Venator Materials PLC
Q4 2021 Earnings Call Transcript

Published: 22 Feb 2022

[Operator:]

Good day. And welcome to the Venator Fourth 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, today's event is being recorded. I would now like to turn the conference over to Kate Robertson, with Venator, Investor Relations. Please go ahead.

[Kate Robertson:]

Thank you, Rokko. And good morning, everyone. I'm Kate Robertson, Investor Relations for Venator Materials. Welcome to Venator's fourth quarter and full year 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 fourth quarter and full year 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 and expectations for the future. All such statements are forward-looking and while they reflect our current expectation, 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 annual report on Form 20-F for the year ended 31st of December 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 during the quarter. We will also refer to non-GAAP financial measures such as EBITDA, adjusted EBITDA, adjusted net income, free cash flow and net debt. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted to our website at venatorcorp.com. I would now like to turn the call over to Simon.

[Simon Turner:]

Thanks, Kate. And good morning, everyone. Welcome to our fourth quarter and full year 2021 earnings call. Beginning on Slide 3. In 2021, demand recovered and remained strong throughout the year. Supply chains were under pressure and we incurred significant cost inflation, primarily TiO2 feedstocks, other raw materials, energy and shipping. In response, we implemented a range of actions including increased selling prices, surcharges and cost control measures. Notwithstanding these challenges, the Venator team delivered $40 million of adjusted EBITDA in the fourth quarter and $180 million in the full year of 2021, an increase of $15 million and $44 million, respectively. Turning to Slide 4 on our Titanium Dioxide segment. Fourth quarter adjusted EBITDA from our Titanium Dioxide segment was $35 million compared to $25 million in the prior year quarter and $54 million in the third quarter. Throughout the fourth quarter, demand for our functional TiO2 products continued to be robust across all regions and sectors. We continue to see a recovery of demand for our specialty TiO2 products, most notably into textiles applications. TiO2 sales volumes declined 2% compared to the prior year quarter. The decrease reflects strong demand in the prior year period as the global economy emerged from COVID-19 shutdowns and limited inventory levels in 2021. Volumes declined 10% sequentially, which is consistent with historical seasonality and the impact of plant maintenance. In the fourth quarter, we incurred significant cost inflation from energy, primarily in Europe and raw materials, which was in line with our expectations at our prior earnings call. We mitigated these headwinds through a range of actions, including increased selling prices, targeted surcharges and cost control. TiO2 average selling prices increased 20% compared to the prior year period and 6% sequentially in local currency. Now turning to the outlook for TiO2. Underlying demand remains strong, specifically in Europe and North America. We continue to see high demand across all major sectors. Recovery continues in specialty TiO2 applications such as textiles, personal care and automotive. Our inventories are at historically low levels and we expect inventories to remain lean throughout 2022. We are increasing production to meet the requirement of our customers for all products. Shipping availability remains tight, ports are congested, and lead times are longer. Inventories are low and we don't have the benefit of normalized inventory levels to fall back on, which brings additional precious to already fragile supply chains. Looking at our cost base, we expect to see inflationary pressure on most TiO2 feedstocks during the first half of the year. We expect energy costs in Europe to remain elevated with volatility due to current political turmoil. We continue to manage our costs with programs such as fixing a significant portion of our variable costs. However, we are subject to market rates on the remainder. We will expand and intensify our range of price increase actions, which will now include monthly price reviews and tailored surcharges. This will bring more flexibility to manage margin in this increasingly volatile raw material, energy and freight cost environment. These initiatives are supported by our customer-tailored approach. Turning to Slide 5 and our Performance Additives segment. Our Performance Additives segment delivered adjusted EBITDA of $19 million in the fourth quarter of 2021 compared with $15 million in the prior year period and $5 million in the third quarter. Strong demand continued for our functional additives products into automotive, electronics and coatings applications. Demand in the fourth quarter for color pigments and timber treatment products were at normal seasonal levels. In the fourth quarter, total segment sales volumes declined 2% compared to the prior year period and 5% sequentially. Average selling prices increased 8% compared to the prior year period and 9% compared to the third quarter in local currency as we implemented price increases and surcharges to mitigate increased cost inflation. In 2022, we expect demand to remain robust and volumes to follow normal seasonal patterns. As with our TiO2 segment, we expect continued inflationary pressures on raw materials, energy and shipping costs, which we will offset with increased selling prices in accordance with our customer-tailored approach. Moving on to Slide 6 and our cost programs. In 2021 we delivered the full benefits of our 2019 Business Improvement Program and we exceeded our 2021 target delivery for our 2020 Business Improvement Program by $6 million and substantively completed the actions to capture $55 million compared to the 2019 baseline. We expect to incur total cash restructuring costs of approximately $25 million in 2022, which will support the delivery of this program. I will now pass the call over to Kurt for him to comment on our financials.

