Venator Materials PLC Ordinary Shares

Hello, and welcome to the Venator fourth quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please send your conference specialist for pressing the star key followed by zero. Please note, today's event is being recorded, and it will be a presentation only. I now would like to turn the conference over to Kate Robertson, Venator Investor Relations. Please go ahead.

Thank you, Keith, and good morning, everyone. I'm Kate Robertson, Investor Relations for Venator Materials. Welcome to Venator's fourth quarter and full year 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 fourth quarter and full year 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 guaranteed of future performance. You should review our annual report on Form 20F for the year ended December 31st, 2022 and our other filings of 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 for the most directly comparable gap financial measures in our earnings release, which has been posted to our website at www.benatarcoop.com. Please note that we will not be holding a question and answer session on this call. I would like to turn the call over to Simon.

Thank you, Kate. Beginning on slide three. The macro environment, which deteriorated sharply during the third quarter, continued to be challenging throughout the fourth quarter. We experienced low demand for our products and high raw material and energy costs. These trends were particularly acute in Europe, which is the region we are most exposed to. Total company adjusted EBITDA in the fourth quarter was negative 57 million compared to negative 8 million in the third quarter and 40 million in the prior year period. We are undertaking an in-depth strategic review of our business to improve our operations, strengthen our liquidity position, and establish a sustainable capital structure. We have appointed Moles and Company and Kirkland and Ellis as respective financial and legal advisors, in addition to Alvarez and Marcel, to assist with strategic review and engagement with stakeholders. Turning to slide four on our titanium dioxide segment. Adjusted EBITDA for our TO2 segment was negative 50 million in the fourth quarter 2022, compared to negative 5 million in the third quarter and 35 million in the fourth quarter 2021. We entered the fourth quarter experiencing weak demand in Europe and Asia and softer demand in North America as a result of customer destocking. Destocking continued throughout the fourth quarter and demand for our products was weak in all regions and markets. Fourth quarter sales volumes were 28% lower than the third quarter 2022 and 44% lower than the prior year period. In response, we reduced production across our network to manage inventories, and as a result, we were adversely impacted by unabsorbed fixed costs. Fourth quarter average TO2 selling prices decreased 3% sequentially in local currency. TIO2 average selling prices increased 8% compared to the fourth quarter 2021 in local currency, as we continue to hold monthly pricing reviews of our customers as part of our customer-tailored approach, which provides flexibility in the fast-paced environment we operate in. The outlook remains uncertain due to challenging macroeconomic conditions, and thus far during the first quarter, we have seen some recovery in TIO2 sales volumes. We believe that these stocking in Europe has primarily run its course, though underlying demand remains weak. We expect our sales volumes in APAC to improve towards the end of the first quarter, as domestic Chinese demand improves post-lunar year. Although we expect sales volumes to increase in the first quarter, this will be more than offset by higher cost of goods sold and lower average selling prices, resulting in a meaningfully lower EBITDA result in the first quarter compared to the fourth quarter. First quarter cost of goods sold are expected to increase as we benefited from the sale of energy hedges and furlough schemes in Germany during the fourth quarter, and we are restarting our moderated TO2 plants during the first quarter. We continue to operate our Scarlino TO2 facility at one third of its 80,000 tonne nameplate capacity to reduce the rate at which the remaining gypsum disposal and storage capacity is consumed. At the current operating rate, we will soon have insufficient capacity for the gypsum produced, and as a consequence expect to stop production during the second quarter of 2023. If we do not receive approvals for additional gypsum storage capacity by the end of the first quarter of 2023, we may permanently close the site and subsequently incur associated site closure costs. Our 50,000 tonne Juesberg Germany TO2 site primarily manufactures products into fibers and active material end markets. Following the COVID-19 pandemic and ongoing weak demand in Asia, there has been lower demand for these products. This manufacturing site has been significantly impacted by higher inflationary costs, resulting in unsustainably low TO2 contribution margins. We have taken steps to reduce the economic impact on our business by suspending production at the site during the fourth quarter of 2022 and part of the first quarter of 2023, and by furloughing most of our employees at the site. We are in the process of restarting production for both TO2 and functional additives in the first quarter of 2023. As part of our ongoing strategic operational review, We do not believe it is economically viable to continue TIO2 production of our Dewsburg site longer term. We therefore intend to permanently close TIO2 production of our Dewsburg site unless economic conditions meaningfully improve. As a result, we will engage with the relevant Works Council when required. We intend to transfer the production of certain specialty TIO2 products to other sites with lower manufacturing costs. Turning to slide five and our performance additive segment. The performance additive segment was more resilient during the fourth quarter than TIO2. The segment delivered 5 million of adjusted EBITDA in the fourth quarter of 2022, compared with 9 million in the prior quarter and 19 million in the prior year period. Sales volumes decreased 19% compared to the third quarter and 22% compared to the fourth quarter of 2021. The primary driver of lower earnings on a sequential basis was lower sales volumes. The decline in sales volumes was the result of softer demand, primarily in construction and coatings end markets, and lower sales volumes from our functional additives business. Demand for our functional additives products remains healthy, but sales volumes were lower in the fourth quarter due to the temporary suspension of production at Juesburg TIO2 and functional additives facility in response to lower TIO2 demand and high energy costs. Demand for our ultramarine blue products remains healthy. Average selling prices in local currency increased 7% compared to the third quarter 2022, and 27% compared to the fourth quarter 2021, as we continue our monthly pricing reviews of customers to mitigate the ongoing impact of energy and raw material cost inflation. In the first quarter, we expect the EBITDA result from the performance additive segment to be significantly lower than the fourth quarter, and we expect EBITDA results to be negative. This is primarily due to suspended production of our functional additives facility, which is co-located with our TIO2 facility in Juesburg, Germany. On November 14, 2022, we entered into a definitive agreement to divest our iron oxide business from within color pigments, the Cafe Industries, for an enterprise value of 140 million. We estimate cash proceeds to be approximately 135 million net of working capital adjustments, taxes, fees and other closing cash adjustments. As a result of this transaction, we estimate that the borrowing base on our ABL will reduce by approximately 55 million, resulting in an estimated net liquidity improvement of approximately 80 million. In the near term, this transaction will bolster our liquidity and allow us to focus on our strategic assets. Turning to slide six, Early in the fourth quarter, we implemented a 50 million cost reduction program to reduce our cost structure. This program was initiated in response to the challenging business environment. By the end of 2024, we expect actions to be in place to deliver the full cost reduction program benefits to deliver 50 million EBITDA compared to 2021, adjusted for the impact of foreign currency translation, inflation, and our 2020 Business Improvement Program. These actions to reduce costs include reduction of SG&A headcount and discretionary spend, lower manufacturing costs, and partially offset cost inflation. We expect cash costs to deliver the program of approximately $30 million spread over the next couple of years. I will now pass the call over to Kurt.

