Q2 2020 Venator Materials PLC Earnings Call
Good morning, and welcome to the night.
Second quarter Twentytwenty cool.
Participants will be in listen only mode.
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Yeah.
After today's presentation, they will be an opportunity to ask questions to ask a question. Chris Star then one when you're just on keypad.
So let's go to your question Please press star Big too.
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I would not after the conference GGP Snow director of Investor Relations. Please go ahead.
Thank you, Chris and good morning, everyone I'm, Jeffrey Schnell director of Investor Relations for Venezuela materials welcome to vent towards second quarter 2020 earnings call joining us on a call today are Simon Turner, President and CEO, Kurt Ogden Executive Vice President and CFO.
This morning, we released our earnings for the second quarter 2020 via press release and posted their release and accompanying slides to our web site and vendor to our core dotcom.
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 FCC for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan a 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.
It is now my pleasure to turn the call over to Simon.
Thanks, Jeff and good morning, everyone.
Would begin I'd like to express my gratitude on behalf of then it towards the individually collected about that.
Our associates over these past month.
Because of these assets, our corporate and business functions are running well well manufacturing activity continued to reliably serve our customers and our safety performance continues to improve.
Let's begin on slide three.
Then it's also delivered 37 million of adjusted EBITDA in the second quarter, notwithstanding the significant challenges caused by cobot 19.
Companywide, Oh sales volumes declined 19% compared to the prior year period, primarily as result of the pandemic, we continued to deliver on our cost initiatives, which helped mitigate the headwinds from lower demand.
As I mentioned last quarter, we have some structural advantages against the impact the Pope at 19, which helps insulate our exposure in the quarter, namely our high contribution if not fix and food packaging applications on the resilience enough color pigments timber treatment businesses.
We also delivered 18 million of free cash flow in the quarter.
Turning to slide four.
The onset of covert 19, we immediately focused on protecting the health and safety about people on the reliability of our assets. We enacted a range of safety measures that are manufacturing side. Some instructed most of our office based employees to work from home. We created a covert 19 staring group manage all critical facets of our business a meaningfully enhanced.
Communication on transparency throughout the organization.
We also took meaningful steps to improve our liquidity and made progress towards that target of returning to positive free cash flow.
Specifically, we requeue stock cash uses including reducing our expected capital expenditures to approximately 60 million for twentytwenty compared to 115 billion last year.
We maintained an aggressive stance towards managing our working capital with strict inventory controls.
We delivered 11, many enough cost benefits in the quarter, consisting of approximately 7 million of our covert 19 cost initiative on an incremental 4 million benefit from our business improvement program.
We reported 18 million a positive free cash flow through to capital working capital management, and we posted all liquidity, which at the end of the quarter stood in excess of 450 million.
We are encouraged by the phase reopening of economies across the globe and the cadence sales trends throughout the quarter.
That said, we remain cautiously optimistic on the pace of recovery I believe the pop will be uneven.
From an operational starts to close collaboration we have put our customers and suppliers and I'm Marcelo multi line production network gives us the flexibility to respond to prolonged uncertainty in the supply chain and economy.
We remain committed to improving our cost and delivering on our objectives I believe our robust response.
It didn't experienced associates and clear strategy will withstand the unique challenges over at 19 has presented.
Turning to slide five on our cost programs.
Strengthening our business and improving our cash flow was our top financial priority advantage.
We remain on track with our priority of from prudent proving out cost competitiveness.
We delivered 7 million up call that cost benefits from our cobot 19 cost initiative I continue to expect to deliver more than 20 million for the full year compared to 2019, helping to mitigate the impact of the pandemic.
We delivered for many of the benefit from our 2019 business improvement program in the second quarter and approximately two thirds of around your target a 13 million and the first off of Twentytwenty.
And we have identified 10 million of cost an operational efficiencies within our color pigments business, which are incremental savings from our 2019 business improvement forever.
Well I'm pleased with the execution, thus far we have an unrelenting focus on improving our cost competitiveness. We are currently developing other initiatives to improve our cost profile, which we expect to announce an improvement as we complete the initiatives associated with our 2019 business improvement program.
Turning to slide six an off the titanium dioxide segment.
So titanium dioxide volumes declined by 16% compared to the prior quarter within the 15% to 20% range. We provided on off this quarter earnings calls.
Yeah, I have two volumes declined by 21% compared to the prior year period.
Our average T O two price remained stable sequentially for the six consecutive quarter highlighting one of the benefits of our customer tell you that approach.
Looking at our business regionally.
On a relative basis Asia, and North America with the most resilient regions in the quarter.
A lot by Europe, which is also a largest market you too.
Europe was impacted by the most restrictive policy responses to the pandemic and therefore, the result was generally expect it.
Our average tier two price remained stable on a year over year on a sequential basis in all regions.
In the second quarter, we generated 35 million of adjusted EBITDA or not the titanium dioxide.
Compared to 55 million into Q 19 on 46 million in the prior quarter.
The impact on demand from covert 19 was the largest driver of the decrease and was partially offset by our cost reduction initiatives.
