Venator Materials PLC Ordinary Shares

Materials First Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Kate Robertson of Investor Relations for Venator Materials. Please go ahead.

Thank you, Andrea, and good morning, everyone. I'm Kate Robertson, Investor Relations for Venator Materials. Welcome to Venator's first quarter 2022 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 first quarter 2022 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 annual report on Form 20F for the year ended December 31st, 2021 and Form 6K for the quarter ended March 31st, 2022 and our other filings with the SEC for more information regarding the factors that could cause actual results to differ materially from the 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 www.venetocorp.com. I would now like to turn the call over to Simon.

Thanks, Kate. Welcome, everybody, to our first quarter 2022 earnings call. Beginning on slide three, we are deeply saddened by the military action which has taken place with the Russian invasion of Ukraine. since our last earnings call. And all our thoughts are with those that have been affected. We have suspended sales to Russia, which are approximately 1% of revenues. Although there has been no material direct impact to our business, the conflict has clearly exacerbated cost inflation, most notably energy in Europe and existing supply chain issues. Notwithstanding these challenges, I was very pleased with our first quarter adjusted EBITDA of $57 million. Moving to slide four and our titanium dioxide segment. CIO2 segment adjusted EBITDA in the first quarter of 2022 was 49 million compared to 35 million in the fourth quarter of 2021 and 40 million in the prior year quarter. Demand continued to be strong throughout the first quarter in North America and Europe for all CIO2 sectors. We had a smaller exposure to the APAC region where demand was softer as a result of reinstated COVID lockdowns in certain areas of China. We increased production from our manufacturing facilities during the first quarter. However, as a result of the continued strong demand for our products, our inventory volumes are below historical seasonal norms. Sales volumes increased 15% sequentially, which was the top end of our guided range, and declined 1% compared to the prior year period. In the prior year, we benefited from selling down inventories, which impacted the year-on-year comparison. Cost inflation continued to be a significant headwind in the first quarter. The majority of our energy costs were fixed, but we saw unprecedented spikes in underlying market rates, primarily as a result of the conflict between Russia and Ukraine. We also saw cost inflation headwinds from feedstocks, shipping, and other raw material costs. In the first quarter, we increased our average selling prices 12% sequentially and 29% compared to the prior year period in local currency, enabling us to mitigate inflationary cost pressures and maintain our prior year adjusted EBITDA margin. Turning to the outlook for TIO2, as I mentioned earlier, we continue to operate with historically low inventory levels, and we have seen little evidence of restocking throughout the supply chain. We expect inventories to remain at seasonally low levels throughout the second quarter and the remainder of 2022. Demand continues to be robust and our order book is healthy. We continue to increase production of all products to meet the requirements of our customers. We expect an increase in 2022 sales volumes compared to 2021 consistent with increased production. However, this increase will be constrained by our low inventory levels and the reliability of supply chains and shipping availability. We continue to work with Italian authorities for the approval of gypsum disposal of our Scarlino TO2 site. We are hopeful that this will be successfully resolved in the middle of this year. In the meantime, we have moderated the facility by one third of its capacity, which we estimate will have a net EBITDA impact of less than a million dollars compared to our second quarter forecast. We expect the market rates for energy, primarily in Europe, to remain elevated in the near term. Throughout the remainder of the year, the majority of our energy needs will be purchased through fixed forward contracts. However, we are subject to market rates for the remainder. We implemented tailored monthly pricing and surcharge reviews for all customers in March. We believe that these selling price reviews coupled with cost control measures will mitigate future cost headwinds. We expect these monthly customer-tailored price reviews to continue throughout 2022. This brings flexibility to manage our margins in this increasingly volatile raw material, energy, and freight cost environment, and these initiatives are consistent with our customer-tailored approach. Turning to slide five and our performance additive segment. Our performance additive segment consists of three distinct businesses, functional additives, which supplies products to enhance coatings and plastics products. Our color pigments business, which produces colored inorganic pigments for the construction, coatings, plastics, and specialty markets. And finally, our North American timber treatment business, which manufactures wood preservation chemicals. These businesses generate annual revenues of approximately 600 million and are highly cash generative. We have seen significant earnings uplift over the past two years in these businesses, due to improved product mix of sales and successful implementation of our business improvement programs. Our performance additive segment delivered 20 million of adjusted EBITDA in the first quarter of 2022, compared with 19 million in the prior quarter and 22 million in the prior year period. Strong demand continued for our functional additives products sold into automotive, electronic, and coatings applications. Color pigment demand was strong, primarily for construction applications and for ultramarine blue products, which go primarily into plastics end-use applications. Demand increased for timber treatment products in line with seasonal norms. Segment sales volumes increased 7% sequentially and declined 5% compared to the prior year period. The decline compared to the prior year is primarily due to demand for timber treatment products returning to normal seasonal levels. Our performance additive segment is facing similar challenges of cost inflation and supply chain disruption as our TO2 segment. During the quarter, we saw further sequential cost headwinds from energy, shipping, and raw materials. Although less energy intensive than our TO2 segment, we have implemented similar energy hedging strategies and are therefore subject to market rates on a portion of our energy usage. Average selling prices increased 9% sequentially and 20% compared to the prior year period in local currency as a result of actions implemented to mitigate the impact of cost inflation. We expect demand to remain robust and sales volumes to follow normal seasonal patterns. We continue to see cost inflation in the near term, which we expect to recover through our customer tailored monthly pricing initiative, which commenced in March. I will now pass the call over to Kurt.

