Venator Materials PLC
Q1 2018 Earnings Call Transcript

Published: 1 May 2018

[Operator:]

Hello, and welcome to the Venator Materials 1Q18 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. Now I would like to turn the call over to Jeffrey Schnell. Please go ahead, sir.

[Jeffrey Schnell:]

Thank you, Keith. Good morning, everyone. I'm Jeffrey Schnell, Director of Investor Relations for Venator Materials. Welcome to our Venator’s first quarter 2018 earnings call. Joining us on the call today are Simon Turner, President and CEO; and Kurt Ogden, Senior Vice President and CFO. This morning we released our earnings for the first quarter 2018 via press release and posted it to our website, venatorcorp.com. We also posted a set of slides on our website, which will be used on the call 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, 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 SEC 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, 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. It is now my pleasure to turn the call over to Simon Turner, President and CEO of Venator.

[Simon Turner:]

Good morning, everyone. It's my pleasure to welcome you to our first quarter 2018 earnings call. Let us begin on Slide 3. We're pleased to report strong results in the quarter. Our results highlight our focus on execution, while capitalizing on continued momentum from 2017. We reported adjusted EBITDA of $157 million for the first quarter. This represents nearly a threefold increase over the prior year quarter, driven by significant price capture and additional gains from our $90 million business improvement program. Cash generation after adjusting for Pori was solid, generating $23 million of operating free cash flow in the quarter. Turning to Slide 4 and the Titanium Dioxide segment. Our Titanium Dioxide segment delivered another great quarter, and generated $143 million of adjusted EBITDA, driven by higher TiO2 pricing and additional benefit from our business improvement program. Pricing increased 23% compared with the prior year quarter, and 5% compared to the fourth quarter of 2017, reflecting strong industry fundamentals. Sales volumes increased 2% versus the prior year quarter after adjusting for the impact of the Pori fire and plant site closures as tight supply conditions persist. Underlying demand trends for our specialty, differentiated and functional products remain positive and are tracking in line with normal historical seasonality. We are working closely with our customers and expect a more modest price improvement in the second quarter aligned with our more measured approach to market conditions. Looking forward and consistent with our previously communicated outlook, TiO2 industry fundamentals remain favorable and supportive of an elongated cycle. Inventory levels remain low throughout the supply chain and industry utilization rates remain elevated, which we expect will continue throughout 2018. We are well positioned to manage all cost inflation in 2018. Through our close relationships with our suppliers, we have excellent visibility of our total expected ore costs for the year and should see additional benefits from our portfolio, which enjoys a sulfate ilmenite cost advantage. Therefore we expect a more modest pricing environment as we target ongoing margin stability. Turning to Slide 5 and Performance Additives. Revenues were up 9% over the prior year period driven by higher average selling prices, especially in functional additives and color pigments amid flat volumes, which were slightly impacted by higher energy costs and weather events in North America and Europe. We expect to see further seasonal improvement in volumes in the second quarter. The positive momentum of the Performance Additives restructuring program continues to manifest contributing $2 million to EBITDA in the first quarter. We expect the actions we have taken to date, including the closure of the color pigments facilities in Easton and St. Louis to continue to provide a meaningful positive impact in 2018. Moving onto Slide 6 and the business improvement program. We captured an additional $10 million of EBITDA benefits in the first quarter, building on the $24 million captured in 2017. We are on track to deliver on our target of capturing $30 million of incremental savings in 2018 over what was achieved in the prior year. The team is highly focused on delivering on our program and enhancing our overall competitiveness in the market. We continue to expect to capture the full $90 million of EBITDA run rate benefit by the first quarter of 2019. Turning to Slide 7, prior to the fire in 2017, our TiO2 manufacturing facility in Pori, Finland was one of the most profitable sites in Europe. The facility was designed to use low cost limonite ore to produce TiO2 with approximately 60% site capacity designed to produce a suite of high-value specialty and differentiated products further enhancing its profitability. We aim to restore the specialty portion of the asset as quickly as possible. We continue to make progress on the construction phase of the rebuild and our estimates for the self-funding of the reconstruction and commissioning of Pori remain unchanged at $325 million to $375 million. Construction projects of this magnitude are complex and this reconstruction project entails a series of mechanical construction phases of batch processing units, and concurrent rolling commissioning as construction of each unit is completed. We now have greater visibility on the timeline for commissioning constructed units and producing finished products. We currently have 20% of the total prior site capacity available for production of finished specialty products. We expect to restore additional capacity and be producing some finished specialty products during the second half of 2018 and the remaining specialty capacity to be restored and producing finished products during 2019. Based on current market and economic conditions, associated costs and projected returns we currently intend to rebuild the commodity portion of the facility. We do not currently expect product from it to be reintroduced to the market prior to 2020. On April 13, we received insurance proceeds totaling $236 million and have therefore recovered the full amount of our insurance settlement. We expect our business interruption losses through 2019 to be fully offset by these proceeds. With that I will pass over to Kurt to give the financial review.

