Q3 2021 Venator Materials PLC Earnings Call

Good morning, and welcome to furniture third quarter 2021 earnings Conference call.

All participants will be in listen only mode should you need assistance. Please didn't have a conference specialist by pressing the Turkey, followed by zero.

After todays presentation, there will be an opportunity to ask questions.

I'll ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two.

Please note. This event is being recorded I would now like to turn the conference over to Kate Robertson Investor Relations. Please go ahead.

For more information regarding the factors that could cause actual results to differ materially from these projections or expectations.

We do not plan on publicly updating or revising any forward looking statements in the quarter.

We will also refer to non-GAAP financial measures such as EBITDA adjusted EBITDA adjusted net income free cash flow and net debt you can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted to our website at www Dot Venezuela.

<unk> Dot com.

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

Thanks, Jay and good morning, everyone welcome to our third quarter 2021 earnings call.

Beginning on slide three.

Macroeconomic environment has been challenging in the third quarter generally healthy demand was dampened by supply chain disruption and a rapid increase in energy shifting most raw material costs.

Our businesses performed well during the third quarter. Despite the challenges we continue to face and I would like to thank our associates for their ongoing efforts and continued hard work as we navigate these challenges.

<unk> delivered $48 million of adjusted EBITDA in the third quarter compared to $17 million in the third quarter of 2020, and 43 million in the second quarter of 2021.

Turning to slide four knots, attaining dioxide segment.

Third quarter adjusted EBITDA from US attaining dioxide segment was 54 million compared to $21 million in the prior year quarter and 36 million in the second quarter of 2021.

Throughout the third quarter, we continued to see robust robust demand for our functional T O two products across all regions and sectors.

Demand for our specialty <unk> products continues to improve specifically for T O two into textiles applications.

Our inventory levels remain historically low despite increased production during the quarter.

<unk> sales volumes increased 11% compared to the COVID-19 impacted prior year quarter and declined 1% sequentially due to low inventory levels entering the quarter and maintenance that extended into the third quarter.

CIO to average selling prices during the third quarter increased 12% compared to the prior year period, and 5% sequentially and.

In local currency, we have successful we implemented price increase initiatives during the year and expect further increases within 2022.

During the third quarter, we saw significant cost pressure due to rising prices of energy shipping and most raw materials, although we fix a significant portion of our cost base, we are still subject to market rates for certain portion of our variable costs and.

In addition to our price increase initiatives, we are implementing additional fourth quarter surcharges to preserve our margins. These surcharges apply to specific shipping routes and are being selectively implemented on products, which are manufactured at certain European facilities impacted by higher energy costs. We expect these surcharges to <unk>.

Remain in place until energy and shipping cost returned to more normalized levels.

Turning to the outlook for <unk>, we expect to see robust demand for our functional <unk> products across all regions and sectors. We.

We expect sales volumes to be seasonally lower in the fourth quarter, albeit more modest than historical averages.

Turning to slide five in performance additives.

Performance additives segment delivered adjusted EBITDA of 5 million in the third quarter 2021, compared with 5 million in the prior year period and $18 million in the second quarter.

Seasonally strong demand continued for our functional additives products into automotive electronics and coatings applications on color pigments into coatings and construction end markets and all regions.

The seasonally strong demand was dampened by supply and logistic challenges in the quarter. We expect these favorable demand trends to continue into the fourth quarter and follow normal seasonal patterns.

Although we have seen softer demand for our <unk> for our timber treatment products in the third quarter, we expect demand to return to normal seasonal levels in the fourth quarter.

In total we expect fourth quarter volumes for this segment to be seasonally lower than the third.

As with our <unk> segment, we have seen costs increased significantly over the quarter.

We are currently in discussions with customers to implement the combination of increased selling prices and surcharges for energy in order to mitigate these higher costs, we expect to fully offset these increased costs through increased selling prices in early 2022.

Turning to slide six and our cost programs.

Our 2020 business improvement program has delivered over 40 million of savings to date compared to 2019 baseline and the program remains on track in.

In the third quarter of 2021, we delivered incremental savings of $10 million from our 2020 business improvement program and $16 million of temporary COVID-19 savings from the third quarter of 2020 reversed.

We are lowering our estimated restructuring cost to deliver our 2020 business improvement program to approximately $40 million.