Turning to the outlook covert 19 continues to create significant uncertainty yet we were encouraged by the cadence of sales volumes through July and our order book.
In the third quarter, we expect sales volumes to be modestly better than the second quarter twentytwenty on prices to remain stable.
Oh Im on for many applications has improved we continue to see weakness in textile demand impacting our specialty tea attribute business.
This has a relatively limited impact on our total volume. However, the contribution margin is higher than our functional and differentiated tier two and therefore will adversely impact earnings in the third quarter.
Additionally, we have taken fed actions to manage our production network to better align with demand I control our inventories.
In the third quarter, we will content with margin pressures associated with reduced operating rates, albeit with a corresponding inventory reduction.
We expect the partially offset these headwinds, but the incremental benefit from our cost initiatives.
Covert 19 had a significant impact on the demand for our products and the second quarter, the timing and trajectory of the recovery remains uncertain. The actions. We are taking now will better position Bennett towards the benefit from what we believe a favorable long term fundamentals for t. attitude.
Turning to slide seven performance out of it.
Revenues declined 15% compared to the prior year period sales volumes declined 16% compared to the prior year period, and 11% sequentially, primarily due to lower demand related to covert 19.
The average price rose modestly in the quarter due to favorable product mix and I've kind of pigment on simple treatment businesses.
After demand automotive coatings and construction end use applications led to lower volumes in our functional additives and color pigments business.
We saw relative strength in demand from timber treatment business as the iwai trends in North America remains resilient.
Pricing in color pigments improve as we improved our mix and we saw a high demand for our coatings plastics on specialty and use not vacations competitive products used in nonresidential construction.
The performance additives segment generated 13 million of adjusted EBITDAR in the second quarter down 3 million compared to the prior year period.
This was primarily a result of low demand due to covert 19 on partially offset by a self help initiatives lower costs on the impact from price for favorable mix.
Notwithstanding covert 19 in the first half of Twentytwenty. The performance additives segment delivered an improvement in EBITDA compared to 2019, primarily due to our self help measures.
We are taking meaningful steps in our performance additives segment to improve the profitability of the segment.
As I previously announced we have identified 10 million of cost and operational efficiencies within our color pigments business.
Which are incremental to savings from our 2019 business improve.
I cannot see our two business the ultimate trajectory pace and timing of the recovery remains uncertain.
In the third quarter, we expect demand and pricing for our performance out of segments remained stable compared to the prior cool with differences by product an application.
Additionally, we expect margin pressure from reduced operating rates, particularly in our functional additives business as we had just stopped production and manage our inventories.
I'll now pass the call over to discuss our financials I'll then return to provide some additional comment.
Thanks, Simon let's turn to slide eight.
In the second quarter total adjusted EBITDA declined 24 million compared to the prior year period, and 20 million compared to the first quarter at 2020 <unk>.
The decline compared to both period was primarily attributable to lower volumes as a result of lower demand due to the effects of covert 19, and partially offset by lower costs and the benefit from our business improvement program and our Cove at 19 initiatives.
Turning to slide nine and our cash flow bridge in the second quarter, we generated 18 million a positive free cash flow.
This was primarily due to efficient working capital management as we aligned our production network to meet demand with a strict focus on inventories.
At the end of the second quarter total liquidity was 453 million consisting of 188 million in cash and 265 million of Undrawn availability under our asset based revolving lending facility.
We do not have any significant long term debt maturities until 2024.
On May 20 seconds, we successfully completed an offering a 225 million in aggregate principal amount as senior secured notes due in 2025.
The proceeds of the offering were used to repay borrowings under our ABL facility and for enhancing our liquidity position.
At the end of the second quarter net debt totaled 769 million.
It's timing has stressed improving our cash flow as a top priority for Venezuela.
Let me address the individual line items provided on slide our outlook for capital expenditures in 2020 remains 60 million 46 million of which was spend in the first half 2020. This is reduction of nearly 50% compared to 2019.
We generated a modest source of cash from working capital in the second quarter and expect a modest source of cash for the full year 2020.
This is subject to market conditions and other factors, but we're highly focused on managing our inventory levels.
Cash restructuring in 2020 is unchanged versus our prior estimate of 15 to 20 million.
Other cash uses in 2020 are expected to be approximately 75 million, primarily consisting of pension obligations joint venture capital expenditures and legal fees.
In 2020, we expect to we expect cash taxes to be less than 5 million and our adjusted effective tax rate to be 15% to 20% in the long term I.
Additionally, cash interest is expected to be 40 to 45 million.
Our pori related expenses are expected to total approximately 15 million in 2020 down from an outflow of 64 million in 2019.
We recognize the importance of improving our cash flow and remain intensely focused on reducing our costs and minimizing our cash uses.
We continue to assess the impact of cobot 19 on our business and liquidity and we'll continue to further address our cash uses as appropriate we.
We believe we have ample liquidity to weather, the pandemic and position venator to deliver sustainable free cash flow.
With that I'll turn it back over to Simon.