[Kurt Ogden:]

Thanks, Simon. Let's go ahead and turn to Slide 8. Our adjusted EBITDA improved $157 million in the first quarter this year, an increase of $108 million compared to the prior year period. Higher selling prices in both our Titanium Dioxide and Performance Additives segments continue to drive the majority of our earnings improvement. We also improved the sales mix within our Titanium Dioxide segment. As Simon mentioned earlier, we delivered $10 million of increased earnings through our business improvement program. Costs were higher as we saw some modest raw material inflation. Compared to the prior quarter, our adjusted EBITDA increased $39 million. Higher average selling prices in both segments more than offset the impact of higher costs. Although we are essentially sold-out of TiO2 and capacity constrained at the moment as a result of the Pori outage, we saw a seasonal improvement in sales volumes. We also saw seasonally higher sales volumes in our Performance Additives segment. Let's go to Slide 9. At the end of the first quarter, we had liquidity of $486 million. Our cash balance was $223 million, and the undrawn availability under our asset-based revolving lending facility was $263 million. At the end of the first quarter, our net debt was only $529 million, and our net debt leverage decreased to 1.1x last 12 months EBITDA. During the first quarter of 2018, we received $62 million of insurance proceeds. In addition on April 13, we received $236 million, which will be reflected on our balance sheet in the second quarter. Our insurance partner, FM Global, has been great to work with and the April payment represents our final settlement with them. Structurally, we continue to enjoy relatively low tax rates. In the first quarter 2018, our adjusted effective tax rate was 19%, with a cash tax rate of 13%. 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 in 2018 will be approximately 15% to 20% with a cash rate of 10% to 15%. We believe the impact of the recent US tax reform will not have a material impact on our business, given the low percentage of our global taxable income in the United States. During the quarter, we saw an increase in working capital of $55 million consistent with normal seasonal patterns. This will moderate in the second quarter and working capital should become a source of cash in the second half of the year. We expect a net increase in working capital in 2018 of approximately $20 million to $30 million as value of our inventory increases consistent with the increase in our underlying average selling prices and raw material costs. Turning to Slide 10. We expect to generate more than $200 million of operational free cash flow in 2018, excluding any net capital expenditures in excess of our insurance proceeds to rebuild our Pori, Finland facility. In the first quarter, we generated $23 million. However, the pace of cash generation will increase as seasonal working capital trends reverse. We recognize visibility into our cash generating profile is available for many. The schedule outlines our estimated cash uses for 2018 before Pori, which are approximately $265 million to $300 million before cash taxes. 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 earnings; second, strengthening our balance sheet by paying down our debt. We are targeting net debt of approximately $350 million within the next few years; and third, as our net debt approaches our target of $350 million, we expect our board to 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 for concluding remarks.

[Simon Turner:]

Thank you, Kurt. Moving to Slide 11. Our business continues to perform well and we are pleased with the strong first-quarter results highlighted by strong price momentum supplemented by additional benefit from our business improvement program. The momentum in TiO2 has continued in the second quarter evidenced by additional price capture and supported by a positive demand outlook. We are well positioned to manage and pass on raw material headwinds and are working closely with our customers acknowledging their market challenges while targeting our own underlying margin stability. With regard to Pori, we reiterate the self-funded portion of the reconstruction and commissioning remains within the range of our previously stated guidance. In summary, industrial fundamentals remain strong with clear demand growth and no fresh capacity additions in view. Venator is well-positioned to benefit from this longer and more stable cycle by our specialty [ore] advantages augmented by the business improvement program. We thank you for your continued interest in Venator. We'd now like to open the call for questions.

[Operator:]

Yes, thank you. [Operator Instructions] And the first question comes from Frank Mitch with Wells Fargo.

[Unidentified Analyst:]

Hi guys. This is Lisa on for Mitch. So my first question…

[Simon Turner:]

Hi, Lisa.

