Venator Materials PLC (NYSE:VNTR ) Q2 2022 Earnings Conference Call July 26, 2022 8:00 AM ET

Kate Robertson - Investor Relations

Simon Turner - President and Chief Executive Officer

Kurt Ogden - Executive Vice President and Chief Financial Officer

Hassan Ahmed - Alembic Global

David Begleiter - Deutsche Bank

Will Tang - Morgan Stanley

John McNulty - BMO Capital Markets

Arun Viswanathan - RBC Capital Markets

Good morning and welcome to the Venator Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, that this event is being recorded today.

I would now like to turn the conference over to Kate Robertson, Venator Investor Relations. Please go ahead.

Thanks Joe, and good morning everyone. I’m Kate Robertson, Investor Relations for Venator Materials. Welcome to Venator’s second quarter 2022 earnings call. Joining us on the call today are Simon Turner, President and CEO; and Kurt Ogden, Executive Vice President and CFO.

This morning, we released our earnings for the second quarter 2022 via press release and posted the release and accompanying slides to our website at venatorcorp.com. During this call, we may make statements about our projections, our expectations for the future. All such statements are forward-looking and while they reflect our current expectation, they involve risks and uncertainties and are not guarantees of future performance.

All Performance Additives comparisons we make on this call exclude the water treatment business, which was sold in May 2021. You should review our Annual Reports on Form 20-F for the year ended December 31, 2021, From 6-K for the quarters ended March 31, 2022, and June 30, 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 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.venatorcorp.com.

I would now like to turn the call over to Simon.

Thank you, Kate, and welcome everyone to our second quarter 2022 earnings call. Beginning on Slide 3, we’ve made significant progress strengthening our underlying business through delivery of our business improvement programs and a shift to customer tailored monthly pricing reviews. Total company adjusted EBITDA in the second quarter increased to $61 million from $57 million in the first quarter and $43 million in the prior year period. Our team of dedicated associates continue to manage the significant external supply chain centered challenges and delivered strong results.

Turning to Slide 4 and our Titanium Dioxide segment. Second quarter 2022 TiO2 segment adjusted EBITDA was $49 million, compared to $49 million in the first quarter of 2022 and $36 million in the prior year quarter. Strong demand for all TiO2 sectors continued throughout the second quarter in North America. We saw normalized demand in Europe into plastics and inks end markets.

Demand for products into coatings end market application was softer in Europe and Asia. As we discussed on our last earnings call, during the second quarter, we partially suspended production of our Scarlino, Italy facility by one-third. As a result of the above factors, sales volumes decreased 9% sequentially and 7%, compared to the prior year period.

We continue to see cost inflation in the second quarter, primarily from feedstocks, energy and, other raw materials and our monthly customer tailored price reviews continue to bring flexibility to manage our margins in this volatile cost environment. Our average selling prices increased 7% sequentially and 31%, compared to the prior year period in local currency.

In the near-term, we expect demand to remain strong in North America, remain intact in Europe, and softer in Asia. We plan to continue with our monthly customer tailored pricing reviews for all our customers. We see market rates for energy, primarily in Europe, remaining elevated and volatile. We also see further pressure from feedstocks and other raw material.

Underlying TiO2 fundamentals remain broadly positive and we expect this favorable dynamic to continue. I would like to provide a further update on our Scarlino TiO2 facility in Italy. Our Scarlino facility generates gypsum as a byproduct of the manufacturing process, which has been landfilled on-site and also transported for use in the reclamation of a nearby former quarry owned and operated by third parties.

We continue to work with Italian governmental authorities for the authorization of continued gypsum disposal. While we continue these efforts, we have now suspended two-thirds of the production from this site to preserve our remaining available landfill capacity. We have a pathway and are hopeful that authorizations will be granted, otherwise, we may be compelled to close the site entirely. We continue to explore all options to avoid the outcome, and we will continue to optimize production to ensure we create the most value out of our network.

Turning to Slide 5 and our Performance Additives segment. Our Performance Additives segment delivered $19 million of adjusted EBITDA in the second quarter of 2022, compared with $20 million in the prior quarter, and $18 million in the prior year period. This segment continues to perform well, which has been achieved through organic growth, improved product mix of sales, successful delivery of our business improvement programs, and focus on our customer tailored approach to mitigate cost pressures.