Thanks, Simon. Let's turn to slide six in our adjusted EBITDA bridges. First quarter total adjusted EBITDA increased by 17 million compared to the prior quarter. The increase was primarily due to increased average selling prices and seasonally higher sales volumes, partially offset by higher cost inflation. Adjusted EBITDA for the first quarter increased 8 million compared to the prior year period, primarily due to increased selling prices implemented to mitigate the impact of increased cost inflation. Total company sales volumes declined 2% from the impact of normalized demand and the constraints of low inventory compared to the prior year. Turning to slide seven and our cash flow considerations. Our first quarter free cash flow was negative 103 million. including a working capital use of $87 million. We generally expect an increase in our primary working capital during the first half of the year. This year, that trend was amplified, and our accounts receivable were much higher as a result of higher selling prices and, to a smaller degree, higher sales volumes. We received $85 million cash in settlement from Tronox on April the 25th, which includes $10 million of negotiated interest originating from 2019 when the break-fee conditions were met. We are pleased to have resolved this multi-year legal dispute, and as noted in recent press releases, we intend to use a portion of the proceeds to reduce our debt. As we consider options for debt reduction, we are also actively considering refinancing portions of our existing debt structure. During 2022, we expect the following cash uses. Capital expenditures of 85 to 95 million, which includes modest investment to support future growth. Working capital to be a cash use of more than 20 million due to higher selling prices and cost inflation. restructuring to be a cash use of approximately $25 million as we pay for our successfully completed business improvement program, and other cash uses, including pension, which are expected to be approximately $25 to $35 million, which is $10 million lower than our 2021 number, primarily as a result of lower pension contributions. We are committed to improving Benetor's cash flow profile, and this remains our primary financial objective. Over the next two and a half years, we expect to see a substantial reduction in our annual cash uses of approximately 70 million. In fact, most of this reduction will take place in the next year and a half, as noted on this slide. The reduction will be attributable to lower restructuring costs of 25 million, completion of the PORI site closure and corresponding reduction of approximately $25 million, and finally, a reduction in our pension and other cash uses of around $20 million. As we shed these legacy cash uses, the business will further improve its ability to pursue debt reduction and other value-enhancing options. I'll now turn the call back to Simon for some concluding remarks.

