Venator Materials PLC
Q4 2018 Earnings Call Transcript

Published: 20 Feb 2019

[Operator:]

Good day, and welcome to the Venator Materials Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. [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, Nicole. Good morning, everyone. I’m Jeffrey Schnell, Director of Investor Relations for Venator Materials. Welcome to Venator’s fourth quarter and year-end 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 fourth quarter and year-end 2018 via press release and posted the release and a set of accompanying slides to our website @venatorcorp.com. During this call, we may make statements about our projections of our 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. 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 earnings call. Let’s begin on slide 3. Venator’s strong performance in the first half of 2018 is compared to heightened volatility in the latter half of the year, as geopolitical factors and economic uncertainty drove customer destocking, primarily in Europe and Asia. These factors drove lower demand in both our TiO2 and Performance Additives segments and were partially offset by pricing momentum in specialty TiO2. Despite these second half dynamics, we reported $436 million of adjusted EBITDA in 2018. In 2018, we successfully completed the actions, which are expected to deliver the $60 million of fixed cost benefit from our 2017 Business Improvement Program. In response to the current economic demand environment and our reduced TiO2 manufacturing footprint, we commenced an additional and aggressive $40 million cost and operational improvement initiative. We are on track with the transfer of our specialty technology and subsequent shutdown of our Pori, Finland TiO2 manufacturing facility. Turning to slide four and our Titanium Dioxide segment. In the fourth quarter, our Titanium Dioxide segment generated $52 million of adjusted EBITDA compared to $119 million in the fourth quarter of 2017 or $86 million after adjusting for lost EBITDA at Pori which was reimbursed by insurance proceeds in the fourth quarter 2017. Pricing was broadly in line with our expectations. Prices increased 1% compared to the prior year period but declined 3% compared to the third quarter of 2018, primarily in functional grades in Europe and Asia. We continue to see positive momentum globally in our specialty TiO2 pricing, reflecting solid underlying growth in these more specialized applications, underscoring our commitment to strengthening our leadership position in specialty TiO2. We are encouraged by the deceleration in the rates of destocking in the fourth quarter with volumes declining 6% year-on-year compared to the 18% decline in the third quarter. Fourth quarter sales volumes declined primarily in functional grade products including coatings in Europe and Asia, and due to lower availability for certain specialty product grades. In the quarter, we incurred higher variable cost inflation including raw material and energy costs, which were partially offset by $4 million benefit from our 2017 Business Improvement Program. As we mentioned on our third quarter earnings call, we envisage these raw material energy cost trends will continuing into 2019, and we are taking appropriate actions to mitigate these costs. In the near term, we expect differences in regional performance to persist, characterized by strength in North America, slower growth in Europe, and weakness in China. Notwithstanding the soft economic backdrop in 2019, longer term TiO2 industry fundamentals remain favorable. Turning to slide five and Performance Additives. Revenues declined 16% compared to the prior year period, driven by a 13% decline in volumes. Pricing declined 1% year-over-year but increased 2% after adjusting for the impact of closed sites, as part of our restructuring program. Performance Additives generated $3 million of adjusted EBITDA in the quarter, down from $15 million in the prior year quarter. The decline in EBITDA can be attributed to customer destocking in functional additives and to a lesser extent color pigments. We were also impacted by low volumes in timber treatment as we are no longer selling one of our products to a large customer. In color pigment, site closures at Easton and St. Louis as part of our restructuring program and higher raw material and energy costs. These headwinds are slightly offset by a $1 million EBITDA benefit from 2017 Business Improvement Program. Throughout 2018, we took decisive actions to better position the businesses within our Performance Additives segment. We restructured our North American iron oxide business to the closure of our Easton and St. Louis facilities, and we rationalized our Augusta facility. We expect to supplement these actions with further penetration into more differentiated applications, and other operational and cost improvements as part of the 2019 Business Improvement Program. Based on the actions we've taken, we expect Performance Additives to deliver EBITDA in 2019 above 2018. Moving on to slide six and our Business Improvement Programs. We captured an additional $5 million EBITDA benefit from our 2017 Business Improvement Program in the fourth quarter, building on the $47 million captured through the first quarter of 2018. We have already taken required actions that are expected to deliver the full extent of our fixed cost reduction target of $60 million in 2019. As we’ve previously communicated, the additional $30 million of improvements are volumetric based and dependent on market conditions. We are committed to further strengthening our business. In light of the current economic and demand environment and a reduced TiO2 manufacturing footprint, we have commenced the 2019 Business Improvement Program of comprehensive costs and operational improvement initiative designed to generate $40 million of EBITDA improvement, building on the $60 million we delivered as part of our 2017 Business Improvement Program. We expect to complete all actions by the end of next year, ending 2020 at the full run rate. The total expected cash restructuring expense is approximately $15 million. My team is highly focused on delivering the benefits we've outlined, the full extent of which will further or enhance our overall competitiveness, improve our cash flow and enable us to invest in our future to better serve our customers. I'll now pass the call over to Kurt Ogden, our CFO, to discuss our financials.