Segment sales volumes decreased 3% sequentially and 16% compared to the prior year period. Volumes were impacted by product availability and softer demand for products into construction. Globally, demand remains strong for our ultramarine blue product, which goes primarily into plastics end use applications.

During the second quarter, cost inflation persisted particularly on raw materials, energy, shipping and logistics, which was offset by our monthly pricing actions to reduce the impact to our margins. Average selling prices increased 10% sequentially and 26%, compared to the prior year quarter in local currency.

As I mentioned earlier, we expect demand for ultramarine blue products to remain strong globally and third quarter demand in other end markets to be similar to the second quarter. We continue to see cost inflation, which we expect to recover through our customer tailored monthly pricing initiatives.

I'll now pass the call over to Kurt.

Thanks, Simon. Let's turn to Slide 6 and our adjusted EBITDA bridges. Total adjusted EBITDA increased by $4 million, compared to the prior quarter. The increase was primarily due to an increase in average selling price, partially offset by higher cost inflation and lower sales volumes.

As Simon mentioned, we saw further cost inflation primarily on feedstock, energy, and other commodity raw materials. The EBITDA impact from lower sales volumes was primarily attributable to the partial production suspension at our Scarlino TiO2 facility and softer demand in Europe and Asia into coatings applications. Our SG&A/other costs are favorable primarily due to foreign exchange gains in the second quarter of 2022 and lower SG&A costs compared to the first quarter.

Total adjusted EBITDA increased $18 million, compared to the prior year period, primarily due to increased selling prices, partially offset by cost inflation and lower sales volumes. During the second quarter, we did not see the normal seasonal uplift in demand for our performance additives products that go into construction and certain product availability.

We also saw softer demand into TiO2 coatings and partial production suspension at our Scarlino TiO2 facility. Our SG&A and other costs were favorable, primarily due to foreign exchange gains in the second quarter of 2022.

Turning to Slide 7 and our cash flow considerations, free cash flow in the second quarter was positive $58 million, including the $85 million receipt in cash settlement with Tronox. Working capital was a cash use of $54 million, primarily due to timing of feedstock shipments, modest replenishment of finished goods inventories, and higher valuations.

Liquidity at the end of the second quarter totaled $341 million consisting of $109 million of cash plus $232 million of availability under our ABL facility. We have taken advantage of the strong U.S. dollar and through multiple transactions we monetized and reentered into new cross currency swaps. This resulted in $8 million of cash benefit in the second quarter and another $8 million in the third quarter for a total benefit of $16 million in cash.

During 2022, we expect the following cash uses. Capital expenditures of approximately $90 million, which includes modest investment to support future growth, working capital to be a cash use of more than $30 million, due to higher selling prices and cost inflation, restructuring 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, are expected to be approximately $25 million to $35 million, which is approximately $10 million lower than 2021 as a result of lower pension contributions.

By the end of 2024, we expect to see a substantial reduction in our annual cash uses of approximately $70 million compared to 2022. The reduction will come from lower restructuring costs of around $25 million, completion of the Pori site closure, and corresponding reduction of approximately $25 million cash used, and finally, a reduction in our pension and other cash uses of around $20 million. As a reminder, we expect most of this reduction to take place in the next 1.5 years. Putting these legacy cash uses behind us is an important milestone as we strengthen Venator.

I will now turn the call back to Simon.

Thanks, Kurt. Turning to Slide 8. The Venator team delivered strong second quarter results and I continue to be proud of their teamwork and innovation to navigate the challenges presented to us. Cost inflation pressure is expected to continue in the second half of 2022 on most feedstock and we continue to manage our requirements by working closely with our supplier base.

European energy costs remain volatile with the ongoing conflict between Russia and the Ukraine. We continue to mitigate these pressures through procurement and hedging strategies. Our monthly pricing review strategy has been instrumental in enabling Venator to mitigate cost inflation pressures and manage margins.

We intend to continue to review prices of our customers on a monthly basis, which is fully supportive of our customer tailored approach. Underlying TiO2 fundamentals remain broadly positive. There is no meaningful recent or new capacity on the horizon in an industry, which requires approximately [200 kilotons] [ph] for new supply each year.

