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Edited Transcript of VNTR.N earnings conference call or presentation 6-Aug-19 12:00pm GMT

Q2 2019 Venator Materials PLC Earnings Call

STOCKTON-ON-TEES Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Venator Materials PLC earnings conference call or presentation Tuesday, August 6, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey Michael Schnell

Venator Materials PLC - IR Director

* Kurt D. Ogden

Venator Materials PLC - Executive VP & CFO

* Simon Turner

Venator Materials PLC - President, CEO & Director

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Conference Call Participants

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* Aleksey V. Yefremov

Nomura Securities Co. Ltd., Research Division - Research Analyst

* Arun Shankar Viswanathan

RBC Capital Markets, LLC, Research Division - Analyst

* Brian J Lalli

Barclays Bank PLC, Research Division - Director & Senior Analyst

* Eric B Petrie

Citigroup Inc, Research Division - Senior Associate

* Hassan Ijaz Ahmed

Alembic Global Advisors - Partner & Head of Research

* James Michael Sheehan

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Jeffrey John Zekauskas

JP Morgan Chase & Co, Research Division - Senior Analyst

* John Ezekiel E. Roberts

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals

* John Patrick McNulty

BMO Capital Markets Equity Research - Analyst

* Katherine Anne Griffin

Deutsche Bank AG, Research Division - Research Associate

* Patrick Duffy Fischer

Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst

* Roger Neil Spitz

BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst

* Steve Byrne

BofA Merrill Lynch, Research Division - Director of Equity Research

* Steven Kyle Haynes

Morgan Stanley, Research Division - Research Associate

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Presentation

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Operator [1]

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Good morning and welcome to the Venator Materials Second Quarter Earnings Call. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the call over to your host today, Jeffrey Schnell, Director of Investor Relations. Please go ahead, sir.

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Jeffrey Michael Schnell, Venator Materials PLC - IR Director [2]

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Thank you, Keith and good morning everyone. I'm Jeffrey Schnell, Director of Investor Relations for Venator Materials. Welcome to Venator's second quarter 2019 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 second quarter 2019 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. You should review our filings with the SEC for more information regarding the factors that could cause actual results to differ materially from these projections or expectations.

We do not plan on publicly updating or revising any forward-looking statements during the quarter. We will also refer to non-GAAP 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.

It is now my pleasure to turn the call over to Simon.

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Simon Turner, Venator Materials PLC - President, CEO & Director [3]

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Thanks, Jeff, and good morning everyone. It's my pleasure to welcome you to our earnings call. Let's begin on slide 3.

The challenging economic and Ti02 industry environment observed in the first quarter of 2019 persisted in the second quarter. Notwithstanding these challenges, Venator delivered $61 million of adjusted EBITDA. Higher Ti02 sales volumes were more than offset by lower average selling prices, lower fixed cost absorption, and a challenging demand environment in some of our additives applications, including automotive, electronics and plastics.

Importantly, we continue to work with our customers to formulate tailored solutions, which aim to reduce price volatility in our Ti02 business while simultaneously remaining intensely focused on reducing our cash outflows and return to positive free cash flow.

Turning to slide 4 on our titanium dioxide segment, in the second quarter our titanium dioxide segment generated $55 million of adjusted EBITDA compared to $124 million in the second quarter of 2018 after excluding the EBITDA attributable to our Pori, Finland manufacturing facility. Lost EBITDA at Pori was reimbursed by insurance proceeds through the second quarter of 2018, when we received our full and final payment. And therefore going forward, we will not have this comparison.

Excluding foreign currency translation, the average selling price declined 9% compared to the prior year but remained flat compared to the first quarter of 2019. This result was primarily a function of managing our supply network and furthering our tailored customer approach to reduce price volatility. Prices for functional Ti02 products were most impacted in Europe, which was the highest priced region in the prior year period.

As expected, prices in Europe shifted towards that of the more stable North American region. And as we indicated on last quarter's call, we exited the second quarter with prices in Europe slightly below that of North America. Prices in Asia also moved lower compared to the second quarter of 2018, driven by lackluster demand primarily in China.

We continue to see higher and more stable pricing dynamics for our specialty Ti02 products compared to functional Ti02 products, underscoring our commitment to transferring production from Pori to other sites in our network. These actions will further strengthen our leadership position in these higher value applications.

Titanium dioxide volumes increased 9% compared to the prior year period and broadly across applications and geographies. This was the result of increased availability of higher value specialty Ti02 products, increased sales of new differentiated products, and easier year-over-year comparisons as customer order patterns were delayed.

Sales volumes improved compared to the prior quarter due in part to higher sales of new products and seasonality. The sequential increase, however, was moderately below the seasonal average due to the pull-forward effect of Brexit in the first quarter of 2019. Sales volumes of specialty Ti02 products increased at a low single-digit percentage compared to the prior year period.

The trends impacting the Ti02 industry have clear differences by region. In North America, we sell our Ti02 mainly to smaller customers and into non-slurry applications. Demand remained stable in the second quarter and we saw a seasonal improvement in demand across most applications, including coatings and plastics, supplemented by higher sales of new products.

As I mentioned earlier, pricing remained stable in North America. We remain in a sold-out position with our manufacturing asset in Lake Charles, Louisiana and our exports to the region are principally limited to higher value, smaller volume specialty applications. We continue to forecast stable pricing and demand trends for North America in the second half of 2019.

