Venator Materials PLC
Q2 2018 Earnings Call Transcript

Published: 31 Jul 2018

[Operator:]

Good morning and welcome to the Venator Materials Second Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Jeffrey Schnell, Director of Investor Relations. Please go ahead.

[Jeffrey Schnell:]

Thank you, Gary. Good morning, everyone. I'm Jeffrey Schnell, Director of Investor Relations for Venator Materials. Welcome to Venator's second 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 second 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:]

Thanks Jeff and good morning everyone. It's my pleasure to welcome you to our second quarter 2018 earnings call. Let's begin on Slide 3. We're pleased to report strong results in the quarter and our results highlight continued pricing momentum, solid execution, and strong cash generation. We reported adjusted EBITDA of $157 million in the second quarter, roughly 70% improvement versus the prior quarter was driven by continued price capture in both segments augmented by additional gains from our $90 million business improvement program. Cash generation after adjusting for Pori was solid, generating $45 million of operating free cash flow in the quarter. Turning to Slide 4 and our Titanium Dioxide segment. Our Titanium Dioxide segment delivered another great quarter and generated $147 million of adjusted EBITDA driven by higher TiO2 pricing and contribution from our business improvement program. We also realized a $6 million benefit from the sale of our remaining carbon credit. Prices increased 18% compared with the prior year quarter or 24% including the positive impact of foreign exchange and roughly 2% compared to the first quarter of 2018. Pricing was in line with our expectations reflecting continued strength and industry fundamentals. Sales volume after adjusting for Pori and other plant closures declined 12% compared to the prior year quarter as the manufacturing shortfall reduced product availability for certain functional grades, customer uncertainty surrounding pricing nominations, and higher inventory in the prior year quarter. Industry utilization rates remain high and inventory levels remain low throughout the supply chain. We expect the demand environment in second half of 2018 to reflect normal historical seasonal patterns with regional variability reflecting the pace of prior price capture. Turning to our feedstock outlook, and as previously communicated, we expect raw material inflation to persist in the second half of 2018. We have visibility into our total cost for the year and believe our sulfur asset base should see a modest cost advantages high grade ores namely rutiles and slags halved and are expected to come into the most pressure. Long-term Titanium Dioxide industry fundamentals remain favorable and supportive an elongated cycle. We are focused on continuing to manage our pricing and cost structure to deliver strong cash flow generation throughout the cycle. Turning to Slide 5 in our Performance Additives segment, revenues rose 6% over the prior year period driven by higher prices and volumes in functional additives and color pigments. Adjusted EBITDA of $23 million improved modestly versus the prior year due to a $3 million benefit from our business improvement program and offset by higher raw material and energy costs. In the second quarter, we implemented a restructuring of our color pigments manufacturing facility in Augusta, Georgia, resulting in a non-cash restructuring charge of $126 million. These actions will ultimately improve the profitability of our color business and better align Venator for the future. Looking to the second half of 2018, we expect the performance of our Performance Additives business to reflect historically softer seasonality and higher raw material and energy costs. We will continue to optimize our manufacturing network to provide complementary benefits to our ongoing business improvement program. Moving on to Slide 6 on the business improvement program, we captured an additional $7 million EBITDA benefit in the second quarter and in total, we've now captured $41 million. We are on track to deliver on our target of capturing roughly $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 which further enhances our overall competitiveness in the market. We continue to expect to capture the full $90 million EBITDA run rate benefit in the first quarter of 2019. Turning to Slide 7, on July 16, we announced that we have signed a business transfer agreement with Tronox for the purchase of a European Paper Laminates business, contingent upon the closing of their merger with Cristal. Separately we have signed a Memorandum of Understanding to provide Venator an exclusive right to negotiate the purchase of the Ashtabula, Ohio, TiO2 complex currently owned by Cristal should a divestiture be required to complete the pending Tronox/Cristal merger. Our acquisition of the Paper Laminates business would extend our European market leadership and further expand our differentiated product range. Additionally the acquisition of the Ashtabula, TiO2 complex would dramatically grow our North American presence and global TiO2 capacity enabling Venator to serve its valued customers better. The initial purchase price of the Ashtabula complex would be $1.1 billion if following adverse ruling by the U.S. District Court Tronox does not promptly divest Ashtabula and instead continues to await the decision of the FTC's administrative law judge that purchase price would be reduced to $900 million. Additionally the parties have agreed that Tronox will pay a $75 million break fee upon closing of the Tronox/Cristal merger, if divestiture of the 8,120 grades of Venator has been completed and the Ashtabula site is not sold to Venator. Due to the nature of the transaction and ongoing negotiation of a definitive agreement, we will not be able to provide more commentary today regarding the MOU. Turning now to our TiO2 facility in Pori, Finland. Earlier this year we took steps to strengthen our project resources and improve our probability of success. Within the past few months, we engaged additional outside experts and hired and reallocated additional internal resources for the project with an objective of improving both the execution and cost management of the project and to update our view on the total cost to rebuilding the site. This process identified additional reconstruction would be required outside the immediate fire zone leading to increased costs. Unfortunately, our contractor on the site also experienced a recent and significant safety incident which pulls construction for several weeks while the incident was under investigation which also has extended the reconstruction timeline. These recent changes and events have led us to believe now that the full rebuilding commissioning may require more self-funding than our previous estimate of $325 million to $375 million and take longer to complete. As a result of these recent developments, and in light of our potential acquisition of the Ashtabula facility, we are reviewing options within our manufacturing network including the option of producing Pori specialty and differentiated products elsewhere in our network and outpacing our ongoing construction activities at Pori accordingly during this period of review. We intend to provide more clarity regarding this review of options in the coming weeks as further information becomes available. With that, I will pass over to Kurt to give the financial review.

