Venator Materials PLC
Q3 2021 Earnings Call Transcript

Published: 3 Nov 2021

[Operator:]

Good morning, and welcome to the Venator Third Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Kate Robertson, Investor Relations. Please go ahead.

[Kate Robertson:]

Thank you. Good morning, everyone. I'm Kate Robertson, Investor Relations for Venator Materials. Welcome to Venator's third quarter 2021 earnings call. Joining us on the call today are Simon Turner, President and CEO; and Kurt Ogden, Executive Vice President and CFO. This morning, we released our earnings for the third quarter 2021 via press release and posted the release and accompanying slides to our website at venatorcorp.com. 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. All performance additives comparisons we make on this call exclude the water treatment business, which was sold in May 2021. You should review our Form 10-K for the year ended December 31, 2020, and our Form 10-Q for the first quarter of 2021, our Form 6-K for the second and third quarters of 2021, and our other 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 in 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 www.venatorcorp.com. It is now my pleasure to turn the call over to Simon.

[Simon Turner:]

Thanks, Kate, and good morning, everyone. Welcome to our third quarter 2021 earnings call. Beginning on slide 3. The macroeconomic environment has been challenging in the third quarter. Generally, healthy demand was dampened by supply chain disruption and a rapid increase in energy, shipping and most raw material costs. Our businesses performed well during the third quarter despite the challenges we continue to face, and I would like to thank our associates for their ongoing efforts and continued hard work as we navigate these challenges. Venator delivered $48 million of adjusted EBITDA in the third quarter compared to $17 million in the third quarter of 2020 and $43 million in the second quarter of 2021. Turning to slide 4 in our Titanium Dioxide segment. Third quarter adjusted EBITDA from our Titanium Dioxide segment was $54 million compared to $21 million in the prior year quarter and $36 million in the second quarter of 2021. Throughout the third quarter, we continued to see robust demand for our functional TiO2 products across all regions and sectors. Demand for our specialty TiO2 products continues to improve, specifically for TiO2 into textiles applications. Our inventory levels remain historically low despite increased production during the quarter. CO2 sales volumes increased 11% compared to the cohort impacted prior year quarter and declined 1% sequentially due to low inventory levels entering the quarter and maintenance that extended into the third quarter. TiO2 average selling prices during the third quarter increased 12% compared to the prior year period and 5% sequentially. In local currency, we have successfully implemented price increase initiatives during the year and expect further increases within 2022. During the third quarter, we saw significant cost pressure due to rising prices of energy, shipping and most raw materials. Although we fix a significant portion of our cost base, we are still subject to market rates for a certain portion of our variable costs. In addition to our price increase initiatives, we are implementing additional fourth quarter surcharges to preserve our margins. These surcharges apply to specific shipping routes and are being selectively implemented on products which are manufactured at certain European facilities impacted by higher energy costs. We expect these surcharges to remain in place until energy and shipping costs return to more normalized levels. Turning to the outlook for TiO2. We expect to see robust demand for our functional TiO2 products across all regions and sectors. We expect sales volumes to be seasonally lower in the fourth quarter, albeit more modest than historical averages. Turning to slide 5 and Performance Additives. Our Performance Additives segment delivered adjusted EBITDA of $5 million in the third quarter of 2021 compared with $5 million in the prior year period and $18 million in the second quarter. Seasonally strong demand continued for our functional additives products into automotive, electronics and coatings applications and color pigments into coatings and construction end markets in all regions. This seasonally strong demand was dampened by supply and logistic challenges in the quarter. We expect these favorable demand trends to continue into the fourth quarter and follow normal seasonal patterns. Although we have seen softer demand for our timber treatment products in the third quarter, we expect demand to return to normal seasonal levels in the fourth quarter. In total, we expect fourth quarter volumes for this segment to be seasonally lower than the third. As with our TiO2 segment, we have seen costs increase significantly over the quarter. We are currently in discussions with customers to implement the combination of increased selling prices and surcharges for energy in order to mitigate these higher costs. We expect to fully offset these increased costs through increased selling prices in early 2022. Turning to slide 6 and our cost programs. Our 2020 business improvement program has delivered over $40 million of savings to date compared to the 2019 baseline, and the program remains on track. In the third quarter of 2021, we delivered incremental savings of $10 million from our 2020 business improvement program and $16 million of temporary COVID savings from the third quarter of 2020 reversed. We are lowering our estimated restructuring costs to deliver our 2020 business improvement program to approximately $40 million. I will now pass the call over to Kurt Ogden to comment on our financials.