The situation at Scarlino remains uncertain. While we continue to work with Italian governmental authorities, we have suspended two-thirds of our TiO2 production from the site to preserve our remaining available landfill capacity. We have a pathway and are hopeful that authorizations will be granted. Otherwise, we maybe compelled to close the site entirely.

We continue to explore all options to avoid that outcome. Earnings from our collection of Performance Additives businesses continue to improve as a result of successful business improvement programs, product portfolio optimization and pricing strategy. We see additional opportunities for long-term EBITDA improvement within this highly cash generating segment.

Venator has a world-class product portfolio, which we delivered to our customers through our bespoke [customer-aided] [ph] approach. We are focused on growth of differentiating specialty product sales and continue to optimize production from our network to deliver value enhancing earnings.

In addition, we are making good progress to reduce our cash uses by approximately $70 million by 2025. This will reposition our business for ongoing success and enhance shareholder value.

And with that, I would now like to open the call for questions.

[Operator Instructions] The first question will come from Josh Spector with UBS. Please go ahead.

Hey, good morning. So, just two questions on TiO2. I was wondering if you could differentiate on the sequential volume move between what the impact was from your ability to produce and what's going on in Italy and other regions, I guess versus what was actually weaker demand? And then second, just curious if you could comment on where customer inventories are within Europe and Asia where you're seeing some softer weakness on the demand side? Thanks.

Sure Josh, I'll pick up on this. This is still your first question about the second quarter, sort of trying to get a handle on passing out the year, the delta there. So, if we think about it on a sequential basis, what I would say to you is, that less than half of the impact occurred because of the moderation of Scarlino. The majority still came in TiO2 from the softer demand in Europe and Asia, specifically, particularly in coatings.

And to be clear, there was a small part of the shortfall in the second quarter volumetrically because of product availability of one of our additives products out of Germany, but that was the minority. So, I think that deals with the question about the impact. And if you could just remind me of the second part of your question, I'd appreciate that.

Sure. It was just inventories. What are your customer inventory levels in your [indiscernible]?

So from an inventory standpoint, I mean, we have come through this period where there'd be very little inventory in the chain. There is no doubt that we have seen some softening in Asia and in Europe. We don't see – we see some customers, particularly in the coatings area, not so destocking a little bit there. We think this is a bit of a pause. We know that customers have painted a picture, several large customers have painted picture in the second half where they could see some rebound or some improvement, particularly in Asia and some have made that [common] [ph] in Europe too.

So, we still see inventories as being low and of course some customers are concerned about ongoing concerns about product availability, which is further keeping a lid on what I would call heavy restocking. We haven't seen that at this time.

Our next question will come from Hassan Ahmed with Alembic Global. Please go ahead.

Good morning, Simon and Kurt. You guys obviously touched on [ore price] [ph] inflation, obviously other raw materials as well. Can you talk a bit about what you guys seeing in terms of ore availability? And also part and parcel with that, obviously, as you are seeing ore price inflation, you guys are obviously doing your monthly pricing reviews as well. So, also if you could touch a bit on if at all you're seeing any signs of demand destruction on the back of significantly higher TiO2 pricing?

Yes. I mean, that second point Hassan, I mean, the answer is very straightforward, no. We don't see that at this time. And these prices, while higher than recent years, it's not sort of record highs if you like. And there's a good appreciation from the customers also about the direct cross run-ups that have occurred over these past four or five years, which have, sort of driven this situation. And of course, they've been passing price-through to their own customers pretty successfully from what we could see.

In terms of your question about raw materials as it relates to ores, I mean, ores has typically been our biggest spend item within the business and our variable costs. We have seen an improvement in the securing and supply chain dimensions around feedstocks. We believe that we've done a good job navigating through a sort of tighter period these past 6 months to 9 months and we believe that that situation will sort of loosen a little bit in the second half.

So, we currently foresee no problems getting our allocation and our requirements met in the second half across the range of the feedstock. The feedstocks contracts have now been settled. Typically, these contracts go around 6 month period, not always, but typically. I would characterize to our second half headwind on feedstock as being in-line with our forecast, and across the different families of products, not dissimilar from each other.