[Kurt Ogden:]

Thanks, Simon. Let's go ahead and turn to slide seven. Total adjusted EBITDA declined $73 million compared to the prior year period. Excluding the impact of Pori, total adjusted EBITDA declined $40 million. The majority of the decline can be attributed to lower volumes and higher raw material and energy costs and were partially offset by higher selling prices and lower corporate expenses. Our 2017 Business Improvement Program was a $5 million benefit. Compared to the prior quarter, total adjusted EBITDA declined $32 million. For the combined business, our sales volumes were significantly impacted by customer destocking. Average selling prices declined in functional TiO2. However, our specialty TiO2 selling prices remain robust. Costs were a $4 million headwind in the quarter. Turning to slide eight. Venator continues to have an attractive financial position. At the end of 2018, we had liquidity of $424 million. Our cash balance was $165 million and the undrawn availability under our asset based revolving lending facility was $259 million. We are taking steps to increase our liquidity to fund the Pori transfer and shutdown as well as for other general corporate purposes. Venator ended the year with net debt of $583 million, and our net debt leverage remains attractively low at approximately 1.3 times our trailing 12 months EBITDA. Structurally, we continue to enjoy relatively low tax rates. This is primarily a function of the countries where income is generated, the $1.1 billion in net operating losses from which we benefit and tax valuation allowances in certain countries. In 2018, our adjusted effective tax rate was 11% and our cash tax rate was 13%. During the quarter, 2018, our rate was also impacted by a reduction in income earned in valuation allowance countries in addition to the completion of certain filings associated with the separation from Huntsman, both of which had the effect of lowering our adjusted effective tax rate. Turning to slide nine and our cash bridge. Venator generated $436 million of adjusted EBITDA in 2018. Total free cash flow was an outflow of $38 million, which was significantly impacted by Pori-related expenses and a use of cash from working capital, as customer destocking late in the year led to higher inventory levels. Our preliminary expectations for 2019 uses of cash are as follows. We expect total capital expenditures of $130 million, consisting of a $105 million of normal course CapEx and $25 million of specialty technology transfer CapEx. We remain focused on transferring our specialty technology from Pori to other sites. Our specialty portfolio is a core advantage of our business and is characterized by a more robust and stable earnings profile than functional TiO2. As we stated previously, we have flexibility on our capital expenditures. We have deferred $60 million of capital expenditures associated with the range of strengthening actions. Based on our revised capital program, we now expect total capital expenditures of the specialty transfer program to be $90 million and is expected to generate approximately $15 million of incremental adjusted EBITDA in 2020 and approximately $40 million in 2023. We believe deferring the strengthening component of the capital program is prudent as we balance our cash needs with the current economic and demand environment. We will continue to reevaluate, embarking on the strengthening program, and weighing it against other projects, which are aimed at generating long-term shareholder value. Cash interest is expected to be $40 million to $45 million, and cash taxes are expected at the low end of our long-term range of 10% to 15%. Restructuring expenses are expected to be approximately $30 million to $35 million, which includes $15 million of cash restructuring for our 2019 Business Improvement Program. We expect cash pension and other expenses in 2019 to be $60 million to $70 million. Working capital was a use of cash of approximately $105 million in 2018. We have taken a more aggressive stance to manage our working capital. The actions we have implemented are designed to deliver a $60 million reduction in working capital compared to 2018 and will be weighted to the second half of the year. Finally, our Pori-related expenses are expected to total $65 million to $70 million in 2019, including approximately $45 million of project wind down and closure costs as well as $20 million to $25 million of other operational costs. We have measures in place to further reduce these costs. With that, I'll turn it back over to Simon for concluding remarks.

[Simon Turner:]

Thank you, Kurt. Moving to slide 10. Volumes in the fourth quarter reflect continued destocking of functional grade products in Europe and Asia offset by the relative stability in North America. However, destocking has decelerated from the previous quarter, and we expect it to diminish further in early 2019. Given the combination of near-term economic uncertainty, our reduced production network and the successful completion of all cost actions from our 2017 Business Improvement Program, we have commenced a new 2019 Business Improvement Program. This comprehensive competitive business program is designed to further strengthen our cost structures, reduce working capital and pursue a range of measures that all improve our cash flow generation. We are encouraged by the medium and long-term demand outlook, especially for our high-value specialty and differentiated products, which continue to be highly valued by our customers. Accordingly, our strategic priority remains the transfer of such technology and subsequent closure of Pori facility, which will strengthen Venator’s leading position in high-value specialty TiO2 applications. Longer term industry fundamentals remain favorable with continuing global demand growth outpacing limited new supply. The range of measures we are implementing now will position Venator for greater success in the future. With that, we thank you for your continued interest in Venator. I would now like to open the call for questions.

[Operator:]

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

[David Begleiter:]

Thank you. Good morning. Simon, Kurt, just on 2019 Business Improvement Program. Can you quantify maybe a little more detail, where exactly the $40 million is coming from, which buckets perhaps?

