Venator Materials PLC
Q2 2021 Earnings Call Transcript

Published: 3 Aug 2021

[Operator:]

Good morning, and welcome to the Venator Second Quarter 2021 Earnings Call. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would like to turn the conference over to Kate Robertson. Please go ahead.

[Kate Robertson:]

Thank you, Francesca, and good morning, everyone. I am Kate Robertson, Investor Relations for Venator Materials. Welcome to Venator's second quarter 2021 earnings call. Joining us on the call today are Simon Turner, President and CEO; and Kurt Ogden, Executive Vice President and CFO.

[Simon Turner:]

Thanks, Kate, and good morning, everyone. Welcome to our second quarter 2021 earnings call. Beginning on Slide 3, the economic environment has improved significantly since this time last year, which was significantly impacted by the COVID-19 pandemic. We saw a strong demand environment across our business in the second quarter of 2021. Venator delivered $43 million of adjusted EBITDA in the second quarter, compared to $49 million in the first quarter of 2021 and $37 million in the second quarter of 2020. Turning to Slide 4 and our Titanium Dioxide segment, EBITDA from our Titanium Dioxide segment was $36 million in the second quarter of 2021, compared to $35 million in the prior-year quarter and $40 million in the first quarter of 2021. TiO2 fundamentals are very encouraging. Underlying demand continues to be strong across all regions and sectors, with limited supply of product in the marketplace and stabilization of Chinese exports. Rising raw material, energy, and shipping costs, along with positive industry fundamentals, have created a favorable environment for quarterly selling price increases. Recovery for our specialty TiO2 products, mainly in automotive and textile sectors, is underway, albeit at a slower pace than our less differentiated products.

[Kurt Ogden:]

Thanks, Simon. Let's turn to Slide 7 and our adjusted EBITDA bridges. Second quarter total adjusted EBITDA increased $6 million compared to the prior year period. The increase was primarily attributable to an improvement in our average selling prices in both of our segments. The increase in total sales volumes was 13%, as we saw a demand recovery from the prior-year period, which was impacted by the COVID-19 pandemic. Cost of goods sold increased due to higher energy, raw material, and shipping costs and the unfavorable impact of maintenance downtime at certain of our TiO2 facilities. We estimate the EBITDA impact associated with TiO2 maintenance downtime in the second quarter was approximately $10 million, from the combination of lower fixed cost absorption, lost sales, and increased maintenance costs. These costs were partially offset by benefits from our 2020 Business Improvement Program. Compared to the first quarter, total adjusted EBITDA decreased by $6 million. Unfortunately, the benefits from our TiO2 selling price increase initiatives and Business Improvement Programs were more than offset by the increased maintenance costs just mentioned and higher costs from the reversal of 2020 temporary COVID savings. Turning to Slide 8 at our cash flow considerations, liquidity at the end of the quarter totaled $421 million, comprised of $182 million in cash and $239 million available under our asset-based lending facility. As a reminder, we do not have any significant debt maturities until 2024. We delivered positive free cash flow in the second quarter of $4 million. We continue to exercise extreme discipline as it relates to our capital expenditures and other cash uses. Sale proceeds from the water treatment business are included within the pension and other line item.

[Simon Turner:]

Thanks, Kurt. We remain encouraged by the continued improvement in TiO2 industry fundamentals, despite our second quarter results being dampened by approximately $10 million of essential maintenance activities. Demand has been strong in most major applications. Inventories remain low, Chinese exports into Europe have stabilized, and we are capturing solid selling price increases from our price increase initiatives. We continue to successfully navigate freights, ore, and other supply chain challenges. Looking to the third quarter, demand continues to be robust for our products, and our order book is healthy, though we expect to see some seasonality. Maintenance activities initiated in the second quarter extended into July, and we estimate this will negatively impact third quarter EBITDA by up to $5 million. We are focusing on increasing our production levels, while implementing initiatives to maximize utilization rates of our current TiO2 capacity. We expect to reach pre-pandemic production levels in the second half of the year. Our customers continue to experience the benefits of our customer-tailored approach, and our selling price initiatives will bring further price improvement across all regions. Our Performance Additives segment continues to perform well, particularly in coatings, plastics, and construction, and we see additional opportunities for long-term EBITDA improvement. Our 2020 Business Improvement Program is making good progress, and we remain on track to deliver the full benefits by the end of 2022. As a reminder, we expect this program to further strengthen our cost structure and deliver $55 million of annual savings.

[Operator:]

The first question comes from Vincent Andrews with Morgan Stanley.