I would make that comment. But of course, as you're well aware, of late, of course, energy has become, sort of a more volatile and more elevated situation for our product costings and the like, but from a feedstock standpoint, it's more stable. We know where we're going. We think we're getting our product shipped.

Makes sense, very helpful. And as a follow-up on the free cash flow generation side of it, I mean obviously scraping away these settlement amount that you guys received, I mean it was negative sort of free cash flow in the quarter, but obviously, you guys highlighted the 70 million reduction in annual cash uses by end of 2024. So, I'm just trying to get a better sense of when you feel you as a company will turn free cash flow positive with all these different moving parts?

Yes. Hassan, it's a good question. That continues to be our highest priority from a financial standpoint is becoming free cash positive, and look, I'm not sure absent the legal settlement benefits that we've had here this year. If you pull those out and we look at when we will be operationally free cash flow positive, it's probably not in 2022, but we feel like we've got a shot here in 2023. And then of course as we move into 2024, the bar lowers and our ability to be free cash flow positive becomes more probable as we shed these legacy cash uses.

So, the further we go forward in time, the easier that hurdle will be, but we continue to be hyper focused on it in the meantime and doing everything we can in order to achieve that goal.

Very helpful, Simon and Kurt. Thank you so much.

Our next question will come from Jeff Zekauskas with JPMorgan. Please go ahead.

Thanks very much. What's the normal utilization rate of the Scarlino facility?

So, typically we'd be expected to run that sort of in a band of like 85% to 92% of its nameplate capacity of 80 kilotons.

If you have to close it down, what would the cost of that be? The accumulated costs of putting the facility to rest?

Yes. I mean, look, let's be clear. We are hopeful that we are going to get the necessary approvals from the authorities to continue operating this facility. And we have had [some progress] [ph]…

I was wondering what the cost would be to close it down?

Yes. Look, we haven't got to the point where we prepared to sort of put numbers out there on the cost, but I have to say that we have experience of plant closures and the different [components path] [ph], which are pretty typical, severance, any contract penalties or remediations and the like. And I would think about Scarlino at the lower end of the range of what historical closure costs would be and spread over multiple years, but it's too early to be getting to that point. We've got to work through to get more specific numbers.

And in terms of the legal gain, what was the cash flow impact of legal gain in the quarter? And are there any taxes that need to be paid in the future? And if there are, how much are they?

Jeff, if you are referring to the Pori related legal settlement…?

No, I'm sorry, the legal settlement from…

Yes. No, that's fine. So, we collected $85 million of cash in the second quarter and the tax rate associated with that will be roughly 10%. We did pay a couple million of tax associated with that [$85 million] [ph] collection in the second quarter, and the remaining amount will be spread out here through the balance of 2022.

Okay, great. So, you talked about fundamentals being pretty good, but is it European coatings demand dropping, I don't know, 10% to 15% year-over-year? And haven't the Chinese shipped? I don't know, 100,000 tons more than they did in the first six months of last year? I would think that those would make operating fundamentals more difficult. Do you expect to grow volumes sequentially in the third quarter in TiO2?

So, let me pick it up, Jeff. I mean, the second part of your question, we would expect to hold on to the sort of volumetric levels in the third quarter that we sold in the second quarter in TiO2. So, think about that as a sort of similar level. Coming back to the fundamentals, I mean, if we talk – if you look at China, if you look at what's been shipped into Europe this year, we've seen progressive decrease, we've seen a third month of decreases and those outpace any sort of reduction in coatings demand we see in Europe.

So, we continue to see in Europe a significant amount come into Europe, but it's actually at the moment lower than in Chinese shipping to the all of the Americas. So, of course, your figures on a year-on-year basis, overall exports are up by about 15%, that's true. But significant portion of that has gone into Russia, largely to sort of replace western companies that have pulled out.

So, I think from a demand point of view, yes, it's true. We are seeing some softness in coatings in the second quarter, but we do see that – we don't see that as an onward and deteriorating situation as I've explained. And we continue to believe that we can manage that level of, sort of Chinese exports. So, it really comes back to our point about supply. Supply is not getting built and underlying this market is growing and we do expect it to be growing by hundreds of kilotons on average per year over time. And supply is not being built. So, that's what we referred to there.