Asia is a large consumer of Ti02 and the market remains highly fragmented despite recent and ongoing consolidation. Demand remained sluggish in the second quarter due to weakness in China, which put pressure on pricing. Venator's exposure to the Asian market is limited to our manufacturing capability in Malaysia and limited exports of higher value specialty Ti02 products.

Europe is our largest market for Ti02, accounting for half of the segment's sales. Growth in the second quarter was modest and supplemented by increased sales of new products and easier comps as the destocking we observed in 2018 impacted Europe ahead of other regions.

In the second quarter, we incurred higher variable cost inflation, including approximately $13 million of higher raw material costs, mostly high-grade ores, which were partially offset by a $3 million benefit from our business improvement program. The inflationary pressures on our basket of raw materials will remain in the second half of 2019, particularly for high-grade retail and slag.

Turning to the outlook for Ti02, in the near term we expect the current and challenging macroeconomic environment to remain, impeding visibility and promoting uncertainty in demand trends. We will continue to implement our tailored customer approach, which is designed to reduce price volatility, and to manage our production network to align with customer commitments. We expect pricing trends to remain stable sequentially in the third quarter.

Volumes will be negatively impacted primarily due to seasonality and partially offset by higher production of our specialty Ti02 products and increased sales of new products. By region, we expect continued relative strength in North America, modest demand in Europe, and weak demand in Asia, barring any potential trade resolutions and/or incremental stimulus actions.

As previously mentioned, raw material cost inflation will persist in the second half of the year due to the phasing of contracts and the mix of production from our manufacturing sites. Additionally, planned outages in the third quarter will negatively impact EBITDA by approximately $5 million compared to the second quarter of 2019.

Notwithstanding an apparent soft economic backdrop in the second half of 2019, longer-term Ti02 industry fundamentals remain favorable. Ti02 industry inventory levels are normal and capacity additions are well understood and in line with normalized industry growth rates. We are focused on delivering our cost and operational efficiencies as part of our business improvement program, continue to manage our production network to meet our tailored customer approach, and are on track with the transfer with the transfer of specialty technology from Pori, strengthening our leadership position in these higher value applications.

Turning to slide 5 and performance additives, revenues declined 19% compared to the prior year period, driven by a 16% decline in volumes, a 1% decline in the average selling price, and a 3% headwind from foreign currency, partially offset by a 1% benefit from mix. Sales volumes declined broadly across all businesses compared to a strong prior year quarter. I'll provide some additional comments on the three main businesses within performance additives.

Color pigments volumes were primarily impacted by lower construction activity in North America and Europe and lower plastics demand. Nonetheless, volumes improved sequentially. We expect seasonality will be more tempered in the third quarter compared to prior years as some delayed activity manifests.

Pricing declined slightly in the second quarter compared to the prior year period. However, we have actions in place to stabilize pricing in the second half of 2019.

Timber treatment volumes are down compared to the prior year, primarily due to lower sales to a large customer as a result of a lost tender in the third quarter of 2018 and lower U.S. construction activity.

Functional additives volumes were negatively impacted by weaker than expected demand for automotive and electronic applications, which began in the fourth quarter of 2018. These headwinds appear likely to continue into the second half of 2019.

The performance additives segment generated $16 million of adjusted EBITDA in the quarter, down from $23 million in the prior year quarter but a sequential improvement of $1 million. The year-over-year decline in EBITDA was primarily attributable to lower sales volumes resulting from the headwinds I described earlier, and partially offset by a $1 million benefit from our 2019 business improvement program.

We have taken meaningful steps to streamline our cost structure within each business in the performance additives segment, including realigning our global leadership. We expect to continue to realize the additional benefits from the ongoing business improvement program, enhancing the business and accelerating its longer-term pathway to growth. We are also assessing possible actions to further increase planned savings in this business.

In light of current market conditions, we are tempering our expectations for the full year and are now forecasting performance additives EBITDA in 2019 will be similar to the level achieved in 2018.

I will now pass the call over to Kurt to discuss our financials.

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Kurt D. Ogden, Venator Materials PLC - Executive VP & CFO [4]

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Thanks, Simon. Let's go ahead and turn to slide number 6 to discuss our business improvement program.

We continue to be intensely focused on strengthening our business and improving our cash flow. We commenced our 2019 business improvement program in the fourth quarter of 2018 following the successful completion of our prior program.

This cost and operational improvement program is designed to generate $40 million of annual EBITDA benefits through an improvement in Ti02 manufacturing efficiencies, a reduction in SG&A, and manufacturing and other operational improvements in the performance additives segment. We intend to complete all the actions necessary to deliver on our target by the end of 2020, ending the year at the full run rate level.

In the second quarter of 2019, we captured an additional $4 million of EBITDA benefit from our 2019 business improvement program. Year to date, we have realized a cumulative benefit of $7 million, $5 million in Ti02 and $2 million in performance additives. We are tracking ahead of schedule with our expected 2019 capture and anticipate delivering more than $10 million of benefit in the current fiscal year.

Let's turn to slide 7. Total adjusted EBITDA declined $67 million compared to the prior year period after excluding the impact of Pori and the carbon credits we sold in the second quarter of 2018. The majority of the decline is attributable to the lower average selling price in our titanium dioxide segment, higher raw material costs, and lower fixed cost absorption.

Sales volumes were a net positive, as higher availability of certain products and increased sales of new titanium dioxide products more than offset lower volumes in our performance additives segment due to the factors Simon described. The benefits from our business improvement program were also manifest as we deliver on our aggressive improvement initiatives.