[Kurt Ogden:]

Thanks, Simon. Let's go ahead and turn to slide 7 and review our adjusted EBITDA bridges. Adjusted EBITDA for the third quarter increased $31 million compared to the prior year period. The increase was primarily attributable to an improvement in our average selling prices, which was primarily driven by a 12% improvement within our TiO2 segment. Total sales volumes, including mix, increased 7% as the prior year period was impacted by the COVID-19 pandemic. Cost of goods sold increased due to higher energy, raw material and shipping costs. These costs were partially offset by benefits from our 2020 business improvement program and the favorable impact of higher plant utilization in the current year period. Compared to the second quarter, total adjusted EBITDA increased by $5 million. The increase was primarily due to increased TiO2 average selling prices up 5% and benefits from our 2020 business improvement program. This was partially offset by seasonally lower sales volumes in our Performance Additives segment and increased cost of goods sold due to higher energy raw material and shipping costs as well as the reversal of 2020 temporary COVID savings. Turning to slide 8 and our cash flow considerations. We have simplified our free cash flow definition to cash provided by operating activities less capital expenditures. Within our earnings release, we have included additional supplemental information on Table 7. In summary, our third quarter free cash flow was negative $13 million as we ramped up activity for capital expenditures and paid the semiannual interest due on our notes. We continue to closely manage our working capital, which was a $16 million source of cash in the quarter, though we still expect it will be a modest use of cash for 2021. We expect 2021 total capital expenditures to be approximately $75 million, which includes a modest investment in some discretionary projects that support future growth. On October 15, we successfully completed the refinancing of our ABL facility and extended the maturity to 2026. Importantly, we do not have any significant debt maturities until 2024. We recently completed a valuation for our largest pension plan that takes place every three years. As a result, we expect to save more than $20 million in future cash payments compared to 2020. In the fourth quarter, we expect to receive a refund of approximately $20 million, representing monies paid into escrow this year while the valuation took place. We are currently working with the pension trustees to transfer assets and liabilities from this pension plan to an insurance company, commonly referred to as a buyout. We anticipate this could take one to two years. With that, I'll turn the call back to Simon for some concluding remarks. Simon?

[Simon Turner:]

Thanks, Kurt. Turning to slide 9. CO2 fundamentals continue to be robust, and we are pleased to see further recovery in our specialty business. Our order books for the fourth quarter are seasonally healthy. Inventories remain historically low and Chinese exports into Europe remained stable. We have ramped up our production levels. And as a result of muted seasonality, we expect to see some modest inventory replenishment in the fourth quarter, specifically in December, which will support our customers in early 2022. The recent increases in prices for energy shipping and raw materials in many cases has risen to unprecedented levels, and we expect these costs to remain elevated throughout the fourth quarter. In addition to our normal fourth quarter price increase, we are implementing surcharges within the quarter to mitigate the inflationary impact of energy and freight and preserve our margins. These surcharges are short term, and we continue to closely monitor rates, which will determine the duration. We expect favorable TiO2 fundamentals to continue and, therefore, anticipate further price increase in 2022 as we remain committed to expanding our margins. We will continue to work closely with customers as part of our customer-tailored approach. We continue to see healthy demand for our functional Avitas and color pigments products from our Performance Additives segment. We have seen softer demand for our timber treatment products, and we expect to see timber treatment demand normalized in the fourth quarter and expect to see normal seasonal demand for functional additives and color. The Performance Additives segment continues to be cash generative as delivering on its portion of the 2020 Business Improvement Program. We continue to see additional opportunities for long-term EBITDA improvement. Our 2020 business improvement program continues to remain on track to deliver the full £55 million of benefits by the end of 2022. So far, this program has delivered more than $40 million of savings as we remain focused on controlling our costs and expanded our margins. As Kurt mentioned, a valuation of our largest pension plan was recently completed, and we expect more than $20 million in future annual cash savings compared with 2020. This valuation and outcome and an important milestone for Venator. We continue to focus on working capital management and optimization of our exit from our Pori TiO2 facility as we work towards improving our cash flow profile. We reiterate our strategy to deliver on our cost control and improvement initiatives, improve our cash flow profile and to deliver on our customer-tailored approach as experts in pigments and additives. I would like to 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. The first question comes from the line of Joe McNulty with BMO Capital Markets. Please go ahead.