[Kurt Ogden:]

Thanks, Simon. Let's stay on Slide 7 a little longer. On April 13th of this year, we successfully settled our insurance claim and collected $236 million of additional proceeds. We elected to receive our insurance proceeds in Euro in order to match the currency of our cost and lost profits. In total we have collected €468 million or 551 million in U.S. dollar equivalent. As a result of our final settlement with the insurers, we have determined in consultation with our auditors the most appropriate accounting for the final insurance proceeds is to recognize them within the P&L in the quarter the final settlement occurred. Therefore during the second quarter, we recognized $325 million in cost of sales and are no longer carrying any deferred revenue on the balance sheet. As a result, we will no longer offset future costs and lost EBITDA related to Pori with insurance proceeds. We recognize this is a major change for those who model expected future earnings. To recalibrate future expectations, please consider the historical range of earnings from the Pori facility was approximately $50 million in the 2015 trough year and approximately $100 million in the 2012 peak year. Turning to Slide 8, our adjusted EBITDA improved to $157 million in the second quarter an increase of $63 million compared to the prior year period. The earnings improvement versus the prior year was predominantly driven by higher selling prices in both the Titanium Dioxide and Performance Additives segments though slightly offset by lower volumes and higher raw material and energy costs. As Simon mentioned earlier, we delivered another $7 million of EBITDA benefit through our business improvement program with $41 million delivered to-date. Foreign exchange was a modest benefit compared with the prior year supplemented with a $6 million benefit from the sale of our remaining carbon credits. EBITDA in the second quarter was flat compared with the prior quarter, pricing headwinds and performance additives namely color pigments offset the sequential improvement in TiO2 pricing. Volumes however improved in color pigments and Timber treatment as U.S. construction activity improved compared to the slow start in the first quarter offsetting flat volumes in TiO2. An improvement in costs from higher asset utilization and contribution from the business improvement program was largely offset by the sequential improvement in foreign exchange rates. Let's turn to Slide 9; Venator continues to have an attractive financial position. At the end of the second quarter we had liquidity of $625 million. Our cash balance was $354 million and the undrawn availability under our asset base revolving lending facility was $271 million. At the end of the second quarter, our net debt was $394 million and our net debt leverage decreased to 0.7 times our last 12 months EBITDA. During the second quarter of 2018, and as communicated earlier, we received $236 million of insurance proceeds which represents the final settlement with our insurance partner. Structurally, we continue to enjoy relatively low tax rates. In the second quarter 2018 our adjusted effective tax rate was 18% with a cash tax rate of 4%. We have approximately $1 billion of net operating losses from which we expect to benefit for several years to come. Looking forward, we reiterate our estimated long-term adjusted effective tax rate of 15% to 20% with a cash tax rate of 10% to 15%. During the first half of 2018, we saw an increase in working capital of $119 million consistent with normal seasonal patterns. Looking into the second half of the year we expect these trends to reverse with working capital becoming a source of cash. We continue to expect working capital in 2018 to be a net use of $20 million to $30 million. Turning to Slide 10, we continue to expect to generate solid 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 second quarter we generated $45 million and $68 million in the first half of the year. The schedule also outlines our expected cash uses for 2018. Simon back over to you for concluding remarks.

[Simon Turner:]

Thank you, Kurt. Moving to Slide 11. We are pleased with the performance of the solid cash flow generation in the second quarter and the first half of 2018. Our portfolio benefited from continued pricing momentum outpacing raw material costs. Heading to the second half of 2018 we expect price increases to continue to moderate and raw material costs particularly ores to rise. Venator will remain focused on delivering results optimizing our manufacturing network and generating continued benefits from our business improvement program. Stepping back industry fundamentals remain favorable, supported by tight supply conditions and a positive demand outlook especially for high-value products, providing the opportunity to capitalize on an elongated cycle. Additionally through the business transfer agreement and memorandum of understanding with Tronox we have positioned Venator such as we may have the opportunity to acquire the high quality Ashtabula complex as well as extend our European market leadership. We thank you for your continued interest in Venator, I would now like to open the call for questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from David Begleiter with Deutsche Bank. Please go ahead.

