Q1 2022 Venator Materials PLC Earnings Call
Okay.
Sure.
<unk> first quarter 'twenty.
Earnings Conference call.
All participants will be in listen only mode.
Should you need assistance please.
Specialist by pressing the star keys.
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 <unk>.
Thank you Pat.
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 of Investor Relations for furniture, where material. Please go ahead.
Thank you Andrea and good morning, everyone I'm take Robertson Investor Investor Relations for Benetton materials welcome to <unk> third quarter 2022 earnings call joining us on the call today assignment Turner, President and CEO , and Kurt Ogden Executive Vice President and CFO .
This morning, we released our earnings for the first quarter 2022 via press release and posted the release and accompanying slides to our website at Venezuela Dot com.
During this call we may make statements about our projections or expectations for the future.
Such statements are forward looking and while they reflect our current expectations. They involve risks and uncertainties and are not guarantees of future performance or performance additives comparisons we make on this call exclude the water treatment business, which was sold in May 2021, you should review our annual report on form <unk>.
20-F for the year ended December 31 2021.
6K for the quarter ended March 31, 2022, and our other filings with the SEC for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan on publicly updating or revising any forward looking statements during the quarter.
We will also refer to non-GAAP financial measures such as EBITDA adjusted EBITDA adjusted net income free cash flow and net debt you can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted to our website activity.
<unk> Dot <unk> dot com.
I'd now like to turn the call over to Simon.
Thanks, Keith and welcome everybody to our first quarter 2022 earnings call beginning on slide three.
We are deeply saddened by the military action, which has taken place with the Russian.
The Russian invasion of Ukraine, since our last earnings call.
And all of those have been effected.
We have suspended sales to Russia.
Which are approximately 1% of revenues.
Although there has been no material direct impact to our business. The complex is clearly exacerbate cost inflation, most notably energy in Europe and existing supply chain issues.
Notwithstanding these challenges I was very pleased with our first quarter adjusted EBITDA of $57 million.
Moving to slide four and also taking dioxide segment.
<unk> segment adjusted EBITDA in the first quarter of 2022 was $49 million compared to $35 million in the fourth quarter of 2021 and $40 million in the prior year quarter.
Demand continued to be strong throughout the first quarter in North America, and Europe for all CIO two sectors.
We have a smaller exposure to the APAC region, where demand was softer as a result of reinstated COVID-19 lockdowns in certain areas of China.
We increased production from our manufacturing facilities during the first quarter. However, as a result of the continued strong demand for our products our inventory volumes are below historical seasonal move.
Sales volumes increased 15% sequentially, which was at the top end of our guided range and declined 1% compared to the prior year period.
In the prior year, we benefited from selling down inventories, which impacted the year on year comparison.
Cost inflation continued to be a significant headwind in the first quarter.
The majority of our energy costs with fixed, but we saw unprecedented spikes in underlying market rates, primarily as a result of the conflict between Russia and Ukraine.
We also saw cost inflation headwinds from feedstocks shipping and other raw material costs.
In the first quarter, we increased our average selling prices, 12% sequentially and 29% compared to the prior year period in local currency.
Enabling us to mitigate inflationary cost pressures and maintain our prior year adjusted EBITDA margin.
Turning to the outlook for Tio too as I mentioned earlier, we continue to operate with historically low inventory levels and we have seen little evidence of restocking throughout the supply chain.
We expect inventories to remain a seasonally low levels throughout the second quarter and the remainder of 2022.
Demand continues to be robust and our order book is healthy we continue to increase production of oil products to meet the requirements of our customers.
We expect an increase in 2022 sales volumes compared to 2021 consistent with increased production.
However, this increase will be constrained by our low inventory levels on the reliability of supply chain and shipping availability.
We continue to work with Italian authorities, the approval of gypsum disposal with our Scotts <unk> sites. We are hopeful that this will be successfully resolved and limited this year in.
In the meantime, we have moderated the facility by one third of its capacity, which we estimate will have a net EBITDA impact of less than $1 million.
Compared to our second quarter forecast.
We expect the market rates for energy, primarily in Europe to remain elevated in the near to three.
Throughout the remainder of the year the majority of our energy needs will be purchased through fixed forward contracts. However, we are subject to market rates for the remainder.