Thank you, Kurt. Turning to slide eight. I'm very pleased with our first quarter results, and I'm proud of the Venator team who continue to navigate the unprecedented challenges we are facing. We continue to see robust demand in North America and Europe, and our order books remain strong across all applications in both titanium dioxide and performance additives. We expect this demand profile to continue throughout 2022 and also expect to see recovery in Asia as COVID lockdowns in China are lifted. Supply for all our products remain tight and inventories are significantly lower than historical seasonal norms. We continue to successfully navigate supply chain challenges for our raw materials and energy, and we continue to increase our production to meet the requirements of our customers. Nearly all our TIO2 sites are expected to produce more in 2022 than last year. We see continued high-cost inflation pressure, primarily from energy, but also from feedstock, shipping, and other raw materials. We expect this trend to continue throughout 2022, and I'm indicating this through procurement and hedging strategies. Sales actions include monthly tailored price and surcharge reviews, which were implemented in March. Our continued focus on growing our specialty and differentiated business will also lead to improved sales mix. Taken together, all these actions will help us improve margins through 2022. We are in an elongated TIO2 upcycle. We continue to see underlying demand growth and tightness in supply demand with limited new capacity on the horizon. In addition, we expect further EBITDA improvement from our performance additives business. We are pleased to have resolved the multi-year legal dispute with Tronox and received $85 million cash in settlements. We remain committed to strengthening our underlying business to position Venator for success by increasing production, delivering on our customer-tailored price approach, and controlling our costs. As Kurt mentioned, we expect our cash uses to reduce by approximately $70 million within the next few years, which will be a big step forward toward improving our financial profile. All these actions will enhance shareholder value. And with that, I would now like to open the call for questions.

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 keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble the roster. And our first question will come from Josh Spector of UBS. Please go ahead.

Yeah, hi, guys. Thanks for taking my question. Just curious, looking at your quarter-on-quarter bridge for price mix and the COGS, you know, they're pretty close to offsetting each other. I guess as you work with customers on, you know, faster pricing adjustments and you talk about incremental inflation, do you expect that price mix to be kind of equal to that COGS increase sequentially, or do you think price mix starts to outpace that?

Yeah, I mean, look, we think that we've done a nice job in the first quarter of mitigating these inflationary pressures with some pretty significant price outcomes. Of course, as we've said many times before, no customer likes price increases. We have had this progressively tailored approach for these past three years or so. I expect that pattern to continue in the second quarter. The one thing that is very clear is we've given ourselves more flexibility by moving to more monthly-based reviews by the use of surcharges in selected cases as well. But of course, one of the issues that we observed in March particularly was these spikes in energy. And we are through April now in the second quarter, but we don't know how stable or volatile these energy prices to which we're exposed in some parts of our contract where we're not fixed will play through. So it is a tough question to answer. My expectation is that we would at least manage to sort of hold on to what we've got while these headwinds are blowing hard, and hopefully we will be able to expand as we go into the second quarter.

Okay, thanks. And I apologize if I missed this in an earlier update, but Can you just give more detail on what's going on in Italy? Is that curtailment or slowdown just primarily related to some of the gypsum capacity issues, or is there something else going on there?

Yeah, I mean, this is not a new sort of dynamic here. We've sort of made reference to this for, you know, a considerable length of time through our filings and the like. You know, we have been engaged with for some time a sort of dialogue with local regional authorities and community groups about, you know, how we manage our eco-product business out of Scarlino, Italy. And, you know, obviously with the sulfate-based process there, we have some significant quantities of gypsum that, you know, we produce as a result of producing titanium dioxide. And historically, we have used sort of quarry-stroke landscaping reclamation facilities, you know, for managing a significant portion of this gypsum. And, you know, of course, over time, those facilities, quarries and landfills and so forth fill up. So we've been in negotiation about the next way that we manage that with the authorities. Now, at the moment, we do not have an agreed outcome. We are hopeful that we will bring this to resolution by the middle of the year. In the very near term, we've elected to take one of our three streams off of roughly a third of the capacity in this quarter. And that will have a sort of singular millions impact, if you like, through the quarter. But it relates to the sort of like, you know, next agreement and consent limit for the amounts of gypsum that the site will produce in the coming years. And that's, I think, a fair representation of where we are with the dynamic.

Understood. Thank you.