Thank you hit turning to slide 10.
Our second quarter results demonstrate the value of our customer tailored approach and execution on our self help measures our business performed well notwithstanding unprecedented global economic conditions.
In the third quarter, we expect volumes to be modestly better on price to remain stable.
We expect further benefits from our cost initiative to be offset by lower fixed cost absorption on lower contribution from especially if you go to business.
Our focus is on servicing our customers closely managing our production network and working capital executing on our cost initiatives on protecting the safety of our employees in our.
Irrespective of Cove at 19, our five prong strategy remains asphalt we.
We are committed to our customer tailored approach in both our tier two and performance Subsegments. This balance how's the anticipated effect of reducing margin volatility and improving visibility for us our customers.
We are focused on strengthening our leadership position in specialty and differentiate the tier two as well as improving the mix in our performance out of segment.
We are unwavering with our self help actions, which are aimed at enhancing our competitive position in all our businesses. We took decisive actions with our covert 19 initiatives. I'm currently are in the latter stages of delivering on our 2019 business improvement program.
We will continuously assess the need for further cost initiatives to enhance our competitiveness and we expect to have more to discuss on this front late this year.
We continue to have a relentless focus on reducing our cash usage on improving our cash free our free cash flow as Curt mentioned, we delivered positive free cash flow in the second quarter on our expected cash uses in twentytwenty will be significantly below that of 2019.
We continue to target a further reduction cash used as this year I'm beyond.
We are fully committed to maximizing shareholder value through active portfolio optimization, we plan to continue exploring a potential side of the color pigments business. However, the process remains on pulls due to covert 19.
In the interim we remain committed to enhancing the profitability of this business.
The uncertainty created by Cobot 19 have tested our resolve has not deter us from executing on our strategic priorities.
Encouraged by the phase three opening of economies, we cannot predict the timing of shape of the recovery, but expect it will be uneven recently and bifurcation. Our focus is on delivering our cost actions to mitigate the impact with the pandemic.
That's a position bennettsville to meet customer needs and create long term value for show.
With that we thank you feel continued interest invented so I would now like to open the call for questions.
Thank you very much.
Ladies and gentleman, who will now begin the collection on session to ask a question that they started one and the telephone keypad.
You are using this thesis on piece becomes more and since before.
Just on your question, Please press star and.
Our first question is from Bob Court of Goldman Sachs. Please go ahead.
Thank you hi, everyone. This is Tom once you on for Bob I'm. So first question could you just touch on T. O two demand across the North American and European and Asian markets I guess, what did demand look like across the second quarter and how do you see that trending through July and into the third quarter.
Sure I'll pick up on that and I will start with that Twoq as PEO question.
First the I think you'd I'd like to make the point the on a previous call. We a full cost of 15% to 20% of compression we came in at 16%.
We had some visibility at that time, which is somewhat more challenging in the third quarter I'll come back to that but in the second quarter. We continue to see some signs of recovery in China, but weak domestic demand and that's something was very fair in the second quarter on across Asia, much of which was in.
Locked down we saw a fairly so mix than uneven recovery in the second quarter.
In the U.S., we saw a week or architectural coatings with fairly resilient plastic.
And the Europe, we still low at him on coatings in paper with plastic holding up a little bit better. So I think we made the point on prior calls, but you know diverse product slate and all segments remix.
Gives us some sort of like protection, which we saw in the second quarter embodied in a negative 16% result, so I think that further comments, we could say about the third quarter would be that well first off we did see the cadence of sales improving in the second quarter June was.
The best month in the quarter.
And I will tell you that July has improved upon June.
We are a little bit cautious about the remainder of the third quarter on the macro issues. So hey, our biggest market and is in Europe, where traditionally have cost in August we see it about a holiday period did on some uncertainty around the September month, which is the traditional when will that be likely somewhat different this year.
In addition for US we continue to take on some stress headwind in our textile segment of our specialty business and that's why we are saying why we will see a best the sales volume in the third quarter.
It will you should think about it as modest or incrementally better.
Rather than a rapid bounce back.
I think we are seeing recovery, we are seeing the stop gradual recovery, but we shouldn't forget that we did dip quite significantly within the second quarter and obviously you know our results both on a year on year on sequential basis, a driven mainly by that volume volume Hall.
Maybe maybe a few other comments the color a in the third quarter is true to say that we do see further recovery in China.
But.
You know we should represent we should.
Not forget across but there is quite a bit of stock in the system that will be some de stocking prices dropped quite significantly in China. So there will be some attempts to rebuild them in the United States in the third quarter, we expect to see stronger recovery in architectural coatings, although in some my earlier point benefits or is not the largest in North America and we expect.
To see demand improving as construction restyle.
In Europe, we expect to see further architectural coating recovery I was evidenced in July and we expect to see plastics remain resilient.
That's great. Thank you and then second question what are you seeing from a raw material standpoint in the T. O two business across the regions have you seen any inflation in recent months are up conditions remained more or less stable and how do you see that playing out into the second half. Thank you.