[Simon Turner:]

Certainly, I'll pick up on that, David. As we said, we completed the actions of the recent 2017 program. This specialty program, which is already underway, $40 million run-rate at the end of 2020, we would expect to capture 10 in ‘19 and $35 million in 2020. Now, to your question, think about it like this. One quarter of the $40 million, let's say $10 million, roughly one quarter relates to SG&A compression and demand [ph] reductions. Another quarter relates to performance additives, some of which comes from our functional additives business in Germany and the remainder from our color pigments network. And finally, the remaining 50% is around TiO2 manufacturing cost and efficiencies. Here, we're talking coproduct benefits including reduced waste disposal, maintenance effectiveness and energy reduction programs. I hope that clarifies to you point.

[David Begleiter:]

Very helpful. And just lastly, on TiO2 operating in 2019, Simon, what's your expectations for new additions of capacity in China both in ‘19 and 2020?

[Simon Turner:]

We see limited new additions in China beyond what’s we announced. We still believe that the authorities and regulation framework in China speak to limited beyond extension of brownfield for sulfate franchises. And obviously, there are some numbers out there around chloride improvement that as we said a number of times we believe the rates of that capacity build on the day will be somewhat lighter than publicized.

[David Begleiter:]

Thank you.

[Operator:]

Our next question comes from PJ Juvekar of Citi. Please go ahead.

[PJ Juvekar:]

Yes. Hi. Good morning. So, you took some restructuring and impairment charges of $55 million. But, if I look at table four, you show several other charges such as net client incident cost and also some integration expenses. Can you explain what these charges are and would they continue in 2019?

[Kurt Ogden:]

Good morning, PJ. This is Kurt. So, as part of not only the Pori closure, but as well as some of these other actions that we have taken, we have implemented and taken a restructuring charge associated with that. As you know, the accountants will only let you recognize in the current period those items that you have a very discreet plan for. We would expect that going into 2019, there may be some residual restructuring charges but not to the same extent that we have seen here in 2018 and specifically in the fourth quarter of 2018.

[PJ Juvekar:]

And then, Simon, can we discuss your outlook for ore raw materials and your various slag grades that you buy? What kind of raw material inflation do you expect in 2019? And beyond this destocking that you’re seeing, so do you just expect some margin deceleration at the gross margin level? Thank you.

[Simon Turner:]

Sorry. I have to say, PJ, I didn't hear the second part of your question. I heard the first piece about raw materials. Could you repeat second?

[PJ Juvekar:]

Yes. So, beyond this continued destocking that's going on in TiO2, you're unlikely to get any pricing. So, with raw materials going up, just talk about margin outlook for first half. Thank you.

[Simon Turner:]

Yes, okay. I think I would preface both of my answers on this PJ by saying, this is one of those times in our industry where visibility is less than clear; there is a fair amount of uncertainty. We have seen a significant destocking, as you know, decelerating in TiO2 in our case. And we are encouraged that we've seen a relatively decent start for the year, and we believe it will diminish. Now, there's no question that the demand and dynamics in the industry can be seen through primarily a regional lens where we’re seeing a strong U.S., slow growth in Europe and weaker Asia. As it relates to raw materials, we do continue to see some incremental raw material inflation in 2019. The majority of that will come from higher grade chloride destocks, namely chloride slags and rutiles. And we've seen a more flattish environment for the sulfate ilmenites and other materials. So, I think that's an important piece of color to pass across. We believe that our improvement actions, both those that are running into ‘17 program, and the new ones in the ‘19 program will serve to have the effect of offsetting, much of this raw material inflation. So, that should give you some idea about how we see the raw material evolution in our business in 2019. I think, it's fair to say that it’s a bit better than we have seen at the tail end of last year. Moving to destocking, and we got hit particularly hard in the TiO2 business in the third quarter. You’ll have noted that we got hit quite hard in our performance additives business actually later in the fourth quarter. So, these are sizable impacts. We're encouraged by the stability of pricing in North American near term. We expect that to remain the case with prices flat to possibility even up. There is no doubt there is going to be a little bit of near term slippage in pricing in the first quarter in the weaker demand areas outside of the U.S. to varying degrees. But, we think it's too early to call quarter two. And we expect to see quite a vigorous discussion around pricing at that time. So, I hope that color can help answer that question.

[PJ Juvekar:]

Yes. Thank you very much.

[Operator:]

Our next question comes from Aleksey Yefremov of Nomura. Please go ahead.

[Aleksey Yefremov:]

Thank you. Good morning, everyone. Simon, just to clarify the comment you just made raw material inflation being offset by Business Improvement Program. I think, earlier you had said that business improvement would benefit the Company by $10 million. Is it fair to assume that raw materials headwind is about the same sort of category?