I'll now pass the call over to Kurt to comment on our financials.

Thanks, Simon Let's go ahead, and turn to slide seven and review our adjusted EBITDA bridges.

Adjusted EBITDA for the third quarter increased $31 million compared to the prior year period.

The increase was primarily attributable to an improvement in our average selling prices, which was primarily driven by a 12% improvement within our <unk> segment.

Total sales volumes, including mix increased 7% as the prior year period was impacted by the COVID-19 pandemic.

Cost of goods sold increased due to higher energy raw material and shipping costs.

These costs were partially offset by benefits from our 2020 business improvement program and the favorable impact of higher plant utilization in the current year period.

Compared to the second quarter total adjusted EBITDA increased by $5 million.

The increase was primarily due to increased <unk> to average selling prices of 5% and benefits from our 2020 business improvement program.

This was partially offset by seasonally lower sales volumes in our performance additives segment and increased cost of goods sold due to higher energy raw materials and shipping costs as well as the reversal of 2020 temporary COVID-19 savings.

Turning to slide eight and our cash flow considerations.

We have simplified our free cash flow definition to cash provided by operating activities less capital expenditures.

Within our earnings release, we have included additional supplemental information on table seven in.

In summary, our third quarter free cash flow was negative $13 million as we ramped up activity for capital expenditures and paid the semiannual interest due on our notes we continue to closely manage our working capital, which was a $16 million source of cash in the quarter, though we still expect it will be a modest.

Use of cash for 2021.

We expect 2021 total capital expenditures to be approximately $75 million, which includes a modest investment in some discretionary projects that support future growth.

On October 15th we successfully completed the refinancing of our ABL facility and extended the maturity to 2026 importantly, we do not have any significant debt maturities until 2024.

We recently completed a valuation for our largest pension plan that takes place every three years as a result, we expect to save more than $20 million in future cash payments compared to 2020.

In the fourth quarter, we expect to receive a refund of approximately $20 million representing monies paid into escrow. This year, while the valuation took place.

We are currently working with the pension trustees to transfer assets and liabilities from this pension plan to an insurance company, commonly referred to as a buyout. We anticipate this could take one to two years with that I'll turn the call back to Simon for some clue for some concluding remarks Simon.

Thanks, Kipp turning to slide nine.

C O two fundamentals continued to be robust and we are pleased to see further recovery in our specialty business.

Our order books for the fourth quarter, a seasonally healthy inventories remain historically low on Chinese exports into Europe remained stable, we have ramped up our production levels and as a result of muted seasonality, we expect to see some modest inventory replenishment in the fourth quarter, specifically in December which will support our customers in early 2020.

You too.

The recent increases in prices for energy shipping and raw materials in many cases has risen to unprecedented levels and we expect these costs to remain elevated throughout the fourth quarter.

In addition to our normal fourth quarter price increase we are implementing surcharges within the quarter to mitigate the inflationary impact of energy and freight and preserve our margins.

These surcharges are short term and we continue to closely monitor rates, which will determine the duration.

We expect favorable <unk> fundamentals to continue and therefore anticipate further price increase in 2022, as we remain committed to expanding our margins.

We will continue to work closely with customers as part of our customer tailored approach.

We continue to see healthy demand for our functional emphasis in color pigments products from our performance additives segment, we have seen softer demand for our timber treatment products and we expect to see timber treatment demand normalized in the fourth quarter and expect to see normal seasonal demand for functional additives and color.

The performance additives segment continues to be cash generative and delivering on its portion of the 2020 business improvement program. We continue to see additional opportunities for long term EBITDAR improvement.

Our 2020 business improvement program continues to remain on track to deliver the full $55 million of benefits by the end of 2022. So far. This program has delivered more than 40 million of savings as we remain focused on controlling our cost and expanded our margins.

As Curt mentioned evaluation of our largest pension plan was recently completed and we expect more than $20 million in future annual cash savings compared with 2020. This valuation on outcome and an important milestone for Venezuela, we continue to focus on working capital management and optimization of our exit from our <unk> facility as we work towards.

Improving our cash flow profile, we reiterate our strategy to deliver on our cost control and improvement initiatives improve our cash flow profile and to deliver on our customer tailored approach as experts in pigments and additives I would like to thank you for your continued interest in Venezuela, I would now like to open the call for questions.