[Kurt Ogden:]

Thanks, Simon. Turning to Slide 7 and our adjusted EBITDA bridges. Compared to the third quarter, total adjusted EBITDA decreased by $8 million. The decrease was primarily due to lower volumes as a result of normal seasonality and increased cost inflation. This was partially offset by higher average selling prices and benefits from our 2020 Business Improvement Program. Adjusted EBITDA for the fourth quarter increased $15 million compared to the prior year period. The increase was primarily attributable to an improvement of 17% in total company average selling prices. Total company sales volumes declined 2% from the impact of normalized demand and plant maintenance. Cost of goods sold increased due to higher raw material, energy and shipping costs and these costs were partially offset by benefits from our 2020 Business Improvement Program. Let's turn to Slide 8 and our cash flow considerations. Our fourth quarter free cash flow was negative $9 million and full year free cash flow was negative $54 million and we ended the year with over $350 million of liquidity. Throughout 2021 we continued to be disciplined with our cash uses and continued to make structural improvements to our free cash flow. In 2022 we expect the following cash uses, capital expenditures of $85 million to $95 million, which includes modest investments to support future growth. Cash interest to be similar to 2021 and we expect working capital to be a cash use consistent with price inflation. Restructuring to be a cash use of approximately $25 million, primarily attributable to our Business Improvement Program. And we recently completed a valuation for our largest pension plan and we expect to save more than $20 million in cash payments compared to 2020 and more than $10 million compared to 2021. We continue to work 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 that this could take 1 to 2 years. I'll now turn the call back to Simon for some concluding remarks.

[Simon Turner:]

Thanks, Kurt. Turning to Slide 9. I was pleased with our results and operations in 2021 as we successfully managed the challenge from the pandemic. Our associates did an outstanding job managing the pressures we faced. And on top of this, we progressed our position by responding to meet our customer's requirements, increasing our selling prices to mitigate cost inflation, delivering on our Business Improvement Programs and reducing cash uses to benefit us in future years. Our Performance Additive businesses improved significantly in 2021. Segment EBITDA increased $10 million compared to 2020 and $18 million compared to 2019 as we continue to deliver on our Business Improvement Program, implement pricing initiatives and margin expansion. Additionally, in May 2021 we published our first sustainability report as a stand-alone company, which showcased the efforts of our team in many environmental, social and governance areas. We look forward to publishing our second report in the second quarter. To recap on our results, 2021 adjusted EBITDA totaled $180 million, which included $14 million incremental benefit from our Business Improvement Programs. Compared to 2020, total company sales volumes increased 5% and average selling prices increased 7% due to actions we took through price to mitigate cost inflation. Our Performance Additives order books are healthy for all businesses, including timber treatment where we experienced softer demand within the third quarter, which normalized during the fourth quarter. We expect demand patterns throughout 2022 to follow normal seasonal trends. In 2021 we delivered a further $14 million from our Business Improvement Program. Actions to deliver the full 2020 Business Improvement Program are substantively complete. We are in an elongated TiO2 upcycle and fundamentals continue to be favorable. We expect demand in 2022 to be robust specifically in Europe and North America as economies recover from COVID. We continue to increase our production to meet the requirement of our customers for all products and our teams continue to do a great job in managing these challenges. Raw material, energy and shipping costs remain elevated for both our segments and we expect continued cost inflation in 2022. As inventories throughout the supply chain are at historically low levels, any disruption to product availability, freight and logistics could potentially impact our performance. Supply chains remain fragile. Given this increasingly volatile cost environment, more specifically energy inflation in the European market, we will expand and intensify our range of price increase actions. This will now include monthly price reviews and tailored surcharges. This will bring more flexibility to manage margin through these challenging conditions. In summary, we are strengthening our underlying position for Venator for success by increasing production, delivering on our customer-tailored price approach and controlling our costs, all of which will provide earnings uplift. We continue to remain focused on controlling our cash uses such as pension, working capital and optimizing our exit from Pori. These actions are instrumental in delivering our target of being free cash flow positive. I would now like to open the call for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. Today's first question comes from Josh Spector with UBS. Please go ahead.