Thanks, Simon. Let's turn to slide seven. Fourth quarter total adjusted EBITDA decreased $49 million compared to the third quarter. The decrease was driven by a significant decline in sales volumes, primarily within our TIO2 segment. Costs to get sold were adverse to the prior quarter due to unabsorbed fixed costs as we reduced production across our network. This was partially offset by lower site fixed costs as we utilized government furlough schemes at certain sites. We mitigated higher underlying energy costs with the sale of energy hedges in Germany, realizing a one-time benefit. Price mix was favorable within our performance additive segment as we successfully implemented price increases within certain businesses. This was more than offset by lower CIO2 average selling prices, which decreased 3% in local currency. SG&A and FX and other was adverse due to FX gains in the third quarter. Compared to the Fourth quarter 2021, our total adjusted EBITDA decreased by $97 million. Benefits from positive price mix were more than offset by significantly lower sales volumes, primarily due to weak demand in our TO2 segment and the higher cost of goods sold. Cost of goods sold were higher, primarily due to increased energy costs, partially offset by the sale of energy hedges. SG&A was favorable by $5 million, and this was more than offset by FX currency losses and higher minority interest. At the end of the fourth quarter, our total liquidity was $276 million, which consisted of $114 million in cash and $162 million available under our ABL facility. Fourth quarter liquidity was similar to the third quarter as negative free cash flow of $48 million, was mitigated by the receipt of proceeds from the completion of a cell leaseback transaction for our iron oxide color pigments manufacturing facility in Los Angeles, California, and a reduction in the amount of letters of credit with respect to the successful buy-in of our largest pension plan. Despite increased sales volumes thus far in the first quarter, Business conditions remain challenging due to continued high energy and raw material costs and lower average selling prices compared to the fourth quarter. As a result, our liquidity reduced to $134 million as of February 17th of this year, including $97 million of cash and $37 million available under our ABL. Our ABL availability reduced as a result of borrowings made during 2023 and discretionary reserves imposed by lenders. We expect our ability to utilize the liquidity under our ABL to be limited due to lender reserves and other limitations. We expect our 2022 audited financial statements that we will file with the SEC on Form 20F to be issued with an unqualified audit opinion with explanatory language about our ability to continue as a going concern as a result of projected liquidity. We continue to pursue mitigating actions that will strengthen our liquidity and are focused on all of our cash uses. 2022 capital expenditures totaled $69 million. We estimate capital expenditures in 2023 to be approximately $55 to $60 million, which excludes capital expenditures for our iron oxide business from the second quarter onward and consists primarily of maintenance. Working capital was a use of cash in 2022 of $135 million. Inventory was a cash use of $172 million as a result of cost inflation and the rapid decline in second half demand for our products, which outpaced our reduced production. The inventory outflow was partially offset by lower accounts receivables due to lower sales volumes. In 2023, we plan to reduce our inventories to more normalized levels but expect higher accounts receivable as demand for TO2 recovers. We estimate this will likely result in a net use of cash from working capital in 2023. I'll now turn the call back to Simon. Thanks, Kurt.