Compared to the prior quarter, total adjusted EBITDA increased by $1 million. Seasonally higher sales volumes in both titanium dioxide and performance additives were the largest contributor to the sequential improvement. In addition, the benefits from our ongoing business improvement program and lower SG&A and more stable sequential foreign currency movements more than offset the impact of lower selling prices, foreign currency translation, and higher cost of production.

As we look into the third quarter, we expect Ti02 prices to be stable. However, volumes will be seasonally lower. And as Simon previously mentioned, we have planned Ti02 maintenance that will cause a negative $5 million EBITDA headwind. We also expect higher raw material costs.

Turning to slide 8 and our capital resources, at the end of the second quarter net debt was $720 million and our net leverage ratio was approximately 3 times our trailing 12 month adjusted EBITDA. During the quarter, we increased the aggregate principal amount of our asset-based revolving credit facility from $300 million to $350 million.

The total liquidity was at approximately $307 million at the end of the quarter, consisting of $50 million in cash and $257 million of un-drawn availability under our asset-based revolving lending facility. Importantly, we do not have any significant debt maturities until 2024.

We continue to enjoy relatively low cash tax rates. This is primarily a function of the countries where income is generated and the $1.1 billion in net operating losses from which we benefit. Our tax expense is significantly affected by the mix of income and losses in tax jurisdictions in which we operate and valuation allowances in certain jurisdictions.

In 2019, we expect to see a higher adjusted effective tax rate of approximately 35%. Beginning in the second quarter, we are applying a normalized adjusted effective tax rate which better reflects the current weighted average tax rate applicable under the various jurisdictions in which we operate.

We continue to forecast our adjusted effective tax rate will be between 15% to 20% in the long-term. Most importantly, our 2019 cash tax rate guidance remains steady at 10% to 15%, which is consistent with our long-term cash tax guidance.

Total free cash flow in the second quarter was a use of $50 million. This was significantly impacted by typical working capital seasonality and the timing of Pori related expenses, both of which were in line with our expectations. Our updated outlook for 2019 uses of cash are as follows.

Total CapEx, capital expenditures, are expected to be approximately $130 million, which includes approximately $15 million of capital expenditures related to the specialty technology transfer. As I've stated previously, we will remain balanced on our CapEx budget without compromising the integrity or operability of our assets. That being said, we have the ability to reduce this outflow within reason should market conditions warrant.

Cash interest is expected to be $40 million to $45 million, and cash taxes are expected to be within our 2019 and long-term range of 10% to 15%. Cash paid for restructuring is expected to be approximately $30 million to $35 million. Cash pension and other expenses in 2019 are expected to be $60 million to $70 million.

Working capital was a cash use of a $43 million in the second quarter of 2019, in line with our forecast. Based on the current Ti02 industry outlook, we expect to deliver a working capital reduction of $25 million to $40 million for the full year of 2019 compared to 2018. This change relative to our prior guidance reflects the anticipated inventory build related to the acquisition of the paper laminates product line in the second quarter 2019 and stronger titanium dioxide sales volumes more than offsetting lower valuations in accounts receivable.

Finally, our Pori related expenses are expected to total $65 million to $75 million in 2019, of which $53 million was spent in the first half of 2019. As a result of our actions, the cash spend at Pori is dramatically slowing down.

With that, I'll turn it back to Simon for concluding remarks.

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Simon Turner, Venator Materials PLC - President, CEO & Director [5]

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Thank you, Kurt. The global macroeconomic and Ti02 industry remained challenging in the second quarter, but we remain focused on our strategic objectives.

We continue to drive our business to be the premier producer of specialty and differentiated Ti02, where we achieve higher and more stable margins. This can be seen in the volume performance of our specialty Ti02, the success of our new product rollouts, and the advancement of the transfer of our specialty technology from Pori to other sites in our network.

We have also executed a carefully focused program that prudently aligns our production network volumes to meet a tailored customer approach while containing inventories at appropriate levels and maintaining an intense focus on generating positive free cash flow. This has resulted in a higher effective floor price compared to prior cycles.

Our 2019 business improvement program is off to a strong start as we continue our long-standing commitment to improved competitiveness across our portfolio. We are on plan and confident that we will complete the actions necessary by the end of next year to deliver the full $40 million run rate EBITDA benefit.

While in the near term we expect demand to remain somewhat subdued, reflecting the ongoing uncertainty affecting our end-use applications, the above actions will significantly strengthen our business and enable us to capitalize on the favorable long-term fundamentals.

With that, we thank you for your continued interest in Venator and would now like to open the call for questions.

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Questions and Answers

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Operator [1]

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Thank you. (Operator Instructions) And the first question comes from Duffy Fischer with Barclays.

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Patrick Duffy Fischer, Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst [2]

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Q: In reference to the 9% volume gain year-over-year, can you kind of walk through the regions? How did each region do specifically on volume?

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Simon Turner, Venator Materials PLC - President, CEO & Director [3]

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A: Yes, we can give a little bit of color to that, Duffy. I think that the way to think about that is that we saw a little bit from new product introductions. That was mainly in Europe. We saw a little bit from our new laminates business, and I would characterize roughly half of that increment as European with the balance spread around the different regions of the world.

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Patrick Duffy Fischer, Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst [4]

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Q: Okay. So Europe did better than the 9% and the other regions did less. And that's how it averages out to 9%?

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Simon Turner, Venator Materials PLC - President, CEO & Director [5]

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A: No. So what I'm saying is that we probably did a little bit better in Europe than the other regions.