[Josh Spector:]

Yeah. Hey, guys. Thanks for taking my question. I just wanted to follow up on your comments on monthly price reviews and kind of how that flows through to the customers? I guess what percent of your customers would be open to monthly price discussions or is that a change that needs to take place with you and your customers at this point?

[Simon Turner:]

Well, let me answer that by saying, Josh, that we continue to implement a range of price measures and that's really what lies behind our tailored approach. The essence of that is individual agreements with customers for agreed shipments and service and the like. So we have been managing monthly pricing as part of our commercial arrangements in some parts of our base. We saw in the fourth quarter our input costs rise. They were in line with our expectation and we put through significant price increases in the fourth quarter. Now you will have seen the outcomes reported on our results. I will say that we expect to outpace those fourth quarter price outcomes within the first quarter of 2022 because we are intensifying our price actions. Now it's true of course that our energy input cost factor, which isn't our only factor of course of our input cost escalation, but our energy is predominantly in Europe where we have the preponderance of our production and assets. So while we initially thought that maybe we'd see a peak in input cost and energy pricing in the early part of this year, I think now we're not so sure. Frankly, we don't know what that future holds. And while we continue to be successful expanding margin, we've decided now is the right time to introduce, particularly in the European market I would say, these monthly price reviews more formally with a broader range of our customers. We're not prepared obviously to break out percentages. And this of course is in addition to our underlying price increases and surcharge programs, which we've got running in many parts of the world in many parts of our business.

[Josh Spector:]

Okay. Thanks. And I guess just a follow-up on that is I mean can you comment on how much of the price increases are surcharges in the fourth quarter versus what you're expecting in the first quarter? So how successful you were putting on those surcharges? And kind of related to that, you talk about costs increasing, your COGS Q-o-Q bridge was $15 million-ish - $14 million I guess exactly. What sort of range are you thinking that increases sequentially into first quarter?

[Simon Turner:]

Yeah. Look, I'll speak to the first part of that question, Josh, and then I'll pass over to Kurt about the range point. But certainly there is no doubt that in the fourth quarter, the majority of our underlying price capture was through what we would call price increase and not surcharge. That pattern might shift or will shift in the first quarter, but it will still be the case that the majority of the price capture, which will be accelerated over the fourth quarter, will be underlying price increases. Kurt?

[Kurt Ogden:]

Yeah. Josh, as we look into the first quarter, we certainly expect there to be additional costs flowing through here. It's going to be more than the $14 million that we saw in the fourth quarter. Hence, the reason why we are going out with these more assertive pricing measures and I'm speaking to the whole company there. We're seeing inflationary pressures not just in the TiO2 business, but also in our Performance Additives segment as well.

[Josh Spector:]

Okay. Thank you, guys.

[Simon Turner:]

Thanks, Josh.

[Operator:]

And our next question today comes from David Begleiter with Deutsche Bank. Please go ahead.

[David Begleiter:]

Good morning. Simon, do you expect more Chinese exports in 2022 than last year and what impact do you think it will have on pricing especially in Europe?

[Simon Turner:]

Yeah. Look, I think that it's pretty clear that after a more muted sort of first three quarters of 2021, you know, Chinese exports moved up a little bit in the fourth quarter more substantively and of course the pattern remained that those who are destined more for broader Asian markets. So I think we would note and observe that as the tail end of 2021. It's been pretty soft in China in the first part of the year ahead of the Lunar New Year and it's not yet clear as to what that demand profile will look like over these next couple of months. But there's no doubt that we would expect that pattern of exports in the fourth quarter to continue probably in the first quarter of 2022. And I suspect that the annualized full year 2022 Chinese exports will probably top - maybe not by a large amount, but top the full year 2021 although that does remain to be seen and depends very much on demand profiles in China and elsewhere. Of course we should also add that we've seen determined price initiatives by Chinese exporters both within China and outside of China with announced price increases for January of this year. So hopefully that answers your question. I guess the only final thing to add there, David, is we don't see any meaningful shift in the pattern of exports and to restate, we don't see that getting in the way of our - our market outcomes in Europe and other Western markets.

