Venator Materials PLC Ordinary Shares

gap 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 thanks kate and good morning everyone welcome to our third quarter 2021 earnings call beginning on slide three the macroeconomic environment had 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 four on 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 continue to see robust demand for our functional TO2 products across all regions and sectors. Demand for our specialty TO2 products continues to improve. specifically for TIO2 into textiles applications. Our inventory levels remain historically low despite increased production during the quarter. TIO2 sales volumes increased 11% compared to the COVID impacted prior year quarter and declined 1% sequentially due to low inventory levels entering the quarter and maintenance that extended into the third quarter. CIO2 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 fixed 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 high 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 TO2, we expect to see robust demand for our functional TO2 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 five and performance additives. Our performance additive 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 and 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 TO2 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 six 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 for him to comment on our financials.

Thanks, Simon. Let's go ahead and turn to slide seven 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 upset 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 TO2 average selling prices of 5%. and benefits from our 2020 business improvement program. This was partially offset by seasonally lower sales volumes in our performance additive 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 A 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 15th, 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 evaluation 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?

Thanks, Kev. Turning to slide nine. CIO2 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 remain 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 TO2 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 additives and color pigments products from our performance additive 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 in color. The performance additive segment continues to be cash generative and 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, evaluation 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 are an important milestone for Beneteau. We continue to focus on working capital management and optimization of our exit from our Pori TO2 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.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. The first question comes from the line of John McNulty with BMO Capital Markets. Please go ahead.

Yeah, thanks for taking my question. So when you look at the exposure that you have around energy and raw materials or 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?

Yeah, John, 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 aware there, with limited storage facilities and so forth. So, you know, UK and Germany, we've seen more. I think that the way to characterize the answer to your question without throwing the exact percentages, the majority of our energy costs are hedged and locked in. But we do have a portion that 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'd paint the picture on roars along the following lines, mainly energy, mainly northern Europe. some global asset exposure, particularly pinch point in Asia, and some sort of like ongoing, you know, drift up in feedstock costs, which largely have been sort of expected, I would say. In performance additives, the picture is somewhat different. We have a lower exposure to energy in absolute terms. There is energy escalation in the third quarter. But, you know, where we really, you know, took the hit in the third quarter specifically was for freight rates. you know, because we send quite a bit of material out of Asia, out of China, you know, into the U.S. And, you know, we've seen significant escalation in freight, you know, and the impact on our EBITDA in the third quarter. And as the, you know, as we talked about in the body of the script and the call here earlier, you know, prepared remarks, we have implemented a range of initiatives on top of our regular fourth quarter price increases, which, let's remind ourselves, basically continues the pattern of the three earlier quarters of increases. We've initiated some very targeted freight and energy surcharges in a very sort of differentiated and focused way across performance additives and TO2.

Got it. That's helpful color on it. And then maybe, you know, 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, you know, what would be more comfortable or more reasonable levels? How should we be thinking about that?

Yeah, I mean, I'll take it by segment, John. I'm presuming your question refers to both TO2 and additives. I'll take them sequentially. A TO2, you know, we entered the quarter very, very low because we have the maintenance in 2Q that drifted into July. You know, we were slightly down on volume sequentially in TO2. We would have been up were it not for, you know, that lingering effect to the maintenance. You know, so really in the fourth quarter, we're going to see, you know, our plants running You know, 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 an ordering, even though their own operations may be curtailed or paused. But we think there'll be a modest, you know, downtick, seasonal, typically seasonal. 4Q on 3Q is around 10% in TO2, but we think it'll be much lighter than that this year because of the 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 it in 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 our volumes and our inventories in the fourth quarter. We expect to see further demand, a 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 inventories somewhat in the fourth quarter, a bit better on a pro-rast basis than TO2. But they're still going to be pretty snug going into next year.

Got it. Thanks very much for the call.

Thank you, John.

The next question comes from the line of Vincent Aldridge with Morgan Stanley. Please go ahead.

Hey, this is Steve, hands on to Vincent. Thanks for taking that question. Just wanted to follow up on the surcharges. 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.