We implemented tailored monthly pricing of surcharge reviews for all customers in March we believe that the selling price reviews, coupled with cost control measures will mitigate future cost headwinds.
We expect these monthly customer tailored price reviews to continue throughout 2022.
This brings flexibility to manage our margins in this increasingly volatile raw materials energy and freight cost environment.
And these initiatives are consistent with our customer tailored approach.
Turning to slide five in our performance additives segment.
Our performance additives segment consists of three distinct businesses functional additives, which supplies products through enhanced coatings and plastics products, our color pigments business, which produces colored inorganic pigments for the construction coatings plastics and specialty markets and finally, our north American timber treatment business.
Which manufactures wood preservation chemicals.
These businesses generate annual rent revenues of approximately $600 million on a highly cash generative.
We have seen significant earnings uplift over the past two years and these businesses due to improved product mix of sales and successful implementation of our business improvement programs.
Our performance additives segment delivered $20 million of adjusted EBITDA in the first quarter of 2022.
Compared with $19 million in the prior quarter and $22 million in the prior year period.
Strong demand continued for our functional additives products sold into automotive electronic and coatings applications.
Color pigment demand was strong primarily for construction applications and for ultra Marine Blue products, which go primarily into plastics end use applications demand.
Demand increased for timber treatment products in line with seasonal norms segment.
Segment sales volumes increased 7% sequentially and declined 5% compared to the prior year period, the decline compared to the prior year is primarily due to demand for timber treatment products returning to normal seasonal levels.
Our performance additives segment is facing similar challenges of cost inflation and supply chain disruption as our tier two segments. During the quarter. We saw further sequential cost headwinds from energy shipping and raw materials.
Although less energy intensive than our <unk> segment, we have implemented similar energy hedging strategies and are therefore subject to market rates on a portion of our energy usage.
Average selling prices increased 9% sequentially and 20% compared to the prior year period in local currency as a result of actions implemented to mitigate the impact of cost inflation.
We expect demand to remain robust and sales volumes to follow normal seasonal patterns. We continue to see cost inflation in the near term weeks, which we expect to recover through our customer tailored monthly pricing initiative, which commenced in March.
I will now pass the call over to Kurt.
Thanks, Simon, let's turn to slide six and our adjusted EBITDA bridges.
First quarter total adjusted EBITDA increased by $17 million compared to the prior quarter. The increase was primarily due to increased average selling prices and seasonally higher sales volume, partially offset by higher cost inflation.
Adjusted EBITDA for the first quarter increased $8 million compared to the prior year period, primarily due to increased selling prices implemented to mitigate the impact of increased cost inflation.
Total company sales volume declined 2% from the impact of normalized demand and the constraints of low inventory compared to the prior year.
Turning to slide seven and our cash flow considerations.
Our first quarter free cash flow was negative $103 million, including a working capital use of $87 million.
We generally expect an increase in our primary working capital during the first half of the year. This year that trend was amplified and our accounts receivable were much higher as a result of higher selling prices and to a smaller degree higher sales volumes.
We received $85 million cash in settlement from Tronox on April the 25th which includes $10 million of negotiated interest originating from 2019, when the break fee conditions were met.
We're pleased to have resolved this multi year legal dispute.
As noted in recent press releases, we intend to use a portion of the proceeds to reduce our debt.
As we consider options for debt reduction we are also actively considering refinancing portions of our existing debt structure.
During 2022, we expect the following cash uses capital expenditures of $85 million to $95 million, which includes modest investment to support future growth.
Working capital working capital to be a cash use of more than $20 million due to higher selling prices and cost inflation.
Structuring to be a cash use of approximately $25 million as we pay for our successfully completed business improvement program.
And other cash uses including pension, which are expected to be approximately 25% to $35 million, which is $10 million lower than our 2021.
Number primarily as a result of lower pension contributions.
We are committed to improving <unk> cash flow profile and this remains our primary financial objective.
Over the next two five years, we expect to see a substantial reduction in our annual cash uses of approximately $70 million. In fact, most of this reduction will take place in the next year and a half as noted on this slide.
The reduction will be attributable to.
