Venator Materials PLC

Thank you, Franchesca. And firstly, apologies to everyone.

It appears that there was some technical problems where we were merged another call. And I'm Kate Robertson, Investor Relations for Venator Materials.

Welcome to Venator's First Quarter 2021 Earnings Call. Joining us on the call today are Simon Turner, President and CEO; and Kurt Ogden, Executive Vice President and CFO.

This morning, we released our earnings for the first quarter 2021 via press release and posted the release and accompanying slides to our website at venatorcorp.com. During this call, we may make statements about our projections 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 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.venatorcorp.com. It is now my pleasure to turn the call over to Simon.

Thanks, Kate, and good morning, everyone. Welcome to our First Quarter 2021 Earnings Call.

The macroeconomic backdrop continues to improve. In many countries across the globe, coronavirus restrictions are beginning to relax and the vaccine rollout is encouraging.

Although we remain cautious, industry fundamentals across our portfolio are positive. Venator delivered $49 million of adjusted EBITDA in the first quarter compared to $25 million in the fourth quarter of 2020.

Turning to Slide 4 on our Titanium Dioxide segment. In the first quarter, our Titanium Dioxide segment delivered $40 million of adjusted EBITDA compared to $46 million in the first quarter of 2020 and $25 million in the fourth quarter of 2020.

Demand for functional TiO2 was strong across all sectors and all regions. We also saw good recovery in demand for our specialty TiO2 products mainly in textiles and automotive sectors.

We have more ground to cover for a full recovery. Total TiO2 volumes were 1% lower compared to the prior year quarter, and increased by 14% compared to the fourth quarter, which was slightly ahead of our expectations.

As a result, inventories remained tight throughout the quarter despite increased utilization rates compared to the fourth quarter of 2020. We experienced some minor disruption and additional costs due to Brexit, which have been resolved.

Turning to price. Excluding FX, TiO2 average selling prices declined by 1% compared to the prior year period and increased 3% compared to the prior quarter.

The increase in selling price is due to successful implementation of our first quarter price increase initiative relating to our Functional TiO2 products. And has also resulted in more convergence of price across the regions.

Prior to this, TiO2 average selling prices have been relatively stable for 8 quarters. However, during this time, we have onboarded meaningful raw material inflation.

Our price increases are helping us to reclaim lost margin. Chinese exports were stable compared to the prior quarter with the main export markets being Asia and the emerging markets.

We continue to see a pullback in exports to Europe and North America due to stronger local Chinese demand for TiO2, coupled with shipping constraints, which is resulting in customers looking to us for reliable supply. As a result of higher raw material and shipping costs, we continue to see selling price increase announcements from Chinese producers, which in turn continues to narrow the arbitrage window.

Turning to the outlook for TiO2. We expect to see continued strong demand for our functional TiO2 products across all regions and demand for our specialty products to recover more slowly into textiles, personal care and automotive.

We expect sales volume in the second quarter to be similar to the first quarter as we restore production to pre-pandemic levels. However, inventories at the end of the first quarter was slightly lower than our expectation, and additionally, we continue to manage supply chain challenges, both factors could limit our upside.

We expect that the second quarter will bring further price capture across all regions from our second quarter selling price initiative. In the second half of 2021, we expect to incur some headwinds on feedstocks as a result of continued tightness in the feedstock market.

In addition, we expect energy costs will be unfavorable due to rising prices. We expect to manage our margins through further TiO2 price increase and pass these higher costs on to our customers.

Turning to Slide 5, on Performance Additives. Adjusted EBITDA improved by $8 million compared to the prior quarter and $1 million compared to the prior year period.

This is primarily attributable to further recovery of demand and benefits from our 2020 business improvement program. In the first quarter, we saw further demand recovery for our functional additives products across automotive, electronics and coatings applications.

Our color pigments business continue to display strong demand, especially in European construction and coatings within Europe and Asia Pacific. Timber treatment demand has been robust, as a result of positive home improvement trends in North America.

Average selling prices were flat year-on-year and declined by 3% compared to the prior quarter. The decline in prices compared to the prior quarter is attributable to product mix, as it relates to seasonal demand for certain products.

In the near term, we expect to see favorable business conditions continue with demand remaining strong for all businesses. Shipping costs and supply chain challenges continue to be managed and monitored.

However, we expect to mitigate increased shipping costs with price increases to maintain our margins. We recently signed an agreement with Feralco Group to sell our water treatment business, which is part of our Performance Additives segment for $6 million cash.