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Patrick Duffy Fischer, Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst [6]

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Q: Okay. And then if you look at your mix, functional versus specialty as a percentage this year and last year, how did that change?

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Simon Turner, Venator Materials PLC - President, CEO & Director [7]

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A: Well, the specialty business is relatively small, so I'd characterize the mix comparison as flat, unchanged.

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Operator [8]

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And the next question comes from John McNulty with BMO Capital Markets.

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John Patrick McNulty, BMO Capital Markets Equity Research - Analyst [9]

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Q: So it sounds like the European markets have started to stabilize at this point, and seems like the destocking is done. With raw materials starting to push higher, when do you think the market's going to be tight enough or stable enough to start pushing through price hikes to help offset the raw material headwinds that you and maybe the rest of the industry are facing?

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Simon Turner, Venator Materials PLC - President, CEO & Director [10]

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A: Yes, I mean, let's pick up on both of those statements there. As you say, Europe, we have seen some stabilization. We have seen the destock run its course, so I can confirm that. We are largely unchanged in our view about the outlook for raw materials. And you'll recall that we said a while back we expect to onboard around $40 million of year-over-year headwind, three-quarters of which relates to our feedstocks.

And what we are seeing is that is playing out in the second half. We will see some low single digit increases in some of our higher grade ores. And we are seeing stability, a more flattish outlook, in our sulfate ores. So I think the scene that you painted there of stability and the picture of feedstock is now pretty clear as we look through into the second half.

I would be very careful about trying to answer your question about characterizing triggers based on what we see out there with demand volatility. We see a lot of uncertainty. What we would be prepared to say to you is that we could -- as a result of our continued focus on stabilization we would expect to see near term further success in stabilizing prices going into 3Q. And as we mentioned earlier, this has been successful in putting a floor under prices at a higher level compared to prior cycles.

Directionally, of course, what we need to see is a bit of a pickup in demand, I think, to further allow us to target price initiatives more fundamentally. We have been very careful with our network, to manage the utilization of our network in the low 80% range in the second quarter, and we have kept our stocks at a very disciplined and appropriate level, around 50 days.

We have seen sequential flat pricing and only a nominal pickup in demand. So all of those factors lead us to believe that we are seeing a successful stabilization program.

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Operator [11]

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And the next question comes from Jim Sheehan with SunTrust.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [12]

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Q: So it looks like inventories of Ti02 in China are a bit elevated. Do you expect increased exports from China into Europe as two major producers start ramping up new capacity?

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Simon Turner, Venator Materials PLC - President, CEO & Director [13]

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A: Yes, I think what we see in China is continued weaker markets. We export some specialty product into China. We don't compete in a large way within China, but certainly we feel the effects of softening.

As the midyear point, Jim, we have noted increased exports out of China to the tune of around 3%. Most of this has been directed into the Asian region, notably India I would pick out. And it's clear that when you take exports to both Europe and the United States, those exports into both regions on a year-on-year basis are down. And taken together, they are down by 30%.

So yes, it's possible, of course, we could see with this demand profile we've painted some increased exports. We think that capacity ramp ups that do exist out there are going to be slower, take longer. And we think because of the way we compete in the market, particularly in Europe targeting more specialized and differentiated applications, that makes our business more robust should such a dynamic play out that you put forth.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [14]

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Q: Very helpful. And also, Simon, how are you thinking about M&A and strategic options for your portfolio as at this point?

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Simon Turner, Venator Materials PLC - President, CEO & Director [15]

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A: I think we continue to focus on creating value by focusing on our strategic priorities. And that mainly relates to building out the transfer of technology, specialty technology, from Pori to the other sites and focusing on our product rollouts and our internal actions that will lead to a stronger business in what is quite a weak and challenging demand environment.

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Operator [16]

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And the next question comes from Aleksey Yefremov with Nomura.

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Aleksey V. Yefremov, Nomura Securities Co. Ltd., Research Division - Research Analyst [17]

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Q: Do you have any reason to believe that raw materials inflation in Ti02 will slow down or completely stop next year?

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Simon Turner, Venator Materials PLC - President, CEO & Director [18]

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A: What we can see is the second half, as I mentioned earlier, I think we've got a fairly clear runway now and we're pretty much contracted out for the second half of 2019. So we have seen some slowing of onboarding of costs. I think we spoke earlier, previous calls, we expected to see around two-thirds of the onboarding occur in the first half. So, yes, we would already say that there has been directionally some slowing, and certainly in some other non-ore categories we've seen that come to pass.

So that's what we're seeing in the second half. I think that fundamentally in this weaker demand environment there's a reasonably strong amount of ore available for sulfate ores. We know there is still some capacity to be brought to bear in high grade too, but I think it's too early to comment on what we'd see next year around fundamental feedstock pricing and other raw materials.

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Aleksey V. Yefremov, Nomura Securities Co. Ltd., Research Division - Research Analyst [19]

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Q: Thank you, Simon. And Kurt, was there any change in Pori related closure or in relocation costs beyond 2019, so 2020 plus?

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Kurt D. Ogden, Venator Materials PLC - Executive VP & CFO [20]

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A: There has not been any change in our estimated costs that we have, certainly not in 2019. And as we project forward, we have had no changes in those forecasts either.

I will say, Aleksey, we do continue to explore ways that we can further reduce the expected outflows that we have in future years, but not change right now to those estimated outflows.