I guess maybe a last question. So, what's the price trajectory look like as best as you can tell for the remainder of the year? Have we come to an end or are we still rising?

No, we certainly don't think we've come to an end. I mean, we've already said that we expect to see feedstock cost increases and other raw materials in the second half and I think everyone is seeing and going to see those. We of course have a bigger European footprint and the exposure to energy there. And we've – you can see in our second quarter numbers that year-on-year were up local currency pricings up by 31%.

So there's strong determination through our tailored approach and monthly approach to continue that in the second half. That's not yet clear with a bit of softening of demand across whether the trajectory will remain the same, but we certainly will be and it's our intention to push further price increase.

I'm sorry, just one more. So, European gas is now $50 an MMBtu plus, does that – if it remains there through the course of the third quarter, does that put a strain on you relative to the second quarter in terms of your cost structure? And if it does, how much?

Well, it certainly puts a [strain] [ph] and if the question is, how much of it? We can manage through our margin and price management. And we're not prepared to break up the number, but you can imagine that this is, while we've got significant hedging programs, this type of elevated level causes some pain. So, it does bring some pressure. We can't deny that. And we – that's why we'll be pushing on our price increases.

Okay, great. Thank you so much.

Our next question comes from David Begleiter with Deutsche Bank. Please go ahead.

Thank you. Simon and Kurt, in TiO2 do you think you can grow EBITDA sequentially in Q3?

Well, I think it's going to be pretty tough. We're not going to get volumetric uplift there. And conditions are a little bit softer in the third quarter. I think we've highlighted in Europe and Asia. And even as that gets better, we don't expect that to come very extremely quickly. So, I'd say the answer to your question is going to be tough, yes. It's probably going to be a difficult task.

Thank you for that. And just similarly in Performance Additives, do you expect a similar or typical seasonal performance in that business or perhaps a further weakness given the macro backdrop?

I think we expect it to be similar. I think if you look at our Performance Additives business performance in the second quarter and look historical patterns. And there's no doubt about it in the second quarter. We suffered from global sort of construction weaknesses and we expected to [cease] [ph] a bit of a better seasonal uptick, which we didn't get. And we still have a pretty decent earnings result because we've made some improvements to that business.

So, I think we're pretty positive about seeing a pretty decent return from Additive in the third quarter.

David, I will say that we've got a pretty easy comp, compared to the third quarter of last year. So, we certainly expect it to be much stronger than what we had last year, notwithstanding a seasonal decrease into the third quarter from the second.

Our next question comes from Vincent Andrews with Morgan Stanley. Please go ahead.

Hi, guys. This is Will Tang on for Vincent. Thanks for taking my question. So, you guys had a $103 million kind of inventory headwind to working capital during the quarter. Is that a function of a more, I guess, purposeful inventory build given, kind of the lack of inventory you've called out in the past or I guess just a function of the weaker architectural demand? And then how would you kind of characterize your own inventory position I guess kind of ending second quarter here?

Yes. I mean, look, it does vary. I mean, we didn't intentionally set up to grow inventory. I mean, obviously with inventory valuations being what they are, we have very highly incentivized from our cash program to constrain and minimize. That said, there was some deterioration in coatings and different plants make different products that we did see a little bit of a modest inventory build within that number on the finished goods.

A bigger and more, sort of a large issue for us in the quarter was timing of feedstocks and frankly that was quite a material number within the negative 103 in inventories. I've mentioned the higher cost, but as we see inventory in the chain, I mean, we're taking all steps we can to control our raw materials on our finished goods. We don't see customers have quickly restocked here. They seem to be managing there.

So, I would say that from our evidence inventories in the chain are still relatively low, but clearly not quite as [tight] [ph] as they were.

Got it. And then, I guess, I think in the past, you've talked about using that cash that you achieved from the Tronox settlement to kind of restructured debt, but I guess given the rising interest rate environment that's kind of work against you there, are there any changes to your plans or is that still how you – is that still how you plan on using that?

Yes. Will, we continue to look for the right opportunity to use some of the cash that we have on our balance sheet and pay down our debt. Ideally, we would do that in connection with an optimization of our capital structure. And so, we continue to look for the right window in order to do that. So, stay tuned.

