Q3 2019 Earnings Call
Good day, and welcome to <unk> third quarter earnings call.
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Thank you Brett just good morning, everybody I enjoy personnel director of Investor relations preventative or material.
Welcome to that of course third quarter 2019 earnings call joining us on the cost there Simon Turner, President and CEO , Kurt Ogden Executive Vice President CFO .
This morning, we released our earnings for the third quarter 2019 via press release and hosted the release and accompanying slides for web site at <unk> Dot com.
During this call we may make statements about projections or expectations for the future.
Statements are forward looking and while they reflect our current expectation they involve risks and uncertainties are not guarantees of future performance.
You should review our filings with the FCC for more information regarding the factors that could cause actual results to differ materially from these projections or expectations, we do not plan or public 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 and 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 at this time.
Thanks, Jeff and good morning, everyone, let's begin on slide three.
The macroeconomic challenges the subsequent uncertainty experienced in the first half 2019 assisted in the third quarter. Notwithstanding these headwinds most of which are beyond our control then it's all delivered $50 million of adjusted EBITDA and I sense of adjusted diluted earnings per share.
Turning to slide four and lots of titanium dioxide segment.
In the third quarter ought to take them Dockside segment generated $51 billion of adjusted EBITDA compared to $75 million into third quarter 2018, the average theater to selling price declined 7% in local currency compared to the prior year, but remain stable on a sequential basis for the second successive quarter.
This was primarily a result, managing else Oh supply network and I would tell you that customer approach to reduce price volatility.
On a year over year face this prices for functional tier two products for most impacted in Europe , which was the highest priced region in the prior year period.
As expected prices in New York shifted downward. So that's the most stable North American region, and we exited the third fourth with average prices in Europe below that if the North American region on the U.S. dollar basis.
Prices in Asia also moved lower compared to the third quarter 2018, driven by weaker demand primarily in China.
North American prices remain the most stable globally average T O two prices remain stable compared to the prior quarter, though.
Specialty Theo to pricing has remained more resilient when compared to functional T. O two products in the third quarter pricing was stable compared to the prior year period.
Modest de stocking in certain products related to trade uncertainty Nonetheless, the relative demand stability in pricing dynamics underscore our commitment to transferring production from party to other sites and on that work ultimately strengthening our leadership position to these high value application.
Titanium dioxide volumes increased 12% compared to the prior year period on broadly across applications and geographies.
The increase was primarily results have increased sales of new differentiated products improved availability of certain products on high demand compared to the prior period, which was significantly impacted by customer inventory reductions.
So to volumes decline compared to the prior cost at the high end about average seasonal range on broadly across and use applications, including coatings paper and plastics.
The regional trends impacting the T O two industrial well defined here are some additional comments by region.
As mentioned on prior earnings calls in North America, we set out T O two primary to smaller customers on into non slurry applications demand normalized in the third quarter 2019, I was supplemented by increased sales of new differentiated products.
The average tier twos selling price in North America was stable in the third quarter compared to the prior quarter, which reflects our sold out position not a manufacturing sites in Lake Charles and I'll tell you that customer approach aimed at reducing price volatility.
Asia remains a significant consumer of tier two and an important global market for the industry on this highly fragmented.
Demand in China remained weak in the third quarter no demand in Asia, Excluding China was comparatively stable.
I would it be prices in age was stable sequentially, reflecting our differentiated market position in the region. Our exposure to Asia is comparable in size to our position in North America on limits its why manufacturing facility in Malaysia, and supplemented by exports of specialty and differentiated tier two to the region.
Europe is our largest market for tier two and accounts for approximately half of the segment's revenue.
Compared to the prior year period volumes in Europe increased modestly benefiting from higher sales of new differentiated products and improved demand compared to the third quarter 2018, when customers reduce the inventory levels.
As mentioned earlier in my remarks, the average T O two price in the European market declined compared to the prior year quarter, but remain stable on a sequential basis.
In the third quarter, we incurred higher variable cost inflation, including high raw material costs, which were mostly from high grade or on a negative contribution with lower fixed cost absorption as we manage our production network.
These headwinds were upset by 6 million dollar nonrecurring benefit from a change in plant utilization rates, which increased our overhead absorption on corresponding inventory valuation on a 5 million dollar benefit from up business improvement program.
Notwithstanding that some precious unexpected seasonal headwinds longest MTO to industry fundamentals remain favorable we are focused on enhancing our specialty tier two portfolio on delivering the benefits of our business improvement program, improving our competitiveness rabbits there to cycle.
I will provide more comments on the outlook shortly.
Turning to slide five on performance additives.
Revenues declined 10% compared to the prior year period, driven by 9% decline in volumes, a 2% unfavorable impact from foreign currency had a 2% headwind for me.
Yes, the upset by 2% increasing the average selling price I will provide some additional comments on the three main businesses within performance additives.
Pigments volumes were primarily impacted by lower demand for products into construction related applications in North America on lower plastics demand.
The impact from low volumes, there was offset by higher average prices, which primarily reflects the partial pass through of tariffs related to current U.S. and China trade policies.