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

Morning, Simon and Kurt. You know, you guys talked about increased production and obviously higher demand in 2022. Just wanted to sort of dig a bit deeper into that. I mean, you know, typically, you know, the TIO2 world grows at 3%. You know, you obviously have low inventory levels these days. you know, global GDP, you know, higher than normal. I mean, I'm just trying to get a sense of what that TIO2 market demand growth looks like. And for you in particular, will you grow in line with the overall TIO2 market?

Yeah, look, I think we would expect to grow at least in line, Hassan. I think potentially slightly higher because TIO2, You're right about underlying GDP growth and recovery, and that would be our general assumption about growth. But of course, if you look at some of the noise in the fourth quarter, we had some maintenance moderation and the like. So we had a pretty top-end outcome in volumes in the first quarter, 15%. And I think we said that we would expect to increase capacity and production through 2022 over 2021 by between 5% to 10%. That's what we'd be looking for. And there are some factors out there that will determine whether that's towards the lower or the higher end. But I think think about it from that point of view. That's how we see 2022.

And Hassan, let me just add to that that there's no capital investment necessary in order to access that excess latent capacity that we have. So, yeah, as you know, as we came out of the pandemic, we were really ramping up the assets in 2021, and so we're getting into a more normalized run rate here in 2022. So, that capacity is there for us to access, and we're just tuning up the facilities in order to access it.

Yeah, and I think one thing I would like to add, Hasan, is we don't We think, you know, although it's a careful navigation on supply chain, we think we get through these first six months without production interruptions due to lack of inputs, i.e. feedstocks, energy, chlorine, all the like. You know, we think we get fully shipped. Of course, it's quite challenging, but we think we get fully shipped to be able to make our production and we won't be constrained. Of course, as you know, we're coming off incredibly low inventories.

Understood. Very helpful. And as a follow-up on the input side of things... Can you talk a bit about the availability of ore in particular? Obviously, it seems constrained. I mean, is it just a 2022 phenomena? Is it maybe going to extend beyond that? And also part and parcel with that, what you guys are seeing in terms of global cost curves?

Yeah, I think on the first question with the feedstock, we made the point that that we buy a full range of feedstocks, and we have quite a diversification because of our technology platform between, you know, ilmenides, flags, you know, high-grade chloride flags, and root cells and the like, synthetic and natural. So, you know, I'm happy to report at this point that we think we get shipped despite challenges, and I think it's probably because of that diverse range of vendors that helps us. We're not overly dependent on one although of course there are some you know big supply points for us um it's not a massive group of small vendors but you know we do at least have some diversification you know i think it is a pinch point in in 2022 i think beyond that you know it's hard to tell depends how demand comes back you know i you know there's been many times these past you know five ten years plus that, you know, predicted minerals shortages will have a heavy impact on the industry. And of course, at some point that will be right. But I'm quite optimistic over these coming years that it doesn't provide a meaningful bottleneck. You know, I won't say there won't be pinch points, but I think, you know, availability is there. And that's the answer to your first question. And, you know, we have availability in all the different mineral types we purchase, you know, although in some cases we have to work incredibly closely with the vendor around shipping profiles, size of shipments and the like. You know, I think turning to your second point, it's a very interesting point about cost curve and industry dynamics, because we made the point that, you know, all through these last period, extra supply and capacity is not coming online, you know, and demand continues to steadily creep up underlying demand. So from a fundamental standpoint, you think that's good. I think there is a slow shift occurring on the cost curve. And the reason I say that is because all participants has seen significant direct cost escalation in these last five years. And therefore, if you look at the total cost structures on each and every site, the proportion of that cost structure that's taken up by direct costs rather than indirect costs or variable costs rather than fixed costs, depending on your preference and terminology, it means that that tends to, by definition, flatten the curve. Of course, there still will be a curve, but it does tend to somewhat reduce the advantage of low fixed costs per ton on a site. It doesn't clearly eliminate it, but it tends to reduce it. So I think that's a factor. The other factor, of course, is in China. As we've seen these last three or four years, a lot of the factors that go into Chinese small unit production have been blowing against Chinese manufacturers. You know, I think the need for Chinese producers to, you know, participate at world-wide pricing is, you know, higher than it's ever been. And so we've seen that in the broader Asia region, that the Chinese pricing postures look sort of like very similar to ours in many cases, you know, and that wasn't always the case. So those are the comments I would add in response to your second point, Simon.