[Unidentified Analyst:]

Hi. So, you guys as you mentioned, you have not changed the $325 million to $375 million range for the Pori rebuild, what gives you confidence from when you mentioned that three months ago to today?

[Simon Turner:]

Well, I think - this is Simon here, Lisa. I think clearly we spoke a lot about Pori on our last call and subsequently. I think it is important to know as we stated it is a complex project. It requires a lot of attention. We have said for a while that this was a fire in the center of the plant. It requires a lot of reconstruction work in close quarters. There is some shared infrastructure and, of course, it is fast-paced. I think the important update here is, as we turn now to look into the commissioning process, we are now in a position to bring you information and we are committed to regular updates on these calls. When we look at the commissioning program, while we want to go as speedily as possible we have identified that we are going to be using a rolling commissioning program. And what does that mean? It means that we are going to have the opportunity to utilize the batch nature of sulfate process, construct units, hand them over for commissioning on a rolling basis both within the line and across lines. And that is quite a sequencing challenge. So that informs our update around how we sequence, which informs us to say that we will be producing finished product this year with the additional product in ’19. And it is the amount of focus that we are looking at. All opportunities to strengthen the process up on the site, and of course, it is a very visible and important part of what we are doing. So that is really what gives us the confidence along with the fact that we continue to use this new information to model the range of outcomes and scenarios around the cost and timeline and that is what draws us back to reiterate that we are in this range of $325 million to $375 million.

[Unidentified Analyst:]

Okay, very helpful. Thank you. And then also on the modest pricing environment that you guys alluded to, could you possibly break that down by region, which regions might see a larger decline, or what not?

[Simon Turner:]

Okay. We are certainly not talking about declines. We are not prepared to break it out in granular detail by region, by what I can say is this, is that the casing for price momentum is strong in all major regions, and the data point that could be helpful I think is that we would expect to capture around half in quarter two of what we captured in quarter one.

[Unidentified Analyst:]

Okay, thank you.

[Simon Turner:]

Thanks Lisa.

[Operator:]

Thank you. And the next question comes from Laurence Alexander with Jefferies.

[Unidentified Analyst:]

Hi, this is [Nick] on for Laurence. I was wondering if you could provide a little bit more color on inventory levels in the customer chain, and if you see any risk of a Q2 destock cycle?

[Simon Turner:]

Yes, look, inventories at the aggregate level remain tight. Now, of course, every market is the same around the world, but we have worked closely with our customers to consider price pass through, it has become very evident to us that they are not in the business of hoarding or stockpiling or trying somehow to get ahead of increases. So, what we can tell you certainly of the large customers, the multinational customers, and the large regional customers, many of whom have both transportation methodologies and storage facilities. They are not storing unduly high or even remotely above average levels of our product in inventory in their warehouses, and of course neither are we. Of course, as we know, there are some indirect channels around the world, notably in South America and Asia where you do see some of this inventory effect, but again if you go back to, we often do this to draw comparisons with the cycle back in 2011, 2012, where we saw wholesale hoarding and then a massive stock unwind. We don't see anything like that picture today. In fact, everyone is being very attentive to their working capital and cash processes.

[Unidentified Analyst:]

Okay. Thank you very much.

[Operator:]

Thank you. And the next question comes from Steve Byrne with Bank of America.

[Steve Byrne:]

Thank you. Given the Pori reconstruction is now taking longer than you previously thought -

[Simon Turner:]

Hi, Steve. Steve, sorry, Simon here. Could you restart the question? You are very indistinct.

[Steve Byrne:]

No, sorry. Can you hear me now?

[Simon Turner:]

Yes, that is better, Steve.

[Steve Byrne:]

Okay. My question is about the insurance proceeds and given the Pori reconstruction is taking longer, does it mean more of it will be allocated to business interruption versus reconstruction, and of that $236 million you received a couple of weeks ago, will that flow through the PNL all the way through 2019?

[Kurt Ogden:]

Steve this is Kurt. Let's be clear on that final settlement that we have received from our insurer 236 million that is a receipt in advance of the needs that we have both to fund the reconstruction of the capital cost as well as the recognition of business interruption that will continue to take place through 2019. So we will continue to carry on our balance sheet a pre-payment safety will and then as we incur the cost or as we incur what otherwise would be an EBITDA loss associated with lack of production then we will recognize that pre-payment through the financial statement and we expect that to last all the way through 2019 such that there will be no economic impact on the PNL.