We benefited in the quarter from a price self help actions and expect to continue to benefit from these ongoing on aggressive cost and operational enhancement efforts in 2020 .
Timber treatment volumes declined compared to the prior year period, primarily due to lower sales to a large customer as a result of a loss tenda in the third quarter 2018.
The average selling price increased slightly in the third quarter due to the mix of sales within the business.
In the fourth quarter, we will love this year over year volumetric headwind on the impact will be substantially muted.
Functional additive volumes were negatively impacted by weaker than expected team on automotive and electronics applications due to the continuation of customer Destocking in these channels, we expect weaker demand conditions to continue.
The performance out of sub segment generated $13 billion of adjusted EBITDA on the quarter.
Up $1 million compared to prior year quarter on a sequential decline of $3 million.
The muted year over year growth in EBITDA was primary due primarily attributable to higher pricing and lower costs, including the benefits from our business improvement program and offset by weaker than expected sales volumes, resulting from the headwinds I described earlier on principally due to lower volumes in our functional additives business.
In the third quarter, we had a 2 million dollar nonrecurring benefit EBITDA from a change in plant utilization rates, which increased our overhead absorption.
The past two years, we have taken meaningful steps to streamline our cost structure within each of the businesses.
In light of most of your market forces, especially within automotive and electronics end uses we are tempering our estimate for segment profitability.
We now expect performance, obviously as EBITDAR in 2019 will be less than the $62 million EBITDA generated in 2018.
We conducted a come comprehensive preview of color pigments business in the third quarter.
Hazardous, though we have identified meaningful self help measures that are intended to improve the profitability of the business over the next three years by approximately $10 million for a similar amounts of investment.
The improvements we have identified or a combination of cost savings on efficiencies and are incremental to 2019 expected results. We believe these actions will augment the competitiveness and cash generation of the color pigments business.
We believe there are synergies or the complementary portfolio of offerings to provide a global and diversified customers. The color pigments business has attractive organic and inorganic growth prospects and actions, we have taken and plan to take will further optimize its cost structure and reinforce the free cash flow generation.
In the interim we continue to engage with those parties, who have expressed interest in acquiring the business.
To enhance shareholder value, we retained 50 as a financial advisor to explore potential sale. If the color pigments business. The process is ongoing and therefore, we will not be providing more commentary on them.
With that I'll now pass the call that's occurred to discuss our financials I will then return to provide comments on the outlook good.
Thanks, Simon, let's turn to slide six 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. The cost an operational improvement program and is designed to generate 40 million of annual EBITDA benefit through an improvement in CIO to manufacturing efficiency.
Sees a reduction in SGN, eight 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 third quarter 2019, we captured an additional 8 million EBITDA benefit from our 2019 business improvement program.
Year to date, we have realized a cumulative benefit of $15 million.
We have accelerated the capture in 2019 and currently expect to generate more in the fourth quarter well ahead of our original forecast of more than 10 million for the full year 2019.
We're pleased with the execution today and are confident in our ability to deliver the targeted benefits as promise pets.
Let's turn to slide seven.
In the third quarter total adjusted EBITDA declined $27 million compared to the prior year period.
Most of the decline was attributable to the lower average selling price in our titanium dioxide segment higher raw material costs and lower fixed cost absorption, partially offset by an 8 million dollar nonrecurring EBITDA benefit, resulting from a change in plant utilization rates, which increased our overhead.
Net absorption in corresponding inventory valuation in the third quarter at 2019.
Notwithstanding lower volumes in performance additives further recent Simon described earlier sales volumes were a net positive as a result in increased sales of new differentiated tier two products improved production at certain facilities and higher demand compared to the prior year period.
Benefits from our business improvement program. We're also manifest as we continue to deliver ahead of target on our aggressive improvement initiatives.
Compared to the prior quarter total adjusted EBITDA declined by 11 million seasonally lower sales volumes in tier two and performance out it is where the largest contributor to the sequential decline.
Pricing was stable in raw materials, or a modest headwind, though more than offset by an 8 million dollar nonrecurring benefit due to change in plant utilization rates, which increased our overhead absorption and corresponding inventory valuation I.
Additionally, we continue to benefit from our ongoing business improvement program, which offset a modest headwind from FX and others.
Turning to slide eight and our capital resources.
At the end of the third quarter net debt totaled 713 million and our net leverage ratio was approximately 3.3 times, our trailing 12 month adjusted EBITDA.
Total liquidity was approximately 325 million at the ended the quarter consisting of 40 million in cash and 285 million an undrawn availability under our asset based revolving lending facility. We do not have any significant debt maturities until 2024.
We continue to enjoy relatively low cash tax rate. This is primarily a function of the countries where income has generated and the 1.1 billion in net operating losses from which we continue to benefit.
Our tax expense is significantly affected by the next of income and losses in tax jurisdictions in which we operate and valuation allowances in certain jurisdictions.
Beginning in the second quarter of 2019, we applied a normalized adjusted effective tax rate, which better reflects the current weighted average tax rate applicable under the various jurisdictions in which we operate.
