Q3 2019 Earnings Call
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I would now like to hand, the confidence do your speaker today Brennen Arndt Senior Vice President of Investor Relations. Please go ahead Sir.
So I could your well and welcome everyone to our third quarter 2019 conference call, what our call today, our Jeff Quinn, Chairman and Chief Executive Officer, John Freshwater is young Chief operating Officer, John Romano, Chief commercial and strategy Officer, and Tim Carlson, Our Chief Financial Officer.
We will be using slides as we move through today's call. Those are you listening by Internet broadcast through our website should already have them, but I was listening by telephone if you haven't already done. So you can access them on our website at Tronox Dot com.
Moving to slide two with a reminder, that comments made on this call any information provided both in our presentation on our website includes certain statements that are forward looking and subject to various risks and uncertainties, including but not limited to the specific factors summarized our FCC filings, including goes under the heading entitle to.
Occurs in our annual report on Form 10-K , slash shape for the year ended December 31st 2018.
Sure information represents our best judgment based on today's information. However, actual results may vary based on these risks and uncertainties and a company undertakes no obligation to update or revise any forward looking statements.
During today's call, we will refer to certain non U.S. GAAP financial terms that we use in the management of our business I believe are useful to investors evaluating the company's performance. These include EBITDA adjusted EBITDA adjusted EBITDA margin adjusted earnings per diluted share and free cash flow reconciliation. So there are numerous U.S.K.
GAAP terms are provided in our earnings release and any appendix of the slide deck that accompanies guidance with respect to the fourth quarter and for your 2019 adjusted EBITDA adjusted earnings per diluted share and free cash flow [laughter], we're not able to provide without unreasonable effort. The most directly comparable GAAP financial measure or reconciliation.
Such financial measures because certain items that impact such measures are out of our control on certain or cannot be reasonably predicted.
As you saw in our earnings release, we provided our results on both a reported basis on a pro forma basis to assist in our discussion of third quarter performance as it compares to the third quarter 2018, and the second quarter 2019, our primary focus today will be on the pro forma comparisons to enhance your understanding of the underlying trends in our business but.
Formats and in our markets in the appendix of our earnings release, and this presentation or a statement of operations and an adjusted EBITDA reconciliation both on a pro forma basis for the third quarter's a 2019 and 2018 moving to slide three sound my pleasure to turn the call over to Jeff Quinn, Jeff. Thank you.
Brent and good morning, everyone and thank you for joining us today.
Our strong third quarter performance clearly demonstrate.
The inherent stability and resilience of our vertical integration business model in a challenging global macroeconomic environment.
The third quarter performance was driven by strong execution on the many operating the commercial initiatives that are within our control sets are delivering the synergies optimizing our global operating footprint, taking full advantage of our vertical integration.
Managing overhead and wisely allocating capital.
We delivered acquisition synergies a $45 million due the ended the third quarter.
Our global team feels there real sense of ownership regarding the synergy commitments that we have made to our shareholders.
Every day, we're finding additional value, creating opportunities and the new tronox.
We have raised our target for synergies to be delivered in 2019 65 million.
Ill review, our progress an outlook for those synergies in more detail on the next slide.
Our adjusted EBITDA margin of 24%.
With that of the second quarter, despite sales volume declines in Circon pigment, reflecting the margin benefits from our vertical integration and are continuing drive to lower our cost per tonne do our successful operational excellence program.
We continue to see benefit from our alignment with pigment customers growing faster than the overall market.
The balance of ourselves.
Across geographic regions and across our broad product portfolio.
The success of our be spoke win win margin stability initiative.
And is enhancing the stability of our top line relative to historic industry patterns.
This stability is reflected in our global average T ao to selling price, which has remained essentially level on a sequential basis across 2019.
No we are experiencing some softness in circon demand in the near term primarily in China. This high value Coproduct continues to deliver strong profitability and margin enhancement.
We see the medium to long term outlook Presort Con Ed. It's very good were steady GDP level demand growth and increasing global supply tightness.