[David Begleiter:]

Thank you. Good morning. Simon, Kurt, is Pori is an option to not to shut down for completely and not write any TiO2 unit or is that does not on the table?

[Simon Turner:]

I think the way to think about that in the light of the new information we gained in this quarter with the potential purchase of Ashtabula and the new information on cost from the site is that no option is off the table. And we will look at the range of possibilities within our manufacturing network to pick the best option to optimize and preserve our specialty in differentiated business and manage our capital allocation.

[David Begleiter:]

Yes, Simon with Pori, how much -- what was the operating rate of Pori in the second quarter?

[Simon Turner:]

I'm sorry, could you repeat the question.

[David Begleiter:]

What was that -- what was Pori operating at in the second quarter; I believe it was just specialty product for what percentage of unit was operating?

[Simon Turner:]

20%.

[Operator:]

The next question comes from P.J. Juvekar with Citi. Please go ahead.

[P.J. Juvekar:]

Yes, hi good morning.

[Simon Turner:]

Good morning P. J.

[P.J. Juvekar:]

Simon, can you hear me?

[Simon Turner:]

I can hear you, P. J.

[P.J. Juvekar:]

Right, the Chinese exports are fee out to went back considerably exports to Europe after the Pori shutdown or Pori outage. How do you plan to get that share back and how long does it take to you to move the specialty production from Pori to any of your other sites?

[Simon Turner:]

Well as far as the first point goes P.J. in Chinese exports I think if you look back over the last 12 months and certainly must be some very recent data for April and May after the March strike, you could see the exports to Europe have remain essentially flat over that period. We have said previously that some of those exports clearly were predicted to come into Europe as a result of the Pori outage. But also of course we should bear in mind that with Europe been more likely the highest priced dollar market in the world this office the most attractive net backs any exporters including the Chinese. So I think the big picture continues previously falling back of exports in China, I think we saw this April and May back more to historical levels. Clearly the first -- the second part of your question that is why we have this study underway. We are doing a comprehensive assessment of the range of our options and within that we will be able to answer the question that you pose the second part of your question around, what options are there, what would they cost, how long would they take, what is the better option, and why? And we look forward to updating you in the coming weeks with the more fulsome answer to that question.

[P.J. Juvekar:]

Okay, thank you for that. And then, secondly, you mentioned customer shortfall in orders for this quarter. I was wondering if you can drill down on that because one of your customers mentioned that they're formulating TiO2 out. Is that something what you're seeing or is that -- was that comment just a seasonal comment?

[Simon Turner:]

Well, we see very little of any of formulating out because we think that the vast majority of our customers completed those optimization reviews a long time back. Although I just step back P.J. and broadly think about the backdrop to your question there and the comment we made in the script about customers and look we continue to see an elongated cycle, elevated earnings over a longer time period. We believe that the key drivers remain the same drivers that we've previously spoken about i.e. supply and demand limited fresh new supply coming into the market, pricing still too low to attract in the West at least major expansions should opportunities exist. Consolidation continues right through the chain be it from customers TiO2 producers, or mineral produces and we are seeing more transparency cash focus there. China continues to mature, we're seeing higher cost structures there, environmental pressures remain, there are very limited Claudia exports coming out of China at this time. And we’re seeing the Chinese or certain Chinese producers taking price leadership outside of China as well. So we’re seeing more rationality in the chain of course we said the pricing is moderating, we’re seeing some softer demand conditions in China a little bit softer in Europe in the second quarter, a strong conditions in North America, customers are clearly going to test us as pricing moderates by regional dynamic. There will be some product flows between and within regions. And our comments relate to the end of the quarter, customers being a little bit testing of us to see where prices are going, holding their breath I should say, we see no hoarding, we see no major substitutions, we don't see any downward lurches, we see a strong elongated cycle, but you have to look through in the second half where seasonality effects come in and see that there's going to be some puts and takes on pricing in the different regions. But we don't think that should obscure the fact here that we are into an elongated cycle with positive industry fundamentals.

[P.J. Juvekar:]

Okay. Thank you. Thank you for explaining the cyclical versus seasonal aspects. Thank you.

[Operator:]

Excuse me. The next question comes from Duffy Fischer with Barclays. Please go ahead.

[Duffy Fischer:]

I was hoping you can just help clarify, so with Pori you have been earning money that runs through your EBITDA or adjusted EBITDA that you didn’t really earn, you didn’t sell those funds from insurance both last quarter and LTM, can you help us I mean parse out what was from insurance in both the last quarter's EBITDA for that segment and the LTM EBITDA for that segment, so that we can build our model going forward off a base now that you won't have that insurance flowing through that segment?

[Kurt Ogden:]

Good morning, Duffy. This is Kurt. As you heard in our prepared remarks, we recognize that you will need to adjust those models and so what we have tried to do by framing that peak to trough profitability, Pori, is give you a sense for how much of that lost profit or lost EBITDA would have been recognized associated with the Pori outage itself. And so just to reiterate the 2000 trough period for Pori was $50 million, the peak in 2012 was $100 million, and so it's reasonable to estimate depending on where you think we are in the cycle to peg a lost EBITDA commensurate with something within that range. And so to be a little bit more specific Duffy, so we're not going back and identifying the specific business interruption, we had the appropriate accounting during that period. But want to give you a view on how you can think about that going forward.