[Steven Haynes:]

This is Steve Haynes on for Vincent. I just wanted to ask a quick question on your volume expectations for 2022 and given that inventories in the channel might be a little bit tight. So how should we be thinking about volumes in 2022?

[Simon Turner:]

Yes. I mean, look, I think we said in our prepared remarks, we expect to see this pattern of strong demand continue in -- through 2021, the balance of 2021. Along the way, we expect it to be quite difficult to see inventories rebuilt. We don't see inventory in our customer channels to any degree. We know there are several supply chain challenges the industry faces, certainly we face around freight, logistics, feedstocks, and so forth. We also can tell you that our customers are extremely motivated around supply and getting their necessary allocation quotient of products from us, because they themselves have experienced many force majeure or interruption-type events during this sort of strong recovery. So that is the backlog into 2022. We're not prepared to put a number on 2022 except to say we expect to see the cycle extend and continue. Clearly, we -- it is our goal to increase our available capacity to supply that market. And as we sit here today, we would see our year-over-year 2022 over 2021 production capability extending by sort of mid-single digits. That should give you a sort of view of what we see as the way we're setting ourselves up for the rest of the year and beyond.

[Steven Haynes:]

And just to clarify, that's up mid-single digits on a percentage basis.

[Simon Turner:]

[Operator:]

The next question is from Josh Spector with UBS.

[Josh Spector:]

Simon, I was wondering if you could square away one of the comments that you made about the second half. I mean, I think second quarter volume's still below 2019 levels by a good margin. You commented on sequential declines with normal seasonality, but then you made the comment of getting flat to pre-pandemic levels. How do you get there with those different moving pieces?

[Simon Turner:]

Yes. I mean, look, I think the way we said on our prior call, and we're saying again now that we expect the second half to be -- when we're running the assets in the second half of this year, they will be at the pre pandemic 2019 level. So that's the sort of rate in the second half compared to the sort of average rate we saw in 2019, so I think that's pretty clear as to how we get to that statement. Of course, there are some sort of moving parts in these volumes. If you look at our numbers, adjust for the sort of lost sales and outage we had in the second quarter, which we called out, then we think our sort of sequential growth is -- would be pro forma in line with some others. Of course, you have to bear in mind that the second quarter of 2020, we didn't see as large a dip in our sales volumes in the second quarter last year over the first quarter as some others, so we see a different recovery profile year-on-year as well. So I think that the -- suffice to say that we will have -- we see the second half demand being strong. You should be able to figure out what our sort of production run rate from what we said at pre-COVID levels. And we've sort of tried to give a view on, in the earlier question there, about how we see 2022 and the cycle extending along that sort of trajectory.

[Josh Spector:]

Okay. And I guess, how much are you planning on raw material logistic costs to increase sequentially? I think you called out higher costs into the second half. And you made the comment that you expect to recover that with price. Do you have visibility on the timing of when you see that price cost gap closing?

[Simon Turner:]

Yes. Look, I mean, again, you've got a number of moving parts. But if we focus on our sort of direct cost margins, clearly, we have had this EBITDA margin issue in the second quarter through the maintenance activities and FCA. But we outran the sort of raw material increases. We see further increases in the second half of this year. It's fair to say, I think, that those increases are clearer over the next quarter than they are over the full second half, so we're not prepared to sort of put a number on it, although, clearly, there will be a significant 2021 raw material headwind. Does vary by category. And what I think we are feeling confident that, as we've said through the year, that we'd expect to see price increases as we step through 2021. So, as we see those raw materials unfold, however they play out in the last part of the year, we would expect to be looking to recover that in our margin.

[Operator:]

The next question is from David Begleiter with Deutsche Bank.

[Katherine Griffin:]

This is Katherine Griffin on for David. So first, just wanted to get your thoughts, Simon, on feedstock ore costs. I know you spoke a little bit about your expectations for offsetting raw material increases with price. But I'm just curious if you could kind of speak to the dynamics related to recent supply disruptions with some kind of major ore suppliers and sort of how tight things are in terms of that feedstock availability, and kind of how that could play out through the rest of the year.