Lower restructuring costs of $25 million completion of the Pori site closure and a corresponding reduction of approximately $25 million and finally, a reduction in our pension and other cash uses of around $20 million.
As we shared these legacy cash uses that business will further improve its ability to pursue debt reduction and other value enhancing options.
I'll now turn the call back to Simon for some concluding remarks.
Thank you Kipp turning to slide eight I am very pleased with our first quarter results and I'm proud of the Venezuela team, who continued to navigate the unprecedented challenges we are facing.
We continue to see robust demand in North America, and Europe , and our order books remains strong across all applications in both titanium dioxide and performance additives.
We expect this demand profile to continue throughout 2022, and also expect to see recovery in Asia as Covid Lockdowns in China are lifted.
Supply for all our products remain tight and inventories are significantly lower than historical seasonal norms.
We continue to successfully navigate supply chain challenges for our raw materials and energy and we continue to increase our production to meet the requirements of our customers.
Nearly all our <unk> sites are expected to produce more in 2022 last year.
We see continued high cost inflation pressure, primarily from energy, but also from feedstock shipping and other raw materials. We expect this trend to continue throughout 2022 on a mitigating this through procurement and hedging strategies.
Sales actions include monthly tailored pricing surcharge reviews, which were implemented in March.
Our continued focus on growing our specialty and differentiated business will also lead to improved sales mix.
<unk> taken together all of these actions will help us improve margins through 2022.
We are in an elongated T O two upcycle we.
We continue to see underlying demand growth on tightness in supply demand with limited new capacity on the horizon.
In addition, we expect further EBITDA improvement from our performance additives business we.
We are pleased to have resolved the multi a legal dispute with tronox and received $85 million cash and settlement we.
We remain committed to strengthening our underlying business to position <unk> for success by increasing production delivering on our customer stated price approach and controlling our costs as Curt mentioned, we expect our cash uses to reduce by approximately $70 million within the next few years, which will be a big step forward toward improving our fine.
National profile.
All of these actions will enhance shareholder value.
And with that I would now like to open the call for questions.
We will now begin the question and answer session.
Good question Chris.
And then one on your telephone keypad.
If youre using a speakerphone please pick.
Thank you.
Keith.
Thank you.
Sue.
At this time, we will pause momentarily to assemble the roster.
Hello, My first question will come from Josh Spector of UBS. Please go ahead.
Yeah, Hi, guys. Thanks for taking my question.
Just curious looking at your quarter on quarter bridge for price mix in the call.
Cards.
They are pretty close to offsetting each other I guess as you work with customers on faster pricing adjustments can you talk about incremental inflation do you expect that price mix to be equal to that Cogs increase sequentially or do you think price mix starts to outpace that.
Yes, I mean look we think that we've done a nice job in the first quarter of mitigating these inflationary pressures with some pretty significant price outcomes.
Of course, as we've said many times before no customer likes price increases we have progressively tailored approach for these past three years or so I expect that pattern to continue in the second quarter.
The one thing that is very clear as we've given ourselves more flexibility by moving to more monthly based reviews by the use of surcharges in selected cases as well.
But of course, one of the issues that we observed in March, particularly was the spike in.
In energy we are.
Through April now in the second quarter, but we don't know how stable are volatile these energy prices to which we're exposed in some parts of our contract where were not fixed will play through so it is a tough question to answer that my expectation is that we would at least.
Managed to sort of hold on to what we've got while these headwinds are blowing hard and hopefully we will be able to expand as we go into the second quarter.
Okay, Thanks, and I apologize if I missed this in an earlier update but can you just give more detail on what's going on in Italy is that curtailed winter slowdown just primarily related to some of the gypsum capacity issues or is there something else going on there.
Yes, I mean, this is not a new sort of dynamic here, we've sort of made reference to this fall.
Digital length of time through our filings and the like.
We have been engaged with for some time.
Sort of dialogue with the local regional authorities and community groups about how we manage our eco product business out of Italy.
With the sulfate based process that we have some significant quantities of gypsum that we produce as a result of producing titanium dioxide and historically, we have used sort of core stroke landscaping reclamation facilities.
For managing a significant portion of this gypsum.
And of course over time those facilities quarries in landfills and so both fill up.