Our global team is moving forward into 2020 together as one tronox, we have a clear strategy, we are executing well and we are generating significant momentum towards creating the world's leading T O two company.
As we've said our mission is to be the T ao to equity offering of choice one that displays greater stability you financial performance in cash generation across cycles than historic norms are out of our industry peers.
Moving to slide four I would like to add a little more color on the success of our program to deliver synergies from the Crystal acquisition.
This is an update of the synergy slide we introduced to you on Investor day, and we're using yet to track our progress.
Through the end to the third quarter, we have deliberate total synergies a $45 million of which $21 billion worth filled those synergies have been reflected in our EBITDA through the end to the third quarter.
The majority of this figure is SGN they related plus some additional realize feedstock synergies and pigment related supply chain benefits.
$13 million on synergies are related.
Two actions that have already been taken which will flow through into EBITDA in future quarters. This figure reflects feedstock and other mining related supply chain synergies achieved.
And which are sitting on our balance sheet as I've said before through pinedale in future quarters, and $11 million, our cash synergies not reflected in EBITDA, consisting of interest and tax savings.
The original synergy target said at Investor Day was $45 million, which we've already achieved through the third quarter.
Given the strong outperformance, we are increasing 22019 synergy target to $65 million.
We look to the outer years, we have confidence that we will be able to significantly exceed our current targets for those out years. When we talk to you early next year, we will provide update taught updated targets for 2020 through 2022.
I'm now going to turn the call over to John Romano, Our Chief Commercial Officer, John first of all turn John our Chief operators operating officer. These guys and their global teams are the ones. There are making this all happened on daily basis across the six continents. There are now tronox.
John We'll report on our commercial performance and the trends, we're seeing in our global markets, Sean Francoise, We'll report on our operational performance and the success, we've had in integrating our operations and delivering on the synergies John turn it over to you thanks, Jeff moving to say.
Slide five as Brad said, our presentation will focus on the pro forma numbers to give you a clear understanding of our commercial performance and the trends in our markets first the year on year comparison revenue of $768 million was 8% lower than the year ago.
Or 7% lower excluding $10 million of revenue in the year ago quarter from the electrolytic business that we sold in September of last year.
The two pigment sales at $603 million were 4% lower sales volumes increased 3%, while selling prices were 5% lower on a local currency basis on U.S. dollar basis prices work.
7% lower as FX translation was a 10 million dollar headwind on revenue.
The sales volume increase reflects the completion of the Destocking in Europe , and Asia and continued stability in the North American market inventories across the value chain appear to be largely normal across regions.
The primary reason for the lower year on year average tier two selling price and this is a reminder for you as it's something we've spoken about on recent calls was crystals commercial approach in 2018.
So the 5% year on year decline in pricing on a local currency basis is essentially a prior year issue.
As you'll see in the sequential comparison, our global average selling prices have remained essentially stable.
Shortly after the acquisition, we fully implemented our single unified commercial approach to serving our combined global customer base.
And we were pleased to find minimal customer overlap across the regions.
In addition, our average pricing across the regions was quite similar so the price harmonization program across the merged customer base went very well one was completed early in the third quarter.
Moving to zircon sales of $68 million were 35% lower than a year ago.
Sales volumes were 32% lower due to softer market conditions, primarily in China.
Affected by the trade war, environmental regulations, and generally slower growth.
Selling prices were 4% lower primarily due to product mix, we've seen an increase in sales of standard grades ERCOT products versus premium grade, which largely explains a reduction in global average selling price in the quarter.
And in feedstock and other products sales of $97 million increased 9% on higher CP slag sales.
Moving to slide five for the sequential comparison versus second quarter again on a pro forma basis revenue of $768 million decreased 7% on lower tier two and zircon sales volumes, partially offset by higher CP slag sales volumes.
Tier two pigment sales of $603 million were 8% lower compared to $657 million sales volumes were 7% lower within the seasonally typical range and selling prices were less than 1% lower on a local currency basis Anda U.S. dollar basis.