[Joe McNulty:]

Yeah. Thanks for taking my question. So, when you look at the exposure that you have around energy and raw materials are on the variable cost side, I guess what percent of those would you say are locked in where you're kind of protected through this kind of unusual spike, especially in European energy? And how much of it would you say you're exposed on?

[Simon Turner:]

Yeah, Joe, I'll pick up on that, and good morning, and thank you for your question. As you point out, of course, we've seen this rapid increase in energy costs, particularly for us in Northern Europe. There's been a bit of a hotspot in the UK as most people are where they with limited storage facilities and so forth. So UK and Germany, we've seen more. I think that the way to characterize the answer to your question without throwing exact percentages, say the majority of our energy costs are hedged and locked in. But we do have a portion of floats in the market. And even that smaller portion has quite an impact when you look at the rates of increase as you can imagine. So in TiO2, I'd say I paint the picture on raws along the following lines

[Joe McNulty:]

Got it. That's helpful color on it. And then maybe can you speak to - I think you spoke to it a little bit in terms of the need to replenish your own inventories. I guess, can you give us some color as to kind of where inventories are both kind of for yourself, but also at the customer level? And how long you think it may take to kind of get us back to what would be more comfortable or more reasonable levels? How should we be thinking about that?

[Simon Turner:]

Yes. I'll take it by segment, John. I'm presuming your question refers to both TiO2 and abate. I'll take them sequentially. At TiO2. We entered the quarter very, very low because we have the maintenance in 2Q that drifted into July. We were slightly down on volume sequentially. In TiO2, we would have been up were it not for that lingering effect to the maintenance. So really, in the fourth quarter, we're going to see our plants running, as we said earlier, back to pre-COVID levels, they're already at those levels. We see customers with a very healthy demand in the fourth quarter. There will be the sort of Christmas break in Europe. The question is to what degree customers carry and ordering even though their own operations may be curtailed or paused. But we think there'll be a modest downtick in seasonal, typically seasonal 4Q on 3Q is around 10% in TiO2, but we think it will be much lighter than that this year because of a healthy demand. And we expect to close the year with very low inventories, not quite as low as we entered the fourth quarter, but there'll be a slight bit of replenishment. But frankly, we're not going to have a lot of inventory on our hands going into the 2022. We don't see our customers either. And we think that it's going to - for the foreseeable, it's going to remain pretty tight. In Performance Additives, we will get a little bit more possibility to improve our volumes and our inventories in the fourth quarter. We expect to see further strong demand in the fourth quarter as we saw in the third. We expect the normalization of timber. But that said, we will get the chance, we think, to improve our inventory somewhat in the fourth quarter, a bit better on a pro rata basis the TiO2. But there's still going to be pretty snug going into next year.

[Joe McNulty:]

Got it. Thanks very much for the color.

[Simon Turner:]

Thank you, Joe.

[Operator:]

The next question comes from the line of Vincent Adige with Morgan Stanley.

[Steven Haynes:]

Hey, this is Steve Haynes on for Vincent. Thanks for taking my question. Just wanted to follow up on the surcharges. And maybe if you could provide a little bit of color on the size of the surcharges relative, I guess, to some of your underlying price increases in TiO2.

[Simon Turner:]