[David Begleiter:]

Okay, very good. And just on Performance Additives, you had a very strong Q4 to end the year. How are you thinking about the earnings outlook for this business throughout 2022?

[Simon Turner:]

Yeah. I mean as you state, we did have a very strong fourth quarter. I mean actually the third quarter was pretty weak and there was some sort of smear across there. It was pleasing to see the uptick in the timber treatment business in the fourth quarter, which had been softer earlier in the year and we had some other factors in our favor not least of course which was some very meaningful price increases passed by the team in the additives business in surcharges and so we're very pleased with the outcome. Now the way I think about this business, David, is it should be very clean although this is a front half loaded business. There's never been an absolutely distinct pattern in those collection of businesses compared to TiO2 by quarter. But certainly by - on an annual basis, we would continue to expect to go forward in the additives segment 2022 over 2021. Maybe not at the same pace that we saw in 2021 and 2020 where we collectively I think went toward to the tune of around $18 million over those 2 years. But certainly we're envisaging uplift again. We expect that the front half typically is 55% to 65% of the earnings typically.

[David Begleiter:]

Very good. Thank you.

[Operator:]

And our next question today comes from Vincent Andrews at Morgan Stanley. Please go ahead.

[Will Tang:]

Hi, guys. This is Will Tang on for Vincent. Thanks for taking my question. Can you just kind of talk about what you're seeing in terms of TiO2 inventory positions throughout the channel?

[Simon Turner:]

Yeah. I mean the very quick answer is very little. As we scan around inventory and supply chains in general, it appears very much to us that our key suppliers don't have much of anything to ship us. It's a real - it's very expensive getting freight. It's freight shortages and worse, what we're finding is extended shipments because of port congestions and other unplanned events on shipping routes. So it's very stretched. We've got very little at the input side of our businesses vis-à-vis inventory and we're carrying all-time historic lows of our final product practically across the board. I've never seen a supply chain as empty as this in my over 30 years in these industries and I have no reason to believe that our customers with the possible exception of some parts of China and some parts of Asia are carrying anything, but low inventories. So I think it's true that they're very low. It's also true that the risk factor has risen because we're now seeing that any little bump translates into potentially some kind of service either to us or from us. And that's the reality we're dealing with and obviously of course that situation continues to be volatile and in some areas, in fact the volatility is increasing. So really that is the overall picture, the big picture on inventories. And because we experienced these risks and we experienced economic shortfalls because of that, we can no longer really afford to maybe operate some of our product prices over longer time periods because the events are unfolding very quickly. As we all know, today particularly with the Ukrainian situation and other political situations and economic situation. So I think that's how we see the inventory position, Will.

[Will Tang:]

Got it. And then I guess just one more follow-up. I mean I think last quarter, you guys talked about potentially seeing volumes in 2022 above 2021. But just given your commentary about historically low inventory position, is that kind of still the case?

[Kurt Ogden:]

Will, just to restate the question. I think you're asking about whether or not we're going to see volume improvement in '22 versus '21. And that is certainly what we expect to see, certainly in the TiO2 business. Is that the right question, Will?

[Will Tang:]

Yes, that's it. Thank you.

[Simon Turner:]

Yeah. Look Will, sorry, I misunderstood the very first part of your question. Thanks for that, Kurt. Look, we do expect to see that. We are planning on that, we are setting up around that. We think we navigated the first quarter without supply chain disruption on the feedstock input side, which is one of our sort of significant concern areas. Thereafter, as I said with inventories being so lean, we really need a sort of near flawless performance to be able to manage these low inventories and manage that production roster, but that is our plan. That's what we're gunning for is to increase that production level.

[Will Tang:]

Got it. Thank you.

[Operator:]

And our next question today comes from Hassan Ahmed with Alembic Global. Please go ahead.