[Simon Turner:]

Yes. Happy to answer the question. We said a number of times that our range of ore feedstocks -- and I'm going to start with the feedstock piece rather than other raw materials -- but on the ore feedstocks, we buy a wide range of products across our sulfate and chloride technology platform. That's an important point, because we saw ilmenites rise at the back end of last year. We have seen some further pressures through this year, as the Chinese block had really seen the earlier increases. I don't think there's anything really meaningful to add on the rutiles discussion. I think it's very clear to people, observers, what these supply points are in Africa and in South Africa, which have got various challenges, some nearer term, some lasting a little bit longer. So I don't plan to trail through what each of them are. I think that's pretty well-known by observers. Suffice to say that in the case of Richards Bay, which clearly is a very meaningful high-grade chloride feedstock supply point for the industry, at least, we have a relatively small exposure to Richards Bay. And we have concluded that we will be able to navigate our way through the current and ongoing supply reductions out of that supply point in South Africa. So I'm not saying it's not an -- easy to manage the supply chain challenge. But by looking at what we buy into each of our facilities, looking at our network, we are able to withstand that disruption and manage our way through it, so that's a very important point. I don't think we're seeing anything from the high-grade feedstock producers vis-a-vis requests for price that we didn't expect, and we continue to negotiate with them. And in some cases, we have outcomes; in others, we still have ongoing discussions, and that will continue. So I think in the feedstock block, I would add that, I think obviously, there's been some very difficult -- and tragic in many ways -- socioeconomic factors that play down in South Africa, a place where I lived for many years and my wife from South Africa, some born in South Africa, so it's very disturbing to see what's been happening -- continuing to happen in parts of South Africa, particularly in those parts of northern and where some of these facilities are located. So it has been challenging getting information and making an assessment of how this will play out, but our assessment is there will continue to be challenges in the coming months. We're planning for challenges in the coming months, but we will be able to get through it.

[Katherine Griffin:]

Great. And just secondly, if I could touch on -- I appreciate kind of the color on second half in terms of production, getting back to pre-pandemic levels. But I'm curious if you could kind of talk to your expectations for pricing -- for TiO2 pricing -- in Q4 and perhaps the ability to kind of -- if there's enough sort of positive market fundamentals and feedstock ore costs remain elevated, raw material costs are not elevated, is there a chance that you could see more supportive pricing in Q4 maybe relative to prior years? I think just any kind of color on your expectations around that would be helpful.

[Simon Turner:]

Yes. To address the pricing point, we said after the first quarter, it's always an unwelcome discussion for our customers talking about price, of course. We saw a higher price capture in the second quarter than the first quarter. We believe we are on course for a very good price capture in all of our major markets and regions in the third quarter as well. We're using a whole range of tailored approaches with customers, which recognize their specific circumstances. We see they themselves as managing inflationary pressures from a range of suppliers and passing that through to their own customers. So that's the sort of backdrop that we've seen in the first half, and we are very encouraged by what we were on course for in the third quarter as well. Now, as you're aware, the fourth quarter historically has not always been a quarter which sees the most price increases because it's the sort of seasonal low and there's stock built generally. I have to say, on this occasion, with all we're seeing inflation, with all we're seeing on tightness of supply in the third quarter, I think the prospects for further price increases in the fourth quarter are very good.

[Operator:]

The next question is from Matthew DeYoe with Bank of America.

[Matthew DeYoe:]

Based on benchmark moves in your exposures, it seems like I would have guessed TiO2 price for your regions would have been up over like 10% year-over-year. I mean, I understand no one ever captures the full magnitude of market moves. The 3% growth in price year-over-year kind of seems a little pedestrian on a capture basis, so I'm just kind of wondering what's driving the differential here.

[Simon Turner:]

Yes. I mean, look, if the functional -- our functional products grew at a 5% price increase sequentially. And of course, we've had price increases in 2Q -- in 1Q before that. We expect to have further price increases in the remaining quarters. This industry, as you may be aware, did go through a phase where there were some very large price increases passed through in a short space of time, law of unintended consequences and all that, back in 2011, '12, meant that there had been some demand destruction effects and a general sort of reconciliation with our customers and unhappiness about how we managed our contracts between ourselves. I think that's fair to say. I certainly speak for our own company in that regard. And subsequent to that, we decided and chose consciously to embark upon a far more disparate range of contracts with our customers that recognize, amongst other things, their need to manage their pass-through, but recognize importantly from our perspective that when we made these products, they were going to end up at the customers' and not just seen as a fungible stockpile. So there's been quite a shift. I can -- I hear what you're saying, that it may appear in one quarter as a relatively low amount. But if you look at what's been happening in successive price increases, and if you look at the way that this has helped provide some stabilization investment planning into our business, then we think that the pros outweigh the sort of cons, if you go for sort of like a short-term sprint.

[Matthew DeYoe:]

So conceivably, this is not maybe what we're thinking, but if Chinese prices or Chinese product moves into Europe more appreciably, and the contract -- the prices move lower, you wouldn't see the give up to the extent that the market would as well. You would keep a more muted reaction and down tapes. Is that correct?

