And then, a best case was $100 million over the limit. Now what we're telling you is, most probable case is $325 million. So let's reconcile that bridge between the two most likely estimates that we had of $150 million to $325 million. The composition of that difference is roughly half, increase in business interruption, associated with a change in the timeline of the rebuild of commodity portion to a normalized construction timeline. The other half is associated with the increases in costs that we have been seeing, associated with the fast-track premium escalation as well as we have gotten into the site, we have had to replace more equipment than we had estimated earlier, where we were hoping that we would be able to just simply repair the equipment.

[Matthew DeYoe:]

Okay. And then, I might have missed this, but what do you expect to see as far as raw material cost inflation year-over-year? I mean, I believe prior conversations flagged a number between something like $50 million to $60 million.

[Kurt Ogden:]

Yes. We're prepared for there to be some raw material inflation here in 2018. We believe that the business is well positioned to pass those increases on to our customers, such that, we expect margin improvement in 2018 over 2017.

[Matthew DeYoe:]

Do you have an estimated, just maybe even percent, year-over-year raw material inflation estimate?

[Kurt Ogden:]

Well, we do Matt, but as you can appreciate, we're pretty reticent to add ammunition to our suppliers by providing a discrete number. I think the key point here is that, we expect margin improvement, and we do have the ability to pass on whatever price -- excuse me, whatever raw material headwinds, we'll see.

[Operator:]

And the next question comes from Duffy Fischer with Barclays.

[Patrick Fischer:]

First question, as you move to 60% on the specialty towards the end of the year, two questions there. One, will you be consuming enough ore to produce all the TiO2 arm side or will you ship in some raw ore that you'll upgrade? And then, as you feather in that -- or that 60% into the specialty market, to Simon's point, it's been out of the market for over a year, competitors have taken some of that business, will you have to sell some of that into a functional market for a while, as you load that back into specialty applications?

[Simon Turner:]

Yes, I think that's a great question. I think clearly, it underscores why we are going at this type of very high speed on our specialty lines to bring back these proceeds, and very well valued and appreciated products in this industry. Of course, there is a competitive dynamic. I think we've said a couple of times, that we are developing and improving some of these products while we are offline, so to speak. There will be some nominal -- not ores, but some raw semifinished TiO2 to brought into the finished operation during 2018, a small portion. And we will be -- but we will be -- majority would be produced under our fresh new project. And, of course, it remains to be seen. But to your second point is to how well the uptake will go. We are confident these are good products and better products. But there will be a competitive dynamic and I wouldn't certainly for one, would want to rule out the fact that we may have to sell a little bit of that in the beginning to -- as we get into reestablishment.

[Patrick Fischer:]

Great. And then, just on the insurance plan going forward, will your rates rise meaningfully? Or will the terms or what you can get for insurance change so that maybe next time you actually don't get market margins, you'd get some type of normalized margin on product that was lost for business interruption.

[Simon Turner:]

Duffy, it's a very astute question. And yes, rates will be going up in 2018. And they're going up in part, because of the fire that we have incurred. In addition to that, as you know, the insurance industry has suffered a number of losses, associated with some of the weather impacts of hurricanes and earthquakes that they have sustained losses associated with. So we've had a very good dialogue with our insurers. Thus far, we think we got a pretty good read on what that increase is going to be. And we -- I will say that we are entering into a program where we are spending CapEx that will help mitigate any future risks at our sites, and that is helping our insurance premiums we partner with our insurance underwriter in order to keep the premiums down as well as protect the assets that we have in the future.

[Operator:]

And the next question comes from Jeff Zekauskas with JPMorgan.

[Jeffrey Zekauskas:]

There are number of TiO2 properties that are on the market. And putting aside the question of whether you are or aren't interested in those properties, has a changing regulatory environment kept you from exploring those possibilities or investigating those possibilities as much as you would like?

[Simon Turner:]

I think, Jeff, we're not really able to comment here around regulatory approvals. Clearly, we will always consider any opportunity we see that would increase value for our shareholders. But I think, I can't say much more than other than maybe there has not been some kind of dynamics of the nature you describe, I think, but I recognize them.

[Jeffrey Zekauskas:]

Let me try it a different way. Do you think that you have a meaningful acquisition pipeline in 2018? Or you don't?

[Simon Turner:]

Well, of course, one person is meaningful as another person is unmeaningful. I can say to you is that, we will continue always to identify opportunity within the business and act on that. If we see that's the right thing to do, that's really more the most I can say.

[Jeffrey Zekauskas:]

Does the extra spending on your plant constrain you from possible acquisition activity?

[Kurt Ogden:]

Jeff, this is Kurt. I don't think it does. We have the attractive net debt profile we have today, we think we have a balance sheet that would support and acquisition should the opportunity arise.

[Jeffrey Zekauskas:]

And then lastly, you talked about constraints in Chinese TiO2 production. But TiO2 exports out of China in December, who were -- I don't know, 40% up year-over-year. What do you make of that? Like do you think that Chinese exports are going to stay close to 88,000 tons? Or you think they were to come off -- was that an anomaly? How do you reconcile the increase in exports with your vision of constraint production in China?

[Simon Turner:]

Yes. I think to your point there, Jeff, we wouldn't say it's some kind of one-off, there's been a record here of, you know exports built out of China elsewhere. From our perspective, we continue to see one dynamic stay the same, which is that the majority of those exports go into a greater Asia, and to some extent, non-European and non-North American destinations. So that's a trend that we continue to see. We know things were a little soft within the domestic market of China at the back end of last year. We know it's the larger and more advanced producers that are selling these exports, probably to compensate for some of the softness and some of the pricing dynamics within China. We would draw your attention to the fact that part of those increases relate to the phenomena we described earlier about -- which was always going to happen, which was these extra increment coming into Europe, which is different from what went before. And of course, finally, pricing for these products, although, these are coming out of China into the broader Asia, they're still -- these are products which are commanding higher prices as well. So you couple that with the overall tight situation, I think, you can get a read on that.