Yes. Look, Steve, we're not at this time, willing to sort of dimension it. This is what I'd like to say about surcharges and price. We're in the fourth sort of sequential quarter this year of price increases in TiO2. We've seen significant announcements and pretty high rates of capture. And you can expect that to continue in the fourth quarter. And frankly, I think you can expect that pattern to continue into the first quarter of 2022 as well. That remains the dominant method of expanding our margins in TiO2, and that has been successful in the third quarter as the numbers show. That said, to Joe's earlier question, we have seen some energy pockets in the UK and Northern Europe and in other parts of the TiO2 enterprise in Europe, as you know, we've got a high capacity share in Europe. So we basically have had to look very carefully, particularly those products that get made in Europe and exported into long-haul regions, should we say. And in those cases, we've put some additional surcharges in place, and those will come on top of the regular negotiated price increases. So I think you should think about price in TiO2 and surcharges as sort of the surcharges, the minor cost to the TiO2 regular price increase is the major core. I think that's the way you should think about that. We expect them to be pretty short term in nature as we get through the energy situation in Europe. Additives is somewhat different. In additives, we really saw the freight hurt us badly. And we've taken some strong across-the-board measures with some pretty healthy surcharges put in place. You probably have seen those surcharge-type mechanisms out there from other parts industry customers, competitors and the like. And we will keep those under review. But they also come on top of our regular price increases. But if I were to characterize those surcharges and additives, I would say that they probably - it's not so much the major minor cord, but they are in themselves pretty healthy additional increments.

[Steven Haynes:]

Okay. Thank you. That's helpful.

[Operator:]

The next question comes from the line of Josh Spector with UBS. Please go ahead.

[Josh Spector:]

Yeah. Hi, guys. Thanks for taking the question. I guess, just to follow this path on the raw side of things. I guess if you just look at where things stand now, just trying to understand kind of the sequential burden that you're going to face in fourth quarter and perhaps into one quarter, if there's some lag there. Are you able to dimensionalize that at all? And then we can make our own assumptions on pricing to offset that?

[Simon Turner:]

Yes. Look, we're not going to give absolute numbers there. But of course, it's going to be pretty significant as it flows through the fourth quarter. There's no question about it. We expect that the combination of seasonal sort of volume downtick, plus our price initiatives plus surcharges will make it challenging to preserve our third quarter margin in the fourth quarter because there's quite a lot of power wave of it coming through that and which speaks obviously to further price increases as we as we get into the first quarter. So it's pretty significant. And in TiO2, the bulk of it is coming from Northern European Energy, as we said, and in Performance Additives, it's the freight. Now in Performance Additives, I think we can see a pathway because we can build a little bit more inventory because of the nature of the surcharges of the increases, I think the prospects and margin expansion within the fourth quarter remained pretty positive. So it's somewhat slightly different to the TiO2 picture.

[Josh Spector:]

Okay. That's helpful. And I guess, I mean, your comments on ability to continue to capture price remain pretty positive. I guess, do you close the gap with 3Q margins by the first quarter? Or is it going to take longer than that in your opinion at this point?

[Simon Turner:]

Sorry, could you repeat the question, Josh. I understand is you're comparing 3Q 2021 and the likely outcomes on margin for 1Q?

[Josh Spector:]

Yeah. I mean, you've seen pretty high conviction on ability to continue to get mid-single-digit sequential pricing. Just trying to think, is that enough for you to recover back to 3Q levels? And I'll kind of compound that you mentioned specialty improvement as well this quarter. I guess where do you see margins shaking out at this point with all these moving pieces?

[Simon Turner:]

Yeah. I think to your question, I would say we will be able to recover back to those third quarter levels in the first quarter. And we will already recover somewhat in the fourth quarter in additives. And of course, we're not talking about a sort of collapse in margins in the fourth quarter in TiO2, but just recognize that energy power basically is quite high. So yes, I think the answer to your question is yes, we do expect to be.

[Kurt Ogden:]

And Josh, I'd just add to that, that as we progress and track through 2022, we would expect to see margin improvement through the course of 2022, certainly relative to even the third quarter levels. So we think that the TiO2 cycle is still recovering, and we still think we are in the early innings. And so we would expect to see continued profitability improvement, specifically within the TiO2 space.

[Josh Spector:]

Okay, got it. Thanks, guys.

[Operator:]

The next question comes from the line of Edlain Rodriguez with Jefferies. Please go ahead.

[Edlain Rodriguez:]

Thank you. good morning, guys. Kurt, this is a question I was going to ask. In terms of like now, pricing has mostly been cost push for TiO2, do you believe the market is tight enough that the industry will be able to push to fundamental pricing next year?