Yeah, I think thats a into the answer the question isn't predominantly driven by regions, Although I will pick out from a geographic standpoint that we would acknowledge the half being some material sort of ilmenite based increases within China.
We don't <unk> ilmenite, neither do we manufacture tier two in China, but we have seen.
You know prices pickup for ilmenite in China, I'm not supposed to stimulate that further the need to get the local prices up within China.
That aside and my comments now remain reflects more global dynamics into two rather than any regional specific but you know firstly, we can confirm that outside of all feedstocks, we continue to see tailwinds.
In energy and categories, like caustic and sulfur and sulfuric acid.
And other non all material.
That is continuing and we expect that to continue through the second half.
I think as it relates to all the points being made a number at times over the years that you know that the feedstock industry tends to lag.
The T. Rowe to industry by you anything between three to six months, depending on the feedstock family. When there was a downturn in demand for tier two we've seen this backing away of nine we sold somewhat in the back half of 2018 and certainly now we've seen this unit.
I think a downdraft if demand for tier two so we would expect to see unit downward pressures on raw material tied families. You know gradually come in I'm of course current stock. We have on hand is as being subject to those headwinds of raw materials. So that's why I, just think with our customers full units.
Around our pricing talking to our customers are priced structures.
But this notes out we'd expect to see prices come off.
In the all those gradually over this next period and we expect to see a high grade feedstocks.
Come off less than that low grade feedstocks and low grade feedstocks are the ones. The ventas was more aligned with so that's a picture around the raw material.
Awesome I appreciate it.
No problem.
Thank you next question is from David Begleiter of Deutsche Bank. Please go ahead.
Hey, this is there's applying the airport. They are that's for sure. So given the cost actions and stable pricing youre expecting how should we think about incremental marketing hi.
Second half and 20, while demand recovers.
Well I think you know, let's first half say that.
In our world at the moment 21 feel so long way off so I really don't think it's appropriate at this time to be addressing I'll comment you towards 2021, but clearly you know we've gone through the midpoint of this year.
You know we have seen a 25% destock in the second half of 2018, and a 20% let's call it sort of downdraft in the second quarter of 20, so in the world Upto two demand destruction. This pretty big events in a very short period of time, we have cat our pricing.
Stable these past six quarters, and we spoke in our prepared remarks around the likelihood of being able to retain stability. In this third quarter. We are now and that would bring stability to seven quarters.
And that is because we have been very clear with our customers about.
What they expect to take from us as holding them to that what price point on not only manufacturing products and strictly controlling inventories and we have managed to bring inventories down in the second quarter and make sure that we always keep our inventory position in a in a good states.
For any.
Uptick.
So I think that's that's the outlook in the third quarter for price you can expect more price stability as it relates to rules.
I've said that we expect some of the feedstock to come off but at their at different rates and certainly non feedstock items too.
Stopped coming down so if you think about the contribution margin.
In these next in this next period it's positive.
But one shouldnt forget to cool stops it for US invented so we've got two factors that we've got a can somewhat in the third quarter. One is the fact, we do see us to an outsized pro Ross the impact on our specialty business because of the weakness in textiles, and we will continue to trim our inventories in the third quarter, we only moderate to high.
So the quarter in the second quarter now be more fulsome in the third well just so there will be some fixed cost absorption issues. We can send was we further trim our inventories in the third quarter. So you know the contribution margin not looks positive near term, but hold on to the fact that we do have some other pressures as well.
Okay, and then do you still expect a normal seasonality.
This is this year.
Yes, thats it Thats a great question I mean seasonality how does that bear on on this yet again against study as I mean, it's a pretty well no.
Seasonal sort of patent in Ti Vo too.
That over the years Twoq is being better than Threeq, you, which is being better than one can which is being better than full given that most is how it plays out.
Our active segment, we can say that half one is greater than half to as being the traditional patent and and slightly more seasonal if you like than even the CEO too. So those have been the items.
I think that we could expect to see.
In performance additives.
Cotton in the second off we're going to see some stable volumes and prices in the quarter, but into you know too I think where the havill question is we would expect to see for.
The first time for some time.
An increased volume in the third quarter as against the second quarter, So that would buck the seasonal trend at this point. It is very hard to comment on the fourth quarter. So I I shall refrain from doing so because it is such on an unusual area in any flare up so choppiness and cove it unlocked.
Sounds a regional localized lockdowns could could distort the picture. So I think those that might be the comments I prepared to volunteer.
Okay. Thank you.
Okay.
Thank you very much. The next question is from Mike Ludwig of Barclays. Please go ahead.
Great. Thanks, guys good morning.
One of my good morning.
First question on.
Thank you.
Very helpful color in terms of talking about three to volumes modestly better than Twoq, you and kind of calling out some of the.
Mix headwinds from textiles, So I mean, I guess when you kind of add these up.
Do you think Joe to sequentially should be up flat or down versus the second quarter as we sit here today.
Now the earnings level, Yes, EBITDA yep.
Yeah, I mean look you know I think that ordinary of course with.