Therefore, we expect our 2019 adjusted effective tax rate to be approximately 35%, which is higher than our long term expected adjusted effective tax rate of 15% to 20%.
Our 2019 cash taxes will be less than 10 million and our long term cash tax rate guidance of 10% to 15% remains in effect.
Total free cash flow in the third quarter was a use of $5 million and does not include $15 million a proceeds from the opportunistic monetization a three cross currency interest rate swaps that were in the money.
We concurrently entered into three new cross currency interest rate contract converting 200 million of our.
You asked denominated debt into your as these new contracts have the effective reducing our weighted average cost of debt and utilizes more effectively our euro denominated profits. Additionally, annual interest savings are approximately $4 million per year or approximately 20 million.
Dollars through maturity in July 2024, compared to an unhedged positions.
Our updated outlook for 2019 and preliminary view of cash uses for 2020 are as follows.
Our forecast for Capex in 2019 has been reduced to approximately $115 million and does not include approximately $40 million Pori related gap Capex. As previously stated we will remain vigilant with our capex budget without compromising the integrity.
Or operability of our assets.
Our preliminary outlook for capital expenditures in 2020 is less than $100 million.
Excluding pori related Capex and we can reduce this outflow further should market conditions warrant.
The outlook for cash interest is unchanged at approximately 45 million and cash taxes in 2019 are forecast to be less than 10 million.
For 2020, we expect cash interest to be between 40 to 45 million.
We have reduced the 2019 estimate for cash restructuring payment to $25 million to $30 million.
In 2020, we expect this to be approximately 20 million as Simon mentioned, we have identified $10 million a self help in our color pigments business. We anticipate anticipate the benefit of this new probe program to be cash neutral in 2020 due to a working capital release, which will offset the cost within that year.
Cash pension and other expenses in 2019 are unchanged and are expected to be $60 million to $70 million.
Working capital was a modest source of cash in the third quarter of 2019.
Based on the current tier two industry outlook, we expect to deliver a working capital reduction of 15 to 30 million for the full year 2019 compared to 2018.
The change in our working capital forecast as a result of the change in plant utilization rates, which increased our overhead absorption and corresponding inventory valuation.
We recorded an EBITDA benefit in our third quarter 2019, and therefore on a net basis the impact on cash is unchanged.
We will provide an update unexpected change in working capital for 2020 on our fourth quarter call.
Finally, our reporting related expenses are expected to total 65 to 70 million in 2019, which includes approximately 40 million of capital expenditures.
We have spent $55 million thus far in 2019.
The cash spend a poor is dramatically slowing down and we expect pour a related expenses to be less than 30 million in 2020.
We recognize the importance of returning to positive free cash flow and are intensely focused on reducing our cash uses in the near term. We expect to provide an update to these preliminary 2020 cash uses following our fourth quarter earnings call early next year.
With that I'll turn it back to Simon for concluding remarks.
Thank you could I'd like to provide some comments on the outlook before I summarize and open the call for questions.
Turning to slide nine.
In the fourth quarter, we expect the challenging economic backdrop to continue volumes are expected to reflect historical seasonal cottons I'm not compared to a weak fourth quarter 2018. Additionally, we expect some pressure on margins us be contend with high raw material costs on an incremental headwind from lower fixed cost absorption.
The planned maintenance on reduced operating rates consistent with managing our production on inventory.
Longer term tier two industry fundamentals remain favorable.
So two industry inventory levels are normalized and capacity additions are well understood on in line with normalize industry growth rates.
So continues to be focused on maximizing value for shareholders through the following.
We are committed to our tell you that customer approach by which we actively manage our production network and inventories along with the input staged implementation of a more diverse range of customer agreements. The net effect reduces price and volume volatility evidenced can be seen in a more stable 2019 pricing on higher.
All comes due to increased sales of innovative new tier two products. We're on track with the phase transfer of our specialty Theo to technology from part these actions will strengthen our leadership position in these high value in most stable applications.
We have accelerated the delivery of our business improvement program evidenced by having delivered $15 million of EBITDAR improvements here to date, we are intensely tends to be focused on delivering the remaining cost and operational efficiencies as promised.
We have also identified $10 million of incremental EBITDA benefits, so our color pigments business to improve the profitability of the business over the next three years.
We are intensely focused on reducing our cash usage and generating positive free cash flow compared to our prior expectations. We have taken meaningful steps to reduce our 2019 expect to cash outflows evidenced by a reduction in capex, our preliminary outlook for 2020 signals a significant reduction in cash usage.
Pads to 29 team and we remain focused on further reducing the spend.
We are fully committed to maximizing shareholder value through active portfolio optimization, which in the near term includes exploring the potential sale of our color pigments business.
With that we thank you feel continued interest invented so I would now like to open the call for questions.
We will now begin the question answer session to ask a question you May press the Star then one.
If I didn't answer your question is been addressed.
Your question. Please press Star then Jim.
This question.
Kevin.
Deutsche Bank. Please go ahead.
Thank you good morning.
So I mean first on the pigments good morning.