[Simon Turner:]

Yes. I'm not sure I'd agree that there's been a cost push situation. We've seen some really strong demand. We, in Venator, have been living handsome mouth and inventories. This really does feel like a supply-demand-driven situation. And more lately, of course, as some of these freight and energy headwinds have blown up in the second half, then of course, of course, we aren't willing to absorb that. We work so hard to improve our margins. So yes, more luckily, I think it's been related to cost push. I think that the fundamentals, as Kurt said, remain very healthy. We look at what's going on in China. We look at the demand, we look at what our customers are saying. We look at inventory levels. We sort of haven't got any spec capacity in our network, and we think we're in the early innings of further improvement in the cycle.

[Edlain Rodriguez:]

Okay. Another quick one. Like if you look at your production capabilities for next year compared to this year, one, are you selling everything you produce now? And can you ramp up production for next year if the demand is even more constructive than what we saw this year?

[Simon Turner:]

Yes, we will get an uplift in production next year because we have within the third quarter, come back to pre-COVID production rates, and that will - situation remains the case as we sit here today and the rest of the year. So you can imagine in the early part of 2020 when we were not at those rates. So of course, we have that appropriate amount of percentage uplift as we sort of annualize this pedal to the metal type of approach in 2022.

[Edlain Rodriguez:]

Okay. Thank you.

[Simon Turner:]

Thank you.

[Kurt Ogden:]

Thanks, Edlain.

[Operator:]

The next question comes from the line of David Begleiter with Deutsche Bank. Please go ahead.

[David Begleiter:]

Thank you. Good morning. Simon, just at Performance Additives, how much of the $13 million decline in EBITDA sequentially was due to higher freight costs?

[Simon Turner:]

I think I got the question. You're talking about a sequential EBITDA loss, David?

[David Begleiter:]

Correct. In Performance Additives, EBITDA was down $13 million sequentially. How much of that was due to higher freight costs?

[Kurt Ogden:]

Over half.

[David Begleiter:]

Got it. And given the surcharges you're putting in place, can EBITDA in that segment be up sequentially?

[Simon Turner:]

Yes, it can. We'd expect, as I said earlier, to be able to run hard on production, build a little bit of inventory. By now, we've got strong price initiatives and strong surcharge initiatives out there within the fourth quarter. So we expect to expand our margin in the fourth quarter. And we expect - there have been years in the last three years where we've seen some pretty disappointing fourth quarters, but we don't expect to see that in 2021. We expect to see a pretty decent rebound yet.

[David Begleiter:]

Great. And Kurt, I know it's early, but looking at 2022 free cash flow, can this be positive next year, do you think?

[Kurt Ogden:]

Well, that's certainly what we're going for, David. I think that it will largely be predicated on what happens with the profitability associated with the TiO2 improvement. So, we're doing everything we can. We think that as we've indicated, having the pension valuation for our largest pension plan taken care of is an important step towards that. And so we are all hyper-focused on that.

[David Begleiter:]

Great. Thank you very much.

[Operator:]

The next question comes from the line of Matthew DeYoe with Bank of America. Please go ahead.

[Matthew DeYoe:]

Thanks. I know this represents maybe a little bit of a minority of your buy, but what are you seeing from the high-grade ore market as far as availability and cost inflation, have there been any repercussions from the outage earlier this year or kind of the upcoming planned outages from market suppliers?

[Simon Turner:]

Yeah. Look, I think the pattern here on high grade has been similar for some time. We've made the point that there's been more sort of supply and FM-type interruptions these past couple of years and probably the previous decade. We've had a number of challenges to contend with. We have successfully navigated through those. We are in a low supply position in the sense that we don't buy a lot out of Richards Bay in South Africa. We've got a lower exposure there. You have some exposure, of course. We've navigated through that. We continue to have ongoing discussions with vendors about costs and so forth. But we've got the material we need it. So we have been supplied. It's been in line with the price expectations we've had. Of course, that moves on, and we'd probably be in a better position on our next call to give a bit more color to that question as we come through some of these further negotiations with the high-grade vendors.

[Matthew DeYoe:]

Okay. Thank you. And then what are you seeing from inbound competition and pigment from China? I know just last we heard, given logistics cost, the product was coming in at a decent premium to local European benchmarks. Is that still the case? And does that give you confidence, one, I guess, in your ability to push price near term, but does that change if we get the logistics sorted out and freight costs move lower?