[Hassan Ahmed:]

Morning, Simon and Kurt.

[Simon Turner:]

Good morning, Hassan.

[Hassan Ahmed:]

Simon, if I heard you correctly, I think you mentioned that sequentially TiO2 volumes were down for you guys around 10%. I'm just trying to figure out, obviously cognizant of the fact that there's seasonality there. I'm just trying to understand of that 10%, how much was seasonality and how much was maybe lower production because of raw material issues and the like? And the only reason I bring this up is that there are certain TiO2 majors who announced similar volume declines as you sequentially and others who did not. So I'm just trying to figure out what the cause of that delta was. Were integrated producers sort of able to produce more and maybe gain market share versus non-integrated ones?

[Simon Turner:]

Well, I won't comment obviously on the competitor situation. I'll comment on the Venator part of the question, Hassan. But I know where the question is heading to and what I would say is this. A 10% reduction in the fourth quarter over the third quarter is a pretty typical outcome in many years of a Ti02 industry. It's not - it's certainly not unheard of the drop by about 10% 4Q over 3Q. Of course last year with the demand situation being higher, we could have sold more product in the fourth quarter if we had the inventory to do so. I mean we'll be very clear with you about that. I think the way to think about it is that about half of the 10% shortfall was due to our constraints and half was due to seasonality. So in other words, think of it as a net 5% underlying, but it was tenant for us because we couldn't get the make in that period.

[Hassan Ahmed:]

Understood, very clear. And now moving on to the feedstock side of it. Again I think in your commentary, you talked about how you expect feedstocks availability, cost headwinds and the like to persist through the first half and then sort of ease thereafter. So the first part of that question is what gives you conviction that availability will become, call it, a non-issue in the back half of 2022? And then part and parcel with that, are you seeing any meaningful differences in be it pricing or availability of rutile versus ilmenite?

[Simon Turner:]

Let me maybe correct that. Maybe I gave the wrong impression there, Hassan, I will have to check back in the notes. But certainly from our point of view, what I meant to convey was that we saw - we see pricing uplift in feedstocks in the first half of 2022 because that's the period that we have some negotiations and contracting. I don't think I said, we will check, that it would actually ease and in fact when it's not clear that it will ease. So please don't take from us we're saying that it's going to go up in the first half, it's going to ease in the second. What we're always saying today is that we think it goes up in the first half and that's the period we're contracted. The second part of your question around the different types of feeds, I think that broadly speaking there's a high grade sort of like emphasis where obviously the supply base is narrower for high grade and generally speaking, higher grade materials are tighter than low grade material. That said, we're seeing feedstock escalation in price in both of those categories, lower grade and higher grade. And I think that there is an important point here, Hassan, which is for some time of course rutiles have been higher priced than flags which is similarly higher priced than ilmenites and the like. But even where - one of the things to take into account here is that shipping of these products even where the supplier has got supply of these products, it's still a challenge to get it from the supplier because typically long haul supply chains for feedstock into our own premises. And we've had a few support type based issues with some of those feedstocks. So those are some of the dynamics we see around the feedstock situation. I hope that helps.

[Hassan Ahmed:]

Very helpful, Simon. Thank you, again.

[Simon Turner:]

Thanks, Hassan.

[Operator:]

Our next question today comes from Matthew DeYoe with Bank of America. Please go ahead.

[Matthew DeYoe:]

Thank you. You had mentioned some forward energy purchases. Can you talk through what percent of your needs you kind of look at hedging, and maybe if you can, a little bit more detail on how these are expected to roll off over time?

[Kurt Ogden:]

Matt, this is Kurt. Why don't you let me take that? So what we have tried to do, as we look at putting in place a range of mitigation actions that will address the volatile energy markets that we're seeing in Europe in addition to the pricing mechanisms that Simon mentioned, is to also work with the providers of our energy procurement and fix pricing for certain periods of the quarter and or the year. And as you can imagine, that's a range of different agreements that we have. And so it depends on the site, it depends on who we are purchasing that energy from and then when I talk about energy, I'm talking about both gas, as well as electricity. And so we have a pretty good program. We use third-party experts to help us think through the right levels in terms of fixing those prices. And again that is just one arrow that we have in the quiver to try and mitigate the volatility that we're seeing from these pretty dynamic markets right now.