[Simon Turner:]

No, it’s not Aleksey, because what we said was that we’ve got the effect of already running Business Improvement Programs of ‘17 which will provide us a support in ‘19. We've got new programs in ‘19. And we've also got the trading -- the negotiating environment around those materials shifting as well. So, it's a combination where we expect to offset much of that raw material inflation, and that raw material inflation, as we said, is mostly feed stocks; and within that mostly chloride, high-grade materials.

[Aleksey Yefremov:]

Understood. Thank you. And turning to performance additives, you expect the business to grow EBITDA in 2019. In that context, could you maybe explain how some of the headwinds that you saw in Q4 might reverse some of the destocking, higher raw materials, lost customer et cetera?

[Simon Turner:]

Yes, we're certainly happy to do that. Look, I think, there is no doubt about it. We really like these complementary businesses as we have in our portfolio frequently approach sale. They have different dynamics. I would draw your mind back to the end of 3Q last year. We were tracking at the EBITDA level better than the prior year. And we fully anticipate that with all the actions we've implemented to which I've referred to be seen further EBITDA development over and above where we ended up in 2019. So, it has been no question, a real setback to a confluence of factors in 4Q, but most of which are destocking related and which we expect to reverse in the early part of 2019. It’s fair though to say that we have some exacerbating factors in the quarter whereby we have a specific customer base issue, the details of which we can’t go into in our timber treatment business. We also saw some adverse energy costs in Europe predominantly. We have the first round of some of the increases from China abroad come into U.S. which took effect in the 4Q of 2018. So, if you look across the piece, what we would say is yes, it was a setback, but we still believe that the actions we took last year coupled with some fresh new actions, we've identified for the coming year, will enable to take us -- take that payback business forward and improve over last year.

[Operator:]

Our next question comes from Laurence Alexander of Jefferies. Please go ahead.

[Laurence Alexander:]

Good morning, guys. Two questions. First, can you give us a net tailwind from the productivity actions, is it on the order of about $65 million in 2019?

[Kurt Ogden:]

So, I think, if you refer to the tailwind exiting ‘18, coming into ‘19, is that the question?

[Laurence Alexander:]

What the actual -- because you also have a little bit of incremental in the first quarter, so what the actual net tailwind for the full year will be?

[Kurt Ogden:]

So, $53 million, I think was the number coming into this first quarter. And I think, we said that we expect the remainder of the 60 cost actions we expect to deliver in early 2019.

[Laurence Alexander:]

Okay. And secondly, can you give a sense for how you think share -- how -- what sort of feedback customers are giving you in terms of share shift dynamic? To the extent that volumes recover how you see the industry sort of swapping out or how you see your mix evolving in 2020?

[Simon Turner:]

I'm quite happy to give you the color on that. We've got into this with our team in some detail here, and of course it does vary by region. But, what I can tell you is we do not believe we gained any share or lost any share in the aggregate. We believe that our higher exposure to differentiating the specialty volumes helped us during this period, as you'd expect. And in fact, I would point out that our specialty TiO2s, both from a demand and pricing standpoint just float along unimpacted certainly on the price compared to other parts of the market. We did see some softness in coatings, which we called out. Our plastic franchise was particularly strong. We competed the high performance end of that. So, we would expect it to see any changes in the coatings, and that's what we sold them. But, I must stress that to your question, we saw the volumetric position impacted mainly by the regional dynamics. And to the extent that Europe is a larger market, we've got a significant position in Asia, and those were the ones were the higher destocking. We feel that our cumulative 24% destocking impact in the second half of last year coupled what was already price conversions, our assessment is there is no net aggregate gain or loss of share. What I would also say is we did introduce a couple of new plastics grade in 2018, and they’ve been particularly well-received. And sales of those products held up very well as those grades prove very popular.

[Laurence Alexander:]

And then, just lastly, with respect to the volumetric gains that you sort of are targeting longer term from the Pori relocation, what kind of demand profile do you need to see to capture that?

[Simon Turner:]

Yes. Look, I mean, I think that there’s nothing there in the demand profile plan that is anything above what you call market trend. And we see reversions of trend certainly, and some of these specialty products are slightly higher than trend certainly in our cosmetics, pharmaceuticals areas for instance we expect to be slightly higher than the 2% to 3% long range trends, and that's what we based on. There is no doubt about it in some of the franchise of course, we will have to go back and fight for some market share. I think that's been the case all the way through. But, to your point Laurence, there's not really anything above market trend assumptions.

[Operator:]

Our next question comes from John Roberts of UBS. Please go ahead.

[John Roberts:]

Thank you. On slide seven, the sequential bridge with COGS only $4 million unfavorable, is the unabsorbed overhead from lower volume in the volume part of that bridge or -- and so the COGS is just largely raw materials and variable, or is there some other way to look at that?

[Kurt Ogden:]

Good morning, John, this is Curt. The unabsorbed amount is showing up in COGS. And so, we did have some benefit here in the fourth quarter on net comparison. So, that is netting out against raw material headwinds that we saw in the fourth quarter this year.

[John Roberts:]

And then, could you, -- Simon, could you update us on longer term strategic role of the additives business in the portfolio? It's obviously been disappointing near term, but how do you see that playing a role at Venator longer term?