[Duffy Fischer:]

I guess that gets to my point because this whole thing has seemed very opaque and very difficult on the outside to model and I just -- that's what I don't understand why can't we get a specific number, what was business interruption, what has been capital, so that it helps us grade you to this endeavor?

[Kurt Ogden:]

Yes. Well I think we try to provide to you information that we think will be helpful going forward without providing more detail than what we have provided historically.

[Operator:]

The next question comes from Laurence Alexander with Jefferies. Please go ahead.

[Laurence Alexander:]

I guess two questions, one if you don’t mind my flogging a dead horse on at this point, is the underlying message that you're trying to convey that you won't be able to discuss year-over-year or sequential comparisons at the EBITDA level until four quarters from now because you're going to be comparing against the historical period that you can't benchmark or do you think when you come out next quarter, you'll actually be able to get some kind of bridge, that's the first question. Second just to clarify when you talk about pricing moderating, are you speaking year-over-year or sequentially that is do you still think that your blended average price realization sequentially would be roughly flat or do you think they will be down or at least positive year-over-year like just what are you trying to say with the moderation comment?

[Kurt Ogden:]

Laurence good morning, let me just take the first part of that question. As we get into the third quarter reported results, we believe we'll be able to provide more clarity for you so that you do have a accurate comparison on a year-on-year basis or some form of bridge such that you have visibility and transparency into the underlying trends of the business. So you ought to expect that as it relates to the comparability going forward on a year-on-year basis.

[Simon Turner:]

Laurence, hi it’s Simon. I would like to pick up the second part of your question to be clear about the pricing moderating. What we’re saying here is we have had several quarters of price increases; we spoke about a 2% improvement sequentially in 2Q over 1Q. So clearly that has been a deceleration in the rate of price capture. What we are saying now is that if you look at each of the different regional dynamics between Europe, Asia, and North America, you're seeing different things. In North America, we're seeing some strong demand, good economic conditions, we expect to see some price capture within -- output price capture within third quarter. I think if you look at Asia and Europe of course and Europe the case here is that the prices have been the highest. What we've seen historically in this industry and now we're seeing no different is that as these regional seasonal patterns occur in 3Q, we are seeing convergence of global pricing, so that means that prices between the regions come together. In some cases, the price go up as I mentioned in North America sequentially and others in our case in Europe, the prices likely to be down modestly. That doesn't mean it's down everywhere with all customers in all segments but there will be some downward pricing and corrections and that's what we were talking about with moderation and corrections within between regions as prices converge and that's driven mainly by seasonality in the third quarter.

[Laurence Alexander:]

And I guess can I just clarify one other thing with the adjustments in the Pori accounting; is there any adjustment to how you report free cash flow?

[Kurt Ogden:]

No, as it relates to specifically second quarter as you can see how we have presented the free cash flow, now going forward as we think about the adjusted EBITDA that is going to be coming into that calculation that adjusted EBITDA will no longer have a business interruption component of it and so it will come down to what we have been presenting as a operating free cash flow before the net inflows and/or uses associated with Pori. So I think we try to parse that out for you specifically on Slide 10 of the earning slides as well as within the earnings release itself and so it will continue to have that same level of transparency.

[Operator:]

The next question comes from Bob Koort with Goldman Sachs. Please go ahead.

[Chris Evans:]

Hi, good morning guys. It's Chris Evans on for Bob.

[Simon Turner:]

Good morning, Chris.

[Chris Evans:]

You could give some specific context on the dollar impact of the higher energy in raws, you guys are referencing what did you see in the second quarter and do you still think you'll be able to fully offset these headwinds with price?

[Kurt Ogden:]

Sure. Well let's give you a little bit of context here, if we can as it relates to ore and energy, ore costs for our business are approximately 30% to 35% of our cost of sales, energy is somewhere around 15% the cost of sales. And so as we look forward to the potential EBITDA impact specifically in the third quarter, you could be looking at a headwind of anywhere between $10 million to as much as $15 million in the third quarter now as it relates to our ability to offset that with pricing, I'll have Simon address that.

[Simon Turner:]

Yes, thanks, Kurt. Look I think Chris here what we’re going to see here as we see some price moderation and raws come in particularly ores. I think in Venator we’re well-positioned second half good visibility. I think it’s quite clear to everyone that alumni prices are being flat even to down very helpful to us, high grade markets been with us for some time and price pressures going up, so I think we stand by previous comments there around the scale of pace but I think the broader point here is that we believe that we will see some contouring of pricing as we go deeper into the cycle. Raws are going to come up, we are clearly going to go back out to undertake for higher prices with customers. Now, we are willing to accept margin squeeze. We believe the prospects for the market remaining tighter particularly through seasonal periods are good, so while we may see some moderation it doesn't mean that we want to see prices going back up in regions where they may have normally fallen. And so I think the contouring of prices going into 2019 is going to be a feature that we see as on the elongated cycle.