[Matthew DeYoe:]

Okay. And I guess maybe, Simon, so why is there any demand seasonality at all? Like so inventories are really tight, shouldn't there have been some channel rebuild instead of seeing volumes down? I mean I get that sales were strong last year, but everything you're saying fundamentally kind of makes it sound like the backdrop should be sold out again. So how do we make sense of that?

[Simon Turner:]

Well, certainly there's been no chance for any channel rebuild. I mean there has not been any channel rebuild so when the demand comes in, which we couldn't meet in the fourth quarter, obviously we can only speak for ourselves. Others will need to speak for their self. You need to put the picture together. But we still see - because of some of the underlying issues around the largest applications like coatings and the like, we will still see seasonality. I think what we've seen historically over the years that we had very strong demand periods that the seasonality gets very muted and very dampened in TiO2, so it can move around. And generally speaking over the years it has flattened out somewhat, but we still expect to see seasonality ordinarily in TiO2 and we just haven't had the chance to rebuild anything. And I think it's hard to see even in the first quarter, which sort of distorts the seasonality pattern in a way because we're looking at our actual sales rather than what the actual demand was in the quarter.

[Matthew DeYoe:]

Okay. If I can sneak one more in here a little bit. Can we just bridge a quick free cash flow or can we just go through a quick free cash flow bridge for 2021? I know you gave a couple of line items. So I was maybe wondering a little bit more about the working capital consistent with price inflation details. Does that mean something like plus 15% working capital inflation and is there any other thing that would maybe preclude you from being free cash flow positive next year or 2023…

[Kurt Ogden:]

I mean working capital - happy to take that, Matt. I mean look, we fully expect that working capital is going to be a use of cash in 2022. It is challenging to predict that certainly for the full year as we look at the impact of inflation coming through and how that impacts both our raw material inventory, as well as our finished goods. And so look, I think it's north of $10 million and it will be a function of that inflation that we see, but we were certainly planning for a use of cash as it relates to, excuse me, as it relates to working capital. We did signal that we've got a pretty heavy restructuring cash bill to pay this next year around $25 million. That is primarily paying for a Business Improvement Program. It's worth noting, look, that's going to fall down to around $10 million as we get out into 2023, this is the restructuring cash costs, and then it will fall down to nothing in 2024. So we think that we're burning through some of these cash uses as we go out in time. We talked about the positive developments that we've had on our pension and other cash uses line. We think that we've seen a meaningful improvement in '21. It's going to step down again in '22. It will continue to step down as we look into '23 opposite '22 as well. Now we also see an improvement in our Pori cash uses. I will say that our exit from that side is progressing on track. We will stop production at the end of the first quarter. We'll get a little bit of a working capital release actually, Matt, here as a result of that as we work through inventory over the course of '22 as it relates specifically to inventory at Pori that is. But we continue to see reduction in those structural cash uses such that we think we'll be in a good position to be cash positive in 2022 recognizing we've got to navigate these challenging energy and shipping and raw material markets. But certainly as we progress out into 2023 and we reduce the structural cash uses even further, then our ability to be free cash positive improves to a much greater extent.

[Matthew DeYoe:]

Thank you for that. I appreciate the detail, Kurt.

[Kurt Ogden:]

You're welcome.

[Operator:]

And our next question today comes from Laurence Alexander with Jefferies. Please go ahead.

[Laurence Alexander:]

Good morning. Can we revisit the inventory question on TiO2 from a different angle? What's your sense for what a return to normal would imply in terms of the number as a percentage of like your annual volumes just to get a sense for the magnitude of the tailwind you think you might see in 2023, 2024? And secondly, on productivity, can you talk a little bit about what you see as the next round of productivity opportunities over say the next 3, 5 years?