I'd like to share perspective on market conditions, we've experienced since the first quarter of 2018.
This period has been the longest demand contraction that I can remember in my 30, plus years experience and T O two.
Prior to this downturn the longest period was 16 months during 2011 to 2013.
And although it's been the longest period of demand contraction. It has also been one of the shallow cycles. When you look at price movement in the period.
Given the current supply demand fundamentals. We believe this global downturn is close to an end and even a modest rebound and global macroeconomic conditions should result in a recovery in Seattle to demand.
Moving deserve gun sales of $68 million decreased 24%.
Sales volumes were 20% lower as customers were managing down inventories during the quarter.
However, we expect to see a pickup in sales volume in the fourth quarter compared to the third quarter based on the timing of shipments as Jeff said zircon continues to deliver strong profitability in margin enhancement the medium to long term outlook for zircon is very good and this and with steady GT GDP level demand growth and increasing supply tightness.
With no significant projects and the industry pipeline.
China represents more than 50% of the global zircon market any upturn in the countries economy could result in a rather rapid recovery in zircon.
And finally feedstock and other products sales of $97 million increased 20% driven by higher sales volumes of CP slag and pig iron and with that I. Thank you and I'll now turn the call over to JF for review of our operating performance and profitability in the quarter JF [noise].
Thank you John moving to slide seven.
First looking at the year on year adjust EBITDA comparison.
Adjusted EBITDA of 484 million dollar was 14% lower than a year ago quarter.
As John discussed lower T O two selling price related to legacy Crystal commercial approach in 2018 and lowered his work on volume were the primary commercial drivers.
Partially offsetting this factor was favorable foreign exchange on costs, primarily the Australian dollar and the South African Rand.
We experienced higher operating costs at legacy Chris full game coal mine in Australia due to production downtime in the third quarter compared to full production in a year ago quarter.
We identified different downtime at our Investor day and are on our second quarter call at that time, we committed to resuming full operation in August .
I'm pleased to report we met that commitment as fuel full operation at Gingko review in August right on schedule.
I want to tank, Russ Austin, or managing director in Australia, and his team for a job very well done.
In addition, synergy contribute an improvement to EBITDA of 21 million dollar and the margin benefit from our shift to fully integrated operation contribute an additional 18 million dollar.
Moving to sequential comparison.
Adjusted EBITDA of 284 million dollar decreased 8% from 200 million dollar driven primarily by lower tier two and zircon sales volumes and higher production costs.
Synergy contribute $10 million to EBITDA and favorable foreign exchange on costs again, primarily the Australian dollar into South African Rand also partially offset the slower sales volume.
As you can see we are executing very well and over delivering on synergy.
But delivering dis synergy is only one part of our operational excellence program.
Our global team ease relentlessly driving to lower our cost per tonne, increasing product quality optimizing all global footprint and most importantly continually improving our safety performance on our journey to zero as well.
Called this initiative within trucks.
Yes.
Mobile macroeconomic condition are on certain.
However, as Jeff said, many of the key driver to increasing or profitability and cash flow our in our control.
We fully intend to meet our commitment to lower our costs improve our product quality and generate cash using our advanced age and integrated position.
With that I. Thank you I look forward to continuing to report on our progress in the next call and I'll turn the microphones to Tim Carlson for a review of our financial position, Tim Thanks, Jeff moving to slide eight and starting with our balance sheet.
September Thirtyth 2019 debt was 3.1 billion in debt net of cash and cash equivalents was $2.8 billion.
Our liquidity was $661 million comprised of cash and cash equivalents of 305 million.
We have 356 million available under revolving credit agreements.
In addition, we have $11 million of restricted cash.
Our net leverage was 3.8 times on a pro forma trailing 12 month basis, and including an incremental $100 million of synergies. It's 3.4 times, we continue to target a net leverage ratio of two to three times.
Our capital allocation policy is unchanged with priority given to de leveraging and disciplined capital spending on high return organic projects.
Capital spending in the third quarter was $59 million below our depreciation depletion and amortization expense of 74 million.