Turning to slide eight. Cost reduction, operational optimization, and liquidity remain our near-term priorities, and we have implemented a comprehensive range of actions to manage those areas to the extent within our control. On cost reduction measures, we have initiated a robust global cost reduction program, which is intended to deliver 50 million of annualized savings by the end of 2024, compared to a 2021 baseline adjusted for foreign exchange translation, inflation, and our 2020 business improvement program. These savings will be achieved through lower SG&A costs, lower manufacturing fixed costs, and improvements from a range of actions at our manufacturing facilities. During the fourth quarter, we moderated certain manufacturing facilities, utilized government furlough schemes to reduce and absorb fixed costs, and reduced orders for raw materials to control our inventory levels. We have continued our focus on reduction of other cash uses, and we have lowered our expected 2023 capital expenditures and are focused on reducing our inventories to be more aligned with the outlook for product. On optimizing operations, our Duisburg TIO2 manufacturing site has been significantly impacted by higher inflationary costs resulting in unsustainably low TIO2 contribution margins. And we do not believe it is economically viable to continue TIO2 production there longer term. Today, we have announced our intention to permanently close TIO2 production at our Duisburg, Germany, manufacturing facility unless economic conditions meaningfully improve. On liquidity, we expect to complete the sale of our iron oxide business to Cafe Industries by the end of the first quarter. As a result of this transaction, we estimate a net liquidity improvement of approximately 80 million, which is comprised of net cash proceeds of approximately 135 million and a reduction on our ABL borrowing base of approximately 55 million. We expect total company EBITDA in the first quarter to be meaningfully lower than the negative 57 million EBITDA of the fourth quarter. Higher first quarter sales volumes will be more than upset by lower average selling prices and higher cost of goods sold, as one-time benefits such as the sale of energy hedges and furlough during the fourth quarter are not repeated. We expect EBITDA to improve throughout the year as demand for our products recover. We expect the recovery to pick up pace in the second and third quarters, primarily within our TO2 segments. Our in-depth strategic review is progressing as we continue to explore additional actions to bolster liquidity and establish a sustainable capital structure. We welcome continued dialogue with our shareholders, debt holders, and all other stakeholders on supporting Venator through this process. As we are not taking questions, I would like to thank you all for joining our fourth quarter 2022 earnings call. Please feel free to reach out to Kate with any questions you might have.

Thank you. The conference is now concluded. Thank you for attending today's presentation. May not have snaked your lines.