[Operator:]

And the next question comes from John Roberts with UBS.

[John Roberts:]

Given your thoughts about an elongated cycle. Are you evaluating debottlenecks at any of your other facilities?

[Simon Turner:]

John, Simon here. We are not evaluating what I would call meaningful brownfield debottlenecks other facilities. Of course, we continue as we always do to carve out and to squeeze out extra incremental pounds out of our remaining base while clearly, we have a challenge to ensure that we get our capacity primarily up here as a priority at our Pori facility.

[John Roberts:]

Okay. And then, the ore producers used to have longer-term, multiyear contracts, and then over the past several years, I think the duration of the contracts with the ore producers is really shortened up significantly. Do you see that changing at all? Do you see it staying short as you renew your ore positions over the next 1 to 2 years? You think it will start lengthening it out? Or do you think they'll even allow you to lengthen it out if you wanted to?

[Simon Turner:]

Well, I think it is a bit of a mixed approach here. What I would say to that, is that, you were quite right, several years back it was multiple-year contracts were the norm. During 2012, many of those vendors narrowed their contract term quite significantly, in fact, I will tell you, shorter than the terms we are currently experienced today. So they've kind of shortened them and then lengthen them back again in many cases. I see that by far and away the preponderance of our base is pretty much somewhere between where they used to be many years ago, and that very short-term focus. And like us, they may be taking a slightly longer-term view of the 3 to 6 months, but they certainly not down at the instantaneous or 3 monthly base. They certainly want to get some planability into their businesses.

[John Roberts:]

Would you share with us what you're average duration is currently in your mix of contracts?

[Simon Turner:]

Well, again, I don't think it's hard because of the range of pallet, but I can, maybe, pull out some broad characterizations, is that, certainly in our ilmenite part where we -- as you know, we purchase over 0.5 million tons of sulfate ilmenite around the world from multiple vendors, the trend tends to be at relatively short term. And if I characterize that against the more higher-grade base, where there's a narrow range of vendors, which we have less exposure to, of course, than many of our competitors, then maybe it's a little bit longer than that.

[Operator:]

And the next question comes from Hassan Ahmed with Alembic Global.

[Hassan Ahmed:]

A quick question around the supply side of things. Couple of moving parts. Obviously, earlier, on the call you guys touched on the China rationalization side of things. But a couple of days ago, one of the large Chinese producers announced, I believe, around 200,000 tons of incremental TiO2 -- chloride-based TiO2 capacity. And the announcement was, I believe, starting up in 2019. So the question is, that between some of the rationalization we are seeing coupled with some of these new capacity big announcements that are happening. How should we think about the supply growth picture near to medium-term?

[Simon Turner:]

Well, Hassan, it's an excellent question. And I think that it's an important to note in a 6 million ton type of market with these kind of average historical incremental growth rates and you're looking at 200,000 tons of capacity every year required for supply to keep pace with demand in this industry. Recent announcements underscores to me that near term, there is no new supply coming into the market on a net incremental basis. In fact, if you take some of the downs in the Chinese buck, you could argue that it's still a net incremental down. I think to me that the trend is always that when projects are identified and outline with fast pace, as we know the tendency is -- it tends to take longer to complete the project and longer to get up to the full capacity. So I think it's a great question. And that's why, we continue to say that the evidence around the elongated cycle is unfolding and it's strengthening. And these kind of announcements underscore to me why the supply constrained is going to be there for some time. And presuming that we continue to see even just a solid demand for these products, that talks to that -- the length of that cycle.

[Hassan Ahmed:]

Very helpful. Now as a follow-up. There were some conversations about M&A. Let's assume for a second that certain assets become available imminently. It starts the case, and you were to sort of purchase those assets. I guess the question is, a rebuild versus buy, sort of question. Would you consider the rebuild of Pori in that sort of an environment or would you just sit there and say, "hey, look, we bought some capacity, why even bother sort of spending incremental capital on Pori, keep the market tight, we've gotten incremental capacity via M&A and let's not just spend that money on Pori?"

[Kurt Ogden:]

Yes, well, Hassan, as you can imagine, we have contemplated a number of scenarios around Pori, particularly considering the escalation in costs that we have seen, associated with the rebuild. As we indicated earlier, it is a highly profitable facility. And so we think that is highly valuable to have in our network. And so we want to have that along the same lines. I think that we'll be opportunistic and we'll consider other options as well. And so we do have the ability to do both, should the opportunity arise. Not only do we have a strong balance sheet, but we have what we believe is going to be a very attractive free cash flow profile here, notwithstanding the cash usage that will go for the full rebuild of Pori. And as we think about the rebuild of Pori, I do want to just clarify that the project is fast track. And just to clarify that it is largely cost-plus in terms of the arrangements that we have with our contractors in order to rebuild that facility.

[Simon Turner:]

I think maybe just to underscore Hassan as well, and let's not leave attention here on our fourth quarter and full year results. Our underlying business is performing very strongly. We put out there how we see our quarter one expectation are continuing to be even stronger. That should stand us in good stead as we consider ways to take the business forward.

[Operator:]

And as that was the last question, I would like to return the call to Murdo Montgomery for any closing comments.

[Murdo Montgomery:]

Thank you. And thank everyone for taking the time to join the call. We'll leave it there, but please reach out to Investor Relations with any follow-up. Thank you.

[Simon Turner:]

Thank you.

[Operator:]

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.