[Chris Evans:]

Thanks for the color there and then just may be back to the insurance proceeds for a minute and your optionality around Pori, are there any provisions would you if you evaluate the potential closure or non-restart of that or you may have to repay any of the insurance proceeds. And then just quickly on the second quarter cash balances, I just want to be clear, is that fully reflects all of the insurance proceeds that you will receive going forward?

[Kurt Ogden:]

Sure. Chris let me take that up. In connection with the final settlement that we received on April 13th from the insurers that has removed all uncertainty around the insurance claim that triggered this different approach to the recognition of those business interruption proceeds. So we have collected that full $550 million of cash and there is not a circumstance where we would need to repay that nor are there any strings on the deployment of what we do with that cash, to the extent that we want to use those outside of a Pori reconstruction. To the second part of your question the $354 million of cash that we had on the balance sheet at the end of the second quarter fully reflects the insurance proceeds that we have received.

[Operator:]

The next question comes from Hassan Ahmed with Alembic Global. Please go ahead.

[Hassan Ahmed:]

Over the last couple of weeks there seem to be some alarm bells being sounded about the prospects of supply/demand fundamentals, more specifically on the Chinese side of things incremental supply coming online in the near-term, so my question is could you possibly give us further details about all the puts and takes on the supply side, I know demand does what demand does but on the supply side of things, a) in light of what may be going on in terms of your thought process with the timeliness of the arrival of this Chinese capacity and b), we still don't seem to have much clarity around absolute numbers associated with environmental related shuttering in China, so any sort of further details around that could be appreciated?

[Simon Turner:]

Okay, Hassan. I'll pick that up. I think the genesis to your question mainly relates to China, just for the record, I think in the West we had said outside of China there are -- while there are some pronouncements made about the ability to extract further capacity out people circuit, we would take that the 1% or lower kind of level because as time goes on and we've been able to successfully squeeze out more that will continue but of course it does get harder over time but I would say that is 1% or below 1%, so really it comes back to your point about China and believe structures around China. We were very careful last year, when they were a higher intensive environmental inspections to point out the capacity impact to one thing but the cost structures and CapEx builds would be something else similarly being incurred by many producers that within China. We continue to see the stronger Chinese producers strengthen and that will continue as a process and it's a journey. We see as the sulfate process being -- having a lower rate of growth now than it's had for many, many years. We believe there will be puts and takes around sulfate plants within China's some going down, some going up but we would not disagree with those that believe that the net increase is around 50 kilotons per annum on sulfate derived products on a go-forward next couple of years basis. We believe that process remains in the pressure. We believe there will be a cycle of environmental inspections that continue and we believe that there will be some latent capacity that gets improved comes out and there will be some further constraints, so that will ebb and flow I think these next couple of years. More importantly I think on the chloride process which Chinese -- several leading Chinese producers and the Chinese government themselves support. This is a process that requires high levels of knowhow gained over many years of operations and we continue to believe that the ability to produce on a cost effective basis, commercially high quality available products in volume and export those outside of China to sophisticated markets will take several years for a company to make a significant inroads on that. So I think given that my previous statements with this industry requiring of the order few hundred thousands tons of fresh new capacity TiO2 [ph] we believe the prospect remain over these next couple of years within the cycle for strong fundamentals and I think that would probably be a summary of where we sell on this issue have some.

[Hassan Ahmed:]

Understood, understood. Now as a follow-up on the transaction side of things completely cognizant to the fact that obviously this is an ongoing process and there are sensitivities around that but two things one is what was the thought process in terms of considering a buyback versus doing the Ashtabula acquisition or the proposed Ashtabula acquisition, so that's one side. And again on the transactional side of things more cost overruns at Pori reconsidering may be sort of starting -- relocating that capacity elsewhere would you consider a sale of Pori?

[Simon Turner:]

Let's take up those points in sequential order and Kurt I think will add in here. Look there's no doubt about it for us we are very -- we are we remain committed and focused on profiting from what is a very exciting industry. TiO2 has very strong prospects for further growth in the years to come. We do not see very often opportunities to get a large and outstanding industry facility into our portfolio. This is at least an opportunities that come around very often. We are determined as Venator to ensure that we focus on building a long-term successful business and that's really what drove us in terms of the thought process, in terms of better long-term use of cash. We will not deny of course that there have been some statements around buybacks and shareholder friendly options and we certainly have no disposition against those measures. But we think on balance here that our interest building a long-term Venator better served by putting ourselves in a position to purchase Ashtabula and also extend our market leadership in another differentiated and more adjacent market in Europe which as the leader is hard to gain share. So I think that was the thought process behind it and there are certain benefits from that for Venator and of course at the industry level I think that the technology then which I spoke about the chloride technology would then be in the hands of people well used to that technology. I would turning to the second point, look there is no doubt, Hassan, we are disappointed about this new news [indiscernible]. We have said it's a challenging program and I think people know that. We clearly have said that we don't have any option off of the table could that involve the sale of Pori well that's something that the assessment would dig into. I will tell you that we are not in a position to-date to answer that question in a fulsome way, we thought it was really important given particularly what's going to be full and given particularly this new information around Ashtabula that we consult with our board and gain support that we would not rush headlong into a major decision here, it's unfortunate, it spans one of our cause, but we are determined as Venator to come back to in the coming weeks with a better picture of what this means for the business. We understand that creates a period of people have some uncertainty and that is regrettable but we does not relieve us of the obligation to come back on a detailed basis and present the options on the selected way forward to yourselves over the coming weeks and that's probably I think the most we could say at this time.