Yeah.

Thank you well now begin the question and answer session to ask question you May Press Star then one on your telephone keypad.

The speaker phone. Please pick up you have said before pressing the keys.

Your question. Please press Star then two how this time, we'll pause momentarily to assemble our roster.

The first question will come from the line of John Mcnulty with BMO capital markets. Please go ahead, yes. Thanks for taking my question.

So when you look at the exposure that you have around energy and raw materials are on the variable cost side I guess what percent of those would you say are locked in where you kind of protected through this kind of unusual spike in especially in European energy and how much of it would you say you're you're exposed on.

Yeah, John I'll pick up on that and good morning, and thank you for your question as.

As you pointed out of course, we have seen this in a rapid increase in energy cost, particularly for us in northern Europe.

There's been a bit of a hotspot in the UK as most people are aware that with limited storage facilities and so forth.

So U K in Germany, we've seen more.

I think that the way to characterize the answer your question without throwing the exact percentages, but the majority of our energy costs are hedged and unlocked and you know, but we do have a portion of the floats and the market, even though smaller portion has quite a quite an impact when you look at the rates of increase as you can you can imagine.

So in T O two I'd say I'd paint the picture on rules along the following lines, mainly energy, mainly northern Europe, some global asset exposure.

Particularly pinch point in Asia.

Some sort of like ongoing drift up in feedstock costs, which largely have been sort of expected I would say.

In performance additives that picture is somewhat different.

We have a lower exposure to energy in absolute terms there is energy escalation in the third quarter, but you know where we really took the hit in the third quarter, specifically was full freight rates, because we spend quite a bit of material out of Asia out of China into the U S and.

We've seen significant escalation in freight you know in the <unk>.

EBITDA in the third quarter.

And obviously you know as we talked about in the body of the script and the call here earlier in the prepared remarks, we have implemented a range of initiatives are on top of our regular fourth quarter price increases, which lets remind ourselves basically continues the pattern of the you know the three.

The earlier quarters of increases we've we've initiated some very targeted freight and energy surcharge as you know in.

A very sort of differentiated and focused way across performance additives, Ontario too.

Got it that's helpful helpful color on it.

And then maybe can you speak to I think you spoke to it a little bit in terms of the need to replenish your own inventories I guess can you give us some color as to kind of where inventories are both kind of for yourself, but also at the customer level and how long you think it may take to kind of get us back to what would be more comfortable or more more reasonable.

How should we be thinking about that.

Yes, I mean I'll take it by by segment John.

Zooming. Your question refers to both TOTY Ana this is al I'll take them sequentially at T. O. Two we entered the quarter very very low because we have the maintenance into Q that drifted into July.

We are slightly down on volumes sequentially in T. O two we would've been up where it not for that.

That lingering effect to the maintenance so really in the fourth quarter, we're going to see in our plants running you know as we said earlier back to pre COVID-19 levels Theyre already at those levels, we see customers with a very healthy demand in the fourth quarter that will be the sort of Christmas break in Europe. The question is to what degree customers carrying ordering.

Even though their own operations may be curtailed or paused, but.

But we think there'll be a modest down downtick seasonal typically seasonal for Q1 <unk> is around 10% in T. O two but we think it'll be much lighter than that this year because of the healthy demand and we expect to close the year with very low inventories not quite as low as we entered the fourth quarter, but it'll be a slight bit of replenishment, but.

But frankly, you know we're not gonna have a lot of inventory on our hands going into the 2022, we don't see it our customers either.

We think that it's going to for the foreseeable it's going to remain pretty tight.

In performance additives, we will get a little bit more.

Possibility to improve our volumes in our inventories in the fourth quarter, we expect to see further demand strong demand in the fourth quarter as we saw in the third we expect the normalization of timber, but that said, we will get the chance we think too.

Prove our inventory somewhat in the fourth quarter, a bit a bit better on a pro rata basis. The N C. A T O too, but that's still going to be pretty slow going into next year.

Got it thanks very much for the color.

John.

The next question comes from the line of Vincent Andrews with Morgan Stanley. Please go ahead.

Hey, this is Steve Haynes on for Vincent Thanks for taking my question.