For the full year 2019, we forecast capital expenditures of 200 to 215 million and DNA and 280 to 290 million both on an as reported basis.
Regarding returning capital to Shareowners, we've returned approximately 309 million in 2019.
Through the repurchase of approximately 21.5 million shares and regular dividend payments.
Regarding our outlook for the full year 2019, with global macroeconomic conditions remain uncertain and considering the near term softness in zircon demand offset by our confidence in our ability to deliver on our synergies we're revising our outlook as follows.
For the full year 2019 on an as reported basis. Our outlook is for revenue of 2.65 billion. The 2.7 2.7 billion.
Adjusted EBITDA of $615 million to $635 million adjusted diluted EPS of 33 cents to 44 cents and free cash flow of 120 $235 million.
On a pro forma basis, including legacy crystals first quarter and partial second quarter results. Our full year 2019 outlook is for revenue of 3.15 to 3.065 billion.
Adjusted EBITDA of $680 million to $700 million and adjusted diluted EPS of 25 to 36 cents.
The result in fourth quarter outlook for these metrics is in our earnings release with that I. Thank you I'll turn the call back to Jeff for closing comments Jeff.
Thanks, Tim not turning to slide nine I'd like to end our comments were just a few a few prospectus on the path forward.
As we all know the macroeconomic environment has been challenging over the last couple of quarters.
Ever Tronox has been performing well in this challenging environment. We do however, I believe a turnaround as not far away.
As John said it has to his discussion of current supply demand fundamentals in both T ao to pigment and Circon any modest uptick in the economic climate could result in a rather rapid recovery in demand for both products as we enter 2020, we will be well positioned to participate in that were.
Coverage.
And while the supply demand fundamentals give us confidence in the future Upto two we're even more excited about the levers that are within our control.
We continue to deliver on synergies we promised.
Significant synergies anticipated to roll through the Pinedale in coming quarters as they work through the balance sheet.
We remain focused on optimizing our global operating footprint capitalizing on our vertical and Gration.
We continue to manage our overhead and have a robust robust process for managing our capital.
We also remain committed to sustainability.
Corporate citizenship and sustainability are integral parts of our culture and our vision.
We are continuously challenging ourselves to improve our safety performance promote sustainable corporate growth invest in green technologies.
Being turned transparent and all of our business operations and making positive contributions in the communities, where we live and work.
To support our efforts in this area. We have recently promoted Melissa zone to senior Vice President External affairs, and Chief Sustainability Officer to drive products third ship environmental initiatives to Reenergize, our focus on personal in product and process safety and lead our global external.
No affairs activities.
We understand the importance or proactively protecting our privilege to operate.
Garda reputation and showcase the scope of our commitment to sustainability stewardship and safety.
Missy will be a strong leader for Tronox and navigating this landscape and I'm really pleased that she's taken it even more significant role in our team.
I'd also like to announce another organizational change one that I announced with some this level regret.
After a 40 year career in the chemical industry Brennan has announced his retirement effective at the ended the first quarter of next year.
Brendan is a great partner, a trusted advisor and our strong voice of the shareholder within our company I will Miss his advice is council.
However, my level of reluctance in an assay brands departure is matched by my level of excitement and announcing our path forward for Investor Relations six treating Brendan will be Jennifer Gunther, our current vice president of business development.
Jennifer join Tronox in 2018 from Goldman Sachs, where she worked in the investment banking division in their mergers and acquisition and leveraged finance teams. Jennifer also worked with me at solution corporate strategy in development.
And served as a critical member of our team during the self solution set to Eastman chemical.
She holds an M.B.A. from Harvard business School and graduated with honors from the University, Missouri with their dual degree in science and business Administration and International studies with over 10 years of experience across finance business development and strategy in the industrial chemicals sectors I am confident she will be.
Our strong Stewart of our Investor Relations team will bring new focus a new energy to the function Jennifer Brennan I look forward to meeting with many of our shareholders and analysts over the coming months as we effect a smooth transition with the investment community.
With that we'd now like to turn it back to the operator to open it up for your questions.