[Simon Turner:]

Yes. I mean it's an interesting example you've picked up on here, because if you think about how the year-on-year price increases will look end '21 over and '20 -- we don't have that number in yet, right? But it's going to be a pretty significant year-over-year dollars-per-ton increase through the year for TiO2. And if you look at what's going on in China with the onboarding of some of these inflationary costs, you can see why, at that plus the freight logistics issue into Europe, and for Chinese producers to make the same as they were making, they are having to -- they would need a price several hundred -- many hundreds of dollars a ton above prior, even higher than has been achieved thus far. So that's why we're not seeing that wholesale export and arrival of Chinese products into Europe. And the ones that do arrive, Chinese producers agitate for pretty high prices to justify the sort of netbacks against other supply points. So that's another reason that we want to make sure we adopt this sort of like thoughtful approach to our pricing.

[Matthew DeYoe:]

Okay. And I guess just one more quick one. I think you had mentioned that volumes would be down seasonally in 3Q. If I heard that correct, and that's the case, why is that? I mean, if the inventory in the channel is pretty light, wouldn't your end-market customers be using that as a time to rebuild? Or are you rebuilding your own inventories during then, or did I just totally missed that?

[Simon Turner:]

Yes. I mean, I don't see us rebuilding our own inventories in 3Q. Let's be very clear about that. We are going to be pedal to the metal, and we are going to be running flat out, fully sold during that period. And we're obviously going to optimize and maximize our production capability, so that's very clear. Historically, the third quarter has shown a seasonal decline over the second quarter. Now that -- there is a range in that course. In some years, we've seen it has been relatively small, 2% to 3%. In other years, we've seen it as high as double digits. This year, our assessment, allowing for the factors that you described of supply chain and the like, we think it will be towards the lower end of the decline, the seasonal decline. But nevertheless, there will be a decline.

[Kurt Ogden:]

And then, Matt, just to underscore that point, I think what you're seeing here is that we have drawn down our finished goods inventory levels so low that we are limited -- our sales volumes are limited by what we're able to produce. And so, we will sell whatever we can produce in the third quarter, but we don't have excess inventory that we can put into the market right now. And that's what leads to that seasonal impact in the third quarter. Certainly, the market demand is there.

[Operator:]

The next question is from Hassan Ahmed with Alembic Global.

[Hassan Ahmed:]

Question around cost curves. Obviously, you guys highlighted some of the inflationary moves we've seen on the ore side of it. And if my understanding is correct, I mean, we obviously saw low-grade or rising fairly rapidly over the last couple of months, and it seems now with some of the supply constraints out there that high-grade ore is playing catch up. But alongside this, I guess, one of the other dynamics that's in play is, for the TiO2 industry overall, that we are seeing inflationary moves in the price of chlorine. So my question to you is that, as you sort of sit there and think through some of these inflationary moves, be it low-grade ore, high-grade ore, now the availability of chlorine is a bit of an issue. How are you thinking about the relative positioning of sulfate-based TiO2 versus chloride-based TiO2 on the cost curves in the near to medium term? Will one be majorly advantaged, cost-wise, over the other.

[Simon Turner:]

Yes. I think the way to think about that, Hassan, is to divide the answer right into two parts. The first part is as it relates to the Chinese block. There's no doubt in my mind, over the past 24 months, probably plus, the Chinese capacity relative to the non-Chinese capacity has suffered more disadvantage in inflation than their Western counterparts. Now I'm not -- there's a very general comment. I'm not going to put a number on that, but we are seeing, I suspect, shifts of hundreds of dollars of a ton, and multiple hundreds of dollars a ton in some cases. And while the Chinese capacity has had the benefit of lower indirect costs, certainly on the raw materials, energy, and freight, it's really probably at the far end of the curve as a block. And that's an important point. I think of course, within the Chinese block, there will be some higher and some lower. But we should stress this greatly, that if you're a Chinese producer, you've seen the highest rises and earliest rises in ilmenite, you've seen world-scale energy prices. If you're producing chloride, you're largely bringing in ever-increasing high-grade chloride feedstocks, and you're seeing all other sorts of inflationary pressures plus all the freight dislocation logistics. So it really has been a big loading onto the direct cost rate. So I think that part of the block has gone backwards. As it relates to the Western part of the block, of course, it depends who you are and where you are, but there will be some movements in plants and swapping in different places in the curve, no question. It remains to be seen, from our perspective, just what the chlorine inflation really finally looks like, I have to tell you. I don't think we would claim to have the full assessment of that yet. It's something we're turning our attention to. We said the past -- 6 months ago that we expected to get a resumption of the patterns in the ore feedstocks, whereby high-grade chloride materials started to come back against low-grade sulfate and overtake, and we're starting to see that dynamic play out. So there will be some swapping. But frankly, Hassan, I'm not sure we're talking about multiple hundreds of dollars a ton unless the chlorine thing really turns into something pretty large. And in that time, of course, there's been some increases, so some of the sulfate process has seen some of that. So I think I see a swapping between the Western plants on their own unique set of circumstances. But the one very clear comment to me -- and we're seeing this in the price capture dynamic and volumes and exports and the like -- is how the Chinese have sort of gone backwards in the curve as a block.