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Operator [21]

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And the next question comes from John Roberts with UBS.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [22]

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Q: Is there any update on the lawsuits between you and Tronox and any court dates that we should be aware of?

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Simon Turner, Venator Materials PLC - President, CEO & Director [23]

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A: The answer to that, John, is no, there's no meaningful update to that. The $75 million break fee remains due and payable from Tronox in full under the agreement they had with Venator.

Contrary to Tronox' excuses for their failure to pay, I just want to reiterate here that we have acted at Venator at all times in good faith to reach a definitive agreement to purchase the Ashtabula site. So we continue to believe the counterclaims are unfounded. There's no milestones in the roster that provide any meaningful update to your question.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [24]

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Q: And then secondly, Ashland disclosed some weakness in their sunscreen end market demand and some other consumer products. I associate some of that with specialty Ti02 applications. Did you see any of that as well, or were you broadly strong in the specialty area?

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Simon Turner, Venator Materials PLC - President, CEO & Director [25]

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A: Yes, we're broadly strong in the specialty area. Our product, of course, is a key ingredient into those products, and we have not seen such softness.

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Operator [26]

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And the next question comes from David Begleiter with Deutsche Bank.

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Katherine Anne Griffin, Deutsche Bank AG, Research Division - Research Associate [27]

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Q: This is Katherine Griffin on for David. So first question, just wanted to talk about contract prices for Q3. I think there had been some increases implemented that maybe may not be as successful given the demand environment. So I'm wondering if your expectation to stabilize prices kind of assumes that those increases are not successful. And then kind of on top of that, if they are not and prices are flat, do you think you could see some late summer buying on the back of that?

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Simon Turner, Venator Materials PLC - President, CEO & Director [28]

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A: Yes, I might have to return to the second part of your question, Katherine, but let's start off with that first part around price increases. I think that what we've tried to do is set out to people under our stabilization program more now than ever we have a full range of individualized, tailored approaches to each and every customer. So it's entirely conceivable that within a quarter, across quarters, you can have some customers moving up or down depending on the agreement.

But certainly we have and put through selected increases in key markets, notably in Europe in Q3. But broadly speaking, along with some targeted increases in the United States, we still consider that at the aggregate level the target is to retain stability into Q3. And that's the outcome we are targeting and we expect to achieve.

I'd like to kindly ask you to restate the second part of your question, which I didn't fully understand.

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Katherine Anne Griffin, Deutsche Bank AG, Research Division - Research Associate [29]

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Q: Sure. I mean, I was just curious, if there had been an expectation for price increases in Q3, now that maybe that -- if those increases aren't successful, do you think that there could be maybe some pent up demand that you could see released in late summer if those increases are not successful and the price settles flat or even lower than expected?

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Simon Turner, Venator Materials PLC - President, CEO & Director [30]

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A: No, I don't think we see that. I mean, you're talking of pent up demand. I think that as it relates to Ti02, we're into underlying demand now. There's no real noise or any factors that would increase or decrease inventory levels.

And to restate, we are at the inventory level we targeted, around 50 days. We think that's probably on the lower end of the industry level. We can't be sure of that, of course, but that's where we are. And so we don't think that those type of dynamics that you suggest are going to be seen in late summer.

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Katherine Anne Griffin, Deutsche Bank AG, Research Division - Research Associate [31]

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Q: Okay. And then one more, if I could. So I realize that you have the business improvement program in place, but I'm just curious. If the macro gets materially weaker, we are heading into a seasonally lower demand period, are there additional levers that you can pull beyond business improvement to offset that?

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Simon Turner, Venator Materials PLC - President, CEO & Director [32]

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A: Well, certainly business improvement is the main avenue for the business in terms of helping itself. I did touch on in the prepared remarks the fact that we are assessing a range of extra activities, certainly in the additives area, to combat what we would see as ongoing weakness in demand.

And of course, there are other levers as it relates to cash that we could focus in on, certainly capital expenditures. But largely speaking, our target metrics on inventories, our target metrics on other cash items, are in line with our plan and we think appropriate for the business condition we're in.

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Operator [33]

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And the next question comes from P.J. Juvekar with Citi.

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Eric B Petrie, Citigroup Inc, Research Division - Senior Associate [34]

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Q: This is Eric Petrie on for P.J. A question for you, Simon. What do you think your customer Ti02 inventory days are? And then have you seen any customers reformulate to sulfate away from chloride?

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Simon Turner, Venator Materials PLC - President, CEO & Director [35]

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A: Yes. Look, we have got limited visibility on to what our custom inventories are. We have no reason to believe they are elevated or reduced. We think they are at normalized level now, yes. And that goes across the piece, I think.

In terms of formulation, it's an interesting one. We've heard a couple of questions in this regard. We see it through the lens of higher quality and lower quality pigments. So we are overweight in plastics where we supply high quality chloride and sulfate pigments, and customers frequently buy both from us. So they don't always see it as a chloride sulfate issue. It's more about the type or quality of product that can be supplied.

And that's where our focus is, so we don't recognize this almost like tiered switching question between chloride and sulfate. I mean, of course it's true that in China, with significant exports and significant production in China, most of which is sulfate, then almost by definition gains by Chinese producers would be sulfate and presumably some of which would be the expensive chloride. But of course, we have seen in some areas some losses of our own sulfate positions of sulfate.

So I think about this more as quality. And in our business we target specialty and differentiated applications which have more robustness to switchability.