Just wanted to follow up on the surcharges and maybe if you could provide a little bit of power on the size of the surcharges relative I guess to some of your underlying price increases too.

Yeah look Steve we're not we're not at this time willing to sort of dimension it.

This is what I'd like to say about surcharges and price.

You know were in the fourth sequential quarter. This year price increases in T. O two we've seen significant announcements.

Pretty high rates of capture and you can expect that to continue in the fourth quarter and frankly, I think you can expect that pattern to continue into the first quarter of 2022, as well and that remains the dominant method of expanding our margins in <unk> and that has been successful in the third quarter as the numbers show.

That said you know John It's earlier question, we have seen some energy pockets in UK and northern Europe.

And in other parts of the T O two enterprise in Europe as you know, we've got a high capacity share in Europe. So we basically have had to look very carefully at particularly those products that get made in Europe and exported into the long haul region shall we say and in those cases, we've put some additional surcharges in.

Place and those will come on top of the regulating the negotiated price increases. So I think you should think about price in tier two and surcharges as a sort of the surcharges. The mine of course to the tier two regular price increases the major chord I think that's the way you should think about that we expect them to be pretty short.

<unk> term in nature as we get through the energy situation in Europe additives is somewhat different.

In additives, we really saw the freight hurt us badly and we've taken some strong across the board measures with some pretty healthy surcharges put in place a you probably have seen those surcharges.

<unk> charged type mechanisms out there from.

Parts industry customers competitors, and the like and that we expect we will keep those under review.

But they also come on top of our regular price increases, but you know if I were to characterize those surcharges in additives I would say that that probably you know it's not so much the major miners cord, but they are in themselves pretty healthy you know additional increments.

Okay. Thank you that's helpful.

Yeah.

The next question comes from the line of Josh Spector with UBS. Please go ahead.

Yeah, Hi, guys. Thanks for taking the question.

I guess just to follow this path on the raw side of things I guess, if you just look at where things stand now.

Just trying to understand kind of the sequential burden that youre going to face in fourth quarter or perhaps into one quarter. If there is some lag there are you able to dimensionalize that at all and then we can make our own assumptions on pricing to offset that.

Yeah look we're not going to give absolute numbers, but of course, it's going to be pretty significant as it flows through the fourth quarter. There's no. There's no question about it.

We expect that the combination of seasonal sort of volume downtick plus.

Plus our prices initiatives, plus surcharges will make it challenging to preserve third quarter margin in the fourth quarter. Because you know, it's it's there's quite a lot of bow wave of it coming through at which.

Which speaks obviously to further price increases as we as we get into the first quarter. So it's pretty significant and N. T O. Two the bulk of it is coming from northern European Energy as we said in <unk>.

<unk> additives is the freight nonperformance emphasis I think we can see.

Pathway, because we can build a little bit more inventory because of the nature of the surcharges of increases I think the prospects of margin expansion within the fourth quarter remained pretty positive so.

It was somewhat slightly different to the T O two picture.

Okay. That's helpful and I guess I mean, your comments on ability to continue to capture price remained pretty positive I guess do you close the gap with the requeue bargains by the first quarter or is it going to take longer than that in your opinion at this point.

Sorry could you repeat the question Josh do you want to understand as you're comparing <unk> 'twenty one on the likely outcomes on margin for <unk>.

Yes, just I mean, you seem pretty pretty high conviction in our ability to continue to get mid single digit sequential price than just trying to think is that enough for you to recover back to three key levels at all kind of compound that with so you mentioned specialty improvement as well this quarter.

I guess, where do you where do you see margins shaking out at this point with all these moving pieces.

Yeah, I think to your question I would see we would be able to recover back to those third quarter levels in the first quarter and we you know we would already.

Recover somewhat in the fourth quarter in additives.

And you know of course.

We're not talking about a sort of collapse in margins in the fourth quarter and tier two but just recognize that energy power of is quite high. So yes, I think the answer. Your question is yes, we do expect to be in.

Josh I would just add to that that as we progress and track through 2022, we would expect to see margin improvement through the course of 2022.

Certainly relative to even the third quarter levels.

So we think that the.

T O two cycle is still recovering and we still think we are in the early innings and so we would expect to see continued profitability improvement.

Improvement.

Specifically within the tier two space.

Okay got it thanks guys.