Some modest volumetric increased you'd hope to be up realistically I think that despite the good assets a third the cost initiatives and the for the delivery of our existing cost initiatives as I should say you know the impact on the specialty because of the margin impact.
Textiles.
Combined with we've got a bit of softness in autos and our auditors segment combined with really the fixed cost absorption issue.
You are going to sort of outweigh and pulled that down.
Got it fair enough and that just wanted to clarify I think you said in the prepared remarks that there will be lower operating rates or fix higher fixed cost absorption that will sequentially hit margins is that correct.
That's correct.
And less.
Let's be clear, it's lower fixed cost absorption right. So so more costs flowing through the piano Yep Yep, sorry, I guess, just a bit confused by that because I would've thought twoq you would have been the Max Payne point in terms of utilization rates. So I mean was there some inventory mismatch in the second quarter or can you just kind of help triangulate that form.
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Sure I mean, a there's two factors that really drives that the first is that actually you know the pandemic and the lockdowns and so forth didn't all occur overnight in all geographies at the same point. So you know this situation involved these are big heavy industrial assets that needs to be planned and prepare.
Ed to be moderated we don't we comp I do that on a sort of like an event with a very short notice of this is sort of sets up phase, which means that the moderation of our asset circuit within the second quarter did not occur.
For all months in the quarter more of it occurred in sort of the may or June period than did in April.
Given the fact that we've got this ongoing.
Weakness in our textile segment for.
Specialty and given we've also got the ongoing weakness and also for a functional additives.
We have hot you should think about a third quarters being more like a full courses impact of moderation.
Plus a bit more extension of the moderation to cope with the specialty challenge and we will further trim our inventories as a result, so we will lose on the FDIC south alleged but we will gain on the cashed out of the nature, and we will position ourselves well as well. So that's the way I characterize is a little bit counterintuitive I hope.
I understand your point.
You know and while we expect improvement in the third quarter don't forget that the second quarter dipped quite significantly enough third quarter improvement isn't it hasn't taken a backup so those levels. So utilization rates are still low than we'd like them to date.
Got it thank you.
Pleasure.
Thank you. The next question is from one another examiner of Jefferies. Please go ahead.
Hi, This is a Adam view based on for Laurence Alexander Today. So my first question just around cost improvement initiatives Theres quite a few in place the 40 million recruitment program.
Savings targeted and color pigments, and then be Corona virus related savings.
If you could provide any color into.
What the more sustainable cost cuts have targeted here.
Sure look you know the.
To your point around the range of initiatives, we have three distinct buckets that we've called out in the published materials, which we talked about.
Let's start with the $40 million business improvement program to 2019 bit VIP. The activities that we have been reporting back on every quarter. This past 18 months, we'll continue I'm close as we closed 2019 and that will give us.
The full run rate of sustainable benefits in 2021, So we expect the full 40 million run rate in 2021.
In terms of the color pigments business, we will be achieving the 10 million we spoke about in Twentytwenty those will kick in from 2021, but those we see a sustainable.
Business benefit so think about the 40 plus the 10.
As sustainable ongoing business benefits.
Think about the covert savings, which we've described is greater than 20 on the chart materials. You will have noted that we delivered $7 million off in the second quarter.
We have been quite capital position. This 20 million to think about it when we first shared it with you as a sort of onetime type of benefit.
However in line with many other companies as we look at the effects of the pandemic, both near and far and we are trying to see how much about 20, we can convert from a sort of onetime benefit.
Into an ongoing sustainable Ben and that will be on amounts of that 20, but we believe will carry forward and will be repeatable into next year now we're not prepared to Don mentioned this time, but what we have said is when we come back late this year with sort of like ours.
Assessments and announcements on the further activities that we will.
Look to improve in our company our cost structures then at that time, we will confirm how much about sort of 20 is going to be sustainable on how that fits into our brought a unit program recognizing that the 2019 programs coming to an end at the end of this but this year. So hopefully that helps to look like you through that that question now that.
That's very helpful and and so my question second question is on pricing.
I'm wondering if the current pricing cycle, what the proper way to think about the interaction between raw materials and prices are.
All else equal so.
There is that a tailwind from raw materials. For example, do you expect to keep that in some sort of what is the timing around raw when they impact pricing.
Yes are we going to be a big capital about speculation about roles.
Specifics, but I can give some remarks to the I mean look in the second half in the third quarter, we've spoken about keeping prices stable.
We expect set some further tailwinds.
So there will be you know some opening up of the contribution margin within the third quarter, but you should cause forget the net margin level shouldn't forget than we have these fixed cost absorption and specialty challenges, which will eats into into our third quarter earnings, but you're quite right Directionally of course, one would hope.
To hold onto any margin opening with customers that we plan to because we have in boarded over these past two years significant headwinds.
Into our inventories and we expect in no communications and dialogue with our customers to be rewarded for that in our price. So.
That's the nature, if the dynamic which your question points Uh Huh.
Okay. Thank you very much.
The problem.