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Eric B Petrie, Citigroup Inc, Research Division - Senior Associate [36]

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Q: Okay. And as a follow-up, a question for Kurt. What is your target cash balance? It looks like cash and equivalents declined to $50 million, so any color there?

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Kurt D. Ogden, Venator Materials PLC - Executive VP & CFO [37]

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A: Yes. Don't be surprised, Eric, if we bring that down closer to around the $25 million range. And so it will fluctuate and we'll tap into our ABL as necessary. Certainly during the working capital use periods we'll access that. But think about cash on hand a little bit lower than the $50 million, somewhere between the $25 million to $50 million.

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Operator [38]

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And the next question comes from Steve Byrne with Bank of America.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [39]

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Q: What have been your price realizations in your European Ti02 business for sulfate-based products versus chloride-based products? And could you see supply and demand fundamentals for those two product categories to lead to diverging prices in that region?

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Simon Turner, Venator Materials PLC - President, CEO & Director [40]

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A: So what I would say first off is let's remind ourselves that in our specialty area, our specialty products remain at elevated prices and sequentially stable prices. We've seen stability in our specialty area, which is all sulfate.

As related to any potential divergence, where we have realized prices across Europe, as to my earlier comments, there's no demographic that would put chloride or sulfate into different areas. Largely the dynamics are the same. It's more driven by the discussion with the customer and the specificity of the great that they use in their applications. It's fundamentally not a technology issue.

And we do not see any divergence at this time and don't expect to see, I might add, any divergence between simple chloride and sulfate products, because as I said earlier, for us we are looking at the higher performance end of the range with our customers.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [41]

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Q: And are you seeing any Chinese dumping of iron oxide pigments into the European market?

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Simon Turner, Venator Materials PLC - President, CEO & Director [42]

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A: We're not seeing that at this time.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [43]

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Q: And then just one more for you, please, and that is are you seeing any incremental product coming out of Saudi into the European market?

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Simon Turner, Venator Materials PLC - President, CEO & Director [44]

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A: We haven't observed any of that either.

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Operator [45]

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And the next question comes from Hassan Ahmed with Alembic Global.

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [46]

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Q: A quick question on just the cost curve side of things. As I take a look at you guys's EBITDA margins, Q2 2018 around 32%, 12.5% in Q2 2019, and this is for the Ti02 segment. Obviously being primarily sulfate based producers, on the global cost curve you guys are very, very competitively placed.

So my question really is everyone's talking about uncertain macroeconomic conditions and the like. Your own EBITDA margins have come down hard, so I'd imagine the marginal producer isn't doing too well in this environment. So are you seeing any early signs of curtailment, shutdowns? Are they imminent? I mean, how should we think about that?

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Simon Turner, Venator Materials PLC - President, CEO & Director [47]

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A: We are not seeing anything of that nature, Hassan, possibly with the exception within China. I think there's no doubt that within China, because demand has been down because local pricing's been lower, the margin profiles within China could be more squeezed.

But I come back to my earlier point, Hassan, which is the price stabilization program has taken place against a very challenging demand backdrop. And in the back half of last year and the front half of this year, where we've been through a destock, we've seen in 12 months pricing remain at a level which is more elevated than in previous cycles. And that has been delivered from our point of view in Venator, taking a cohesive set of actions to put a floor under such a price.

So while those margins are not where we'd like them to -- of course, we want higher margins, and as would others presumably, we're not seeing the kind of distressed level of marginal producer that we would have been, for instance, at the back end of 2015 or the front end of 2016 where prices were significantly lower, as were margins.

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [48]

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Q: Understood, understood. Now, on the raw material side, Simon, a couple of cross currents, right? Obviously, we all know about the lag between ore prices and Ti02 prices. So with ore, over the last couple of quarters, being relatively sort of low in price, there was a bit of a catch up and that lag effect came into play. But then there was some consolidation within the industry. My understanding is that one of the consolidators was actually in prep to sort of acquire these assets building ore inventory, some sort of changing buying patterns over there.

So the question again is uncertainty macro economy wise, the lag effect seems to have played through, some of the players who were pre-buying seem to have pre-bought. So, I mean, in this uncertain time, should we not see a more immediate crack in ore pricing?

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Simon Turner, Venator Materials PLC - President, CEO & Director [49]

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A: I don't think so, Hassan. I think it might be slightly different this time out because I think that the feedstock producers are running their own version of price stabilization. So, yes, I think what we're seeing is a trend towards more frequent but lower increments with the aim of driving out volatility.

There has been some consolidation, particularly and notably in the higher grade areas. And I think that trend is set to continue.

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Operator [50]

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And the next question comes from Jeff Zekauskas.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [51]

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Q: How much were your raw material costs up in the first half, and how much do you expect them to be up for the year?

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Kurt D. Ogden, Venator Materials PLC - Executive VP & CFO [52]

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A: Jeff, this is Kurt. As we think about raw materials generally year-on-year, Simon has already indicated that we were anticipating around $40 million of increased raw materials 2019 over 2018. About $30 million of that is going to be from ore headwinds.

If we break that down into halves, we think we've seen a little more than call it $20 million of ore headwinds in the first half. As we go into the back half of 2019, the ore headwind will decrease as we compare ourselves to 2018. But we are onboarding some other higher raw material costs such as sulfuric acid, which we will see the impact in the second half of 2019.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [53]

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Q: Aren't sulfuric acid prices coming down, or for related derivatives?