Yeah, 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. You know, we're in the fourth sort of sequential quarter this year of price increases in TO2. We've seen significant announcements and, you know, 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, you know, 2022 as well. That remains the dominant method of expanding our margins in TO2. And that has been successful in the third quarter, as the numbers show. That said, you know, to John's earlier question, we have seen some energy pockets in the UK and Northern Europe and in other parts of the CO2 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, you know, long-haul regions, shall we say. And in those cases, we've put some additional surcharges in place. And, you know, those will come on top of the regularly negotiated price increases. So I think you should think about price and TO2 and surcharges as sort of the surcharges, the minor chord to the TO2 regular price increases, the major chord. 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, you know, situation in Europe. Additives are somewhat different. In additives, you know, 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, you know, surcharge-type mechanisms out there from, you know, other parts of the industry, customers, competitors, and the like. And we expect, you know, we'll keep those under review. But, you know, they also come on top of our regular price increases. But You know, if I were to characterize those surcharges and additives, I would say that they're probably, you know, it's not so much the major and minor chord, but they are in themselves pretty healthy, you know, additional increments.

Okay, thank you. That's helpful.

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

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 or 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?

Yeah, 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, you know, the combination of seasonal sort of volume downtick plus our prices initiatives plus surcharges will make it challenging to preserve our third quarter margin in the fourth quarter because, you know, there's quite a lot of bow wave of it coming through, which speaks obviously to further price increases as we get into the first quarter. So it's pretty significant. And in TO2, the bulk of it's coming from, you know, northern European energy markets. as we said, and in performance additives, it's the freight. Now, in performance additives, I think we can see, you know, a pathway because we can build a little bit more inventory. And because of the nature of the surcharges of increases, I think the prospects and margin expansion within the fourth quarter remain pretty positive. So it's somewhat, you know, slightly different to the TO2 picture.

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?

Sorry, could you repeat the question, Josh? Do I understand that you're comparing 3Q21 and the likely outcomes on margin for 1Q?

Yes. I mean, you seem 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 with, you know, 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?

Yeah, I think, you know, to your question, I would see we'll be able to, you know, recover back to those third quarter levels, you know, in the first quarter. And, you know, we will already recover somewhat in the fourth quarter in additives. And, you know, of course, you know, we still, we're not talking about a sort of collapse in margins in the fourth quarter in CO2, but just recognize that energy power is quite high. So, yeah, I think the answer to your question is yes, we do expect to be back.

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 level. So, we think that The TO2 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 TO2 space.

Okay, got it. Thanks, guys.

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

Thank you. Good morning, guys. I mean, Kurt, this is the 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?

Yeah, I mean, I'm not sure I'd agree that it's been a cost push situation. I mean, we've seen some really strong demand. You know, we in Venator have been living hand-to-mouth on inventories. I mean, this really does feel like a supply-demand-driven situation. And more latterly, of course, as some of these freight and energy headwinds have blown up in the second half, then, of course, we are unwilling to absorb that. We work so hard to improve our margins. So, yes, more latterly, I think it's been related to cost push. I think that the fundamentals, as Kurt said, remain very healthy. You know, 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, you know, we sort of haven't got any spare capacity in our network, and we think, you know, we're in the early innings of further improvement in cycle.

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?

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

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

Thank you. Good morning. I'm Simon. Your performance ad is how much of the $13 million client in EBITDA sequentially was due to higher freight costs?

So you broke up. I think I've got the question. Are you talking about a sequential EBITDA loss, David?

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

Over half.

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

Yes, it can. We'd expect, as I said earlier, to be able to run hard on production, build a little bit of inventory. We've got 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, you know, we expect, you know, 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 here.

Great. And, Curtis, I know it's early, but looking at 22 free cash flow, can this be positive next year, do you think?

Well, that's certainly what we're gunning for, David. I think that it'll largely be predicated on what happens with the profitability associated with the TIO2 improvement. So, you know, 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.

Great. Thank you very much.

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

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 the upcoming planned outages from market suppliers?