Gotcha.

The next question comes from the line of neighborhoods I guess with Jefferies. Please go ahead.

Thank you good morning, guys.

Like this is the question I was going to ask.

In terms of.

Let's now twice and has mostly been a cost push.

T I O two I do believe the market is tight enough that the industry will be able to push two fundamental pricing next year.

Yeah, I mean, I'm not sure I'd agree that it's like being a cost push situation I mean, we see some really strong demand.

We invented soybean living hand to mouth on inventories I mean, this really does feel like a supply demand driven situation on more lastly of course as some of these freight and energy headwinds are blowing up in the second half then of course, you know of course, we are unwilling to absorb that we worked so hard to improve our margins. So yes more laterally I think it's been relate.

The cost push I think that the fundamentals as such remain very healthy.

We look at what's going on in China, We look at the demand we look at what are customers, saying, we look at inventory levels. You know, we sort of haven't got any spare capacity in our network and that we.

We think you know we're in the early innings of a further improvement in cycle.

Okay.

Quick one on that if you look at our production capabilities for next year compared to this year.

Are you selling and what have you put those now and can you ramp up production for next year.

That is even more from swap too and what we saw this year.

Yeah, we will get an uplift in production next year, because you know we have within the third quarter come back to pre COVID-19 production rates in that situation. It remains the case as we sit here today and the rest of the year. So you can imagine any of the early part of 2020, when we will know those rates. So of course, we hope that you know of.

Appropriate amount of percentage uplift as we sort of annualize this pedal to the metal type of approach in 2022.

Okay. Thank you.

Thanks Edwin.

The next question comes from the line of David Begleiter with Deutsche Bank. Please go ahead.

Thank you good morning, I'm Simon Wonder how company performance AD is how much of the $13 million decline in EBITDA sequentially was due to higher freight costs.

So you broke up I think I got the question you're talking about sequential EBITDA.

David.

Correct, and and pro forma EBITDA was down $13 million sequentially.

How much of that was due to higher freight costs.

Over half.

Got it.

And given the surcharges, you're putting in place can EBITDA in that segment would be up sequentially.

Yes, it can.

We'd expect as I said earlier to be able to you know run hot on production build a little bit of inventory. We've got by now we've got strong price initiatives and strong surcharge initiatives out there within the fourth quarter. So we expect to expand our margin in the fourth quarter and we expect you know there've been years.

In the last three years, where we've seen some pretty disappointing fourth quarters, but we don't expect to see that in 2020. One we expect to see a pretty decent rebound here right.

Just I know, it's early but looking at 'twenty two free cash flow can this be positive next year do you think.

Well, that's certainly what we're gunning for David I think that it'll largely be predicated on what happens with the profitability associated with the tier two improvement.

So you know.

We're doing everything we can we think that as we've indicated.

Having the pension valuation for our largest pension plan taken care of as an important step towards that.

And so we are all hyper focused on on that.

Thank you very much.

Okay.

The next question will come from the line of Matthew <unk> with Bank of America. Please go ahead.

Thanks.

I know this represents maybe a little bit of a minority of your your bi but.

What are you seeing from the high grade ore market as.

As far as availability and cost inflation has there been have there been any repercussions from the outage earlier this year or how the upcoming planned outages from from market suppliers.

Yeah, I mean look we I think the pattern here on high grades being similar for some time.

We've made the point that there's been more supply in F. N type interruptions. These past couple of years and probably the previous decade. We've had you know a number of challenges to contend with we have successfully navigated through those we are a fairly in a low supply position in the sense. If we don't buy a lot out of Richards Bay.

In South Africa, because of lower exposure that you have some exposure of course, we've navigated through that we continue to have ongoing discussions.

With vendors about costs and so forth, but you know we've got the material we need it. So we have been supplied it's been in line with the price expectations we've had.

You know that moves on them, we probably be in a better position on our next call to give a bit more color to that question as we you know as.

As we come through some of these further negotiations with it with the high grade vendors.

Okay. Thank you and then what are you seeing from inbound price competition inbound competition.

In pigment from China, and then just last one you heard given logistics cost the product was coming in at a decent premium local.

Local European benchmarks, and that's still the case and does that give you confidence one I guess in your ability to push price near term but.

Does that change.