[Simon Turner:]

Yeah. So I think if we look at the first part of your question, Laurence. In terms of inventory, I think when you start getting down to sort of the 20 and 30 days sort of numbers of days inventory, you really are practically very, very limited with your inventory. So we would think to get back to normal, you're probably looking around about another 10 to 15 days on that so more up around the 40, 45 days to make it sort of like a comfortable or manageable balance. That wouldn't be excessive, it wouldn't be tight. So hopefully that answers your question. The second part of your question related to the productivity. I mean, I think important for us is that we have undertaken a range of BIP programs in COVID savings these past 3 or 4 years, all of which we've delivered on either full amounts or ahead of time. Of course our attention now is turning more to in terms of working with what we've got. It will be more about increasing productivity out of our network where I think we've said publicly that we're trying to get another 10% out of the network in our CO2 network and it will be about positioning marketing and innovation of our specialty and differentiated products. Those would be the two main levers of sort of self-help improvement. There will be ongoing cost curtailment and control programs, but we don't currently see one out there that sort of rivals the BIPs we've had these past 3 to 5 years, which typically are in the sort of like $40 million, $50 million, $60 million per annum sort of savings. So I hope that helps, Laurence.

[Laurence Alexander:]

Thank you.

[Operator:]

Today's next question comes from Arun Viswanathan with RBC Capital Markets. Please go ahead.

[Arun Viswanathan:]

Thanks for taking my question. I guess I just would get your - wanted to get your thoughts on demand. Maybe you could just run through some of your end markets, obviously some differing statements on supply chain disruptions causing demand to be affected in coatings, similarly in automotive as well, plastics seems to be holding in a little bit better. But maybe you can just run through the end markets for TiO2, that would be great.

[Simon Turner:]

Look, I think broadly speaking, we've been saying for some time that regardless of application, pretty much regardless, little bit slower recovery in our specialty areas, that we've seen pretty good demand in all regions for all types of products. Now there has been some shift in some areas. I think we can say clearly that it has been a bit softer in China in these parts so that's very clear. I think most people know that. The part of automotive that we sell into, demand has held up pretty well and has been recovering nicely. So you know, I think - but of course you have to recognize that we - not a very large proportion of our revenues emanate from automotive. But the part that does look positive, textiles continues to recover. I'd say probably your comment about plastics is true and similarly inks. We see good demand particularly in North America and Europe. I've referenced our timber treatment product improvement in the fourth quarter, which is good. I think in coatings, there could be some evidence that on the industrial coating side, the demand is slightly softer than the decorative coating side. And so that would be the one area that maybe is a slight shading from where we've been over these past two or three calls.

[Arun Viswanathan:]

Okay. Thanks for that. And similarly, I guess just as a quick follow-up. Is there any difference in margin in any of these end markets? I guess maybe just related to your position in differentiated versus functional. Just curious if that's kind of held up or changed over the last year or two? Thanks.

[Simon Turner:]

Yeah. I mean certainly in specialty markets, the price and margin premiums have held up very well these past couple of years. Our differentiated products, they are sold into the highly technical areas of the market where there are limited vendors and higher qualification times. Typically prices move in lockstep with more functional products, but the differentials in dollars and percentage terms have remained broadly consistent through that period. So I think the fundamental structural return for the market, be it specialty differentiated or functional products, has largely held at. Of course you can influence your return by your mix and we've said a number of times, we only take specialist products into China, more specialist products into the United States. We have a very small position in the overall Asian market. So we have more ability geographically and customer-wise to pick our spots. We tend to be aligned with smaller to mid-scale customers in the United States as well. So these are some things that can affect price returns. But you will have seen our recent price return in the fourth quarter, which we think compares favorably and as I said earlier, you can expect us to outpace that in the first quarter of 2022 as well.

[Arun Viswanathan:]

Thanks.

[Operator:]

And our next question today comes from Eric Petrie of Citi. Please go ahead.

[Eric Petrie:]

Hi. good morning, Simon and Kurt. How are you?

[Simon Turner:]

Hi, Eric.

[Kurt Ogden:]

Morning, thank you.

[Eric Petrie:]

A question on your specialty TiO2, can you talk a little bit about the recovery of volume compared to 2019 levels and discuss where you stand in textiles, personal care and auto end markets?

[Simon Turner:]

Yeah. I think the pace of recovery has been more gentle, it's going to continue through the year. I think we're now thinking about right at the back end of this year would be the juncture at which we get back to the pre-pandemic levels, maybe early next would be a way to think about it. And that's pretty much across the piece in textiles and the other parts of specialty.