Why this business and not a functional additives and timber treatment wanted a what makes them more strategics you longer term and color pigments.
Well I think it's important to note David that on previous calls we've always said that we opened two routes that create shareholder value.
Weve often try to characterize the three main components of our.
Additives business on let's recap.
Color pigments, a range of smaller factories somewhat allied to our main CEO to offering with that products, namely blue red yellow black pigment.
Second the timber treatment franchise, which is a separate from our cost. So two franchise. Both in terms of strategy on and also in terms of practicality very much a standalone us denominated business and finally outperformance additives franchise, which is.
Couldn't be more different September end that it's highly integrated into our choose big Germany clones. So.
The way we would see it is the functional outlets is very much aligned to operations I'm swatow to offer so very much palm parts of our coal business.
Frankly.
Tim the business, where we to see.
Interest of inquiries as we've mentioned around our color pigments, we may well consider that we were open to whatever would create shareholder value.
But we talking specifically in this kind of our color pigments business. Thus the business that we've seen the subject of a range of inquiries, we've decided to run a formal process by matched up against what we now believe we can do to improve that business than the 10 million dollar incremental improvement from program, which we mentioned that I'll.
Wow.
Very helpful and just lastly, given some stabilization MTO through pricing as we speak right now what's your outlook for tier two prices in 2020.
Well I think you know, let's start with a stabilization piece that David I mean, if we look back we had this industry had a demand shock in the second half of last year. So the tune of around 25% on demand.
Nothing like we've seen in this industry other than in 2008 nine and this particular case of course this tough challenging demand profile has continued pretty much all through 2019 I think most people can see was a very challenging demand periods. These past 18 months.
During this period, we have remained absolutely committed to the stabilization program. The tellez customer approach. The two components the range of contracted activities on the moderation or use of our circuit.
Despite raw material cost going up in the period, despite suffering fixed cost absorption, we stuck Tata and we have seen yes, another sequential price flop donato to business and I hasten some.
Inventories are at a very manageable an appropriate level just around the 50 day Mark. So I think is very important to note that we're very committed to the stabilization we see us Similarly committed on a go forward basis in 2020 , it's too early to coal pricing, specifically, we would acknowledge that could be a range.
Outcomes in 2020 as we go through this end year budget cycle.
Cost the tough macro could continue uneven Dawson of course on the downside on the other side, we have succeeded in Venice on putting a floor at a high level or not yet to prices, we have to our inventories at a good level.
I believe that there's very limited stop right through the chain now across the industry and across our customer base.
Any fresh glimmer of demand here I wish you can make a positive case.
We'll see a pull through in demand and at that point with a deceleration of raw material increases I think we back into opening up margin territory. So we want to call in terms of time of course, that's what we're off to does need some improvement in demand, but we're very well stuff.
Thank you very much.
The problem.
The next question comes from Josh.
Yes. Please go ahead.
Yes, Hey, guys I was wondering if you just provide some more detail around the inventory markets.
Utilization rates have moved pretty material over the past year, but as the first time you guys. That's kind of called it out as nonrecurring just wondering if it's the size of the adjustment or if it's kind of a makeup adjustment for multiple quarters, just trying to think about how it fits in with kind of a forward look here.
Yes, Josh this is current thanks for asking the question, perhaps we can provide a little bit more clarity on that.
We do continually look at current and expected utilization rates and those assumptions feed into our standard costing outputs.
And as we have done that here recently, there has been a material enough change.
We have updated those assumptions for our standard costing and because of the size of the change that's why we called it out.
So this is not something that we would necessarily expect to reverse its baked into our standard costing going forward.
And that any future changes in the assumptions I would expect to be pretty minimal and would not expect him to highlight the way. We had tried to provide transparency for you during this quarter because of the magnitude of it.
Okay. So looking at for Q, if rates remain relatively high I mean, you'll have a seasonal decline you still expect that to be kind of baked into the normal cost of goods at this point.
Right.
Yes, it will continue to be baked in Thats correct, Okay, and just on operating costs. If you can kind of give an outlook on a forward basis into fourq, you and perhaps in the 2020. Just curious if you have you kind of incrementally or you think raw materials and perhaps other costs look like on that we should think about in delta.
Yes, that's Simon has let let's let's take that question a couple of process talk about full Q.
We called out very early in the year, a 40 million dollar headwind on rules.
We spoke a number times around the preponderance of not being related to our largest spend item, namely feedstocks and all those.
Roughly three quarters of stop.
We said that about two thirds of that headwind would occur in the front off on so we get a deceleration effect. So that should help you kind of dimension, what we're talking around in terms of single millions singular millions in the fourth quarter.
Turning to 2020 , we're not willing to comment yet on the direct cost outlook.
We don't see fundamentals that points to improved direct cost increases we've seen traditionally a lag between raw materials into prices that has come down Decelerations I've. Just mentioned, we don't see any fundamental reason in the supply demand fundamentals that we should be on boarding rules next year, but.
Frankly, we still have to go through a number of discussions and negotiations to be able to comment more fulsome lean definitively on.
The only other area I pick how on costs is in any business of this type continues to.