[Simon Turner:]

Well, look, I think we’ve said that the additives collection of business is a business that we like. They parse out into three buckets, which is quite different. You got a standalone, U.S. timber business, you got a German integrated with [indiscernible] functional additives, barium based, zinc based businesses, and you got a range of color pigments businesses across the piece. So, we like all those businesses. There is a higher cash conversion rate. And they are frequently co sales in the color pigments areas. Now that said, we've always said that we will continue to explore full range of measures to maximize the value of our business portfolio. We're going to carry on doing that. Obviously those types of processes are processes that are by the very nature confidential. And we would update you in the due course if and when that's appropriate. But, we like those businesses. We do see 4Q is a disappointment. But, we see as a setback -- and having changed our view that these are good businesses, complementary businesses and generally accepting more revert, when the TiO2 cycle is building around.

[Operator:]

Our next question comes from Vincent Andrews of Morgan Stanley. Please go ahead.

[Unidentified Analyst:]

Hi. This is actually Steve Haynes [ph] for Vincent. I was wondering, if you guys could just sort of help us think about what base volume might be, given after all the destocking has actually settled out. And, any color on what might give you some confidence in the demand coming back would be very helpful?

[Simon Turner:]

Yes. I'll pick that up. It's not particularly satisfactory answer, I have to say, but there is no question, as I said earlier on the call. This is one of those times of limited visibility. We are not yet in a position to give better answer to that question, because clearly, there is a range of volumetric outcomes that are possible in 2019. We can give you a few calibration points. Number one, we have not baked in a full blown recession, global recession into our planning assumptions. Number two, we have observed in prior destocking events that the bounce back from these events can be quite -- getting quite vigorous. And number three, we are encouraged that we've seen some deceleration in the first quarter and 2019. While it is early, from an order perspective, it's got off to a decent start.

[Operator:]

Our next question comes from Robert Koort of Goldman Sachs, please go ahead.

[Chris Evans:]

Good morning. This is Chris Evans on for Bob. In TiO2, just curious, as peers attempt to promote these longer term contracts with customers, how are you -- or how is this behavior impacting your sales efforts? Are customers coming to you looking for similar arrangements or maybe vice versa, any other competitive effects from this approach from peers?

[Simon Turner:]

Clearly, let’s start by saying we are not prepared to talk about competitors and any detail around pricing. That's not something we would feel comfortable as the right thing to do in this type of forum or indeed any type of forum outside of our own internal processes. And what I can tell you is this, we have for a long time believed that larger customers of which we have a number have trended towards custom contracts, which promote both price and volume certainty. And in our larger markets like Europe, that is something we hear from them and we have an interest in doing. So, the trend has been to move in that direction. Equally in some of our more tactical areas, we do have customers on short-term agreements as low as one month, and we do have spot type channels that have higher prices invariably and do not value those arrangements. I think, it's very much a regional situation, in our case, because obviously in some areas like South America maybe or parts of Asia, we do tend to take you know, maybe a more short term approach. But my point is that we believe that we are on a pathway here to promote stabilization and a more certain type of planning environment with our customers. And we believe you can see that in the way our kind of share and pricing profiles play out.

[Chris Evans:]

Thanks. And overall, just curious how would you describe your TiO2 operating rates and maybe just operating philosophy during this destocking period? Previously said you would sort of match your rates to industry conditions. We noticed there may be a small uptick quarter-over-quarter in inventory days. Just curious, if you could kind of opine on what you -- how you guys are running your assets and how you may continue to do those in ‘19?

[Simon Turner:]

Sure. And so, what I would tell you is this. As we close the year around 70 days, we think that's probably not dissimilar to the industry we think. We, in historical periods, have closed more like a 60-day level. So, it's a little bit higher than we like. We have always believed and continue to believe that it's better to manage and moderate on a frequent but smaller basis. We indeed did that in the fourth quarter to some extent and we will be doing some more of that as we go through 2019 as we look for reducing our inventories and delivering on our $60 million improvement. I would characterize our assets today as operating in the low 80%.

[Operator:]

Our next question comes from Matthew DeYoe of Vertical Research Partners. Please go ahead.

[Matthew DeYoe:]

Good morning. So, contributions from the transfer program were based on kind of normalized contributions. I mean, it seems like the specialty business is holding in a bit better than the commodity products. But, would you say, we're still kind of within that normalize range now or if we kind of flat lined it from here, would actual contributions be lower net 15 -- was it 15-40 that you had mentioned?

[Simon Turner:]

Yes. I would characterize that staying within the same band that was the assumption -- formula remains the assumption. And as we said earlier, we have seen some ongoing robustness of these elevated pricing levels, which makes us keen to press on with the strategic priority.

[Matthew DeYoe:]

Okay. And then, can you talk a little bit about the puts and takes in TiO2 prices as we look into 2019? I guess, I mean, how much if you can comment were specialty prices up during the quarter? It seems like more commoditized product was down again in 1Q in Europe and spreads to China still remain fairly high. So, on a full year basis, do you still think prices can be down, more flat, how do you think about shakeout?