So we've been in negotiation about the next way that we manage that with the authorities now at the moment, we do not have an agreed outcome.
We are hopeful that we will bring this to resolution by the middle of the year in the very near term we have elected to take one of our three streams off at roughly a third of the capacity.
In this quarter and that will have a sort of singular millions impact if you like.
Through the quarter.
But.
It relates to the slot like.
Next agreement and consented limit for the amounts of chips and the site will produce in the coming years.
I think thats, a fair representation of where we are with the dynamic.
Understood. Thank you.
Yes.
The next question comes from Hassan Ahmed of.
Alembic Global please go ahead.
Good morning, Simon and Kurt.
You guys.
Talked about increased production and obviously a higher demand in 2022, just wanted to sort of dig a bit deeper into that.
I mean typically.
Tio to grows at 3% you obviously have low inventory levels. These days.
Bob.
Global GDP.
That normal I mean, I'm, just trying to get a sense of what that CIO to market demand growth looks like and for you in particular will you grow in line with the overall API go to market.
Yes look I think we would expect to grow at least in line Hassan I think potentially slightly higher because you are right about underlying GDP growth and recovery and that would be our general assumption about growth.
But of course, if you look at some of the noise.
In the fourth quarter, we had some maintenance moderation and the like so we had a pretty top end I'll come and volumes in the first quarter 15.
<unk>, 15%.
We said that we would expect to increase capacity and production through 2022 over 2021 by between 5% to 10% that's what we'd be looking for.
And there are some factors out there that will determine with us towards the lower or the higher end, but I think to think about it from that point of view. That's that's how we see 2022 and Hassan let me just add to that that.
There is no capital investment necessary in order to access that excess.
Latent capacity that we have.
So yes as you know as we came out of the pandemic, we were really ramping up the assets in 2021, and so we're getting into a more normalized run rate here in 2022.
That capacity is there for us to access and we're just tuning up.
The facilities in order to access it.
I think one thing I would like that Hassan is we don't we think although it's a careful navigation on supply chain. We think we get through these first six months.
Without production interruptions due to lack of inputs feedstocks energy pouring over like we think we get fully shift of course, its quite challenging, but we think we get fully shipped to be able to make our production and we won't be constrained of course as you know, we're coming up incredibly low inventories.
Very helpful and as a follow up on the input side of things.
Can you talk a bit about.
The availability of ore in particular.
Yes.
Obviously, it seems constrained.
I mean is it just the 2022 phenomena is it is it maybe going to extend beyond deck and also part and parcel with that.
You guys are seeing.
<unk> of global cost cuts.
Yes, I think on the first question with the feedstock.
<unk> made the point that we buy a full range of feedstocks and we have quite a diversification because of our technology platform between ilmenite slags and high grade chloride slags and <unk> on the life synthetic and natural so I'm happy to report at this point that we think we get shipped despite.
And I think its pursuit, probably because of the diverse range of vendors that helps us we're not overly dependent on one although of course, there are some big supply points for us.
It's not a massive group of small vendors, but we do at least have some diversification I think is a pinch point in 2022 I think beyond that.
Hard to tell depends how demand comes back.
Many times these past.
510 years plus.
Predicted minerals shortages will have a heavy impact on the industry and of course at some point that will be right, but I'm quite optimistic over these coming years that it doesn't provide a meaningful bottleneck.
And it won't be pinch points, but I think availability is that amongst the answer to your first question. We have availability in all the different mineral types, we purchase.
And in some cases, we have to work incredibly closely with the vendor around shipping profiles.
<unk> of shipments and the like.
I think turning to your second point, it's a very interesting point about cost curve and industry dynamics, because we made the point that all through these loss periods extra.
Extra supply and capacity is not coming online on demand continues to steadily creep up underlying demand. So from a fundamental standpoint, you think thats. Good I think there is a slow shift occurring on the cost curve.
And the reason I say that is because all participants are seeing significant direct cost escalation in these lines last five years.
And therefore, if you look at the total cost structures on each and every site near the proportion of that cost structure that is taken up by direct cost rather than an indirect cost or variable cost rather than fixed cost depending on your preferences terminology.