To combine inflationary and cost of living type incurrence.
Our response is very much about taking masses and our own han's. The VIP is now tracking a $15 million three quarters in US ahead of the target in terms of acceleration on the on pace and we've dug out what we're digging out another 10 million in the color pigments area. So thats, our prime response to the fixed.
As part of our structures hope that's helpful.
Yes. Thank you.
The next question is from Duffy Fisher with Barclays. Please go ahead.
Yes, good morning.
Question first question joins around Cory.
Good I want to understand better that the cash outflow 2019 in 2020 kind of in two buckets. So bucket one just the cash cost just shut the plant down at a remediated and bucket two would be the cost incurred in moving some of that finishing equipment to your other plans.
And then when should we expect that to actually start adding to EBITDA.
Certainly let me go ahead and.
And tackle that so what we have identified if you if you reference slide number eight in our presentation materials, let's just break out here.
The difference of where we see pori related cash items.
So you have a pori cash expenses line. There that is 65 to 70 million estimate for the full year 2019 that has included in that $40 million of Capex associated with the wind down.
Of the projects that we had the bulk of that was span early in 2019 and now as we go forward. We are spending on though the a the exit a pori itself now as it relates to the transfer tax.
Knowledge.
Embedded in our capital expenditure ROE a up above in the 115 million full year 2019 number there is approximately $15 million of Capex included there to accommodate for the investor.
Amend and the rest of our manufacturing network to produce the the specialty products that had been moved out of Corey.
Now as we go into 2020.
We have successfully transferred many of the product grades out of pori into the existing network that would include product grades such as specialty inks.
Cosmetics.
At fibers.
And so we will see those benefits in 2020. It is worth noting of course that the economics that we have in 2020 and right now.
They are a little bit different than what we had certainly back in 2018.
When we were originally planning on moving that product out to the rest of the network.
But the bulk of the pounds have been moved out we'll see that benefit in 2020.
Okay.
And then just a second question on T. Rowe to volumes.
Up 12% for you guys can you at least Directionally talk about did most of that improvement come in functional differentiated or specialty.
Yeah, I'll pick that up Duffy. So just remember the context here at 2018 was quite a disappointing year the industry level demand being down globally by let's say about 6%.
So you know tuck in 2018 coming into 2019 part of our response, along with the value stabilization meshes. His introduction to innovate innovative new products. If you think about step up that you've talked about that I would think about half the stop being in the form of new products in the different.
Jay to plastics and coating segments, both chloride on cell site.
In terms of the rest we are a European sensus revenue base. So you can pro rata.
Yes.
Maybe would be a European drill, but it's not fundamentally driven by specialties.
Great. Thank you guys.
I think I think.
Yes.
The next question comes from John .
Capital markets. Please go ahead.
Thanks for taking my question guys.
With regard to the color pigments business can you just update us on what the trailing 12 month EBITDA was from that business.
So John this is this is Kurt we haven't broken that out in our public disclosure. However, what we have said is that within the performance additives segment. There are three business units color pigment.
Functional added as and timber treatment each one of those represent approximately a third of the total segment EBITDA.
Okay and that hasn't changed over the last year, So I assume.
No. It's approximately it's a it's right around that.
Okay and then.
I guess, if you do go down the road of of monetizing that asset, which it sounds like it's certainly possible.
It would we be correct in assuming that you can protect those proceeds.
With the help of your I know wells if that is that correct.
Yes, that's absolutely correct. So we see very minimal tax leakage should we end up.
With a deal where we end up monetizing the.
The business itself.
And I would also say that that's also in part because we had a pretty high tax basis for color pigments short short and all that makes sense and then I guess last question. Just I know you are still kind of in the throws of the of the Tronox lawsuit I guess, if you can give us any update on the timing there and you road markers that we should be that we should be aware of that would be helpful.
Yes, the Simon here, so, let's let's recap the from our perspective, the $75 million break fee remains due and payable from China.
FFO, which is under the exclusivity agreement, we with with vessel.
So you know despite the Tronox excuses, we hit for the failure to pay we continue to believe we acted in good faith Little times.
To reach not definitive agreements to purchase the Ashtabula side. So we believe any counterclaims run founded.
What we can say too that you have the costs now set of trial date for March 2021, and we look forward to a pressing our claim at that time and that should give you that kind of like set itself the runway that.
Great. Thanks, very much for the update.
Okay.
Next question. The next question from Steve.
With Bank of America. Please go ahead.
Yes. Good morning News just wondering what your interest level is in pulling forward.
In a debottlenecking opportunities at Lake Charles.
Yes look coming from up from our standpoint, we would always take a look at anything that made sense from a de bottlenecking standpoint.
You know on that.
We would consider that with our father of the time.
But I think it's clear to us that we're not talking about here is the.
Expansions or capacity of any scale.
Because you have economics don't justify but yet we have a look at lake Charles or indeed any of our plants, where we felt there was a case for de bottlenecking oil well, what we will capacity creep.
And Simon can you talk a little bit about your your key customers by end market and which ones do you have some visibility into their tier two inventory levels.