[Eric Petrie:]

Helpful. And then secondly, on the transition to monthly pricing settlements, how fast do you think you can cover that from your traditional contracts today and does that extend into those specialty end markets as well?

[Simon Turner:]

Yeah. I mean our specialty markets are already carrying significant levels of price and surcharges in fact and really we're talking here across our European functional business where we would expect to see the majority of our customers on monthly agreements. Now the way we're currently set up, we have some customers on multiyear agreements. We have several customers on annual off-take agreements. But a distinguishing feature of most of these contracts is our ability to move our price and negotiate our price with our customers. So in some areas, we will be able to get on to this very, very quickly, sort of more or less instantaneously. But I think that of course we will still need to sit and discuss, meet with customers. But I would think that we will be able to get more and more momentum from March forward into this program. So it's something that for the reasons I gave earlier and the uncertainty, which we now see probably persisting, that we want to get this out there. I think that many of our customers, I would say most of our customers already face these types of mechanisms from other vendors and other chemical type products. It's not something new to them as a mechanism.

[Eric Petrie:]

Great. Thank you.

[Operator:]

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

[Jeff Zekauskas:]

Thanks very much. Do you expect volumes in the first quarter to be much different than volumes in the fourth in TiO2?

[Simon Turner:]

Yeah. I mean look, I think that from a first quarter perspective, Jeff, we'd like to say underlying seasonality is typically up in the sort of like 10% to 15% range. But I think for us this year given where our inventories are, yes, we did manage to get some parts of our plants running better in the second half year than the first and they will be up, but they're not going to be up near the kind of volume that we would expect or indeed that demand reflects, frankly.

[Jeff Zekauskas:]

Are your price increases going up faster than your raw material inflation now or no?

[Simon Turner:]

Yeah. So when our raw materials - our price increases went up faster than our raw materials in the fourth quarter and they will continue to try and expand that margin in the first quarter, sorry. I mean they went up - they will go higher in the first quarter. In the fourth quarter, we did have some extra cost and while we'd already said that our margin would reduce over the third quarter, we did have some extra costs, particularly FCA.

[Jeff Zekauskas:]

So you talked about possibly having more weight into monthly pricing, are you doing that because your costs are going up so fast or because the TiO2 market is sufficiently tight that you think you have more pricing power? What's the point of trying to increase prices monthly? Why do you want to do that?

[Simon Turner:]

Yeah. I think the issue - let me address that, Jeff. The way we see at the moment is, as I said, inventories right through the chain are very lean. We are struggling to get all of what we need to make the product, any shortfalls we feel immediately. There is a much higher and elevated risk just from the fragile nature of the supply chains, which basically ends up hitting our financials because of this environment. We also see significant cost increases in our primary feedstock, energy particularly in Europe. It's an unprecedented situation on energy in Europe and freight and the like and I must say on all other raw materials. So what we need at this time is an increased ability to respond to that situation and manage our margin more nimbly because historically where some of these quarterly contracts and prices have been set, you know, by the time the quarter is out, you find yourself well adrift of what's going on in the market. So it's a product that is very volatile period we're in.

[Jeff Zekauskas:]

So do you think it will take until the third quarter until your volumes begin to grow year-over-year again given the raw material shortages or then you have a chance in the third quarter, but you don't until then?

[Simon Turner:]

Well, I think of course there is a chance. The issue is - for us is are we going to navigate through to that period without any impact of supply chain failure on our - any of our inputs, chemicals and materials. And I have to say the way things are at the moment, it looks like it's going to be a very difficult task certainly greater than 2021, which in itself was pretty difficult. But of course that is our goal. We've said quite often our goal is to put our production up year-over-year by sort of like low single digits, that type of volume. But it's going to depend ultimately on availability of raws and feedstocks, Jeff.

[Jeff Zekauskas:]

Okay. great. Thank you so much.

[Simon Turner:]

Thanks, Jeff.

[Operator:]

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Simon Turner for any closing remarks.

[Simon Turner:]

Thank you so much. And thank you to everyone for joining the call. Thank you for your continued interest in Venator. Of course we're looking forward to speaking to many of you throughout the quarter in our upcoming conferences. In the meantime, please feel free to reach out to Kate with any additional questions you might have. Once again thank you very much.

[Kurt Ogden:]

Thanks, all.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.