[Operator:]

The next question comes from Aleksey Yefremov with Nomura Instinet. Please go ahead.

[Aleksey Yefremov:]

Good morning everyone, thank you. Sorry to come back to Pori EBITDA question, Kurt when you are adding back insurance business interruption proceeds in the last few quarters, were the add-backs somewhere between that $50 million and $100 million range or where there some additional add-backs if we say assume that Pori was running at a loss, so there would be biggest step down going forward than this historical range might suggest?

[Kurt Ogden:]

So Pori was not running at an EBITDA. While when you say it was running at an EBITDA loss, certainly not under a theoretical model that we were using with our insurers in order to have these intermediate claims that we have had along the way. I do think that if you take that range of $50 million to $100 million and parse that down into quarterly chunks, you would find a quarterly EBITDA that is representative of a run rate within that range. Now I will also add to that that as you know with our business interruption proceeds, we have been covering lost EBITDA or lost profit. We have also been covering the carry costs of the fixed -- unabsorbed fixed costs that continue on that site as well and as part of this review process, we will be addressing that burn rate as well.

[Aleksey Yefremov:]

So there is some additional EBITDA that might step down because of that burn rate in the third quarter?

[Kurt Ogden:]

Yes. We continue to incur unabsorbed fixed costs. So as we fast forward into the third quarter, you will have a fixed cost element that will be embedded in our results that we had been prepaid for here in the second quarter that then we will need to adjust out for our adjusted EBITDA so that you can see what the representative earnings power of the business is.

[Aleksey Yefremov:]

So you will be adjusting that out.

[Kurt Ogden:]

Yes, that's correct.

[Aleksey Yefremov:]

Understood, thank you, Kurt and then what is the current plan of ramping that 20% operating at Pori like I guess I understand you're re-evaluating it but plan A where would it be by the end of the year and in 2019 and also what does it mean for your CapEx, can your CapEx decline substantially if you decide not to go-forward with Pori rebuild in 2019 and 2020 or is it sort of pre-funded you already have orders on the books you will have to spend the money?

[Simon Turner:]

No, I think it's Simon here. Let’s take second part of the question first. We're doing the review and that will tease out the cash we have on our balance sheet now which is substantively earmarked for Pori. We will decide through the review how that cash is to spend and what is the best option on a go-forward basis. As part of your earlier question though, look the 20% of the plant is operating, we have had a three week break due to the safety incident, significant incident on the site in EMS. We have -- we are in the process of restarting the project activity in construction, we are pacing it because over these next weeks, we will have a more clear picture of our way forward and we want to take great care that we're managing our cash carefully in that period recognizing the review. I think given that what we have now seen around the pacing, we will not be paying fast track kind of premium at all over this next period and that coupled with the safety instance mean it unlikely that we'll see fresh new production above the 20% level in the calendar year 2018 and at the earliest juncture will be in early 2019.

[Operator:]

The next question comes from Matthew DeYoe with Vertical Research Partners. Please go ahead.

[Matthew DeYoe:]

Good morning gentlemen. Can you walk through the various options you have within the manufacturing perfect to two transfers Pori -- Pori production elsewhere and prior believed your facilities were largely sold out and then as it relates to Pori is that 20% production run rate profitable assuming no recovery of the unabsorbed fixed costs?

[Simon Turner:]

So let me pick up on the first point first Matt and here I'm talking I think within the framework and the concept of the exercise that is underway. We are not in a position on this call to share with you detailed auction by plant, by product, and so forth with cost and that's the purpose of the review. However some color remarks, I think are appropriate. We clearly want to preserve as much as possible of our specialty and differentiated business. Hive to that has been on the Pori project and that's also helped underpin some cost and scale perspective by incremental commodity pounds made on that site and I think to clarify once more then we said 60% of specialty and differentiated 40% of commoditized pounds. That was our plan. New information has caused us to reassess that. We will be looking across the range of our network because we believe that some of these grades and products can be transferred and these product slates on our factories moved around of course that envelope of opportunities widens and becomes more broader should we be the owners of the Ashtabula Complex, we have to recognize that. So one part of that is with and without Ashtabula, secondly there are opportunities we believe to move some product lines from Pori elsewhere, we also are going to look at if there is any possibility around adding some incremental commodity pounds within any of our factories. And those are the types of activities are being pulled together along with timelines and costs on which we will come back to you on.