[Simon Turner:]

So, I think I heard -- this is 2019 question. And you mentioned about 1Q, of course we're still in 1Q. So, yes, the specialty pricing, demand remains good for those products. We have some momentum in pricing in those products. So, that's how I characterize that near term. We would be unwilling to answer the question and anything too far beyond the near term, because as I said earlier, this range of outcomes is quite wide this time. However, what we can say is that we would acknowledge that to varying degrees, the weakness and softness in Asia and Europe will lead to some softness in pricing in 1Q. U.S. prices remain higher, although our convergence still continues between the three major regions. And we expect to see some price increases. Indeed, in fact, we think we have actually announced some price increases in North America for the first half of 2019. The way in which that plays out in other regions, we'll know more in due course and we'll communicate at that time.

[Matthew DeYoe:]

Clearly, the pushing for prices is a positive as it relates to North America, but I mean price has been flat there pretty much since maybe early last summer. How long do you think North America can sustain the premium to the rest of the world, and are you actively exporting chloride product into North America?

[Simon Turner:]

Look, I mean, as I said on the regional convergence, there actually hasn’t been the case necessarily. So, the U.S. has actually had a premium over the other markets. But, what is true of course in most recent months is the pricing held up better. So, I think there is a difference between high low medium, there will always be a spread, and typical in this type of product cycle that you get convergence rather than divergence. So, I don't think there is anything new there that we’re seeing.

[Operator:]

Our next question comes from Arun Viswanathan of RBC. Please go ahead.

[Arun Viswanathan:]

Great, thanks. Good morning. You discussed that North America could actually see higher prices. I think, you've announced price increase as well. Maybe just discuss why you believe there is such a divergence or why there is such a divergence in demand expectations in trends regionally and why North America -- why you have some confidence I think to move higher in North America? Thanks.

[Simon Turner:]

Yes. Look, I think that it's fair to me that there is -- it's a period where the regional dynamics is primary to global dynamics from what I can see. We saw in the second half of last year, reduced exports into Europe from China quite significantly. We saw us defending share in Europe. We saw a weakness in China. There are quite marked differences in the economic environments in those regions. And that's what's driving all those types of regional supply-demand discussions at this time, driving this. Now, absent a full blown recession, I don't see why that doesn't continue. And it's clear that there's some uncertainty around tariffs in United States with certainly for Chinese producers. We do have some preferential access into parts of North America, which we are using and we do export from Europe into North America. But, those increases of product from us into North America are relatively nominal compared to the scale of the market demand.

[Arun Viswanathan:]

Okay, great. Thanks. And just as a quick follow-up, I guess, at some point, do you think that those exports into Europe from China would stabilize? I know that they have been slow from period to period, but do you think will reach a steady state where that won't be such a pressure point for Europe and it'll be dependent more on volume? And then, if I could, just as a follow-up to an earlier point you made. It sounds like volume really is the main swing factor on your outlook for 2018 if business improvement is going to cover raw materials. Is that a fair comment as well? Thanks.

[Simon Turner:]

Well, certainly, volume is the main swing factor. And let's be clear. We do expect to sell more TiO2 in 2019 than we sold in 2018. Let's be clear about that, particularly without destocking phase we saw in the second half. We saw quite significant reduction on a year on year basis in 3Q of Chinese imports to Europe to the tune of around 23 kilotons. And if you look at the all up types of exports from China into Europe and North America, while they have crept up to some extent, they’re still relatively small as a percent of their capacity in Asia. What continues to happen is that Chinese exports into broader Asia have continued to grow. So, I think there will come a natural balancing point. I think, that natural balancing point is driven as demand grows around the world and the supply base moderates, particularly as China segues over the longer term from that earlier sulfate technology into some of the chloride type technologies, then there will come a point where it does stabilize. I think that -- but I do want to keep this in perspective and in context. It’s not -- we're not being overrun [ph] by Chinese products, Chinese products were also affected by the destocking in both in Asia and Europe.

[Kurt Ogden:]

And just to clarify, the 23 kilotons decrease that we saw Chinese exports into Europe was on a sequential basis. The year-on-year decline was more like 9 kilotons.

[Operator:]

Our next question comes from Jim Sheehan of SunTrust. Please go ahead.

[Jim Sheehan:]

Thank you. Regarding the measures within the portfolio to unlock shareholder value, is there a formal sale process underway for either the whole Company or certain assets?

[Simon Turner:]

Jim, it’s Simon here. There is not a formal process underway. What I can tell you, as we have taken advice and reach out from various -- to the banking community, but there's not a formal process for package of businesses underway.

[Jim Sheehan:]

Great. And on the Timber Treatment customer loss, you talked about maybe replacing those lost volumes at some point. What's your outlook on the timing of that and replacing that lost product?