Yes, I think it's a we are not participate three in slurry in the United States as most people know and relatively high proportion of distribution occurs via that route in the United States. So we believe.
Continue to believe that's you know we've got quite good visibility, even though we're not in it for the amount of pounds. The stuck in inventory in the U.S., which I would say as it provides us a relatively low.
The feedback from our customers is that their levels of inventory on normal to low as as I always are in fact in Europe of course, we do have a much better visibility because of our position and position ASCO with customers on we have a solid.
Transportation delivery method in trucks.
In Europe , which we participate in I wish we pioneered a number of years back and in that area with product. Similarly go into fixed silos.
There is limited ability to build inventory. So I think what we're saying here is in the western World here, and particularly North America and Europe , We would contend that we got relatively good visibility on that the levels our normal cielo.
Thank you.
Your next question comes from Bob.
With Goldman Sachs. Please go ahead.
Hi, This is Anthony walk on for Bob.
On a mappings pigment segment, you highlighted kind of $10 million cost optimization opportunities, what's the timeline to achieve those benefits and how should we think about those flowing through the PML potentially next year.
Yes, so I'll take that so.
The way I would think about this is $10 million the bulk of which will be delivered within the first two years, that's how I would think about not.
Faced in a way that the cash outflow, the restructurings or any monies we spend.
Get taken care of along the way on that on a net wash basis.
Okay. That's helpful. And then all the volume side for Joe to can you just call. It any market share shifts that you may have experienced by region during the quarter and maybe just some additional color on the regional variations in price should experience. Thanks.
Now, let's take the chef think things first I mean, obviously from our points of view I mentioned earlier in the coal we remain committed to our tailored customer approach.
So what we all know, noting here and you've seen in this past third quarter, we had a high end of the range seasonal decline in volumes.
That was as we expected to achieve we do not believe we Ganesha, we do not believe we lost share.
We expect to see that again in the fourth quarter, we expect to see that type dynamic.
So we believe that net of some limited product new product introductions, which clearly enhance our specialized experton differentiated approach with customers.
We are a kind of net neutral on market share. We do note of course that this past third quarter that has been a ramp up in the in competitive activity in some segments, notably in plastics.
So despite what others may say in that segment from our perspective in the third quarter Weve NIE. The gained no lost and we put back down to the fact that we compete always at the highest technical end of the customer requirement.
We see nothing of notes in the coatings or other segments.
Hi, geography, I think the Taylor for years being largely unchanged us being the best in the most stable Europe has been stable for the very nominal growth to flat type of environment in Asia that we've seen in this third quarter.
A softening on some downward pressures coming in as we see a little bit more of a ramp up of Chinese exports I would remind everyone still though that Chinese exports here to date of the end of the third quarter saw still only slightly ahead of weather, where this time in 2018 in fact as being significant reductions in both Europe .
On North America here today. So those are the kind of start to pick out by region just to add that our specialty business.
No.
We've seen some good robustness in terms of demand and pricing on a year on year basis, as we would expect to see.
[noise].
Your next question Francesco we can move to the next.
Yes, okay.
Vincent Andrews with Morgan Stanley . Please go ahead.
Hi, This is Steve hands on for Vincent.
Last quarter, you guys made a comment about about kind of underlying demand being maybe up in that 2% to 3% range in 2020.
Yeah, I called out you know ongoing macro issues. It really are there any updates to that so that you or should we still be thinking about it in that kind of range and would you expect to kind of outperform our or underperformed that.
Well look you know I think as we said we are still contemplating a range of outcomes on a go forward 2020 basis, we haven't finalized our position as we come through the year end purchasing cycle.
Clearly the macros be very challenging this year.
And others will take a view on whether that picture is set to brighten or whether that picture is set to docket and that will be a driving factor on final outcomes.
What we would say, though is given the fact weeping 15 18 months solve frankly in this segment as Bina, a pretty brutal recession from a demand points of view.
We also we all believe that we will see some growth normalizing in line with GDP.
In 2020.
So that's probably about as much as we can say at the moment.
Other than as I mentioned earlier, we think we're well set we think the chain destockings out people running a low low up some normal inventories we've got.
Lower inventory right now than we have this time last year, we've managed the inventory all the way through on the slightest.
Improvement in demand will lead to a pull through in this segment from which will benefit.
Okay. Thank you.
Your next question comes from.
Okay.
Please go ahead.
Hi, Good morning, Simon it's Eric Petered out for Peter.
Hey, Eric.
So a competitor announced that they are introducing chloride T O two credits for specialty end markets like inks and fibers traditionally supplied by.
I'll say like yourselves. So what do you think that impact is how fast do you think those customers will switch and then to tie that back to pour a special to create volume transfer what's kind of B E bike or impacts from the 30 million. That's your targeted of uplift from 2020.
Back in 18.
Yes, so thanks to the question frankly, we're not surprised.
You know off to the par incident of course, we saw one or two other producers, particularly with sulfate technology entrance of the ink space. We've said for a long time, but the specialty markets are very attractive.