It means that that tends to by definition flattened the curve of course, but still will be a curve, but it does tend to somewhat reduce the advantage of this low fixed cost per ton on the site doesn't clearly.
Eliminate it but it tends to reduce it so I think that's a factor the other factor of course is in China as we've seen these last three or four years.
Lot of the factors that go into Chinese small unit production have been flowing against <unk>.
Chinese manufacturers.
I think the need for Chinese producers.
Participate it will type pricing.
Higher than it's ever been and so we've seen that in the broader Asia region.
Chinese pricing just sort of like very similar to ours in many cases when that wasn't always the case, but those are the comments I would add in response to your second point.
Very helpful. Simon Thank you so much.
Thank you.
The next question comes from Vincent Andrews of Morgan Stanley . Please go ahead.
Hi, guys. This is will hang on for Vincent Thanks for taking my question.
Hello, guys talk about.
The customer reception to those monthly prices you'd be implemented in March and then is that something you may continue to do one.
And as the raw material.
<unk> cost situation normalizes, and if not what do you have to see the kind of start getting rid of those.
W.
Yes, I mean, I think it has a few comments.
On your question will.
First and foremost as we said last amount I'd like to reiterate the preponderance of our price increases are through the underlying direct negotiation on the minority of the increases through surcharges. So.
It's an important point because when it comes to reviewing what we do about surcharges lets be clear is that the sort of the smaller part of the price adjustment.
I think we would from today's vantage point, we expect to continue to be sort of monthly price reviews at least through 2022 that will be our best sort of assumption as we sit here today could change, but thats, how we how we see it.
We like the fact that with the volatile sort of markets and volatility in general that we're seeing in the world.
A more sort of regular opportunity.
<unk> reviewed.
Rice is welcome so I think of course.
No one likes.
Increased prices and sustained increases in prices.
But I think our large scale customers looking at that private and public pronouncements around the margins.
Implies that they've got a good way of managing that themselves.
I would see us when the time does come if indeed, it does come to.
Manage back to more normalized pricing structures than we would find a way with each of our customers on the Taylor basis to negotiating discussed how that's been achieved.
Got it and then I guess it really quickly.
How much savings are left.
VIP program now and then are you guys looking.
Further kind of felt that bollix measures that youre costs from.
I guess the implementation by 2020 VIP start to roll off.
Yes, it will.
We have indicated that in 'twenty, two we'll pick up roughly $5 million.
Incremental EBITDA benefit compared to 2021, so we'll get $5 million of benefit in 2022.
Beyond that I think that we will always want to be short.
With our cost structure, we don't have anything planned right now.
But it's something that we have shown that we've been able to successfully take cost out of the business.
As needed.
And we will continue to evaluate that as we go forward.
Yes, maybe I'd like to just either one or two comments if I may.
Big picture here is we have had some discontinued sites closed site system cost takeout programs I can think of at least 383 Vips over these past five years.
So the way I think about it now as we're turning to the future.
Ill focus will be more on productivity improvement getting more tons out of the base. We've got we like the asset footprint and basically have we want to get the most Ava and of course, we're going to continue to place a heavy emphasis on specialty and differentiated products and services.
For our customers and those are the predominant ways, we're looking at improving our earnings profile. While at the same time of course, taking out the $17 billion that we spoke about in the call. It the cash usage in working at the free cash flow from both sides of the curve.
Got it thank you.
The next question comes from Matthew Deyoe of Bank of America. Please go ahead.
Good morning.
Can we talk to the shifts in FX markets, we're seeing right now and how that kind of impacts your results through year end.
It does.
Sure.
And so I can speak to that at a high level, Matt and then if you have additional follow up questions. We can tackle does but think about us as being primarily exposed to the euro and particularly when we think about the top line.
And then.
When we look at revenue exposure is primarily euro and U S dollar.
When we look at our cost structure.
We have.
A exposure to the pound Sterling as you would imagine with a headquarters.
In the UK, So we're short pound sterling.
And as we net out the effect.
Being long Euro short pound sterling on our cost structure.
They have a tendency to minimize and offset one another to the extent that both the euro and pound move in correlation to the U S dollar.
And our relative.
Consistent pattern.
We have had very minimal.