[Simon Turner:]

Yes. I think, our timing as in this year, if we could do well to cover half of the deficit 2019; that would be a good result.

[Jim Sheehan:]

And can you comment on regulatory efforts in Europe to label TiO2 carcinogen?

[Simon Turner:]

Certainly. We understand that the REACH committee is delaying its votes on the proposed classification of TiO2, which in itself is quite an unusually unique situation. And this is due to significant defense among member states about that proposal, largely related to objections over the proposed categorization of TiO2. And we've been in the vanguard of that, we've fought vigorously on that now for multiple quarters. We intend to continue to do that. We believe we strive very-strongly on this point. We are encouraged by the development of the delay. However, we should note that that REACH committee is expected to reconvene in March which is not that far way to continue its assessment. And Jim, I think, at some point, they will have some more information for you. That's our current position.

[Operator:]

Our next question comes from Hassan Ahmed of Alembic Global. Please go ahead.

[Hassan Ahmed:]

Good morning, Simon and Kurt. Simon, you talked about deceleration in the destocking between Q3 and Q4, and it obviously showed up in the volumes as well. The question I have is, did you guys see divergent volume trends or inventory trends on the sulfate side versus the chloride side? Only reason I'm asking this question is that chloride-based producer has also recently reported earnings. And their Q4 volume trend seemed to be far worse than yours. And part and parcel of that question is, are there certain end markets for the sulfate producers that have been more resilient than others?

[Simon Turner:]

Yes. So, look, I think -- let's take -- specialty for us is all sulfate. So, let's just deal with that first. That six [ph] outside of your question I believe in the spirit of your question at least. And we continue to see higher prices, some destocking, but good demand. And if we take the more broader base part of our business, we don’t see any meaningful difference between chloride and sulfate. We got a 70-30 split, but we don't see a meaningful difference there then. What we would say is we see that driven by regional differences and the difference in footprint. And I would point out that while it's true, there can be differences in the fourth quarter, equally there were differences in the third quarter. And you’ll recall that we have this 18% hit in the third quarter. So, cumulative, if you want to think about that in the second half, looking across the second half, we've been hit by about 24%. And, we now see it decelerating. And it’s those regional dynamics that have played into the pricing and convergence of the pricing, and that's what's given the price -- in the different regions. So, that's how we would see that. There are one or two factors that play the discussion. I mentioned earlier some new products we've developed. I mentioned the fact that we compete at the higher performance end of the plastics applications. So, those are factors. But, I think Hassan, 90% of this is regional differences rather than technology or applications.

[Hassan Ahmed:]

I understood. Now, on the raw material side, you talked about certain headwinds there. Now, historically, there tends to be a lag between TiO2 fundamentals and ore fundamentals. So, I mean, you guys experienced the destock over the last couple of quarters. Could you make the case that a similar destock may actually transpire on the ore side, and what seems to be a headwind today may actually turn out to be a tailwind over the course of the next couple of quarters? And again, there are enough rumblings out there that at least a producer has been hoarding, a TiO2 producer has been hoarding ore ahead of certain consolidatory moods.

[Simon Turner:]

Yes. And look, I'd like to be able to say of course that there’s been this destocking in TiO2 and this should eventuate into a wholesale destock and price dynamic and rules. But, the picture is more -- and I’d break it out, Hassan, into three components. There is no doubt about it, even ahead of the destock, there was some vigorous conversations on sulfate ilmenites with our vendors and industry vendors about pricing. And there has been flat to downish pricing there which sits outside the destock. And that sets to continue we believe in a flattish way. In terms of slags typically, ilmenites have been upgraded, 85 type percent product containing TiO2, though there have been some discussions with those vendors around in the destocking, what it means for us, what it could mean for them and reduce demand for them, and there has been an accommodation reached in from our side. We can only so from our side of course. These materials are expensive. We have not stockpiled them in any way. We are not looking that as a source of drawdown working capital more of our finished product. But I would say in the rutiles area, which as you know, with a smaller footprint on chloride for us, those rutiles, they have gone up, stayed up and even with the destocking remained somewhat elevated. So, I recognize part of the dynamic in your question. I parse it into three distinctly different dynamics of play.

[Operator:]

Our next question comes from Steve Byrne of Bank of America. Please go ahead.

[Steve Byrne:]

Yes. Thank you. What are the primary end markets in China that you are seeing reduced demand of shipments? And similarly, on the functional additives, what is the primary end market that you're seeing the decline in?

[Simon Turner:]

Yes. I think -- I'm not sure if the second part of your question relates, just China to see, what does it mean, broader additives?

[Steve Byrne:]

It was broader.

[Simon Turner:]

Okay. So, I’ll take the question first in the order you said, China. So, in China, look, we have a relatively small position. We don't sell much into China. Our calibration point might not be worth as much as others that do. Our specialties we sell in and that's working well, and we're not seeing much change. To the extent we have seen an impact in China and we've got a small window, it's in coatings because as I said earlier, pretty much everything else you take in the time, China sits in the performance specialty areas. So, that's a very important point for China. As it relates to functional additives, I would say that the destock there relates mainly to coatings denominated customers because we sell a fair amount of our additives into coatings customers. We did see the impact in coatings customers did come a little bit later for us in additives as we saw, but in the additives world, it’s coatings customers there, Europe and Asia, in fact mainly Europe.