We expect the transaction to be completed during the second quarter of 2021. Turning to Slide 6 on our cost programs.

Our cost reduction programs remain on track, and restructuring costs continues to be in line with expectations. In the first quarter of 2021, we delivered incremental savings of $9 million, which brings total savings to date to $25 million from our 2020 business improvement program.

As we look to the remainder of the year, we expect the timing of savings to be uneven. Temporary COVID savings realized in 2020 will roll off and will be replaced by new 2020 business improvement savings.

This should be most noticeable in the second and third quarter. Kurt will provide commentary of our financials before returning the call back over for some concluding remarks.

Kurt?

Thanks, Simon. Let's go to Slide 7.

In the first quarter, total adjusted EBITDA declined $8 million compared to the prior year period. The decrease was primarily attributable to an increase in cost of goods sold from higher raw material, energy and shipping costs, partially offset by benefits from our 2020 business improvement program.

Improvement in revenue was due to the favorable impact of foreign currency translation, which was offset by a similar foreign currency impact on cost of goods sold. Compared to the fourth quarter, total adjusted EBITDA increased by $24 million, primarily due to an 11% improvement in sales volumes as well as benefits from our 2020 business improvement program.

This was partially offset by higher raw material energy and shipping costs and the conclusion of our COVID-19 response program. Turning to Slide 8 on our cash flow considerations.

Free cash flow was an outflow of $30 million in the first quarter, which represents a $55 million improvement compared to free cash flow for the prior year period. The improvement compared to the prior year was primarily driven by lower capital expenditures and working capital use.

We are running the business today with considerably less inventory and the timing of certain feedstock payments naturally landed in the second quarter. We exited the quarter with a healthy cash balance of $187 million and $247 million available under our asset-based lending facility, resulting in total liquidity of $434 million.

Guidance for our 2021 cash uses remains unchanged. We expect capital expenditures to be in the range of $75 million to $85 million, as we invest in some modest discretionary projects that support future growth.

We expect cash interest to increase from 2020 as interest is due on our $225 million bond. And although we remain focused on our cash conversion cycle, and we expect working capital to be a modest use of cash in 2021, consistent with price inflation.

We are engaged in a triannual valuation for our largest pension plan. And once complete, we will provide a further update.

We are hopeful that this will lead to lower contributions. With that, I'll turn the call back to Simon.

Thanks, Kurt. We remain encouraged by the improvement in TiO2 industry fundamentals over the last quarter.

Demand has been strong. Inventories are generally low.

We continue to see a pullback in Chinese exports, and we are capturing selling price increases from our first quarter initiative. Looking to the second quarter, demand continues to be strong for our products, and our order book is healthy.

We are increasing our production levels and managing customer demand while implementing initiatives to maximize utilization rates of our current TiO2 effective capacity. Our customers are experiencing the continued benefit of our customer-tailored approach.

And our second quarter selling price initiative will bring further price improvement across all regions. There has been a good recovery in demand for specialty product sales in the first quarter and should continue to gradually improve.

Our Performance Additives segment continues to perform well, delivering strong results. I would like to add that these businesses are very cash generative.

We expect to see favorable business conditions continue across all businesses, within this segment in both the near and medium term. We are making good progress and remain on track with our 2020 business improvement program, which we expect to further strengthen our cost structure and deliver $55 million of annual savings by the end of 2022.

Our free cash flow continues to receive maximum focus and attention. Our entire organization is working hard to reduce cash uses and improve cash generation.

We continue to receive questions and inquiries about environmental, social and governance matters. I am proud of our efforts in this important area, and I'm delighted to announce that the next few days, we will publish our first sustainability report as a stand-alone public company, entitled Expertise In Action.

This report showcases our efforts and performance in key areas to innovate solutions for a more sustainable future and highlights our focus on resource allocation on selected products, technologies and markets that will deliver long-term success. As I commented earlier, we recently signed an agreement with Feralco Group to sell our water treatment business for $6 million cash.

This divestiture enables Venator to unlock value from a noncore business. Feralco is a leading manufacturer water treatment of process chemicals and a more natural long-term owner of the business, which will benefit its customers and associates.

We expect the transaction to be completed during the second quarter of 2021. With that, we thank you for your interest in Venator.

I would now like to open the call for questions.

Well, thank you very much for your interest in Venator. Apologies once more for the glitch at the start of the call.

We look forward to speaking to many of you throughout the quarter at any upcoming conferences. Please feel free to reach out to Kate with any additional questions.

And I hope that you and your families continue to stay safe during this press period. Thank you very much.