Our next question comes from John McNulty with BMO Capital Markets. Please go ahead.

Yes, good morning. Thanks for taking my question. A lot of my questions have been asked already, but I guess one I wanted to dig into a bit. You've got a couple of assets in Germany. I guess, can you help us to understand what happens if the [spigots] [ph] from – regarding [Russian gasket] [ph] cut off to Germany, can these plants operate? Do you have a way to kind of procure the energy that you need to run the facilities, is there a way to think about that?

Yes. I mean, look, I think some general comments implies. First and foremost, we attempt to and have been achieving a pretty close relationship with the authorities in Germany to make sure the dialogue is open and we've been positive about the engagement in regards that the German authorities are showing some understanding of the cost based situation. of our energy and looking at arrangements that could help us in our plants in Germany.

So, that's a very positive signal because it shows the willingness to engage and the understanding of potential problems. Now, the second point I'd like to make is that we're pretty positive about the fact that many of the products we make in Germany go into pretty sensitive applications, pharmaceuticals, and the like, and we think that there's a good chance that the German government sees and understands that they have to keep these products flowing as building products into other industries, should there be? And we don't know this yet, but should there be any allocation or rationing regime put in place?

So, we think we're sort of well-positioned and that would be my second point. And then thirdly, look, of course, ultimately, we have got no guarantees that there wouldn't be some impact. We're staying very close to it. We do have the ability to moderate plants in a way that sort of maximizing whatever gas we would get. But of course, clearly that is a concern on a go forward basis with winter approaching, with European and German assets as to the energy availability. And we are – we can't speculate that, we don't know what's going to happen, but we are closely talking to those authorities is what I can tell you.

Got it. That's helpful. And then maybe one question just on the Performance business. So, you indicated you didn't see the seasonal construction lift the way you normally would, was that just because the construction season didn't actually play out the way it normally does or were there supply related issues where maybe there's a little bit of catch up that you can get in the third quarter? I guess how would you characterize what was driving that kind of lack of seasonal uplift?

Yes. I mean, I would say it was soft demand. I don't see it necessarily as a catch up. On that though, I don't see it also deteriorating. I think we said that we expect to see us delivering a pretty decent third quarter. Of course, there's our EBITDA Performance Additives franchise, but the volumetric damage was done in our colors business where both in Europe and in North America have the same. Both of those regions, which are our main sales regions we saw some downdraft in construction based demand at the volumetric level.

Got it. Thanks very much for the color.

Our next question will come from Laurence Alexander with Jefferies. Please go ahead.

Hi, good morning. This is Kevin Estok on for Laurence. I just had a question about the conflict in Ukraine. Hi. Just wondering how the situation is perhaps interrupting your non-energy related supplies? And then more broadly, just curious, I guess, how you expect supply constraints to more broadly evolve globally over let's say the remainder of the year?

Yes. I mean, I think that where we are on the Ukraine situation is it's not really materially impacting our overall business operations and performance either on that supply or selling end, but I don't think with feedstock situation sort of like improving a little bit, our main availability based issue for raw materials comes down to the previous question on energy really. It's having sufficient gas in the [Nord Stream 1 pipeline] [ph] and what runs and what may play out in that sort of political arena around gas availability. That's our number one. supply chain, challenging concern. I think across the board, we're pretty much getting everything else we need across all our different factories and product groups.

Our next question comes from Arun Viswanathan with RBC Capital Markets. Please go ahead.

Great. Thanks for taking my question. I guess I just wanted to circle back to the energy cost inflation side. So, what is natural gas I guess as a part of your cost structure? And given that you do have some production in Europe, is this a little bit more onerous for you guys? I know it could be, but I just wanted to see if there's any kind of metric you can give as far as maybe as a portion of your cost structure? How much of that is in Europe and so on and so forth? Thanks.

Yes. I mean, look, we have the preponderance of our TiO2 capacity is based in Europe. We have five facilities across Europe. They're all in different sort of situations, opposite energy. I'd say there is some concern around Germany. We've talked about that. We think U.K., Spain is pretty well-positioned. Scarlino is probably somewhere in the middle and of course, we are running that at a lower rate as well.