[Simon Turner:]

Yes. Look, I mean, there's no question. We've said a number of times that the Chinese producers will be selling into Europe, and that may have softened off, of course, with the challenges within China that we're seeing right now. But they'll be back, but we certainly don't expect it to get in the way of our ability to sell our volumes and make our margins. We've managed that to handle that dynamic for several years. It's got a little bit easier this year, but I believe we've got a track record of managing that dynamic, and we feel confident that, that will continue to be the case. There's significant challenges in China with cost escalation even if for the freight were to sort of reduce and we get into a better territory, lower territory, they would still have a significantly higher cost base to export from and they've got their own local structures, of course. So I think that we're well placed. The other thing I'd like to add is if we look over multiple years. The change in patent we've seen these past two to three years as being Chinese producers actually pushing and leading price in broader Asian markets on many occasions. And so, I think the Chinese producers have really become sort of quite accustomed to what that can do to their earnings. And again, we expect to see that continue. And that talks to the fundamentals in this industry, we should continue to see us positive.

[Operator:]

Are you done with your questions? We'll move to the next question coming from the line of Arun Viswanathan with RBC Capital Markets. Please proceed.

[Arun Viswanathan:]

Great. Thanks for taking my question. I guess first question is, could you just go around some of the end markets, I guess, that you participate in. It's a little different for you than some of the other peers. Obviously, coatings, what we're hearing is lack of availability of specific materials has resulted in slightly lower production. I know that's not the case for TiO2. So maybe you can just give us your thoughts on some of your different end markets in coatings and packaging and laminates and whatever else.

[Simon Turner:]

Sure. I'm happy to do that. And maybe we'll add a bit of a sort of regional lens on that. I mean we do see underlying strong demand in all regions continuing in the fourth quarter, or architectural coatings, plastics and demand increasing for industrial coatings applications. So we really do see across the board, inks and packaging Inc.'s very good, continued recovery in textiles, personal care, automotive. So across our TiO2 business, I have to say it's rare that you get all of the planets lining up at the same time and seeing a very positive picture like that, but that's what we're seeing right now. And we continue to hear from our customers, unusually that TiO2 isn't their biggest sort of headache because they've been challenged from a supply chain perspective on a range of items. And we're working closely with our customers. We're generally supplying our customers, even though the supply chain challenges there. We expect this demand profile to continue, and that's what we're hearing from our customers with inventories fairly light through the chain. In terms of performance additives, it's a little bit different because we have yet to see thus far the earliest softening in the year we saw in our Timber Treatment business. Now we do think that sort of normalizes somewhat in the fourth quarter, but that in Performance Additives has been one of the darker spots across our business, if not the dark spot across the whole of the Venator business. In terms of Performance Additives, we've seen good recovery in automotive there, very positive. That's been good. And in construction and paints and coatings markets for our color pigments franchises, we've seen similar demand to TiO2, very strong. So it's very strong to very strong in most places, a recovery in textiles and just Timber Treatment being the soft spot for us.

[Arun Viswanathan:]

Great. Thanks. And maybe if I could, as a follow-up. The industry has gone through a pretty significant period of consolidation. We've seen changes in pricing strategy and commercial strategy to move towards more of a long-term contracting strategy. Do you think that's been a positive move? You've gone through an early up cycle here as well with potentially less price appreciation than we've seen in past early up cycles. So again, do you think that there's a possibility we go back to the old model? Or do you think more and more that your customers are preferring this long-term contracting model?

[Simon Turner:]

Well, having been in TiO2 for well over 30 years. Now I've never ruled out any sort of returns or different types of practices, things change, situations change behaviors change. et cetera. But that said, to your point, I think since 2011 and 2012 peak, there has been a significant change. We saw that pretty disastrous sort of like trough in 2015, 2016. And I must emphasize my comments here relate to Venator and not to the industry and others will see things the way they're going to see it. But these are Veneto related comments. But I think there has been quite a significant change. We have elected to devise a more sort of nuanced and bespoke arrangement with our customers. We think it's working because back in 2012, there was a lot of negative energy expended on substitutions and conflict between the various parts of the value chain. You can see regularly now our customers, large paint companies passing through price increases and managing their margins. They are think more confident about what they're getting from us. We've been quite consistent in our behaviors with them vis-a-vis price and supply and capture and the like. And while they never like any increases, they feel at least they know what they're getting. And that certainly was the big complaint back in 2011. Look, time will tell as we come through the cycle, whether it's an overall better approach, I believe it is a better approach because we can spend more time ourselves planning a longer-term future and investing for that rather than having some of the short-term uncertainty. So some of the cyclicality is definitely diminished for us. And we think it's a long-term good thing as we build strength. But I'd accept that as we're in the early innings still more to play out. But if you look at the type of announcements and captures we've seen these past quarters, several quarters, I feel very encouraged that we're on the right path.