[Matthew DeYoe:]

Okay. And then question for you as it relates to price, so you had mentioned the seasonality is the primary driver for the global kind of price convergence particularly in Europe but does that mean you expect price in Europe to move back higher in the seasonally stronger spring of 2019 or stay flat and then how do we rationalize this with the continued spread between Chinese and European price?

[Simon Turner:]

Yes, I think -- what we see at this point of the cycle as we go into not the high seasonal quarter, i.e. 3Q is we see the regional dynamics coming into play and then that means a global basis product flows typically to where the highest netback can be received. At this time Europe is a highly attractive export destination because of its support to Chinese producers and others because you have high net backs there. We see a self-caring kind of mechanism where U.S. prices go up, U.S. -- European prices fall back a little, convergence occurs and that situation sales levels through the second half of the year. However it's my earlier point we believe that the contouring of pricing particularly raw materials coming, coupled with the supply/demand balance means in seasonal quarters in 2019, you can expect price levels even if they fallen or even if they rose to potentially rise once more and that's certainly how we will be setting ourselves up going into next year although at the specific level, it's too early to comment in absolute detail.

[Operator:]

The next question comes from Jeff Zekauskas with JPMorgan. Please go ahead.

[Jeff Zekauskas:]

Thanks very much. You took $126 million charge in your performance business and you said that it was non-cash, is that -- is it entirely non-cash or is there future spending and just to continue with this type of question, what's the Pori spending to-date and can a decision on Pori be reached without a decision on Ashtabula being reached?

[Kurt Ogden:]

Jeff, this is Kurt. Let me take out the first element of that, so on the $126 million non-cash charge that we took related to restructuring at our Augusta, Georgia facility that is all non-cash, so that was a write-down of the fixed assets that we have onsite as you are aware. Huntsman has been engaged with a lawsuit with Albemarle, who is the successor to the seller of those assets to us. It's clear that that asset will never achieve the designed rates that were represented to us and so notwithstanding the efforts that we put into that, we have written down the value of those assets. Now there is a couple of million of cash restructuring that will take place there in association with this project but that is fully comprehended in the restructuring cash outflow that we have outlined for you on Slide 10 where in connection with our business improvement program and other programs that we have going on, we expect to have a cash restructuring cash outflow in 2018 of approximately $40 million to $50 million and that Augusta element is comprehended in that. The second part to your question is how much have we spent on Pori to-date. We had spend more than $200 million in CapEx funding, in addition to that we have spent cash on the cleanup of the site that exceeds $30 million and as you heard me indicate earlier, we have a burn rate today where we continue to pay for certain unabsorbed fixed costs and so as part of our review process, our intent is to take a look at the cash that we have received and make sure that we maximize the economic return, long-term economic return associated with the deployment of this $350 million of cash that we have on balance sheet today going forward.

[Simon Turner:]

I think Jeff it's Simon, just to add in here on the second part of your question, I think we said that we’re not in a position to go into detail around the memorandum of understanding on the call specifically but I think the previous release clearly shows the mechanism around time with Ashtabula and so forth and of course there is a lack of fuel certainty in that process of course Tronox in a better position to comment on that in a regulatory dynamic than ourselves. But of course our exercise will envisage the possibility of both attaining the Ashtabula complex and not.

[Jeff Zekauskas:]

Okay. And then for my follow-up in the quarter, your volumes were down 12% and you had some production issues. If you didn't have the production issues what would your volumes have been like and then and are those production issues resolved and then secondly you talked about the convergence between European TiO2 prices and U.S. TiO2 prices as one being higher price market and one being a lower price market. I'm not so aware of the difference in price between the two markets, is it between $100 and $200 a ton or how would you frame that price differential?

[Simon Turner:]

Okay, let's take those two very different questions I'll factor in one by one Jeff. Let’s talk about the volumetric delta that you raised. You spoke about 12% as per our script there and the way to think about the production-related element is low-single-digit percentage. Those are production issues we had and we believe those production problems are done and over, so that should take care of your first question. On the second question relates to specifically price convergence between North America and Europe over time as we've seen over the years, there will always be a situation where one region of those two is higher than the other they don’t track exactly the same price. This time it’s the European price that has gotten ahead of the American price in recent quarters; they can be exchange effects as well. So what I am saying is that we expect that convergence to continue to narrow that gap to sub $200 because typically if you take the arbitral in duty and freight of around $300 we would expect it to be within those term lines.

[Operator:]

[Operator Instructions]. The next question comes from Vincent Andrews with Morgan Stanley. Please go ahead.

[Brian Nowak:]

Good morning guys. This is Brian on for Vincent. I was just wondering, do you see any chance of regulatory objection if you were to buy Ashtabula and then not restart Pori, do you see them potentially seeing that as a anti-competitive move and then would you be willing to that as the plan if that was required.