For a number of reasons around robustness switching cost so full high price points. So it's not really surprised that others would see those markets as attractive.
Now I must start up costs that special CMS specialty I think you know over time, we tried to explain to people that these tends to be relatively small in terms of volume. These these are some subset.
They do have different characteristics you've got.
Five as you've got cosmetics pharmaceuticals active materials specialty inks on so for.
It's probably a bit early for us to comment on the specific case you.
Outline that but frankly, we believe for the off to get in many decades in these segments that customers are looking for CLIA.
Hi level of trust and products integrity of the products, which need to stand. The test. The time you spent money is building up relationships with these customers. These customers not conservative the cost of getting it wrong for these customers are extremely high.
Also far greater than in the functional areas and they will looked at these products very carefully. So it seems a timing I think you know that will probably be potentially depending how specialized specialty product. This can be tends to be very slow.
As it relates the party I don't think it makes any difference we have transferred as Curt mentioned the majority of our interest based technology out of party already that's one of the early assays transfers.
And we look forward to improving our position in that segment in 2020 and beyond so from our point of it does make any difference.
Just to say that we have a very active pipeline of products here, we don't spend much time on these calls talking about it but if we did we'd be talking about range of chloride unselfish products. We've launched this year on plans to launch next is just part of life as we know it when you're trying to target products into the expand to them off so we were not.
The price others would see interest in the spot market.
Eric Let me just add to what Simon has said in the original announcement in September .
2018, we indicated a 30 million dollar EBITDA benefit for a 150 million dollar.
Capital expenditure investment for the transfer of technology.
In early earlier this year, we came back and said that 60 million of that capital investment 60 million of the 150, we were not going to do and that would reduce the EBITDA annual EBITDA benefit by 15 million based on current X.
Amit conditions, we can always come back for at later on so the current our current view as you spend 90 in order to get this 15.
And so we have completed most of that however, we do need to recognize that we are in an economic environment, which is not as robust as what we would consider mid cycle.
Appreciate that color.
From my follow up question I wanted to focus and a little bit on Asia trends, what do you think costs the weakness in the quarter or is it just macro slowing or do you see inventory de stocking distributors and secondly, what have you heard from them on billions ramp up of their chloride production.
Well the second part will take first I think because we know here to talk about competitors.
Capabilities, all plans I think.
Position on that as being pretty well.
Made for these past couple of years.
That that technology tends to take longer and produces a lower outcome. The desired. It's a very tough technology to masa. So what we had heard was was only relates to what was in the public domain.
Shifting others apply to us around a number of delays a plan delays to the capacity.
As he was the first part of your question I think you know just really comes back to the macro in China itself.
Clearly some.
Gloominess in China within China, and the 10.
With the tariffs etcetera, and the impact on the customers that used to be rather than the two too.
People themselves as those people that you see the gloom.
That has increased as we come through the notes will be in the third quarter its lead to greater attempts to ship Chinese product into.
Dominantly the Asian region, and the has put some downward pressure on pricing and we have seen some gaps open up between some Chinese exports on local Asian prices. That's that's how it would characterize it and.
Again, it's a clear accounts to point to the last time. This industry had a large demand shop I can only O nine what China went largely unscathed through that down soon and that and the demand rebounded very quickly here, we're seeing a decade late that China very much of a sensor if this reduction in demand because.
The western world's be largely a low growth rates for wall and it's China has come down from its agents to six to force whoever you believe about GDP glide down. These past couple of years, there's really related to the how its thanks.
Thank you.
No from scratch.
Yes, Jim Sheehan.
Please go ahead.
Good morning, Simon are there any business synergies between color pigments and the other performance additives businesses.
And I also think you had a at filed a lawsuit sometime ago against Rockwood regarding some failed technology and color pigments, where does that stand today.
Yes, so I think that the second part will take first you know that lawsuit was filed by Huntsman.
Now against Albemarle. So you know that fast suit did not come through.
With the separation of the vendors so business from announcement on that question is best offset by Huntsman Representatives I would suggest.
The first part of the question.
Frankly, there are some applications, where we sell functional additives on color pigments together, but they are very small in nature of a synergy tends to come more with color pigments and tio to all functional additives in tier two so yes. The answer to your question is within the performance additives.
On a set of businesses there isn't a great synergy.
The color on the other constituent pop.
Thank you and on the.
Cost reductions or the EBITDA improvement the $10 million that you see in color pigments over three years.
And.
I think you've done a lot of self help already in that business slot lots of business improvement.
Programs over the last several years, what what are the opportunities that still remain in color pigments.
Look you know that we believe for US you know it was important to but somehow what the opportunity was we put a very comprehensive exercise together in the third quarter. This year and thus the opportunity for US now of course that could be a different opportunity for someone else depending on their own strategy and position.
I think these past she is we would targeting around $15 million of improvement in over $50 million of color. We come up with 10 now so that should give you a kind of flavor full the fact the of course it doesn't get easier as you go forward if it gets harder and that's a factor to bear in mind.
We think would probably get about 10 most of that pen.
In the first two years.