[Arun Viswanathan:]

Thank you.

[Operator:]

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

[Hassan Ahmed:]

Good morning, Simon and Kurt.

[Simon Turner:]

Hey, good morning, Ahmed.

[Kurt Ogden:]

Good morning.

[Hassan Ahmed:]

Question around cost cuts. Look, I mean, obviously, Q3 was a strange quarter. We saw natural gas doing what was doing, be it here in the U.S. but also across the globe, China, in particular, with gold prices, again, doing what they were doing. And the backdrop to all of this is that there was a rationalization going on in chlorine capacity as well. So on one side, you have high-grade ore, which availability of that is declining. You have the natural gas situation. So I'm just wondering, as you sit there and think about chlorine-based TiO2 production versus sulfate-based TiO2 production, have there been major shifts in the cost curve? And will they continue in 2022? And will there be opportunities for sulfate-based producers to maybe capture more market share?

[Simon Turner:]

Yeah. It's a complex question, Hassan, and there's a number of moving parts of your question intimates. But I think some broad comments apply from our perspective. I mean there's no doubt about it that from a Venator standpoint, having significant sulfate capacity and significant European sulfate capacity, of course, energy and ilmenite escalation has been something that we've had to deal with possibly more than others. And that doesn't help when it comes to the cost curve. US producers have generally been able to hold on to their larger plant, better energy profile. Chinese producers have probably gone backwards in the curve as we've gone through the year with the ilmenite plus all the other high-grade and energy and raw material challenges and freight and so. So I think that will there be opportunities next year. I mean, I think that we see sort of early on in the year, we see a continuation of some of these raw material and energy profiles. I believe that the sulfate feedstock advantage will sort of return gradually. But I'd accept that 2021 is sort of was an aberration. And of course, I think that feedstock supplies in high grade and chloride will continue to agitate for higher prices, and we will continue to resist those. We think that's gone enough and we're having some quite vigorous conversations with those people. But I think the biggest dynamic probably we see next year in terms of relative competitive advantage, as I suspect that the acid and ilmenite issues that we've seen in our sulfate block sort of reduce and that makes us relatively more competitive. And if we think the opportunities relate more to the market and product, but of course, the cost curve opportunity is part of that, too.

[Hassan Ahmed:]

Very helpful, Simon. And a question around freight flows and market share shifts. I mean, I was a bit surprised if I heard you correctly, you're talking about Chinese exports being stable, particularly with sort of the electricity situation, the logistics situation that was going on. I mean, have you sort of seen any market share shifts in Europe in particular, where you guys have gained more market share relative to the Chinese primarily obviously based on supply reliability and the like.

[Simon Turner:]

Yeah, I think it's a great question. I think Chinese producers have elected to have a certain presence. My comments were earlier about stability related mainly to Europe, not to the US and broader Asia. I think they've elected to keep a certain presence. They have gone backwards in terms of competitiveness. They have been deselected by many customers, some of which have come to us some indirectly or directly. And we have picked up share. I think we could have sold even more in the third quarter have not at the July maintenance agreement and so forth. So I think that there's some truth that we've picked up a bit there. But we're not competing directly head on with them because we're looking at the more specialty and differentiated parts of the market where they tend to compete less. But yes, I think they have elected to keep a certain position. And of course, as you say, they have onboarded these significant challenges, and those aren't necessarily going to be the most profitable tonnes. They've certainly tried to retrench more of their export into broader Asia where they can make better returns. So we've seen that dynamic. But clearly, they're not going to evaporate in Europe either.

[Hassan Ahmed:]

Very helpful, Simon. Thank you so much.

[Simon Turner:]

Pleasure.

[Operator:]

The next question comes from the line of PJ Juvekar with Citi. Please go ahead.

[Eric Petrie:]

It's Eric Petrie on for PJ. Good morning, Simon and Kurt.