Thank you next question is from John Mcnulty Cole capital model.
Yes, Thanks for taking my question I'm. So I think earlier in the call you spoke to inventories in Asia being a little bit on the lofty side needing to get worked down can you give us some color as to how you see the inventory in the other two major regions in Europe, and ER and the U.S.
Yeah, I mean look I think from our point of view with better positions to focus on inventory levels.
In the U.S. in Europe, because we've got a much larger position in those geographies collectively than we do have in China, where we we only send in some some 10 nominal tens of thousands of specialty and differentiated potatoes, but clearly that has been a lot of weakness in demand in China has been sort of more stock built.
So we expect to see China de stocking.
Through the third quarter.
And I think that's the sort of important calibration.
Outside of China, though and as we look in Europe, and North America, I mean, we know from our own perspective and of course, we can only talk on behalf of vendors.
But we have been very very focused on ensuring that our inventories would always be at a point where should any meaningful demand improvement eventually.
Stock would not be freely available we we believe in dialogue with our customers of which there was a lot but in fact, they are not carrying.
Excess inventory.
I think in North America and in Europe.
That probably carrying inventories the off sort of down the middle of the fairway, but in some cases anecdotal we've heard of.
Some customers actually under carrying inventory and in fact, you know needing a bit more product than I expected to how from us and if we listened carefully to some of the comments made by the logic coatings.
Enterprises, both within the United States Undone and in Europe.
We have reason for encouragement here in the early third quarter.
Stocks on more of the sunlight normalized level than at any high level, which is which is somewhat different to China.
Got it now that's a that's hugely helpful. And then on the color pigments 10 million dollar kind of incremental savings program.
How much have you gotten year to date like in the end because it sounds like you expect to get the but the bulk of the benefit of the run rate in 2021, so how much how much are you actually seeing at this point.
Yes. So there is there is none of the 10 in the 2020 result.
Let's be clear about however, there were some color pigments based activities nominal number in the 40 that was a pause the business improvement program, but it's a very nominal amount.
Got it and that 10 million that you get starting in 2021 I guess.
When do you kind of flip the switch and it actually and it actually starts to really roll through how should we be thinking about that is it does it kind of January one type thing or.
Because it does seem like it's it's it's on the competent just it's not crossing the finish line yet so I'm just curious how how how and when we see that really start to kick in.
Yes, thats going to gradually build up in the 24 month. After January the one it's not going to be a so flick. The switch type of one big project that or it goes it's a number of smaller initiatives youre going to see that building up and as we as we have seen during these past.
Ever since we've been public we will breakout on share with you.
The fruits of off cost initiative labor that each and every turn out to make sure that you have a clear view of that but thats. The way I would think about that got it thanks very much like color.
Okay.
Thank you. The next question is from Steve Byrne of Bank of America.
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Hi, This is Nick washer on for Steve.
I wanted to talk about kind of Chinese market and kind of where you're seeing product. I know you talked about had domestic demand was weak and the second quarter has improved the bad similar to prices.
But we started to see some of the THQ exports into Europe. So I was just curious kind of where are you seek to exports from China going into Europe, and how that's going to impact the European market or is that slows down a bit as China demand improves.
Yeah look I mean, if there is there is no question that.
We have seen exports in the first quarter of this year.
Tick up quite considerably from China.
Based on the thought that local demand conditions have been very very weak.
And I think we saw something like over 30% increase in exports in the in the first quarter by that that has come off significantly in the second quarter Unsurprisingly.
Which means now on a year to date base I think that it's the numbers more like 15% so as come down significantly in the second quarter and the patent if those exports has been largely the same as we've seen now for some time I'd emerging economies Latin America Pos.
Brought to Asia sent some into the middle East.
Et cetera on the pattern has been more limited amounts of those products flowing into both Europe and North America. So you know we don't really see this point.
Fundamental difference.
With the exports into Europe, and North American that we've been managing these past five or six years. It's entirely manageable. Yes. There are exports, we certainly not getting over run with them. Yes, there is a little bit more chloride now.
But as demand recovers in China.
As lockdown recoveries more broadly in Asia kicking we'd expect to see that pressure you know subside a little bit it's still there's still going to be exports.
Into yes out of China, but probably normalized more on the million ton mile.
Thank you and.
Looking to three Q, you mentioned that Youre JPY, two volumes and looking to improve sequentially and prices will remain stable is this fairly consistent across regions or is there disparity there both in the price and volume side.
Yes, I mean, I think here on the pricing side I think there's no real disparity that that's let's say that.
Certainly on the volumetric site.
As we said in our prepared remarks, I mean, the USA, we start to see some real sort of like.
That said sort of recoveries being generated in the U.S. and the so called so we are one of smaller positions is in the United States. So we won't benefit from that as much as some of our larger U.S. competitors.
However, we expect to see into the encouraging the recovery in Europe continue on us to be the beneficiaries of that so I think that you know we see definitely we see some recovery in China, we definitely feel quite encouraged by what we see in North America.
We spoke about architectural coating recovery and resilience.