Thank you as a reminder to ask a question you wanted to press star one on your telephone to withdraw your question press the pound key please standby Bobby composites Monday roster.
Our first question comes from John Mcnulty with BMO capital markets. Your line is now open.
Yeah. Good morning, Thanks for taking my question.
I was hoping you could maybe give us a little bit more color on the regional tier two markets kind of what you're seeing in terms of demand pull and also maybe an update as to as to how you're thinking about the inventory levels are as you start kind of looking to to position for 2020.
Yes. This is John Romano, So I'll go by region with regards to where the strongest maybe some of the ones that aren't as strong. So North America continues to be very stable I mentioned this 18 month period.
Kind of demand contraction, but demand in North America has been very stable. So I'd say there hasn't been a lot of change there.
In Europe in the third quarter.
We did see a bit I would say weaker demand August and September were a bit more of a I'd say holiday period than we would have normally seen but again still within the seasonal range that we would have expected.
The 5% to 7% range Asia Pacific.
Moving into the fourth quarter, probably still somewhat stable compared to third quarter, we have seen a bit of competitive activity with regards to China.
So in China itself, it say demand still slow hasn't picked up a lot, but that's one where I think when we think about how long. The downturns lasted there were somewhat confident moving into 2020.
Not only on tier two buttons are ecom, we should start see it picked up sometime next year.
As far as the second question I think you had was with regards to inventory.
Yes, there's been a lot of and I guess a lot of people have already published results I'm not going to make reference to anybody other than our own inventory in the third quarter, we typically build a little of inventory and in the fourth quarter, but we also have planned maintenance.
Regularly in those quarters, so I would say our inventories although may have bumped up a little better still in the normal range.
Got it that's helpful. And then I guess a question just on the synergies like is the 65 million that you're expecting in 2019 is that what you'll realize in 2019 or is that the year end run rate and I guess, how should we think about if that's not the year end run rate, where do you think you're going to be ending the year at.
Yes, they that that number is the number that will be realized.
During the year and not all that will flow through.
PNM all in 2019, some of that will be caught up in the balance sheet and dopey pinedale in future quarters, but that will be actually realize for actions taken in 2000 that no during during the year.
Great. Thanks for the color.
Thank you.
Next question comes from Frank Mitsch lets them.
Rich your line is now open.
Yes, Thank you and congratulations Brennan.
Terrific Courier 40 years 40 years in the industry I suspect did you started when you were 15.
Yes indeed.
Best wishes for the future look forward looking it up with you and of course, Jennifer Congratulations on your no new role as well look forward to working with you again.
In that role.
If I can follow up on the synergy question.
You laid out.
In 2019, you'd realize or you're going to realize 45 million and you know all set up to 65 million for 2020.
They had one.
In 120 million in 21.
And you dislike the show the same number im curious as to.
What they're just a pull forward of realization to go to 40 to 65 million in 2019.
Or are you, giving yourself some wiggle room that perhaps you could exceed that 120.
In in year 2020, as well sorry for all the 20.
Okay.
Yes, Frank I think two comments I made during my remarks, I think tied together are the answer to that first.
Every day here now we are finding new ways of creating value with this new footprint with the business model.
So it's new opportunities. It's things there are a discovered in addition to what we expect to no coming into this.
As I said also.
We are.
No confident that we will be able to significantly exceed the current targets that we've laid out for 2020 322 and when we talk to you in February with year end results will be providing an update updated targets and so obviously.
We're going to be increasing those targets.
And when we as we entered the new years. So it's all.
No, it's finding the synergies delivering them faster and finding new opportunities that weren't envisioned at the time at the deal.
Terrific. Thank you very helpful.
The Romano.
No you didn't want to comment on inventory levels at from your competitors, but curious as to where did you think inventory levels.
The.
The customer level and as part of that can you provide an update on how your bespoke margin stabilization contract negotiation discussions are progressing.
Yes, so from thanks, Mitch from the customer perspective, I think that.
Anytime you're.