Net FX exposure on the EBITDA line, recognizing that if you're only looking at revenue our Cogs theres a bit of variability there, but net EBITDA.
It's been minimal I mean, this quarter I believe it was $1 million.
That's helpful. Thank you.
And.
Yes.
Yes.
Thank you to answer this.
So for <unk>, we're hearing a pretty wide range of price increases in.
Probably because everybody is going to different customers with different numbers, but.
Something like 100 euros, 300 euros et cetera.
Do you expect this shakes out and do you need to be at the high end of some of the ranges that we're hearing to keep profits flat quarter over quarter.
Yes.
Yes, so I think if we look at the first quarter.
We're range of local price outcomes that we've observed from public results and the like in our segment I think.
Often.
We see those fairly bunch, but there's quite a spread.
Our own case I have to say that there's a couple of factors, we should point number one.
We've been the beneficiaries of some good mix dynamics in our 12% local currency uplift in in the first quarter that was a part of the reason we had that 12%. It wasn't the majority, but it was it was a significant factor.
Because we have a larger European asset footprint.
Several competitors.
Clearly, we have more exposure to European energy dynamics.
And that has forced us to look at how.
How we price our products off that platform.
As we said on the prior call we moved to monthly reviews, because we needed that nimbleness and I think it's shown in the results that it was the right thing for us to do.
Now as we go into the second quarter, we are going to need.
A pretty reasonable price increases to keep pace with that what we see is our forecast cost inflation in the second quarter and we frankly, we continue to believe that further inflation in the second half of the year and further price increases, but specifically on the second quarter.
No.
We are going to get a pretty.
Significant price increments upwards.
<unk> for us too.
Maintain an open somewhat our margin.
And.
So it's hard to answer as you said because of what you were implying sort of range is but.
Will we get to the 12% in one quarter.
<unk> in the second quarter, no, we will but it's still going to be a pretty significant move forward I think overall.
I really appreciate the context. Thank you.
Okay.
And any question and answers.
The next question comes from David Begleiter of Deutsche Bank. Please go ahead.
Good morning, Simon and Kurt.
In terms of Chinese exports into Europe , what are you seeing and what are you expecting going forward as things progress.
Yes look I mean, I think that there is no doubt about it if we look at the overall export because the most recent export because one could conclude that the Chinese export.
The amounts are that sort of highest level that we've sort of FSC.
There's no. There's no question that the statistical analyses are out there the patterns that we see and have seen.
For several years I might say.
Main fairly similar of course with the Chinese sort of like trade war issues of a couple of years, but it is true that <unk>.
Exports of USD dropped somewhat but if we look at the.
Exports into Europe , they are higher than they have been in the last three or four years, no doubt and Thats driven by no question the softness in the internal domestic Chinese market. So yes. The high yesterday has gone up but I made the point earlier number one is that the cost curve for Chinese producers has gone up significantly with <unk>.
All of these different raw material challenges they've had challenges in recent years over labor inflation, and the capex requirements and environmental requirements and of course, the whole shipping congestion and freight rate pieces also habits. So yes. It's true those exports are going up but they are clearly needed in the market because.
I think.
Several companies are somewhat constrained with these low inventory levels and supply in the customers' needs.
I present to you that this is a highly manageable dynamic and that Chinese producers have become quite sort of focused on ensuring the get.
Fair prices for the products that they ship out of the region.
Let's be clear the majority of those exports still.
Find their way into Asian, and Latin American and middle Eastern markets compared to the western European or north.
<unk> market.
Very good and Justin performance added Simon in Q2, do you expect selling price increases to catch up to higher raw material energy and shipping costs.
Yes, I think thats, our underlying expectation I mean, it would stay in performance additives.
It's a little bit more choppy.
Although.
The feedstock prices in tier two quite significant.
They sort of manage the way that pricing plays through in the in the performance additives business, particularly in our color business, you've got iron oxides, and iron particles in Asian supply and we've noticed more volatility. So how you tune you priced tactics to you'll own the day cost is.
A little bit more challenging actually so you will see some choppiness between quarters I think in.
In performance additives, but we still think we're looking down the power of a pretty solid quarter in the second quarter for our performance additives business to go with these these past two quarters sometimes.