So, I think that energy is a large significant and growing portion of our cost structure Historically, feedstock has been the biggest single spend item. That remains the case that it is the biggest single spend item, but of course, the energy bill, if you look at some of the volatility we've seen through the course of this year, it's been significantly higher and is right now than some of the sort of like Asian or U.S.-based facilities taking these energy products.

So, we can't deny that. And I think you should think about the energy component being a large and second largest part of our direct cost structure and taken together, I would say now that feedstock and energy are probably 70% plus of the overall cost structure of the raw materials and goods we buy to make the product, not our indirect cost.

Yes. Arun, just to put a little bit of a finer point on that, think about energy as an entire basket comprising about 15% to 20% of our cost of goods sold, and there's a range depending on which business unit that we're talking about, but that ought to give you a feel and a sense for how meaningful energy is to us recognizing that we're much more sensitized to ore feedstocks than [we are at] [ph] energy.

Great. That's very helpful. Thanks for that. And then, I guess just, the second question was just on the market outlook itself. So, I think some of the industry trade forecasters have price increases in Q3, but that would be potentially mostly on this inflation, both on energy and feedstocks, is that correct or would it actually – would you expect slight margin expansion as you look ahead or is it mainly to cover those rising costs? Thanks.

I think we'll be looking to target to offset those input costs that we see inflationary pressures in the third quarter on our pricing across most of our – practically all of our portfolio of products. And we see that the third quarter demand will hold onto in TiO2 over the second quarter. And in [indiscernible], we think we're going to get – we set for a pretty decent third quarter. We also note some commentary by some major consumers of our products about what they see in terms of the second half trajectories in Asia, particularly on some in Europe as well.

Our next question will come from Eric Petrie with Citi. Please go ahead.

Hey, good morning, Simon and Kurt.

In TiO2, what's your order book visibility like, and we talked about last quarter re-stocking risk upside, is that still second half or is that going to be pushed into 2023?

Yes. I mean, I think that if you look at – it varies by region. I mean, I think we see demand holding up well in North America. And I think in Europe, of course, there has been some demand softening. We think that it feels more like some sort of correction because we haven't seen great re-stocking. Some customers are concerned, particularly larger ones about potential gas rushing and knock on effects on their own supply base. So, I think they are sort of leery of running their inventories down for [the two] [ph].

There could be some re-stocking, but we see Asia is probably – we don't see it yet, but others think it's going to be rebounding. So, it's certainly soft for us. And we'd expect to see some pickup during the second half there. As I said earlier, we don't see an unduly high level of inventories in the chain and we're not – we don't see those sort of ballooning us if you like in the second half.

And then, I know your exposure to China is relatively smaller compared to some of your competitors, but how much the China lockdowns impact the demand and do you think that was attributable to the higher exports?

Yeah, I mean, look, there has been a real impact in China. Demand has been down, no doubt about it, even though the Shanghai lockdown was lifted quite recently. It's been a big impact and local demand. And as an earlier question highlights the Chinese exports globally, while it's come down sequentially in the second quarter on a year-on-year basis, they are still up. And that's to work by way of compensating for that local demand. You're right, we don't have a big window into China, but the window, we do have, shows pretty weak demand outside of specialty products.

Okay. And lastly if I may, what's the timeline for the landfill capacity reaching full utilization at Scarlino running one-third of operating rate?

Yes. I mean, I think we've got – we still have a window to work with, but we've got to be a bit careful here that we keep the continuity of the plant running. We've taken this precaution to come down. We don't have an unlimited time to sort it out. Of course, we'd like to have sorted out already, but as we get through into sort of early 2023, we shouldn't have further information in 4Q to be able to update you on with where we are in these approvals.

Great. Thank you for the color.

There are no remaining questions at this time. And with that, we will conclude our question-and-answer session. I would like to turn the conference back over to Simon Turner for any closing remarks.

Okay. Thanks, operator, and thanks to everyone for joining our second quarter 2022 earnings call. Thank you for your continued interest in Venator. We look forward to speaking with you at the coming in-person events. And of course, please feel free to reach out to Kate with any additional questions you may have. Thank you.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.