Like I mentioned, we've been in a period of contraction. So typically customers aren't building a lot of inventories I think customer inventory customer inventories have not grown at all that may have actually.
Come down a bit, especially moving into the balance at the end of the year everybody typically will have working capital projects I don't think customer inventory has moved up at all so I would say that it's probably normal to slightly below normal as far as margin stability initiatives.
We're very committed to that continue to have success outside of North America now ethic early on.
We had a lot of success in the U.S. and the coatings market Thats down migrated to other segments such as plastics. So we continue to make good progress in that area and I think it's reflected in the comments that I made earlier about although the period of demand contraction has been longer.
The the shallow or minimal price movement. In this period I think is supported by margin stability initiatives throughout the industry.
Thank you so much.
Thank you. Our next question comes from Duffy Fisher with Barclays. Your line is now open.
Yes, good morning.
First question is just around zircon.
You are down 32% volume do you think thats, what the market is down or did you give up market share and then just a second one around that what's your split between premium grade in standard grade kind of on a normalized year basis.
Yes, so the first question.
On what are the so our out our competitors have published results and they're very similar to ours. So I don't think this is a market share loss.
So it's strictly I would say somewhat of a change in demand patterns, so not not a market share loss and from the standpoint, what was the second question I'm told that minimum standard preferred vendor. So in the quarter I would say our percentage of volume on this and I guess I don't have an exact number but.
Zircon on the premium side is probably more like 60% of our normal sales volume and lower in standard grade Zurich law or about 40%, but that proportion of sales was a bit inverted. This last quarter and that was partially why we had price drop as I mentioned, 4% in the core.
Sure.
Okay.
And then if you could the 18 million number from your slide seven from integrated margin benefits can you use that number to walk through.
Where you're at today kind of back integrating on the worst side for Tio too and really break out what is at 80 million is that just what you were able to produce a ton of war for versus what you would have had to buy it for on the open market and then how much more integrated physically do we get in 2020 versus 2019.
Yes, so duffy, it's Tim I'll handle the first first aspect to that question I don't know for recall from our first quarter call, but we had built some inventory is result of moving to our vertical integration. As result, we ended up putting a bunch of deferred margin on the balance sheet that is just that lower cost or flowing through the.
CNL in the quarter.
Majority of that deferred margin.
It has flown through in Q2 in Q3.
So that vertical integration benefits been realized and we'll continue to realize.
Total integration benefits as part of our synergies and I'll turn it over to JF, yes terms of integration or duthie on that no through through to do this year, we've been at about 70% internally sourced and next year that will grow to about 78%.
Great. Thank you guys.
Thank you.
Next question comes from Hassan Ahmed with Alembic Global Your line is now open.
Morning, guys.
You know a similar question on the pigment side.
Following up on Duffy's question on Zika and.
Sequentially volumes are down 7%, so just trying to get a sense off.
You guys talked about you know seasonally expecting a downtick and maybe this was in line with sort of seasonal demand trends and the likes of the question is that was that contraction inline with what you guys saw into broader market.
Did you regain your market share I guess.
Yes. So this is John Romano again.
Look public data came out on three companies already so one of them actually had an increase in market share.
The other two had.
Q2 to Q3 reductions that were very similar to ours. So I do believe that when we think about the majority of the volume that.
And that 7% drop a lot of that actually happened in Europe , and if you think about our footprint before the transaction about 50% of our volume was in North America.
Less than that now with the merger of the larger company, we have a larger footprint in Europe . So this holiday period that I referred to typically August September probably had a bigger a little bit bigger impact on our seasonal change in demand Q2 to Q3 than it would have previously so short answer is I don't believe we lost any significant share and I do.
Seasonal.
Understood understood very helpful and as a follow up.
Could you just give us your views on the trends that you're seeing on the or side of things.
You know what supply them onto looking like what we should expect.
From a pricing perspective over the next couple of quarters.
Yes, so from the or perspective again, Thats, we continue to see the or supply demand type situation there hasn't been a lot of new projects come on.