Very good thank you very much.
Our next question comes from Arun Viswanathan of RBC capital markets. Please go ahead.
Great. Thanks for taking my question. So I guess I just wanted to understand the level of pressure you're facing.
Some of these factors. So is there any way you could kind of quantify the dollar impact of say.
Or shortages and.
Maybe.
Some other impacts such as FX or any of these larger buckets.
How much do you think your quarterly EBITDA is being affected by some of these factors.
Well I mean, I think we cover the FX point, so it's not really a factor for us but.
Let me go look of all bridges in the charts, whether you look.
In the Q on Q the year on year's I mean, some of these exact cogs movements.
Are pretty high scale so.
I think we expect to see that knee assume continuing certainly in the second quarter.
Have not broken out and we won't be breaking out.
A numerically.
The buckets, but of course, the major spend items.
Duncan energy those are the two big ones, but I must represent that the other chemicals, we use sulfuric acid caustic coke and the like plus of course shipping and freight there is also meaningful.
Every meaningful exposure. So I think your near term you're better off to look at the bridges to give you a guide on the type of quantification of these dynamics.
And.
Of course in Europe as I said, we do have the energy profile.
Profile that is very challenging to manage right now.
And we are trying to.
It's not by fixing.
On the hedging.
Okay, Thanks, Ed and understanding that the model in Tio two has changed.
Such that the.
The pricing isn't necessarily purely raw material driven.
There is a greater impact from supply demand.
You cited high inventory levels from China, but if we look out maybe a couple of quarters.
Do you expect moderation.
When we do see moderation in some of these areas would you expect pricing to kind of follow those costs back down or would you expect to hold on to pricing just given you a differentiated portfolio.
Yes, I mean look as a number of factors in that in that question.
That's first and foremost say that we do actually expect aggregates demand to continue.
Throughout the year, we don't at the moment, although there is much talk about what what sort of comes next.
We prefer to look at the evidence to hand, and the evidence behind is very clear, it's pretty strong it in all markets in all sectors pretty much for applications, where we.
More exposed whether it be specialty or funky.
Functional products, whether it would be additive to <unk>. So we expect that to continue.
We expect these margins, we expect to be able to continue to hold onto and improve these margins as we go throughout the years. We know we are not sort of planning on some sort of forecast a catastrophic event or something were not planning the business like that.
We don't like anyone else know what the future truly holds we don't have any monopolies on crystal balls et cetera.
But I think we're in good shape, we're doing the right things to maximize the value of the business, making the most of what we've got being.
Being very attentive to our cost.
Procurement and pricing strategies and working closely with our customers.
That's an important point.
Customers here.
Really seen the value of being closely connected to us in these times, where its very challenging and I think thats bina.
Greater understanding created between ourselves and customers over this period, so I'm quite optimistic and answer your question a pretty high level answer I know, but I think pretty positive as we go through the rest of the year and beyond because as I said, whereas the incremental supply coming from has not been built during this period.
Plants continue to get older and we have seen failures and supply chain with maintenance and reliability and all of that means that the supply balances remain tighter rather news.
Thanks.
Okay.
Pleasure.
The next question comes from Laurence Alexander of Jefferies. Please go ahead. Good morning. This is Dan Rizzo on for Laurence how are you.
Thank you you mentioned you mentioned, adding capacity that you already have I was just wondering to.
Two what your capacity utilization is right now and.
And when do you expect that to go.
Yes, I mean look as pretty high everything we're doing here to get when I spoke about 5% to 10% more than last year, that's not like 5% to 10% brand new capacity on top of what we have it is our effective operating capacity because last year as some of our assets.
Either reduced or had some outages and the like but it's all about capacity and producing squeezing out more tons of what we've got and that's our.
That's our focus but certainly if you look at where we.
We are right now we are fully sold and we're running everything we can flatten.
Class out now we all know these plants need maintenance so depending on your definition of utilization and the like but I would see I would see it is greater than the 90% Mark quite clearly right now.
Okay, and then with.
You mentioned capex or just youre spending initiatives, where are you spending focused on Mexico I was wondering one what maintenance Capex was two when it comes to working capital if you expect.
Having higher inventories through the end of the year just given some of the supply constraints you have seen in just to make sure that you can meet customer demand.