The reality is in this segment is that we've had market effects. These past years, which have eroded a lot of these self help benefits, but we shouldn't lose sight of the fact that right now when we look at the performance Novitas performance. It's really is the functional additives. This holding back the overall EBITDA result, where we have this continues.
Good.
Problem in predominantly FHC with the automotive in electrical him is being that that's been holding us, but rather than the color pigments franchise.
And regarding your Capex reduction what projects are being pushed out a revised spending less on capex in 2018.
So we've had we've had a hard look at the phasing of Capex in 2019.
You should see some of that reduction as spacing and more some of those choice issues that you allude to will be more coming to our 2020 bucket, where weve highlighted that we won't be spending more than $100 million on them. We do have should we choose the ability to reduce stop and at that time that would be the time to answer that question.
Thank you.
Thanks, Jim.
The next question comes from Laurence Alexander with Jefferies. Please go ahead.
Hi, This is Adam view based on for Laurence Alexander.
Was wondering when we think about performance additives volumes down, 8%, which geographies are driving volume weakness in particular and where any showing strength.
Yeah look I think your performance honest serves that business is biased to both Europe and North America on so I would say that in the construction and plastics markets, which we specifically picked outflow.
So.
Carla.
That would be Europe , and North America.
Functionalities I think it's Europe on that on the Asia, where we're seeing some losses in the automotive and electrical businesses.
Okay. Thank you and then I was wondering can you help us think about capital capital deployment in a scenario where.
The color pigments business is sold.
Yes sure. This is Curt let me take that.
And so you need to understand that our primary desire is to de lever the balance sheet. If we do sell the business.
But of course, we will evaluate options.
At that point in time.
That we do receive proceeds.
And we'll weigh optionality, specifically within the context of the T. Two cycle as well as the broader macroeconomic environment, but it's certainly our desire to to de lever here and.
It is a is quite possible that we would use a portion of those proceeds to do so.
Okay.
Okay. Thank you very much.
Your next question comes from Uh Huh.
Please go ahead.
Wanting Simon and cut.
Good morning.
A question around the sort of industries or pricing stabilization strategy.
I didn't know whether you can sort of how trachea addressed is but one of the questions that I keep getting from investors and one of the fear is out there.
Is that you know one of the large producers would then you know what is a relatively consolidated T O two space.
Walks away from the pricing got stabilization strategy and if that happens all of a sudden did is all of this incremental volume that just gets pushed into the marketplace.
I mean, you know and obviously ruins the whole sort of supply demand story. So how how would you address these fits.
So like how Sanmina I recognize the dynamic and the question and that kind of like concerned that we've heard similar from from people.
This is important as the other thing you know for me to continue to state that we will only speak on behalf of vented, So we comp and won't shouldn't speak on behalf of industry all competitive what well I can tell you though is this what we Venice told police.
And what we are doing now I think we believe in stabilization on the tale of customer approach, we've been consistently doing it and we believe our inventories of volumes on our prices all point to the fact that we have been successful we have done at a cost we have take.
Campaign, we have taken fixed cost absorption paying through pulling back on network. We have we have how to on board a significant issue $40 million of direct costs.
You know extra cost so look your house committed cost we it but we are committed to we think is the right thing. We have noted of course that others have done this type of thing in our own way.
But then subtle too.
Yes, it's clear to me, though that the Venice. So a position is we believe in it we committed to it we're doing it we don't see ourselves stepping away from it and that is being successful at having prices, which are way higher than I think we store in previous troughs and from our perspective.
We would probably say that others must be doing something because I can't see any one on their own could just just you know so outside the market. The markets. The Mark is very competitive we continue to see prices go up and down in various regions currently some pressures in Asia, but.
Thats the way, we are approaching a particularly in our western markets, where we have more control the position that influence to actually take effective steps you know where we are in very tactical small Paul the market, it's less easy to do that but.
That's not solve a late.
Understood very helpful. Now as a follow up on the Chinese side of things you know over the last couple of years.
You know we've seen some ebbs and flows in Tom's off a environmental regulations, environmental inspections and alike and it just seems that over the last couple of months you know things have gotten you know these inspections why is a little strict ever again are you seeing any curtailments a based off of that.
We haven't heard of any fresh new could settlements, we have heard of the precious and we have noted some commentary around production volumes being pulled back.
Within the third quarter in China, I don't expect the foot Stena come off the pedal anytime soon in China as it relates to sustainability measures. There's still a long way to go we've said many times that the capacity build rates of clearly slowed on or a changing but more importantly cost structures arise.
Thanks for sophisticated or the larger Chinese producers I think the Thompson will continue I just think the intensity of it will ebb and flow, but I don't see it actually going away and then if thats helpful. Awesome very much. So thanks, so much time.
President. Please go so a question and answer session.
The conference back over to Simon for any closing remarks.
Thank you very much just assays for everyone. Thank you for your interest. We appreciate that we understand that we don't get to address all the questions. Please reach out to Jeff with any additional questions. You may have and we look forward to engaging with you throughout the quarter on the road enough in fourth quarter. So thank you very much for interest in Venice.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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