[Steve Byrne:]

And with respect to those coatings customers in Europe and China, do you have a sense that the volume declines are greater than the underlying demand for those products that give you the conclusion -- give you the conviction that it is channel destocking and not just underlying demand contraction?

[Simon Turner:]

Yes. I mean, we've seen -- that is definitely form of the case in the third quarter, less so in the fourth quarter. And we believe that what we've seen diminishing in the early part of the year as we turn back to what we might call a regularized demand. And as I mentioned earlier in the call, when that happens, we have seen -- I’m not saying this will happen, we have seen some bounce back in real demand there as people conclude and as -- stop purchasing, we've got the seasonal high quarter, quarter two coming. Just also to mention, by the way back to prior question, I’ve been reminded here that it was also in auto coatings that we saw that softness for our functional additives.

[Steve Byrne:]

And can you comment any on the leadership changes as you're working on, Simon?

[Simon Turner:]

Sure. I mean, as you know, the Company regrettably announced the closure of Pori facility back in September last year. We've freshly completed our 2017 program. There is no doubt about it but we saw an opportunity to collapsing -- make more efficient in our SG&A and support processes for this business. And we think it's important to note in this industry the competitiveness is always a key factor. So, with the reduced footprint, essential to examine the possibility of reducing our cost structures further, and that's where that program eventually is from and as is normally the case for these type of programs, that situation applies from the top of the company right down. Now, that said, I won't try and represent to you this was a situation as all connected to that. We did have a situation of leaders taking up fresh and different opportunities as well. So, it's a bit of a mix picture. But the reality is we are looking to streamline and make more efficient the entirety of the Venator franchise in a way that makes sense for us, given the fact that we've got a significant production facility down.

[Operator:]

Our next question comes from Roger Spitz of Bank of America Merrill Lynch. Please go ahead.

[Roger Spitz:]

Thank you and good morning. First,…

[Simon Turner:]

Hey, Roger. Good morning.

[Roger Spitz:]

Good morning. Provide pluses and minuses to consider when we think about Q1 ‘19 versus the $45 million EBITDA in Q4 ‘18?

[Simon Turner:]

Yes. I think on the pluses side, depending how we characterize it, we would expect to see us about destocking and the seasonality pattern, the pluses on the side of -- on the volumetric side. And that applies for TiO2 and for additives. Of course, seasonality in additive is that much harder and higher in the first half compared to the second half. So, maybe there's a little bit of a plus from that. We will continue to see the uplift from our running on new business improvement programs again. That's on the positive side of the ledger. On the downside of ledger, we will see some raw material escalation in the quarter, and we will see some price softness as we see the after effects of 4Q coming into 1Q outside of North America.

[Roger Spitz:]

Thank you. Also, what did you mean by saying you’re going to take steps to increase liquidity, what specifically were you contemplating? And perhaps if it’s related, can you contemplate on any potential sale of any non-core assets? Thank you.

[Kurt Ogden:]

Roger, this is Kurt. So, I think we out to separate liquidity steps that we’re taking to improve -- or increase liquidity from the exploration of any portfolio management that’s taking place. So, what we’re signaling there is that we intend to increase the capacity of our ABL. We’re also taking a look at bringing in uncommitted working capital that we have in certain jurisdictions such as Malaysia and Italy and using those in order to increase the asset borrowing base. So, we’re take a look at a range of measures. We think it’s the prudent thing to do, given the economic uncertainty that exists out there. And so, we’ll have more information as those measures develop further.

[Operator:]

Our next question comes from Brian Lalli of Barclays. Please go ahead.

[Brian Lalli:]

I was going to ask basically the same question as Roger around liquidity. I guess, my one follow-up to your answer to him, Kurt, would be, are you contemplating anything in terms of issuing additional term loans? I do believe you have capacity, and maybe it’s helpful in reminding us how much capacity you would have to maybe issue some additional secured as you obviously are going through some of the unknowns in ‘19 and maybe ‘20 from a cash flow perspective.

[Kurt Ogden:]

Sure. Thanks for the question, Brian. We do have the ability under our existing credit agreement to expand the facility up by another $225 million. I think that that is something that we would consider, but nothing to say at this point in time around that. As I indicated, we are pursuing these other pockets of liquidity at the moment, but we’ll consider other measures in due course.

[Simon Turner:]

Okay. So, Simon back here. I’d like to thank everyone for joining our call today. Before we end, I’d just like to mention that Kurt, Jeff and myselfwill be on the road in the first quarter. We will look forward to meeting with as many of you as possible. And in the interim, thank you for questions and feel free to reach out to Jeff with additional questions you might have. Thank you very much.

[Operator:]

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