[Steve Byrne:]

Okay. I follow you Kurt but given that it’s taking longer to rebuild [indiscernible], does that mean more of that is being used for business interruption rather than only reconstruction?

[Kurt Ogden:]

So let's be clear here. The reconstruction is still generally in line with what our expectations have been. The additional clarity that we are providing to you now is around when we will have the actual finished product and as Simon has indicated we now have greater visibility into when we will have that finished product available.

[Steve Byrne:]

Okay. That sounds like a yes. And the question on price moderation, is there any incremental supply that might be affecting your outlook for price moderation or any evidence of aggressive pricing among your competitors that is influencing your outlook and are you looking for gross margins to continue to expand from here or to remain more flatter?

[Simon Turner:]

Okay I will take that up Kurt and Steve. Basically the simple answer to the first part of your question is that we don't see aggressive behaviors or anything untoward that we haven’t seen before. I think that as we note within our script that we are moving to a phase where we are targeting ongoing margin stability. Let me just talk you through that maybe by a way of explanation. I think it's pretty clear to everyone that in the previous cycle which is very instructive we saw some real volatility factors including demand instruction, fretting, hoarding, capacity exuberance and feedstock turbulence. Those are factors that we saw that had impacts on practical and strategic decision across the whole chain back then. What we are trying to do this time is we are targeting more responsive approach to customers I mean with the suppliers. We have put through more regular and smaller increments over a period of time. We are trying to lengthen the cycle and limit volatility factor and so for us the advantages when we talk about margin stability and what we are targeting here, what we mean by margin stability is a reduction of volatility through the cycle we mean that the margins have substantially stable over longer period, what we don't mean is that the margin would be identical each and every quarter, there will always be noise mix and seasonal effects that move up and down. Equally we want to preserve our ability to move not many of our customers are pushing for kind of long term 12 months type of certainty, some of indicate the preference still the minority I may add for six monthly type contracts and we have undertaken a much broader and bespoke set of tactics with our customers in all demographics in all segments and have got a much more fluid and diverse range of chosen pricing tactics with those customers. So at the heart of it and coming to the second part of your question, our goal is to at least pass through raw material headwinds and that's an important point and we are well positioned to do that and we of course others will have challenges, we will look at that closely and we are achieving our tactics on a go-forward basis to achieve that and I hope that kind of give you some color as to how vendors will see this management. It's not the former, it’s more of the later.

[Steve Byrne:]

Thank you, Simon.

[Operator:]

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

[Eric Petrie:]

Good morning this is Eric Petrie on for P. J. In your press release you noted that some of the incremental specialty capacity [indiscernible] into 2019, so I just wanted to ask how do you see the split currently, is it more front-end loaded as it occurs or back-end loaded?

[Kurt Ogden:]

Yes I think that's we are not prepared to cross at this stage of the game. We have modeled a couple of scenarios. We haven't even start this commissioning process yet so as we get further on and as we have a solidify our view on that we will come back in a position to answer that question.

[Eric Petrie:]

Okay. Secondly we have heard from some industry consultants that they expect pricing to decline in fourth quarter and then to next year due to capacity restarts in China from environmental regulations and the restart of Pori so how do you feel current - what is your current view on that?

[Simon Turner:]

Yes look I mean there have been some consultants that have been calling or predicting price turn for some time now and the common feature that I have noted is that that seem to drift down each time the discussion is held and frankly there will come a point one day when as correct of course that we don't see that we are about on the to that day. We see and we note of course that there has been a take up, a significant take up in this past March at the Chinese exports. If you think about this industry needing around 20,000 tonnes of TiO2 per year to kind of keep pace with demand growth. If you think about the fact that there is no real large or incremental fresh pounds coming from other sources, we believe that in China the moderations and the impact of moderation this year might be slightly less than last year and we don't want to assume that it's going to be worse than last year, we think it might be slightly better than this year but we don't see frankly the states of the industry and our representations about the cycle material changing at this time. And so no we don't see that at this stage and we continue to look very hard at the fundamentals and they continue to signpost further price move particularly with raw material start making their way in the people's cost structures.

[Eric Petrie:]

Thanks for the color.

[Operator:]

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

[Matthew DeYoe:]

Hi everybody. I have a question for you on the insurance proceeds. So do you have the option to divesture of remainder of the proceeds for business interruption to rebuild the CapEx, I mean I know with the giving shortfall but that seems pretty manageable and given the evaluation of the stock it’s clear that investors are putting cash generation of earnings potential right now.