Plastics.
On the in Asia in China, I think they can be some slower recovery because the way the country's emerging out of locked down also having local flare ups and going back in as a little bit more spotty. So we don't see acute I'd pick that went out geographically as maybe not being quite.
Well.
Got it thank you very much.
Thank you. The next question is Christian is some Josh Spector Oh, Yes. Please go ahead.
Good morning, it's Matt Swarovski on for Josh.
Can you talk about the inventories in performance additives the supply chain there.
And yes.
Yes, if it if there was a recovery.
With the inventories I kind of be meaningful for demand recovery.
Got it is a broad.
As a broad situation.
Our inventories in most parts of that business the segments and different sub businesses within performance outages, you should think about sort of normalized now one or two differences.
The one hour takeout is in our functional additives, which which is made in Europe and.
Significant amount goes into automotive.
We will that is part of the moderation programming in the third quarter. So that would be one where we will we do need to trim a bit mall, but.
The rest I should think about normalized.
Okay.
Thank you and then you mentioned textile demand as a headwind from mix.
If things were kind of to return to normal demand patterns, how meaningful would that be to bottom line or would we not notice it.
Well what is known as the great question is a highly speculative.
Look I think the best thing, we can say Ababa is this.
We've had these ranges of challenges we've seen in this industry now, but these past two or three years.
All through this weaving absolutely unswerving on the taking that approach with our customers.
Stable pricing and lower on most stable inventory level. So.
That is a good thing that positions us well for any uptick.
We rapidly you know navigated Youve a challenge if the pandemic by a whole range of measures on our temporary actions our cash from working capital focus on capital expenditure reductions and so forth. So we did the right things that to strengthen the business and navigate through and positioned well but through this.
Industry fundamentals remain intact known knowns building any new capacity, others, we believe are moderating inventories and controlling inventories.
And at the first sign if a proper demand recovery I guess.
We can debate what normal means of course, we stand to benefit significantly.
From the upside leverage about what Brian.
Thank you.
Thank you Sir your next question is from T.J. Juvekar of Citi. Please go ahead.
Hey, Simon it's very patriotic procedure.
Higher.
Your next year or two volumes were in line guide down 16% quarter over quarter, how did that split between your coatings plastics in specialty grades.
Yes, so look I think we not we won't be prepared to break that out numerically, but we can we could probably give you a bit of color on that I think you know from a specialty standpoint, I think we made the point in the second quarter already that we have been seeing some headwinds with our specialty business, notably in our textiles and ask.
And to continue the Thats I think it's probably fair to say the of all those buckets, you mentioned that being the one that's being the most challenging I think yes, but broadly speaking I would say, where we are right now as you.
Year to date, let's call it third quarter in terms of coatings and decorative coatings. The plastics Im not sure. There is really that much difference you know.
In aggregate between the difference between the two certainly we saw in the first earliest stages in the second quarter plastics was a bit more resilient, but I think what we're seeing now in the third quarter.
His architectural coatings coming back and we have seen that you know more down in North America.
And your.
Okay, and then secondly, a few questions on portion of the 60 million Capex being spent how much of that is related to the transfer of specialty in differentiated products and then secondly, I believe you have roughly 100 million.
Project closure costs to be spent to you know after this year as to how should we think about the cadence of spend.
Yeah, Eric this is correct.
As you know we continue to try and look for ways to optimize the transfer or the remaining transfer of the specialty business out of Corey.
And that includes tackling the remaining hundred million that we have out there.
And so as we look at the spend that we have this year.
That does include a pretty good portion of the of the transfer of the business.
As well as wind down and it is a mix.
Both of those costs, but we continue to look for ways to attend to optimize that and hopefully we'll begin our will have.
The ability to whittle that that total aggregate cost down here as we as we move forward.
Thanks Kurt.
Thank you.
We'll next question is from you showed that Brian.
Global markets.
Great. Thanks for taking my question.
Just just wanted to get your thoughts I guess on supply demand given that that level of elevated inventories that you're seeing maybe in a in Asia slightly.
If there is any potential for pricing later in the year.
And also maybe you can put that in the context of raw material outlook as well. Thanks.
Yes, I mean, I think in China, We said that that we do see inventories that bill we do see destocking through the third quarter.
So.
Potentially that stuff gets drawn down during the third quarter and there is already some.
Dialoging with customers around the need for higher prices prices have fallen quite significantly within within China, and as even be some price discussions outside in broad Asia.
I think is a tough question right now of all times because as we already have said on the call. We sold accounts the seasonal in the three Q against to Q, It's distillate swap the normal way around is the other way round and frankly.
The fourth quarter at this point you'd have to be pretty brief person to sort of have.
Okay confident definitive you want to it so I think you back down to this point of we've very well point east with.
The our inventories, yes, we can get a little bit of relief on raw materials, but weve on boarded the for two years and we still discussing the need for high prices with our customers. So it really comes down to.
The first sort of like sensible point of sustainable demand recovery that we are back on that price discussion.
That's probably about the most we could say at this point and the rest is too speculative frankly.