You know, we get the logistics sorted out and freight costs move lower.

Yeah look I mean, there's no question, we've said a number of times that the Chinese producers will be selling into Europe, and you know that may have softened off of course to the challenges within China that we're seeing right now and but there'll be back, but we certainly don't expect it to get in the way of our ability to sell off.

Volumes and make how margins in Europe, you know we've managed that you have to handle that dynamic for several years, it's got a little bit easier. This year, but I believe we've got a track record of managing that dynamic and we feel confident that we'll continue to be the case you know there are significant challenges in China.

With cost escalation, even if for the freight which is sort of reduce and b get into better territory lowest territory. They would still have a significantly higher cost base to the to export from.

And they've got their own local strictures of course, so I think that we're well placed the other thing I'd like to add is if we look over multiple years.

The change in patent we've seen these past two to three years as being Chinese producers actually pushing and leading price and broader Asian markets on many occasions, and so you know I think that the Chinese producers have really become sort of quite accustomed to what that can do to their earnings.

Again, we expect to see that that continues and I'm not talks to the fundamentals in this industry, we should continue to see as positive.

Yeah.

Okay.

Excuse me neither downs with your questions.

Well move to the next question will come from the line of Ireland with Walnuts Arnold with RBC capital markets. Please proceed.

Alright, Thanks for taking my question I guess first question is could you just stuck around and some of the end markets.

I guess that you participate in it's a little different for you than some of the other peers.

You know obviously coatings for rehearing is a lack of availability of specific materials has.

This resulted in slightly lower production I know that's not the case for Tio too. So maybe you can just yeah, just give us your thoughts on some of your different end markets.

And in coatings in packaging in laminates and whatever.

Or whatever else. Thanks.

Sure I'm happy to do that and maybe it will without a bit of a sort of regional lens on that I mean, you know we do see underlying strong demand in all regions continuing in the fourth quarter.

Architectural coatings plastics and demand increasing for industrial coatings applications. So we really do see across the board inks and packaging inks very good continued recovery in textiles personal care automotive. So you know across our tier two business I have to say, it's rare that you can.

Get all of the planet's lining up.

At the same time and seeing a very positive picture like that but that's what we're seeing right now and you know we continue to hear from our customers.

Unusually that's T O two isn't the biggest sort of headache, because if it hadn't been challenged from a supply chain perspective on a range of items.

And we're working closely with our customers, we generally supplying our customers, even though supply chain challenges there.

We expect this demand profile to continue and that's what we're hearing from our customers with inventory fairly light through the chain.

In terms of performance additives, that's a little bit different because we have yet to see thus far the recovery. The earliest softening in the year, we saw in our timber treatment business now, we do think that sort of normalizes somewhat in the fourth quarter, but not in performance additives has been.

One of the dark spots across our business if not the docks book.

Across the whole of the Venezuela business in.

In terms of functional additives, we've seen good recovery in automotive that very positive Ah that's being good and in construction in paints and coatings markets for our color pigments franchises.

We've seen similar demand too to T. O. Two very strong. So you know its very strong to very strong in most places a recovery in textiles, and I'm, just timber treatment being the soft spot for us.

Great. Thanks, and maybe if I could as a follow up.

The industry has gone through a pretty significant period of consolidation, we've seen changes in pricing strategy and commercial strategy to move towards more of a long term contracting.

<unk> strategy.

Do you think that's been a positive move.

You've gone through and an early up cycle here as well with potentially less price appreciation that we've seen in early in past early up cycles. So.

You know again do you think that there's a possibility we would go back to the old model or do you think are more and more that are your customers are preferring this long term contracting model. Thanks.

Well, you know I think being a twofer over well over 30 years now I've never rule out any sort of returns of different times of practices. You know things change situations change babies change et cetera, but not set you know it's to your point I think since two.

2011, and 2012 peak that has been a significant change we saw that pretty disastrous sort of like trough in 2015, 16, and you know I must emphasize my comments as it relates to Venezuela, and not to the industry and others will see things the way they are going to see it but you know these advantaged toll related comments.

But you know I think there has been quite a significant change we have elected to devise a more sort of nuanced and bespoke arrangements.

We think it's working because you know back in 2012, there was a lot of negative energy expended on substitutions and conflict between the various parts of the value chain.