[Simon Turner:]

Well, I think that we're not in a position yet to speak about this anti-trust regulatory process and I'm not sure on your question who you referring to as they but of course we will always be prepared to work with regulators. We'll take steps that are required if any to obtain approval for our purchase of Ashtabula.

[Operator:]

The next question comes from Steven Byrne with Bank of America. Please go ahead.

[Steven Byrne:]

Hi, what level of due diligence were you allowed to perform ahead of that bid for Ashtabula and are you able to renegotiate that after a more detailed due diligence and then just on that capital that you spent at Pori is any of that modular construction that you could move somewhere else or is that all unit operations fabricated on site.

[Simon Turner:]

Well, look the second part of your question too early to tell with the Pori modules and so forth, we are in the process constructing options there and as we get back -- as we've said over the coming weeks we'll come back to you with more detail on that. We would characterize the diligence; obviously we did have a level of diligence opposite the Tronox process that would be in line with what you'd expect to be the level of the diligence. But beyond that we're not going to be able to speak about any greater detail about any ongoing negotiations with Tronox other than to say we are moving expeditiously forward with our SBA.

[Operator:]

Next question comes from John Roberts with UBS. Please go ahead.

[John Roberts:]

Good, thank you for the accounting help that you at least had tried to provide here but in the year ago quarter looks like you had sales from inventory which contributed to the negative volume comp were those as if inventory sales as if you had Pori. And had normal inventories or were the actual inventory sales and did you have any as if sales from inventory in the current quarter I never really thought about, how you handle inventory this as if accounting.

[Kurt Ogden:]

Yes, so in the prior period, Steve, we had actual inventories that we were still selling out of in the second quarter of 2017 of course that was on the heels of the actual fire itself and so as you look at the results today there is no as if inventory adjustment in the results.

[Operator:]

The next question comes from Jim Sheehan with SunTrust. Please go ahead.

[Jim Sheehan:]

Thank you. Could you talk about your progress on negotiating longer-term supply contracts for TiO2, how are your customers receiving those proposals and do you expect any big changes going forward.

[Simon Turner:]

Jim, it’s Simon here. On previous calls and as is currently the case we continue to point out for us in a more fully sold position. We don't have that incentive to contract over longer periods, we pointed out we have a limited number of customers who are looking to extend contracting ranges from a more typical three months to six months. They are very much in a minority and as we go-forward, we are seeing no increase in pressure from customers or from ourselves to change the way we approach our contracting with customers which we think, at the individual tailored level is the best way to advance commercial discussions with our customers and we're happy with that cadence and pattern we’re in.

[Operator:]

The next question comes from Arun Viswanathan with RBC Capital Markets. Please go ahead.

[Arun Viswanathan:]

Great, thanks good morning. Just wondering you mentioned that raw materials will be going out, what are you expecting to see on the side of inflation for the rest of the year and then as a related question what mechanisms do you guys have to offset some of that those increases and do you see your peers also having those mechanisms, how do you see that playing out? Thanks.

[Simon Turner:]

I’ll leave Arun, Kurt to talk about the numerics and I think if we go back to our statements around [raws], we've said primarily it's about ores and feedstock. There is some energy component which we are well positioned to manage in our various jurisdictions. We feel good about that but if I focus my comments mainly on ores in the sulfate part of our business which is 70% of the business we have very good visibility about how the second half looks and frankly we don't see inflationary pressures -- sorry inflationary pressures at the same degree as we do in our higher grade chloride, rutiles, and slags, which will flow through in the second half and early next year and that constitutes 30% of our production footprint, so there's no doubt that rutiles have come out the blocks earlier and higher with slags lacking. What we can say of course is that with higher grade material tightness continues to be the case with a number of interruption events we've seen in this year in 2018 putting supply tightness into the market there. So I think that’s how it characterize the dynamics of our major feedstock movements. It’s not really for us to comment versus others by producer of course you have to speak to them. But what we would say is that the sulfate purchase of half a million tons of ilmenite clearly was flat to down pricing offers us some advantage in this period.

[Kurt Ogden:]

Arun this is Kurt. I'll just add to that that we do have the business improvement program, we will see additional benefits here in the second half of 2018 from that and it ought to be in the neighborhood of $10 million in the second half itself in order to offset some of those pressures that we’re seeing.

[Simon Turner:]

Next?

[Operator:]

We have time for one last question and that question will come from Roger Spitz with Bank of America Merrill Lynch. Please go ahead.

[Roger Spitz:]

Thank you very much. Can you comment on what the cash cost to shut Pori down if you elected to build that route and clean it up and the cost of shifts the Pori specialty differentiated products to other facilities?

[Simon Turner:]

We cannot comment on this at this time Roger but we will certainly get ourselves in to a position as we come back over the coming weeks to comment on that.

[Simon Turner:]

Great. Thank you for joining our call today. Feel free to reach out to investor relations if any follow-ups. Thanks.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.