Thanks.
Okay.
Chris we can move to the next question. Please.
I'm sorry to come online.
Disconnected up and connected now next question is from Vincent Andrews of Morgan Stanley. Please go ahead.
Hi.
This is stephens onto events and thanks for taking my question I'm just wanted to ask a quick one on your on the year over year EBITDA Bridge there.
18 million dollar benefit I think from cost of goods sold them you may ask bucket that out how much of that as raws.
Hey, just any additional color there would be helpful.
Sure.
This is Kurt so as far as Simon has mentioned, we had 7 million of co vetted initiative.
Saving.
In the quarter and that really compares to the prior year.
But a good portion of that also compares to the prior quarter and you see that manifest both in that Cogs stack of 17 as well as in the S. DNA. So it really manifest itself a couple of different places on the bridge.
We haven't traditionally broken out a detail beyond or send a and or raws and other movements.
But it certainly as you can imagine with that the benefits of lower energy.
That is showing up in that the in that Cogs stack as well as some of these other raw materials that we have that Simon alluded to earlier.
Okay. Thank you.
You're welcome Thank you very much.
Next question is from Hassan make calls and global.
Good morning, Simon incurred.
Good morning, Hassan no question around volume CIO to volumes.
You know overall, obviously sequentially you guys talked about volumes being down, 16%, which which seems pretty consistent with.
What some of your sort of global competitors reported as well I'm, what I'm trying to figure out is it as I look at guide volume figure regionally.
And even by end markets did you guys see.
Any material sort of market share shifts like I said be it by region or or be it by end markets.
Yes, I mean look Hassan obviously, we would not want to lose position in our markets of course, you know definitely is Bennett, so, but yes, I think you can see that our priority has been.
Unswerving on this a stabilizing of price.
On managing our inventories and not really speaks to stability.
More than anything we have those sort of like numbers don't happen, if youre sort of a out that gaining or losing share are moving it around so really from our standpoint, we've really been focus on our marketing plan on our.
Our customer tailored approach there.
Deliver the benefits I think the only thing we would say you know we saw flight when in very clearly at the end of our first quarter to say well, what we thought it would be for the second quarter.
We didn't see that much difference by geography, what I would say, though is clearly will.
Disappointed with the some of our specialty volumes in the second quarter because.
Thats, a and our called the textiles, one out so certainly the sex has held up well plastics held up better in the beginning but now coatings is coming back more.
So really I think that from vented. So standpoint, you would just be very disciplined on some holding our position, but making sure. We more importantly, the our pricing in our inventory mix is balance is very well struck.
Understood understood as a follow up.
On the or side of things you know seems like a very very different sort of in vitamins relative to I.
I guess the run up to the coal they'd lockdowns into like I mean, you know it seemed that pricing was gaining momentum through the consequently 19. Maybe then you know into this sort of January February Twentytwenty time period, and again, you know in talking to a variety of sort of industry players. It seemed that he then or are they.
Ability, particularly on the high inside to fade was an issue and now clearly you know with the locked down volumes coming down on T. O do.
You can't he mentioned the lag effect as well Dean vitamin seems to be quite different. So the question is dead.
I mean with all of those puts and takes I mean is it fair to assume that inventory levels for or maybe actually quite bloated and we may actually see a a fairly meaningful destock over there.
Okay, I think in the aggregate very high level. The pictou paint that Hassan is about spots on because it already these sort of price moves the running out of steam in the front end to 2020.
As demand drops and operates as Microsoft moderate assets under lift.
At this sort of like historical volumes of feedstock that we would then of course the supply the vendor of those materials experience is not as a downdraft in demand destruction of course minerals enterprises find it quite difficult to shed fixed costs or moderate in the.
Same way that we do in our chemical industry. So they do face those pressures and I think as a result of that we tend to see this lag.
West prices, then start softening off.
After sometime after the drop in demand for tier two occurs and not typically relates to sort of contracts negotiations discussion three to six months I think that I don't think there is much different have this time around the only thing I would say is of course the pick chip.
Stock family is somewhat different you know.
We've seen the so more localized push the pricing on ilmenite in China, we pick that out I mean, we still have a fairly broad array of of.
Lower grade choices on of course, as a relatively narrow range of high grade choices, but those products still need to be purchased the made and so I think your point is well made thats, what we expect to see that's what.
We will will play out, but it might be slightly different in the different feedstock groups.
Very helpful. Thanks, Thanks, so much.
Okay.
Well.
Thank you very much.
Ladies and gentlemen message to install question and answer decisions on which often at the conference that can sometimes be closing remarks.
Okay. Thank you operator, and thank you to everyone for your interest in Venezuela, We look forward to speaking to many of you throughout the quarter.
In the engine please reach out to Jeff in the normal way with any additional questions. You. My happened, we will be as responses as we can to meet their needs that thank you. Thank you once again, everyone. Thank you.
Thank you very much.
Ladies and gentlemen, that's it completes this conference call. Thank you for joining today's presentation you may now disconnect.
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