[Hassan Ahmed:]

Understood. Very helpful. And as a follow-up question around volumes, historically, we had heard about the Chinese getting fairly aggressive in terms of gaining market share in Europe. And then, through sort of certain constraints that they themselves were having, delivery, the reliability of sort of supply became a bit of an issue, and it seemed that particularly in Europe, the Chinese were losing share, right? Now, as I sit there and hear the volume guidance from the Western majors, there seems to be a disparity between the Q3 guidance, sequential guidance that the majors are giving versus one of the largest players in the industry, right? So my question to you is, what are you guys seeing in terms of trade flows and market share shifts? Is that meaningful, and will that continue?

[Simon Turner:]

Yes. I mean, look, obviously, we only speak for ourselves and are not willing to sort of engage in specific other competitors and like, Hassan. But from our standpoint, it's very clear. We're not happy in the second quarter to have to forgo sales in what is the seasonal peak period. We did the right thing. We'd do it again with the maintenance decisions we had to take. But the reality is, the market was tight, and some benefited more from that than others. I mean, I think that's clear in some of the patterns in the second quarter. But as we look forward, we don't see the Chinese block demand in China being -- having gone -- the trail gone cold. Of course, we've seen some sort of normalization of demand, but there's still pretty decent demand out there, so we expect that to suck up a whole bunch of Chinese product. We've seen a sort of like a situation, to confirm what you said, Chinese exports into Europe. First off, there was this issue around reliability, availability, and cost. And now, with subsequent inflations Chinese producers wishing to sell are really going to have to demand pretty high prices on their shipping -- very expensive into Europe -- to be able to justify the netback. So I think that's going to continue to impact the trade flow. China will remain pretty strong. They will continue to export, mainly into the Asian region. We won't see a big incursion in Europe. It may even drop back a little bit. But look, it's not going to disappear. It's not going to half. We're talking about some reduction maybe, but we think that's highly manageable.

[Operator:]

The next question is from with Citi.

[Eric Petrie:]

Simon, it's Eric Petrie on for P.J. What kind of EBITDA uplift do you expect over the coming years with the recovery in specialty TiO2 volumes to pre-pandemic levels?

[Simon Turner:]

Yes. So look, I think if you take a look at the specialty part of our business, we said that the recovery is on a slower track. We are seeing recovery, but we're not back to the pre-pandemic levels. And I don't think we're going to be back to pre-pandemic levels this year now with -- by the look of things, so the earliest juncture I think we could expect to see that as during 2022. I think we've said in the past that it's a very meaningful, significant, and important part of our business, but it isn't -- certainly isn't the largest part of our business. And when we're getting these types of price uplifts in the functional part of the business with the volumes, you can see pretty much that it's going to be that that drives the earnings uplift. And then -- so you really -- the question is about the cycle rather than specialty, and we can see -- continue to believe that we're in the earlier part of the cycle, and we're going to see further development of that in next year. We're going to strengthen our earnings profile through into 2022 at the same time that we are working on our cash usage. So that's how we're seeing our mental model, Eric, that helpful.

[Eric Petrie:]

Okay. And secondly, TiO2 margins declined 100 basis points sequentially. How should we think about that in the second half, given seasonality that you talked about, the resumption of production at Greatham, higher raw material costs? Could you just break that out in terms of, do you see it flat, pretty stable or down slightly, or how should we look at that?

[Simon Turner:]

Well, I'd expect to see 3Q higher than the first quarter, based on the fact that we're going to have further price increases, and we're going to have -- we're not going to have the FCA effect, which sort of temporarily took us down in the second quarter. So the way I would think about it is third quarter being opened up against the first quarter. And then the fourth quarter, obviously, well, that's a little bit further out. But as I said earlier in my remarks and answers, we still feel strongly that there's likely to be price increases in the fourth quarter, too. So hopefully, that can help you there.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Simon Turner for any closing remarks.

[Simon Turner:]

Well, thank you, everyone, for joining the call, and thank you for your continued interest in Venator, and we look forward to speaking to as many of you as we can throughout the quarter at the upcoming conferences. So, any questions or clarifications, please feel free to reach out to Kate in the first instance with any points that you will want clarification on. Thank you very much.

[Operator:]

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