Very helpful, Simon. Thank you so much.

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

Hi, guys. This is Will Tang on for Vincent. Thanks for taking my question. Can you guys talk about kind of the customer reception to those monthly price reviews you implemented in March? I mean, is that something you may continue to do once kind of the raw material slash cost situation normalizes? And if not, what do you have to see to kind of start getting rid of those multiple price abuse.

Yeah, I mean, I think there's a few comments to apply on your question, Will. I mean, first and foremost, as we said last time out, I'd like to reiterate that the preponderance of our price increases are through underlying direct negotiation and the minority of the increases are through surcharges. So, you know, that's an important point because when it comes to reviewing what we do about surcharges, Let's be clear, it's sort of the smaller part of the price adjustment. I think we would, from today's vantage point, we expect to continue these sort of monthly price reviews at least through 2022. That would be our best sort of assumption as we sit here today. Could change, but that's how we see it. We like the fact that with the volatile sort of markets and volatility in general that we're seeing in the world, that a more sort of regular opportunity to at least review price is welcome. So I think, of course, no one likes increased prices and sustained increases in prices, but I think our large-scale customers looking at their private and public pronouncements around their margins implies that they've got a good way of managing that themselves. And I would see us when the time does come, if indeed it does come to, you know, manage back to more normalized pricing structures, then, you know, we would find a way with each of our customers on a tailored basis to negotiate and discuss how that's best achieved.

Got it. And then I guess really quickly, how much savings are left on your BIP program now? And then are you guys looking, you know, at just further kind of sell-out knowledge measures as your costs from I guess, the implementation by 2020 BIP starts to roll off?

Yeah, we have indicated that in 2022, we'll pick up roughly $5 million of incremental EBITDA benefit compared to 2021. So we'll get $5 million of benefit in 2022. Beyond that, I think that we will always want to be sharp With our cost structure, we don't have anything planned right now, but it's something that we have shown that we've been able to successfully take costs out of the business as needed, and we'll continue to evaluate that as we go forward.

Yeah, maybe I'd like to just add on one or two comments of a maker. I mean, you know, big picture here is, you know, we have had some discontinued sites and closed sites and some cost takeout programs. I can think of at least three VIPs over these past five years. So the way I think about it now is we are turning to the future and our focus will be more on productivity improvement, getting more tons out of the base we've got. We like the asset footprint and base we have. We want to get the most out of that. And of course, we're going to continue to place a heavy emphasis on specialty and differentiated products and services for our customers. And those are the predominant ways we're looking at improving our earnings profile, while at the same time, of course, taking out the $70 million that we spoke about in the call of cash usage and working at the free cash flow from both sides of the curve.

Got it. Thank you.

The next question comes from Matthew Dio of Bank of America. Please go ahead.

Morning. Can we Talk through the shifts in FX markets we're seeing right now and how that kind of impacts your results through year-on-year, if it does.

Sure. And so I can speak to that at a high level, Matt. And then if you have additional follow-up questions, we can tackle those. But think about us as being primarily exposed to the euro, particularly when we think about the top line. And then when we look at revenue exposure, it's primarily Euro and US dollar. When we look at our cost structure, we have a exposure to the pound sterling, as you would imagine, with a headquarters in the UK. So we're short pound sterling. And as we net out the effect of being long Euro, short pound sterling on the cost structure, they have a tendency to minimize and offset one another to the extent that both the Euro and the pound move in correlation to the US dollar in a relative consistent pattern. So we have had very minimal net FX exposure on the EBITDA line, recognizing that if you're only looking at revenue or COGS, there's a bit of variability there. But net EBITDA, it's been minimal. I mean, this quarter, I believe it was a million dollars.