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Kurt D. Ogden, Venator Materials PLC - Executive VP & CFO [54]

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A: We have one specific site and an arrangement at that site, specifically our Malaysian facility, where we have contracted an increase in those sulfuric acid prices. And so that's primarily what is driving the trend that we are seeing.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [55]

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Q: I guess lastly, do you expect raw material costs or prices to go down next year? And why are raw material prices up at all in the current environment?

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Simon Turner, Venator Materials PLC - President, CEO & Director [56]

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A: I think, Jeff, it's tough to answer that across the range. But what we can do, of course, is focus on our key raw material. And our key raw material responsible for three-quarters of this year's headwind is feedstock.

And you posed the question why is it not going down and why is it going up. Well, we are seeing different dynamics, of course. The reality is that for chloride materials, high-grade materials, there are a very limited range of vendors and there has been consolidation there. And they are working on their utilization, going through their own version of price stabilization. And of course, we do see a lag, but we're going to see those gently creep up, I think.

For sulfate materials, to your point, there is a relatively large amount of this product available. Demand has been weaker. Therefore, we are not seeing any price increases at this time -- or cost increases, I should say, for ilmenite materials or sulfate materials in general. That's not to say it's not possible that they won't start to drop, but we're not yet seeing that at this time. And when we do see it, should we see that, that would only be next year, and then of course there'd be a lag. So it's a fairly stable landscape, as we see it right now.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [57]

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Q: Okay. And then lastly, can you characterize the state of demand for titanium dioxide in China itself? And are Ti02 producers, because of a weak market in China, choosing to export more? And if they are exporting, where are they exporting to? Or is domestic demand in China holding up pretty well? How would you characterize that?

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Simon Turner, Venator Materials PLC - President, CEO & Director [58]

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A: I would say that domestic demand in China is very weak, and I think has been gradually slowing for quite some time now, probably the last couple of years. But it really is weak right now. We continue to see similar export profiles this year as we saw last year at the midyear point. I think it's up 3% all up, on an all up basis.

In terms of color around the particular destinations, well, of course it's mainly Asia, Middle East, some parts of Latin America. I'd pick out India as one which has saw a particularly high year-on-year percentage increase. But in absolute kilotons, I think that we see these exports as largely flat, particularly when you compare them to the previous three or four years of growing exports from China.

It's the same group of top 10 producers that are responsible for most of the exports. I would say, though, that one of the particularly larger ones has a stronger drive to Europe and North America as a percentage. But I would repeat what I said earlier, which is Chinese exports year to date combined into the markets of Europe and USA are down by 30%.

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Operator [59]

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And the next question comes from Vincent Andrews with Morgan Stanley.

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Steven Kyle Haynes, Morgan Stanley, Research Division - Research Associate [60]

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Q: This actually Steve Haynes on for Vincent. You guys made a comment before about kind of being at the underlying level of demand. I was just kind of curious, after we've had pretty intense destocking and restocking cycles over the past few years or so, what do you guys characterize underlying demand as? Should we be thinking of something kind of in the 2% to 3% range? I mean, is that how we should be thinking about 2020 volumes, or is that off?

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Simon Turner, Venator Materials PLC - President, CEO & Director [61]

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A: Just to confirm, of course, that this question is predominantly Ti02 related, I'm taking that as our assumption here, of course, because we do have some different demand characteristics for some of the additive products in different segments such as automotive. But going with it from a Ti02 basis, we're saying we're not seeing a restock/destock phenomena everywhere. We are seeing underlying weakness in China and broader weaker demand in Asia in general, which is a concern to us.

Europe has pretty modest growth; hesitate to call it solid, but pretty modest growth. And in North America, we continue to see a pretty decent level of demand growth. There has been a little bit of delay, I think, in construction, and possibly some of that demand gets pushed into the third quarter, a small amount.

But I would say that, if you go back to the 2% to 3% range on a 2020 basis, that's a good assumption. We expect recovery. We just expect it to be more gradual than we'd hope at the start of this year.

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Operator [62]

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And the next question comes from Arun Viswanathan with RBC Capital Markets.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [63]

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Q: Just curious on the plastics and laminates business. It seems that one of your large competitors had some pretty serious share loss there. Were you able to pick up any extra volume because of that, and is that reflected in your quarterly gain?

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Simon Turner, Venator Materials PLC - President, CEO & Director [64]

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A: We don't see ourselves as picking up any share of any scale. We are fully sold in Asia and North America. Our sequential volumes went up modestly, probably lower than we'd have anticipated, slightly lower. There was a little bit of Brexit effect into the first quarter.

Our pricing was flat. We've focused on certain target positions which we believe we've achieved. We've pulled back on our production. We've set our inventories at a good level, the 50 days as we exit the second quarter. So our game plan has been very much about a focused execution of value stabilization and our prices have remained flat.

Of course, we have noted some dynamics in the market in those segments that were mentioned where some others could be having some targeted approaches. We have noticed that. We do not believe we've been the recipients in any of those positions other than a small contribution from the laminates sector, which was driven more by our acquisition of the 8120 product from Tronox rather than anything to do with market share fundamentally.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [65]

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Q: And then just as a follow up, when you look out into 2020, would you characterize the current environment as kind of bouncing along the bottom, or do you think there is further deterioration that could materialize in the rest of this year and into 2020?

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Simon Turner, Venator Materials PLC - President, CEO & Director [66]

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A: Yes, we are very reticent to get into discussions about 2020 given the way the year has played out and some of the events we're seeing right out there now. What we can tell you is that despite some of this challenging turbulence we've experienced and continue to experience, and some of the noise level's gone up, of course, we still expect to deliver on the stabilization program near term. And demand patterns have been fairly similar through the year by region.