Yes, Dan, let's talk about maintenance Capex first and so we generally think about the business needs for maintenance of roughly $75 million a year now depending on the year that can be a little bit above that or a little bit below that.
I think that this year, it's going to be a little bit higher than that.
Hence the guidance that we've given that not only includes a slightly elevated maintenance capex, but also some discretionary capex within that range of $85 to 95% that allows for additional support of organic growth within.
The business as well.
And then you'll have to remind me the second part to your question just just just about inventories and working capital if theyre going to be elevated through the through the end of the year just Keith just to make sure you have some supply for your customers.
Well they wont be elevated I think the values will be higher but as we look at it from a volumetric standpoint, where.
We're <unk>.
Servicing our customers with everything we produce.
On a real time basis. So I don't we right now we don't foresee building much inventory as we go through 2022.
Because the demand is so insatiable right now that we want to continue.
Provide our customers with the product as we are producing it.
So then last question have you had orders delayed or lost because of supply constraints can eliminate which you can which you can meet in terms of demand.
Yes, I think the way to think about that is quite often customers who will get it.
Latest shipment, but we have to negotiate the shipping time closely with them. So.
We always shipping on their ideal time, probably not but in negotiation with the customers.
We are not letting them down.
But it's it means constant in close communication.
But the good news for US is that we've managed to procure all the raw materials or services, we need to make our products in the first months of the first four months of them. We think in the first half and that has been quite challenging, but we've achieved it and.
We have stepped up our production was a good production quarter for us and we're going to continue to try and do that through.
Through the second quarter and the rest of the year.
So I think largely we shipping on time, if you allow us the latitude of negotiated delivery times rather than absolute preferred.
Okay. Thank you very much.
Okay.
The next question comes from John Mcnulty of BMO capital markets. Please go ahead, yes. Good morning. Thanks for taking my question just maybe a follow up on the on the working capital side. This quarter, you had kind of an unusually high number on the accounts receivable part I guess should we be thinking about the rest of the year.
The traditional first half is a big user of capital or working capital in the second half you get it all back and.
Sometimes and then some maybe sometimes it's a little bit less and getting it all back but is that the right way to think about is there any reason why accounts payable shouldnt be kind of catching up to the receivables number as we kind of look throughout the rest of the year and you kind of start to win some more cash out of the out of the system that way.
Yes, John I think that you've got it right first.
Let's just remind ourselves that elevated accounts receivable.
It's good because it's going to be unwinding into cash here as we progressed through 2022 and you are right I think that there will be an offset here and accounts payable as we go through the year.
As you think about those seasonal patterns, we still think that there will be a first half used followed by a second half relief.
We think that nets out to a total use of more than $20 million as I indicated, but the seasonal pattern between the two halves of the year will be precisely that are used in the first half followed by a source of cash in the second half.
Got it Thats helpful.
And then I guess the second question just I know, it's a little bit early but I guess, just given the windfall of cash that you got from Tronox and then.
The counterbalance of that with rates being higher any preliminary thoughts on how much.
Debt refinancing and debt pay down might have in terms of an impact on your overall interest expense line.
Yes, I think that it's still too early.
Early to say, how the interest line will be impacted as I as we indicated in our prepared remarks, we are actively engaged with.
Several bang to explore recapitalizing, a portion of our debt structure.
So we do want to get ahead of the rising tide.
Higher interest rates.
We're certainly in a much better position to do that now with.
We feel like we had a very strong first quarter, we're very optimistic about the remainder of 2022 and how we're positioned and set up in order to navigate these increased.
Cost headwinds in that and so.
We will continue we will pick our spot here.
We will deploy some of that cash.
<unk>.
And look to optimize the capital structure here in the near term.
Got it thanks very much for the color.
Okay and answer session I would now like to turn the conference back over to Simon Turner, President and CEO for any closing remarks.
Thank you I'd like to thank everyone, who participated on the call today, our first quarter 2022 earnings call and thank you for your questions. Your continued interest in Venezuela.
We can look forward to speaking with you at our upcoming in person conferences and meetings and at any point. Please feel free to reach out to Kate with any additional questions you might have thank you very much.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.