I think the pattern here on high-grade has been similar for some time. We've made the point that there's been more supply and FM type interruptions these past couple of years than 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 you know, ongoing discussions with vendors about costs and so forth. But, you know, we've got the material we needed. So, you know, we have been supplied. It's been in line with the price expectations we've had. Of course, you know, that moves on and we'd probably be in a better position on our next call to give, you know, a bit more color to that question as we, you know, as we come through some of these further negotiations with the high-grade vendors.

Okay. Thank you. And then, What are you seeing from inbound competition in pigment from China? I know just last we heard, given logistics costs, 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?

Yeah, look, I mean, there's no question we've said a number of times that the Chinese producers will be, you know, selling into Europe. And, you know, that may have softened off, of course, with the challenges within China that we're seeing right now. And but, you know, 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 in Europe. You know, 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 will continue to be the case. You know, there's significant challenges in China, you know, with cost escalation. Even if for the freight were to sort of reduce and 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 strictures, of course. So I think that, you know, we're well placed. The other thing I'd like to add is, you know, if we look over multiple years, you know, the change in patent we've seen these past two to three years has been Chinese producers actually pushing and leading price in broader Asian markets on many occasions. And so, you know, I think the Chinese producers have really become sort of quite accustomed to what that can do to their earnings. Again, we expect to see that continue, and that talks to the fundamentals in this industry, which we continue to see as positive.

Excuse me, are you done with your questions? We'll move to the next question, coming from the line of Arun Biswanathan with RBC Capital Markets. Please proceed.

Great. Thanks for taking my question. I guess first question is could you just go around some of the end markets, you know, I guess that you participate in. It's a little different for you than some of the other peers. You know, obviously coatings, what we're hearing is, you know, 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, yeah, just give us your thoughts on some of your different end markets. in coatings and packaging and laminates and whatever else. Thanks.

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 for architectural coatings, plastics, and demand increasing for industrial coatings applications. So we really do see across the board inks and packaging inks very good. continued recovery in textiles, personal care, automotive. So, you know, across our TO2 business, I have to say, it's rare that you get, you know, all of the planets lining up, you know, at the same time and seeing a very positive picture like that. But that's what we're seeing right now. And, you know, we continue to hear from our customers unusually that TO2 isn't their biggest sort of headache because they've been challenged from a supply chain perspective on a range of items. And, you know, we're working closely with our customers. We're generally supplying our customers, even though the supply chain challenge is 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, you know, we have yet to see thus far the recovery, 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, you know, one of the darker spots across our business, if not the dark spot, you know, across the whole of the Venetal business. You know, in terms of functional 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, you know, we've seen similar demand to TO2, very strong. So, you know, it's very strong to very strong in most places, recovery in textiles and just timber treatment being the soft spot for us.

Great, thanks. And maybe if I could, as a follow-up, you know, 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 know, 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, you know, 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. Thanks.

Well, you know, having been in CO2 for well over 30 years now, I've never, you know, ruled out any sort of returns or different times of practices. You know, things change. Situations change. Behaviors change, et cetera. But that said, you know, to your point, I think since, you know, 2011 and 2012 peak, there has been, you know, significant change. We saw that pretty disastrous change. sort of like trough in 2015-16. And, you know, I must emphasize my comments here relate to Venator and not to the industry. And others will see things, you know, the way they're going to see it. But, you know, these are Venator-related comments. But, you know, 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, you know, 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, I think, more confident about what they're getting from us. We've been quite consistent in our behaviors with them. These are the 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, you know, planning a longer-term future and investing for that rather than having some of the short-term uncertainty. So some of the cyclicalities definitely diminished for us, and we think it's a long-term good thing as we build strength. And, you know, but I'd accept that as we're in the early innings here, you know, there's still more to play out. But if you look at the type of announcements and captures we've seen these past quarters, several quarters, you know, I feel very encouraged that, you know, we're on the right path.

Thank you.

Pleasure.

The next question comes from a line of Hassan Ahmed with Aleby Global. Please go ahead.