[Simon Turner:]

Matt we do have the ability to flex that accounting between the business interruption versus the CapEx. Of course the cash has come in the door and so ultimately that is the most important, the only question then is how you account for it on the opposite end as you deploy that capital. And so our view throughout this entire process is such that we wanted to give you a representative picture of what the underlying EBITDA of this business was with Pori and that is in fact what has been taking place as we have applied some - well we have taken care of first and foremost the P&L and then anything that is left over has been deployed to the CapEx and so as there is changes as we go forward it is conceivable that you could see more of those insurance proceeds applied to CapEx but that would really be function of what are the economics of the Tio2 space and what the theoretical earnings of the Pori side would be.

[Matthew DeYoe:]

Okay. And then just to add to that can you opt to not to rebuild the commodity component especially if you can fill the earnings hold with the potential acquisition?

[Kurt Ogden:]

Yes we can. We continue to have that ability to pivot and our decision to ultimately commit the capital to rebuild the commodity portion is still down the road if you will as we see here today the economics are compelling to go ahead and rebuild that facility. The cycle looks like it have legs and we intent to rebuild that but should our situation change for whatever reason or should our outlook change we absolutely have the ability to put a pause button on those - on that commodity rebuild and/ or allocate capital elsewhere.

[Matthew DeYoe:]

Yes. It would seem like if you could capitalize on any divestitures from your competitor mergers you can kind of fill your earnings your gaps, have your cake and kind of eat it too and actually start to pull through more cash from operation. So I appreciate it. Thank you.

[Operator:]

Thank you. And the next question comes from Robert Koort with Goldman Sachs.

[Chris Evans:]

Good morning guys. This is Chris Evans on for Bob. I wanted to go back to the margin stability and the pricing strategy a bit. Can you just comment, have any of your customers or can you comment on the success you have had with customers how many of you signed up, what kind of volumes are you seeing there and you said the intent is really to offset some of the raw pressure and ultimately to make a pass through. Can you quantify the potential cost inflation you are expecting to see this year?

[Simon Turner:]

Well let me just correct the first part of the question I think is around, either way you state that we have this target and program to sign up as many customers as we can to some kind of like program. So we do not have the intention of how specifically sign up, as largest way of our [indiscernible] enter those longer than in the past contracts. What we have said is that we would treat each and every customers on the merits in this segment, in the business profile and the type of region and country they are in and we are prepared to have discussions with those customers that would allow us and we would be prepared to commit over a bit of a longer time than as we may have previously. What I can tell you vis-a-vie cover that we are very limited number of customers who believe that they would like to kind of like contractor to get to some kind of predictability for 12 months, very limited. When we look at customers who are expressing some kind of preference whereby the comply to business over six months timeframe that's still in the minority of our business and frankly that's not moving around that much now to be honest. So it's about trying to understand the dynamics of our customers pass through being responsive to it but without looking ourselves out of market moves and opportunities. As to the second part of your question, I think there are publicly available views on some of the range of increases [indiscernible] and ask for in the different minerals types what I can tell you is that a half million tons of limonite that we purchase sulfate limonite and lot of other high grade materials now, we have a price certainty for the year and I think in order magnitude we have seen larger moves in the [indiscernible] larger and earlier and followed by chloride slag and we have certainly seen relatively flat prices of Chinese limonite which kind of like we have always notes that it led to ongoing flat prices of our own western limonite and in that regard we anticipate any restrictions and constraint that may exist in some parts of the world are going to loosen up as we go through the year and that's going to help us even more on limonite. So I would characterize to you that kind of like margins stabilization and nominal price kind of discussions of the nature we spoke around Q2, those kind of ranges would allow us to stabilize our margins. So that helps.

[Chris Evans:]

It does and then for clarity, you have given some of the breadcrumbs or pieces of information but I was hoping for clarity on the Pori insurance, if you could just give us sort of accounting over that period and does the rebuild has started the accounting for dollar spent towards business interruption insurance versus the capital rebuild.