You can see regularly now our customers large paint companies passing through.

Rice increases and managing their margins.

They they all think more confident about what they're getting from us we've been quite consistent in our behaviors with them. These are the price and supply and capture and the like.

And while they never like any increases they feel at least they know what they're getting and that certainly was the big complaint back in 2011 look time will tell as we come through the cycle, whether it's an overall better approach I believe it is a better approach because we can spend more time ourselves you know planning our longer term future and investing for that rather than having some of the short.

Some uncertainty so some of the cyclicality is definitely diminished for us and we think it's a long term good thing as we build strength.

But I'd I'd accept that as we're in the early innings here, there's still more to play out, but if you look at the type of announcements and captures we've seen these past quarters several quarters I feel very encouraged that you know we're.

On the right path.

Okay.

Thank you.

Okay.

The next question comes from the line of questions Ive met with Alembic Global. Please go ahead.

Morning, Simon and Kurt Hey morning, I was wondering.

First gen around cost Cubs, I look I mean, obviously Q3 was a strange quarter.

We saw natural gas, it's doing what it's doing.

It would be a hit in the U S. But also.

You know across the globe.

In particular with gold prices again doing what they were doing and you know the backdrop of all of this is that there was you know rationalization going on in chlorine capacity as well. So on one side you have high grade ore, which you know.

The stability of that is is declining.

You have the natural gas situation. So I'm just wondering as you sit there and think about chlorine chloride.

Chlorine basically I O two production versus sulfate based D. I O. Two production have there been major shifts in the cost curve and you know whether they continue in 2022 and will there be opportunities for sulfate based producers to maybe capture more market share.

Yes, I mean, it's a complex question Hassan and you know Theres a number of moving parts as your question in some eights, but I think some broad comments apply you know from our perspective.

Active I mean, there's no doubt about it that from <unk> standpoint, having <unk>.

Significant sulfate capacity and significant European sulfate capacity of course, and itchy and element I escalation as you know it's been something that we've had to deal with possibly more than others or not that doesn't help when it comes to the cost curve in the U S. Producers have generally been able to hold onto that so larger plant you know better energy profiles Chinese.

Chinese producers have probably gone backwards in the curve as we've gone through the year with the ilmenite plus plus.

All the other high grade and.

Energy and raw material challenges in freight and so on so I think that you know that will there be opportunities next year I mean, I think that we see so early early on in the year, we see continuation of some of these raw material and energy profiles.

I believe that.

The sofa sulfate feedstock advantage will sort of return are gradually.

But I would accept that 'twenty, one is or was in operation and of course, you know I think that feedstock supplies and high grade chloride will continue to agitate for higher prices and we will continue to resist those you know we think that's you know.

<unk> got enough when you were having some quite vigorous conversations with those people, but you know I think that the biggest dynamic probably we see next year in terms of relative competitive advantage as I suspect that the asset in ilmenite issues that we've seen in our sulfate block sort of you know.

Reduce and that makes us relatively more competitive and if you know we think the opportunities relate more to the market and you know product but of course, you know that.

Cost curve opportunity as part of that too.

Very helpful.

A question around faithful as in market share shifts.

I mean, I was a bit surprised if I heard you correctly, you're talking about Chinese exports being stable, particularly you know, we'd we'd sort of.

The electricity situation in the logistics situation that was going on I mean have you have you sort of see.

Seen any market share shifts in Europe. In particular, you know where you guys have gained more market share relative to the Chinese you know you know, primarily obviously based on supply reliability and the like.

Yes, I think it's a great question I mean, I think in a Chinese producers.

So to have a certain presence my comments were earlier about stability related mainly to Europe not to the U S and broader Asia.

I think they've elected to keep a certain presence they have gone backwards in terms of competitiveness you know they have been deselected by many customers some of which have come through some of you know indirectly or directly and we have picked up share I think we could've sold even more in the third quarter have we not had the July you know maintenance and greet them and so forth.

So I think theres, some truth that we've picked up a bit there.

But you know we're not competing directly head on with them because we're looking at the more specialty and differentiated parts of the market, where they tend to compete less.

But yeah I think they have elected to keep a certain position and of course, you know as you say they have on boarded the significant challenges in there.