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Operator [67]

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And the next question comes from Roger Spitz with Bank of America.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [68]

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Q: For the two segments, you've given some indication. I'm not sure you gave the percentage change on the sequential volumes for each of the two segments in Ti02 and performance additives.

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Simon Turner, Venator Materials PLC - President, CEO & Director [69]

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A: Yes, we didn't break out the sequential gains by segment.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [70]

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Q: Okay. Are there any Ti02 or other turnarounds expected in Q4 2019 or 2020? And if so, what might that impact be? And which plant had the TAR in -- is going to have the TAR in Q3 2019?

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Simon Turner, Venator Materials PLC - President, CEO & Director [71]

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A: We'd spoke about the $5 million impact in our plants in the planned outage in Q3. As it relates to further planned outages, we would always have a scheduled roster any given year. Some of the equipment has to get taken off once every two year or three years, so there will be planned outages in 2020.

We've yet to schedule those, but I would describe those as normal course. In terms of the most clear outage that we've got, the game on the field here is basically at our major outage in our Duisburg, German facility in 3Q.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [72]

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Q: Duisburg, Germany, okay. And then lastly, what drove you to increase your ABL to $350 million from $300 million?

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Kurt D. Ogden, Venator Materials PLC - Executive VP & CFO [73]

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A: Roger, this is Kurt. We felt like it was prudent to do. We had the ability to do so under the credit agreement, as you're aware. And so we felt like it was an opportunistic move to go ahead and inject a little bit more liquidity, or at least availability for the business.

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Operator [74]

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And the next question comes from Brian Lalli with Barclays.

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Brian J Lalli, Barclays Bank PLC, Research Division - Director & Senior Analyst [75]

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Q: Maybe a couple for Kurt. First, I know you've highlighted some of this in past calls, but is it possible to remind us what maybe some of the notable changes will be on the free cash flow front as we move from 2019 into 2020, I guess namely around CapEx for technology transfer, the Pori cash expenses, restructuring costs, etc.? It would be good to maybe size that up in our models.

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Kurt D. Ogden, Venator Materials PLC - Executive VP & CFO [76]

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A: Sure. Well, as Simon mentioned, we are not ready to go out with specific 2020 guidance at this point in time. We are going through a process here as we go into the fall to sharpen up our models and go through a budgeting process. So as it relates to CapEx and that, I think we'll be coming back later this year to give you a sense as to what the quantum associated with that is going to be.

As we think about the Pori cash expenditures that we have planned for right now, the Pori cash expenses are expected to go down from around $70 million in 2019 to around $20 million to $25 million in 2020. And that rate of cash outflow associated with Pori ought to continue into 2021 as well, absent any additional actions that we take to further reduce those amounts.

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Brian J Lalli, Barclays Bank PLC, Research Division - Director & Senior Analyst [77]

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Q: Got it. And then is there any reason to assume that restructuring doesn't come down? And maybe you're not ready to give an exact number, but directionally, $30 million to $35 million for the fiscal year 2019, should that come down?

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Kurt D. Ogden, Venator Materials PLC - Executive VP & CFO [78]

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A: Yes, it ought to. Right now we expect it to come down to less than $15 million as we look into 2020.

Now, Simon has indicated that we're taking a close look at some additional actions to address our additives business. So there is the potential that we may have some funding in order to improve and strengthen that business as well. But that is to be determined. We're in the process of assessing that.

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Brian J Lalli, Barclays Bank PLC, Research Division - Director & Senior Analyst [79]

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Q: Got it. And then two quick follow ups or last ones, just first on EBITDA. As you say, you're going to end the year with something greater than $10 million of EBITDA capture this year on the cost savings. How much do you think you can actually get in your 2020 reported numbers versus exiting at the $40 million run rate?

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Kurt D. Ogden, Venator Materials PLC - Executive VP & CFO [80]

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A: Yes. Well, we will have an incremental amount that ought to put us north of an incremental $20 million. And so I think that that would be a pretty good number to use.

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Brian J Lalli, Barclays Bank PLC, Research Division - Director & Senior Analyst [81]

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Q: Okay, that's helpful. And then last one for me. Obviously, with some of the puts and takes, working capital release versus some of the other with where EBITDA generally is negative free cash flow, do you have a thought on where you might end the year in terms of net leverage? And then I guess what are you current thoughts on sort of the longer term leverage profile for the business as some of these things start to normalize?

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Kurt D. Ogden, Venator Materials PLC - Executive VP & CFO [82]

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A: Yes. We're not going to go out with specific guidance around leverage for 2019. Suffice it to say we are intensely focused, as we've indicated, on improving our free cash flow generation. It is a high priority for the business to improve what we have thus far.

And so I think that you'll see that reflected certainly in the second half of 2019 as we have a working capital release in the second half. And then as we move forward into 2020, we will continue that high concentration and focus that we have as an organization.

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Operator [83]

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And at present there are no more questions, so I would like to return the floor to Simon Turner for any closing comments.

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Simon Turner, Venator Materials PLC - President, CEO & Director [84]

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A: Thank you very much. Well, thanks everyone for joining the call. Please feel free to reach out to Jeff if you have any questions. We will be on the road together very shortly, and we look forward to meeting you and to taking your questions further. Thank you very much for attending.

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Operator [85]

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