[Simon Turner:]

Yes. Perhaps I can take that. So we will be filing our 10Q later on today so I think you are going to get first quarter financials later on today. Let me tell you what we have disclosed in the 10K through 2017 period. We have run through 187 million dollars through the income statement, that number represents a number of items including the right-off of damaged inventory associated with the fire, it includes the right-off the fixed assets. They were damaged in addition to that it covers the unabsorbed fixed cost that we have at the site as well as the lost EBITDA and so those are the main components that go into the income statement. We have also indicated that that has been running through the cost of goods sold line. In addition to that, in our 10K we disclosed that we have spent 94 million of capital expenditures associated with the rebuild and again that was through the 2017 time period.

[Chris Evans:]

Thanks.

[Operator:]

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

[Hassan Ahmed:]

Excellent. Just wanted to revisit some of the comments about raw materials I mean I know you have sort of did the compare and contrast earlier about limonite versus rutile and the like but my question on the nearer term side is that obviously we have seen some supply disruptions on the mineral sand side of things. So in the near term is availability of raw materials an issue number one and number two how should we think about there seems to be a lag between Tio2 fundamentals improving and then mineral sands limonite rutile and the like following suite. So medium term and you guys are talking about sort of stronger for longer Tio2 fundamentals but how should we be thinking about the - if we are seeing a plateauing of pricing on the Tio2 side of things, how should we be seeing the raw material side as in theory picks up. What would that be your margins and part and parcel with that are you guys in the process of signing longer term for limonite?

[Simon Turner:]

Okay. Hassan it's a fair number of points, sub-questions in that question. I am pack them one by one. I heard three points there around falls visuals in near term disruptions I heard a question of price slag and I heard on cost lags and I heard a question about contract. So let’s take them in that order. You are totally right. If you look at the high grade markets particularly we have seen an unprecedented number of interruption events, let's call them that in different regions and countries of the world the common denominator of which is high grade raw materials. At each term we have continued to work closely with our suppliers to understand what that means for us in Venator and our best information today notwithstanding the fact that one or two of these are very recent and maybe not totally determined our best information today is that we will manage on the shipping schedule and not disrupt production roster. So that's an answer to your first point. I would say however that given the fact that 70% of our technology is sulfate and given the percentage that we don't have such a high exposure to some others, so some of these materials we cannot talk to whether the disruption will impact other competitors or to what degree. That remains an open point. But however, you look at it as a minimum it's really tightened up high grade and I think that most people are very clear now that high grade materials are very stretched. There are no more rooms to error of any type of high grade materials viz-a-vie supply. You are quite right about the like in pricing. Like we responded to the last trough by looking digging deeper on cost and improvement is I believe that the minerals vendors have done the same. They have applied themselves to compass business programs taken out a significant amount of cost and they are leaner than they were. They saw even more than we did last time out that the cost of instability factors in the value chain for them means in many cases you actually stop digging minerals out of the ground and you have to seize operations and follow workers and take more structural change in Tio2 where we would turn the production unit down somewhat. So the penalty for interrupting flows of raw materials is high and I think this informs their approach in a price management. So they have indicated to us that they would like to look in the pass through basis giving us ample time, still pushing hard for their increments and they determinately and are achieving some success but to your point there certainly is a longer lag than the last cycle and I believe this is helping us and making sure that their whole chain doesn't bring these volatility factors. That's my answer to your second question and finally on contract I will report to you that there has been no change from the Venator perspective. We continue to have spot and short term contracts for our low grade materials and high grade materials while we may have contract that framework agreements over the year and requirements contracts. They are no different in nature for these past three or four years which similarly to us with our customers typically don't look at the six months period visibility before in a re-cut. So I hope those answers your question Hassan. I am sorry there was a quite lot in there.

[Hassan Ahmed:]

No. No. very clever Simon and quick follow-up if I may, at least one of your competitors is considering debottlenecking. What's Venator thought with regards to debottlenecking as it pretends to you guys and then more broadly speaking is there any risk of you know or call it capacity creep if more and more guys go out and sort of start embarking on this sort of debottlenecking wagon particularly keeping in mind business fundamentals continue to be quite positive.

[Simon Turner:]

Yes. I mean I think I would answer that in two ways. The debottlenecking in my mind as oppose to capacity creep, debottlenecking in my mind is the ability to spend some money and bring on that kind of like 10,000 - 20,000 tons with an extra incremental capacity and do that in an efficient way and we have said for some time that I don't think that this as many opportunities out there outside of China certainly to Venator that we can speak to. We do have some plans within our own business improvements plan to bring additional capacity in the market through addition of efficiencies and operations I would represent that to you it's kind of like that is more creep and debottlenecking. Ideally industry has and continue and will continue to progress on capacity creep and I believe that inevitably the race of success on capacity creep slows slightly over the years and whichever way you look at it capacity creep can on a good day only provide parts of the answer so this is kind of like 200,000 ton a year demand growth that's required and we are talking in the 1% to 2% I think is close to one and two. So hopefully that gives you a range of answers. We just don't see this going to be whole sway to this certainly outside of China. In China, of course still opportunities there.