[Simon Turner:]

Eric, hi. Good morning.

[Eric Petrie:]

I was reading an industry consultant is predicting up to another $300 per ton of pricing increases in TiO2 before a shallow down cycle that would put kind of pricing in the mid-$3,000 per tonne level, not at peak levels of last cycle, but what is your outlook? And at what price point do you believe people will start reformulating and leading to demand decline?

[Simon Turner:]

Yes. I mean, look, we're not going to put a number out there, but all I will say is we are better positioned than any consultants to take a read, I think, on price because we're the ones directly talking to customers. And I think the evidence suggests and I'm trying to temper more words here. But I think that industry consultants tend to be sort of like amplify on the overage or underage in their price, they're either too pessimistic to optimistic. So the way I see it is the answer to that question is fundamentally located in inflation and rules because we focus on our contribution margin. And that fundamentally will determine where the price sort of trajectory is. I think our customers are probably doing the same. You're looking at their price initiatives. So it's partly about pricing. You're right that we still got a ways to run to where we were back in '11 up around the $4,000 mark of pricing. But I think if we see this inflationary environment continue and we see these sort of numbers, some of our projections, I mean, we still got significant price movements to run. And if you look at what we've put on this year and we look at the fact that we're likely to want to continue those types of trajectories at least next year, you could make a case to say that if you just look at price numbers, it could be greater than that. But also, it will depend partly on the raw material profile too.

[Eric Petrie:]

Okay. Helpful. And then maybe a question for Kurt on slide 7 with the $36 million increase in COGS year-over-year. It sounds like maybe $10 million of that was freight related. What's the split between raw material and energy for the remainder of that basket?

[Kurt Ogden:]

Yeah. I think that the freight all in. I think you've got a pretty good feel for that based on what Simon has said already. And so you're specifically looking at the year-on-year $36 million headwind.

[Eric Petrie:]

Yes.

[Kurt Ogden:]

Yeah. Eric, you're specifically looking for outside of freight, what is your question?

[Eric Petrie:]

Yeah. Outside of freight, the larger baskets or energy versus that rate component?

[Kurt Ogden:]

It's energy. And specifically energy within Europe is where we are seeing the most increase in our direct costs right now. So although our feedstock costs are up, our biggest challenge here is managing really the combination of those three factors, energy, raw materials and freight.

[Eric Petrie:]

Thank you.

[Operator:]

The next question comes from the line of Roger Spitz with Bank of America. Please go ahead.

[Roger Spitz:]

Thank you very much. You've talked a little bit about it, but I was looking for maybe more of a financial number of what kind of working capital release you might expect in Q4?

[Kurt Ogden:]

Roger, this is Kurt. I'll take that. I think that it's going to be modest. And in fact, we may actually see a bit of working capital use here in the fourth quarter. As Simon has indicated, we would like to actually build our inventories so that we're prepared for a robust commercial campaign in 2022. And so don't be surprised if it is kind of close to breakeven. And so how that breaks, whether or not it's a source or use, I think it's going to be modest on either side of that. But I think we are looking through the fourth quarter and really want to position for a strong 2022. And so if that means we need to invest a little bit of working capital in the fourth quarter so that we are able to meet an increased demand for product in early 2022, then that would be a worthwhile investment.

[Roger Spitz:]

Got it. And can you give any kind of steer at least for 2022 CapEx?

[Kurt Ogden:]

Well, I think that it is likely to be up modestly from the $75 million that we have today. I think that's still early days. We have begun the initial steps of our annual budgeting process. And so we've got some arm wrestling taking place right now, as you can imagine, Roger, and we're trying to figure out what that spend is. We do think that there are some discretionary opportunities that are going to be worthwhile. So, at this point, I would say it would be up modestly from the $75 million that we expect to spend in 2021.

[Roger Spitz:]

Great. Thank you very much.

[Kurt Ogden:]

Thank you, Roger.

[Operator:]

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

[Simon Turner:]

Well, I'd just like to thank all participants for joining us this morning for your continued interest in Venator. Please feel free to reach out to Kate, Investor Relations or myself or Kurt. We look forward to follow-ups, and we look forward to meeting a bunch of people over the coming weeks as we get through and further into the fourth quarter. So, thank you very much, and stay safe. Thanks everyone.

[Operator:]

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