Morning, Simon and Kurt.

Hey, morning, Hassan. Morning.

You know, question around cost curves. Look, I mean, obviously Q3 was a strange quarter. You know, we saw natural gas doing what it was doing, you know, be it here in the U.S., but also, you know, across the globe, you know, China in particular with coal prices, again, doing what they were doing. And, you know, the backdrop to all of this is that there was, you know, rationalization going on in chlorine capacity as well. So on one side, you have high-grade ore, which, you know, 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, you know, will they continue in 2022? And will there be opportunities for sulfate-based producers to maybe capture more market share?

Yeah, I mean, it's a complex question, Hassan, and there's a number of moving parts that 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, you know, it's 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. You know, U.S. producers have generally been able to hold on to their larger plant, you know, better energy profiles. Chinese producers have probably gone backwards in the curve as we've gone through the year with the ilmenite, plus, you know, all the other high-grade and, you know, energy and raw material challenges and freight and so on. So I think that you know, 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, you know, sulfate feedstock advantage will sort of return gradually. But I'd accept that 21 is sort of was an aberration. And of course, you know, I think that feedstock suppliers in high grade and chloride will continue to agitate for higher prices, and we will continue to resist those. You know, we think that's, you know, gone enough, and we're having some quite vigorous conversations with those people. But, you know, I think that the biggest dynamic probably we see next year in terms of relative competitive advantage, as I suspect that the acid and ilmenite, you know, issues that we've seen in our sulfate block sort of, you know, reduce, and that makes us relatively more competitive. And if, you know, we think the opportunities relate more to the market and you know, product, but of course, you know, the cost curve opportunity is part of that too.

Very helpful, Simon. And a question around trade flows and market share shifts. I mean, I was a bit surprised if I heard you correctly, you talking about Chinese exports being stable, particularly, you know, with sort of, you know, 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, you know, where you guys have gained more market share relative to the Chinese, you know, primarily obviously based on supply reliability and the like?

Yeah, I think it's a great question. I mean, I think, you know, 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 indirectly or directly. And we have picked up share. I think we could have sold even more in the third quarter had we not had 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, yeah, 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 tons. They've certainly tried to retrench more of their export into broader Asia where they can make better returns. We've seen that dynamic. But clearly they're not going to evaporate in Europe either.

Very helpful, Simon. Thank you so much.

Pleasure.

The next question comes from a line of PJ Junicar with Citi. Please go ahead.

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

Eric, hi. Good morning.

I was reading an industry consultant who is predicting up to another $300 per ton of pricing increases in TIO2 before a shallow down cycle. You know, that would put kind of pricing in the mid $3,000 per ton level and not at peak levels of last cycle, but what is your outlook and at what price point do you believe people start reformulating and leading to demand decline?

Yeah, I mean, look, we're not going to put a number out there, but, you know, all I will say is, you know, we are better positioned than any consultant to take a read, I think, on price because we're the ones directly talking to customers. And I think, you know, the evidence suggests, you know, and I'll try and temper my words here, but I think that You know, industry consultants tend to be sort of like, you know, amplify on the overage or underage in their price. You know, they're either too pessimistic or too optimistic. So the way I see it is the answer to that question is fundamentally located in inflation and rules because, you know, 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, you know, we've still got a ways to run to where we were back in 2011 up around the $4,000 mark of pricing. But, you know, I think that if we see this inflationary environment continue and we see these sort of numbers, some of our projections mean we've still got significant, you know, price movement 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 know, you could make a case to say that if you just looked at price, numbers could be greater than that. You know, but also it won't depend partly on the raw material profile too.

Okay, helpful. And then maybe a question for Kurt on slide seven with the 36 million increase in COGS year over year. 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.

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

Yeah, outside of freight, the larger baskets or energy versus that freight component.

Oh, 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.

Thank you.

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

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.

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 break even. 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.

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

Well, I think that it is likely to be up modestly from the $75 million that we have today. I think that 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.

Great. Thank you very much.

Thank you, Roger.

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.

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.

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