[Hassan Ahmed:]

Very helpful Simon. Thanks so much.

[Operator:]

Thank you. And the next question comes from Aleksey Yefremov from Nomura Instrument.

[Aleksey Yefremov:]

Thank you. Good morning everyone. In your, it tends to have seen slow start of the season, have you seen any improvement in demand for Tio2 as your transition from February, March into April?

[Kurt Ogden:]

We haven't seen a slow start in Europe of the nature that you have described Aleksey.

[Aleksey Yefremov:]

Okay but how we characterize your volume and demand and then between as you went from March to April, are volumes consistent or better?

[Simon Turner:]

I think they are in line with our expectations. Clearly we are coming into higher seasonal quarter and as you know we in Venetor are somewhat capacity constraint right now. So whether we feel what we would always feel the bump and jump in volume metrics is another matter but we see it in the market.

[Aleksey Yefremov:]

Thank you Simon and second question for Kurt perhaps I guess at some point you will sort of run out an insurance proceeds, when do you think you will achieve that point that's sort of question number one. Question number two, what do you think will happen with EBITDA at that time? Will there be step down in sale, what magnitude? Thank you.

[Kurt Ogden:]

Yes. So Aleksey so we have indicated that we expect the insurance proceeds to take us all the way through 2019 and by that point in time we have modeled various scenarios and under all of those scenarios we would cover all of the business interruption loss so that there would never be an EBITDA hold if you will in the P&L and that's consistent with our intent to not only bring the specialty portion of the facility back online and producing finished good products but also rebuilding the commodity portion of the facility.

[Aleksey Yefremov:]

Got it. Thank you.

[Operator:]

Thank you and the next question is from John Roberts with UBS Investment Bank.

[John Roberts:]

Thank you. Can you hear me?

[Kurt Ogden:]

Hey John. Yes.

[John Roberts:]

The increase in Chinese exports into Europe, is there a way to think about how much of that might be strategically targeting Pori customers and how much might be opportunistic that will go away as Pori restarts?

[Simon Turner:]

Yes I think that's a great question John and I think there is a pretty simple answer for you. I would think about as half of the increment being related to the Pori situation and the other half being attractive international prices seen by the Chinese and net back to them.

[John Roberts:]

So you would expect half of what we have seen that increase in Chinese export to stay around in Europe, that’s the business that they hope to hang on to long term.

[Simon Turner:]

Well I think they are strong internationally priced markets from a Chinese vantage point, what's very clear to us in Venator is that the [indiscernible] has started there. The tier-1 produces the top ten or so the other ones are really targeting some international presence and I fully believe that it doesn't just disappear I think that you are going to see some Chinese producers in the landscape here.

[John Roberts:]

Okay. Thank you.

[Operator:]

Thank you. And the next question comes from James Sheehan with SunTrust.

[Unidentified Analyst:]

This is [indiscernible] on for Jim. Do you expect the similar magnitude of price increases for specialty Tio2 as with non-specialty or is there more support for future price increases throughout the year there?

[Simon Turner:]

Yes I think that's a great question. I mean I think this time given the nominal nature of this we expect to see a similar level in this next second quarter given that, that's not to say that those two dynamics will stay hand in glove throughout the course of the year but I think in the very near term the answer to your question is yes we see a similar type of change.

[Unidentified Analyst:]

Okay. Great. And just one more. Are you seeing any greater resistance to price increases from producers in the paint and coating in the market?

[Simon Turner:]

Well look we always see resistance from all customers not just in those segments. And of course all producers and customers want to operate and run as good as businesses they can. I would say though that realistically a lot of the larger more publicly visible companies continue to point to price pass through challenges and progressively we see those companies have announced their own plans to tackle both their own product pricing and their cost structure. So I think there is resistance. I think that as I stated earlier there has been a lot of to and fro, a lot of back and forth between us and customers to try and understand that specific situation and to see what we can do to accommodate those pressures. That doesn't mean that they kind of obviously get exactly what they want but to the extent that we are listening and trying to manage the work with them I think that's a good thing. And customers do support this more measured approach. They have acknowledged that to us.