That's helpful. Thank you. you know, I don't know how I expect you to answer this, but, um, so for 2Q, right, we're hearing a pretty wide range of, of price increases and it's probably because everybody's going to different customers with different numbers, but, um, something like a hundred euros, 300 euros, et cetera. I mean, where do you expect this shakes out and do you need to be at the high end of some of the ranges that we're hearing to keep profits flat quarter over quarter? Um,

Yes, so I think if we look at the first quarter, there were a range of local price outcomes that we've observed from public results and the like in our segment. I think often we see those fairly bunched, but there's quite a spread. In our own case, I have to say that there's a couple of factors we should point to. We were beneficiaries of some good mixed dynamics in our 12% local currency uplift in the first quarter. That was a part of the reason we had that 12%. It wasn't the majority, but it was a significant factor. Because we have a larger European asset footprint than several competitors, clearly we have more exposure to European energy dynamics. And that has forced us to look hard at how we price our products off that platform. And as we said on the prior call, we moved to monthly reviews because we needed that nimbleness. And I think it's shown in the results that it was the right thing for us to do. Now, as we go into the second quarter, we are going to need a pretty reasonable price increase to keep pace with that. What we see is our forecast cost inflation in the second quarter. And frankly, we continue to believe there'll be further inflation in the second half of the year and further price increases. But, you know, specifically on the second quarter, you know, we are going to get a pretty significant price increment upwards in order for us to, you know, maintain and open somewhat our margin. And, you know, it's hard to answer, as you said, because of, you know, what your implied sort of range is. But, you know, will we get to the 12% of one Q in the second quarter? No, we won't. But it's still going to be a pretty significant move forward, I think, overall.

I really appreciate the context, and thank you. I know I was going to say that. An easy question to answer, so thanks.

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

Good morning, Simon and Kurt. Guys, in terms of Chinese exports into Europe, what are you seeing and what are you expecting going forward as things progress?

Yeah, look, I mean, I think that there's no doubt about it. If we look at the overall export figures, the most recent export figures, one could conclude that the Chinese export, you know, amounts are at their sort of highest level that we've sort of ever seen. There's no questioning that, you know, the statistical analyses are out there. The patterns that we see and have seen, you know, for several years, I might say, remain fairly similar. Of course, with the Chinese sort of like trade war issues of a couple of years back, it's true that exports to the US did drop somewhat. But if we look at the exports into Europe, they are higher than they have been in the last three or four years, no doubt. And that's driven by, no question, the softness in the internal domestic Chinese market. So yes, they're high. Yes, they've gone up. But I made the point earlier, number one, is that the cost curve you know, for Chinese producers has gone up significantly, you know, with all of these different raw material challenges. They've had challenges in recent years over, you know, labor inflation and capex requirements and environmental requirements. And, of course, the whole shipping congestion and freight rate piece has also added. So, yes, it's true those exports have gone up, but they are clearly needed in the market because, you know, I think, Several companies are somewhat constrained with these low inventory levels in supplying the customer's needs. I represent to you that this is a highly manageable dynamic and that Chinese producers have become quite focused on ensuring they get fair prices for the products that they ship out of the region. Let's be clear, the majority of those exports still find their way into Asian Latin American and Middle Eastern markets compared to the Western European or North American markets.

Very good. And just in performance additives, Simon, in Q2, do you expect selling price increases to catch up to higher raw material energy and shipping costs?

Yeah, I mean, I think that's our underlying expectation. I mean, I would say in performance additives that It's a little bit more choppy. Although the feedstock prices in TO2 are quite significant, they sort of manage the way that their pricing plays through. In the performance additives business, particularly in our colors business, you've got iron oxides and iron particles and Asian supply, and we've noticed more volatility. So How you tune your price tactics to your on-the-day costs is a little bit more challenging, actually. So you will see some choppiness between quarters, I think, in performance additives. But, you know, we still think we're looking down the barrel of a pretty solid quarter in the second quarter for our performance additives business to go with these past two quarters, in fact.

Very good. Thank you very much.

The next question comes from Arun Vishwanathan of RBC Capital Markets. Please go ahead.

Great. Thanks for taking my question. So I guess I just wanted to understand the level of pressure you're facing from some of these factors. So is there any way you could kind of quantify the dollar impact of, say, ore shortages and, you know, maybe – you know, some other impacts such as, you know, FX or any of these larger buckets. How much do you think your quarterly EBITDA is being affected by some of these factors?