Those aren't necessarily going to be the most profitable tons, they've certainly tried to retrench a more more of the export into broader Asia, where they can make better returns. So we've seen that dynamic, but clearly they're not going to evaporate in Europe either.

Very helpful. Thank you so much.

Awesome.

Yes.

The next question comes from the line of P. J <unk> with Citi. Please go ahead.

It's Eric Petrie on for P. J, good morning, Simon and Kurt.

Good morning.

I was reading in the industry consultants, who are predicting up to another $300 per ton of pricing increases and CIO to before.

Hello down cycle.

That would put kind of pricing in the mid $3000 per tonne level.

Peak levels of last cycle, but what is your outlook and at what price point do you believe people start re formulating and leading to demand decline.

Yes, I mean look we're not going to put a number out there, but all I will say is we are better positioned than any consultants.

A REIT I think on price because we're the ones directly talking to customers and I think the evidence suggests you know.

And I'm trying to temper my words here, but I think that <unk>.

Industry concerns tend to be sort of like you know amplify on the overage or underage and net price you know, they're either too positive pessimistic hotel too optimistic so the way I see it as the answer that question is fundamentally located in inflation and rules because we felt for some focus on our contribution margin and that fundamentally will determine.

Where the price so the trajectory is.

I think our customers are probably doing the same you're looking at that price initiatives. So it's it's partly about pricing you're right that you know, we still got ways to run through where we were back in 11 up around the $4000 Mark.

Reising, but you know I think if we see this inflationary environment continue and we see these sort of numbers some of our projections, we still got significant.

Price movements around and if you look at what we've put on this year and we look at the fact that we're likely to want to continue those types of trajectories at least next year you could make a case to say that if you just looked at price numbers could be greater than <unk>.

But ultimately what we've been taught me on the raw material protocols here.

Okay helpful. And then maybe a question for Curt on slide seven with the $36 million increase in Cogs year over year. It sounds like maybe $10 million of that was freight related what's the split between raw material and energy for the remainder of that basket.

Yeah, I think that the freight all in I think <unk> got a pretty good feel for that based on what Simon has said already and so you're specifically looking at the year on year $36 million.

Headwinds.

Yeah and.

Eric you're specifically looking for outside of freight what is your question.

Yeah, I'll try to frame the larger baskets.

Or or energy versus that brake component.

Oh, it's energy and specifically energy within within Europe is where we are seeing the most increase.

In our direct costs right now so although our feedstock costs are up.

Our biggest challenge here is as managing really is a combination of of those three factors energy.

Raw materials and freight.

Right.

Thank you.

Okay.

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

Thank you very much you've talked a little bit about it but I was looking for maybe more of a financial number of what kind of working capital release, you might expect in Q4.

Yeah. Roger this is Kurt I'll take that I think that.

It's going to be modest and in fact, we may actually see a a bit of working capital use.

Here in the fourth quarter as Simon has indicated.

We would like to actually build our inventories so that we're prepared for a robust.

Camp commercial campaign in 2022, and so don't be surprised if it is.

Kind of close to breakeven.

And so how that breaks whether or not it's a source or use I think it's going to be modest on either side of that but I think we are looking through the fourth quarter and really want to position for a strong 2022, and so if that means we need to invest a little bit of working capital in the fourth quarter. So that we.

We are able to meet an increased demand for product in early 2022, then then that would be a worthwhile investment.

Got it and can you give any kind of steer at least for 2022 capex.

Well I think that it is likely to be up modestly.

From the $75 million that we have today I think that it's still early days, we have begun the initial steps of our annual budgeting process and so we've got some some arm wrestling taking place right now as you can imagine Roger and where we're trying to figure out what that spend is.

As we do think that there.

Are some discretionary opportunities that are gonna be worthwhile. So at this point I would say it would be up modestly from the $75 million that we expect to spend in 2021.

Great. Thank you very much.

Thank you Roger.

This concludes our question and answer session I would like to turn the conference back over to Simon and Tanger, President and CEO for any closing remarks.

But I would just like to thank all participants for joining US. This morning for your continued interest in Venice. So please feel free to reach out to <unk> investor relations or myself or could we look forward to follow ups and we look forward to meeting you know.

A bunch of people over the coming weeks as we as we get through and further into the fourth quarter. So thank you very much and stay safe. Thanks, everyone.

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

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