[Unidentified Analyst:]

Thank you.

[Operator:]

Thank you. And the next question comes from Arun Viswanathan with RBC Capital Markets.

[Arun Viswanathan:]

Thanks, good morning. So, first-off I guess, maybe you can just give us your perspective on the potential for long term contracts in the industry as you have already addressed that but is there any motivation amongst customers and producers to go down that route?

[Simon Turner:]

Sorry. You broke up in the one key word. Is there any -?

[Arun Viswanathan:]

Is there any motivation amongst customers and producers to pursue a long term contract and strategy?

[Simon Turner:]

No, look we have heard some of that particularly as we - in the second half of last year it became clear to many customers that there was some real fundamental shift here in Tio2 and they have to consider the possibility that the cycle would run longer than the cycle they have seen. Having said that as they turned it around and we have worked with them, that seems to have come down more on the six month max type of approach. It seems to be the more dominant preference that we are seeing. It's not the only preference of course but it's the most dominant one and I hope that helps answer that question.

[Arun Viswanathan:]

Thanks and this is a follow-up maybe you can characterize [indiscernible] as you did address I mean when you do bring on Pori, what kind of price deterioration or evolution have you modeled and why I mean would you characterize that we are going work closer in the mid cycle and so we share expect deterioration when that capacity is brought back online or how would you characterize that? Thanks.

[Simon Turner:]

Yes. Arun, we have modeled a number of different scenarios that include increases in our Tio2 selling price and so under all of the scenarios that we continue to model we are still within the sell funded range of 325 million to 375 million.

[Arun Viswanathan:]

Okay. Thanks.

[Operator:]

Thank you and the next question comes from Roger Spitz with Bank of America.

[Roger Spitz:]

Thanks very much. Good afternoon. Regarding the 2018 CapEx 120 is before Pori, can you tell us what the gross CapEx will be and what the gross CapEx for 2019 would be?

[Simon Turner:]

Yes. Roger so I think the way to think about it is you are going to have to take the insurance proceeds that we have received in 2018 and just to remind you that was the 62 million that we received in the first quarter plus the 253 and then if you model out take whatever number you want within that range of 325 to 375 take that number, parse that out between 18-19 and 20 and I think what you will find is that a little bit more than a third of that net cash movement will be in ’18 little less than half it will be in ’19 and any balance in 2020 but as you can imagine that will continue to move as we have additional information and insight and incur the actual expenses associated with the rebuild and commissioning and we will continue to provide updates for you around our expectations for that spend.

[Roger Spitz:]

Okay but the CapEx on the cash flow statement will include both the normal CapEx and rebuild cost. Is that correct?

[Simon Turner:]

Yes that's correct.

[Roger Spitz:]

And can you speak a little bit about iron oxide pigment demand and margin how they played out in Q1, 18 please. Thank you.

[Simon Turner:]

I think we are little bit disappointed on the demand and softness in the first quarter and maybe some pent up demand for the second quarter but in the broader point we continue to execute on the iron oxide and colors improvement plan and we feel good about the first quarter overall and our Performance Additives segment and we have been saying that we are going to reverse the annualized trends and we made a good start here in the first quarter with seasonal quarter to come in the second quarter. So we feel good about that at the aggregate level.

[Roger Spitz:]

Okay. I mean I know instruction, at least in the US and it has been up pretty strong numbers at very high rates. I know they are not exactly substitute materials but they are sort of going to housing or decking or what have you. Have you seen any of that where other materials are going to US residential have benefited or you're just not seen that in the iron oxide pigments?

[Simon Turner:]

I think we are just seeing broadly what we are hearing across the broader construction signals in particularly North America in the first part of the year. Little bit softer than people would like but expecting capture in Q2.

[Roger Spitz:]

Thank you very much.

[Operator:]

Thank you.

[Simon Turner:]

Okay. Thank you everyone for your questions today. I hope we have been somewhat successful in shedding some lights on those questions, providing color. We will be out on the road these coming weeks. I would like to leave you with the message from our side we believe that our underlying business is very strong. We expect a very strong quarter two and we continue to see price traction and we are well placed to manage our margins particularly as it relates to our ores, demand continues to be encouraging and we believe that the elongated cycle is what we are still seeing and this is boosted by business improvement program. So from our vantage point at this stage is set for strong 2018 with that I’d like to end the call and say thank you very much.

[Operator:]

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