Well, I mean, I think we've covered the FX point, so it's not really a factor for us. But, you know, I think if we – you've only got to look at our bridges in the charts, whether you look, you know, in the Q1Q or the year-on-years. I mean, some of these COGS movements, you know, are pretty high scale. So – I think we expect to see that near-term continuing, certainly in the second quarter. We have not broken out, and we won't be breaking out numerically the buckets, but of course, the major spend items are feedstock and energy. Those are the two big ones, but I must represent that the other chemicals we use, sulfuric acid, caustic, coke, and the like, plus, of course, shipping and freight, those are also meaningful, you know, very meaningful exposures. So I think, you know, near term, you're better off to look at the bridges to give you a sort of guide on the type of quantification of these dynamics. And, you know, of course, in Europe, as I said, we do have the energy profile that is very challenging to manage right now. And we're trying to manage that by, you know, fixing and hedging.

Okay, thanks, Ed. And, you know, understanding that the model in TIO2 has changed such that, you know, the pricing isn't necessarily purely raw material driven. You know, there's a greater impact from supply-demand. You know, you cited high inventory levels from China. But if we look out maybe, you know, a couple quarters, you know, do you expect moderation? You know, when we do see moderation in some of these areas, would you expect pricing to kind of follow those costs back down or would you expect to hold on to pricing just given your differentiated portfolio?

Yeah, I mean, look, there's a number of sort of factors in that question. Let's first and foremost say that we do actually expect that aggregate demand to continue throughout the year. You know, we don't at the moment, you know, although there's much talk about what sort of comes next, you know, we prefer to look at the evidence to hand And the evidence to hand is very clear. It's pretty strong. It's in all markets, in all sectors pretty much for us applications where we're more exposed, whether it be specialty or more functional products, whether it be additives or TO2. So we expect that to continue. And we expect these margins, we expect to be able to continue to hold on to and improve these margins as we go forward. throughout the years. You know, we're not sort of planning on some sort of forecasted catastrophic event or something. We're not planning the business like that. We don't, like anyone else, know what the future truly holds. We don't have any monopolies on crystal balls, et cetera. But, you know, I think we're in good shape. We're doing the right things to maximize the value of the business, making the most of what we've got, being very attentive to our costs, you know, procurement and pricing strategies. and working closely with our customers. And that's an important point. I mean, the customers here have really seen the value of being closely connected to us in these times where it's very challenging. And I think there's been some greater understanding created between ourselves and customers over this period. So I'm quite optimistic in answer to your question. Pretty high level answer, I know. But I think pretty positive as we go through the rest of the year and beyond. As I said, where is the incremental supply coming from? It has not been built during this period. Plants continue to get older. And we have seen failures in supply chain with maintenance and reliability. And all of that means that supply balances remain tighter rather than looser. Thanks.

Pleasure.

The next question comes from Lawrence Alexander of Jefferies. Please go ahead.

Good morning. This is Dan Rizzo on for Lawrence. How are you? You mentioned adding capacity that you already have. I was just wondering, within TAO2, what your capacity utilization is right now, and what do you expect it to go to?

Yeah, I mean, look, it's pretty high. Everything we're doing here to get, when I spoke about 5% to 10% more than last year, that's not like 5% to 10% brand new capacity on top of what we had. It's It's, you know, our effective operating capacity because last year some of our assets were, you know, either reduced or had some outages and the like. But, you know, it's all about capacity group and producing, you know, squeezing out more tons of what we've got. That's our focus. But certainly if you look at where we are right now, we're fully sold and we're running everything we can, you know, flat out. Now, we all know, you know, these plants need maintenance. So depending on your your definition of utilization and the like, but I would see that, you know, I would see us greater than the 90% mark quite clearly, you know, right now.

Okay. And then with, you mentioned CapEx or just your spending initiatives or your spending focus for next year. I was wondering, one, what maintenance CapEx was, and two, when it comes to working capital, if you expect to be carrying higher inventories, I mean, through the end of the year, just given some of the supply constraints you've seen and just to make sure that you can meet customer demand.

Yeah, Dan, let's talk about maintenance capex first. And so we generally think about the business needs for maintenance of roughly $75 million a year. Now, depending on the year, that can be a little bit above that or a little bit below that. I think that this year it's going to be a little bit higher than that, hence the guidance that we've given that not only includes a slightly elevated maintenance capex, but also some discretionary capex within that range of 85 to 95 that allows for additional support of organic growth within the business as well. And then you'll have to remind me the second part to your question.

Just about inventories and working capital, if they're going to be elevated through the end of the year, just to make sure you have supply for your customers.

Well, they won't be elevated. I think the values will be higher. But as we look at it from a volumetric standpoint, we're servicing our customers with everything we produce. on a real-time basis. So right now, we don't foresee building much inventory as we go through 2022 because the demand is so insatiable right now that we want to continue to provide our customers with the product as we are producing it.

So then last question, have you had orders delayed or lost because of supply constraints kind of limiting what you can meet in terms of demand?

Yeah, I think the way to think about that is, you know, quite often customers will get, you know, a later shipment, but we have to negotiate the shipping time closely with them. So, you know, are we always shipping on their ideal time? Probably not. But in negotiation with the customers, you know, we are not letting them down. But it's, you know, it means a constant and close communication. But the good news for us is that we've managed to procure all the raw materials and services we need to make our products in the first months of these first four months of the year. And we think of the first half and that has been quite challenging, but we've achieved it. And, you know, we have set up our production. It was a good production quarter for us. And we're going to continue to try and do that, you know, through the second quarter and the rest of the year. So I think largely we're shipping on time if you allow us the latitude of negotiated delivery times rather than absolute preferred. Thank you very much.

The next question comes from John McNulty of BMO Capital Markets. Please go ahead.

Yeah, good morning. Thanks for taking my question. Just maybe a follow-up on the working capital side. You know, this quarter you had kind of an unusually high number on the accounts receivable part i guess should we be thinking about the rest of the year where it's the traditional you know first half is a big user of capital or working capital on the second half you you get it all back or and sometimes and then some maybe sometimes it's a little bit less than getting it all back but is that the right way to think about is there any reason why accounts payable shouldn't be kind of catching up to the receivables number as we kind of look throughout the rest of the year and you kind of start to wring some more cash out of the system that way?

Yeah, John, I think that you've got it right. First, you know, let's just remind ourselves that elevated accounts receivable is good because it's going to be unwinding into cash here as we progress through 2022. And you're right. I think that there will be an offset here in accounts payable as we go through the year. As you think about those seasonal patterns, we still think that there will be a first half use followed by a second half release. We think that nets out to a total use of more than $20 million, as I indicated, but the seasonal pattern between the two halves of the year will be precisely that, a use in the first half followed by a source of cash in the second half.

Got it. That's helpful. And then I guess the second question, I know it's a little bit early, but I guess just given the windfall of cash that you got from Tronox and then the counterbalance of that with rates being higher, any preliminary thoughts on how much debt refinancing and debt pay down might have in terms of an impact on your overall interest expense line?

Yeah, I think that it's still too early to say how the interest line will be impacted. As we indicated in our prepared remarks, we're actively engaged with several banks to explore recapitalizing a portion of our debt structure. So we do want to get ahead of the rising tide of higher interest rates. We're certainly in a much better position to do that now. We feel like we had a very strong first quarter. We're very optimistic about the remainder of 2022 and how we're positioned and set up in order to navigate these increased cost headwinds and that. we'll pick our spot here and we'll deploy some of that cash and look to optimize the capital structure here in the near term.

Got it. Thanks very much for the caller.

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.

Thank you. I'd like to thank everyone who participated on the call today, our first quarter 2022 earnings call. And thank you for your questions, your continued interest in Venator. You know, we're going to look forward to speaking with you at our upcoming in-person conferences and meetings. And at any point, please feel free to reach out to Kate with any additional questions you might have. Thank you very much.

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.