So I would suspect as we move into the balance of the year and this is clearly the point in time, where we start going to the negotiation process that they'll still be pressure on the upside on pricing for or JFK, but no I fully agree with with John on that so we have seen a natural rutile high price you know.
At the very high level and we have no reason to think that this is going to move down in fact, the market is still very tight on all type of feedstock and that's really the strength of four vertical integration position and look it's it's true that we by quite a bit the feedstock as Jeff mentioned.
This year, it's it's 30%.
Next year, what would the value in use we will reduce the the proportion of outside or that we use.
And so we see it as an advantage of being vertically integrated in a market where feedstock is moving up in value and ilmenite clearly has an impact on what's going to happen in China, and if you look and we've talked about this I think in previous presentations, but if you think about the last cycle when the market actually dropped pricing.
For ilmenite in China was around 80 Bucks a ton it's still floating at the 160 to 170.
Per ton range, so that is going to in our opinion continue put pricing pressure on costs and ultimately price.
Very helpful. Thank you so much has.
Thank you. Our next question comes from Jeff Zekauskas with Jpmorgan. Your line is now open.
Thanks very much.
Can you talk about the.
The progress you're making at yanbu.
What was the condition of the plan three months ago, and how do how do you see it today.
How has it changed at the problems and tractable are they being solved.
So Jeff it's a sharp software here and look we're very happy with the progress that we have made and look the reality of the market that John has the describe shows that we didn't have to push to produce.
More ton off out of Yanbu, So we put all our effort in improving the quality outdoor CNBU and as you know we mentioned that to you many time yanbu with the replicate so far Hamilton plant.
And the quality of the product made at that plant was that we below what we were able to achieve in Hamilton.
And in in recent here and we are at the moment.
Basically changing the grade that all produced out of Yanbu, we have changed the way we look at the spec for quality and then I can tell you did the team that he's helping our MBU colleagues ease the is going very well and we have seen a step change in quality.
Obviously, we still have work to do on that front, but that's really where we're putting all our effort at the moment and I'm happy to report that as of Monday. This week, we have the group of the Saudi operator in Hamilton, Mississippi, and I mean, working on shifts with or their U.S.
Colleagues and we have a group of us operator, any m. boom.
Doing exactly the reverse and I think thats the strength of that.
Vertical well of the of the combination of something you would the same technology and Jeff I think John Francoise point about moving yanbu to the same quality parameters that we will use internally that we do our global footprint is very important we've we've raised the bar in terms of what the.
Expectations are and we're pleased with and have a confidence in our our plan to get there. So I think that it that is very important in terms of the future bamboo and then as as the market demands that no. We have we definitely will have the possibility of of ramping up.
That production because quality in production go hand in hand, there, they're not necessarily a trade off for each other.
Okay.
And then my follow up Hum.
The volumes of.
T I have two companies in North America fallen on but the titanium dioxide tons from China keep coming I mean there.
You know shipping I don't know 8500 90000 tons month on.
It looks like they're going to ship.
I don't know.
70000 tons more than they shipped last year and the volumes.
Okay chloride imports into China are really falling pretty sharply.
What do you make of this phenomenon why did the tons from China keep coming.
And are you in any way impaired by the decrease in port of chloride based tons that go into China.
Yes, Jeff So again, our data on China exports shows that still floating around a million tons a year.
So no significant change and in the last four months, it's been very stable.
Clearly you mentioned in the us at the.
Trade tariffs that had been implemented have had an impact on geo to imported into the U.S., it's actually gone down 72% year to date.
From roughly 70000 tons a year, it's dropped about 72% so that T. O. Two is moving other places.
I'd say areas, where Chinese T O. Two imports have grown is probably more like India and Brazil. So the volumes are moving around but I don't see that level of at least in last four months, we haven't seen significant change and the trailing 12 months is still about 1 million tons a year.
And as far as important.
In our I guess chloride imports into the you into the market into China.
That number I wouldn't argue it hasn't changed a lot in the last 10 years, it's been floating around 220 to 250000 tons a year for 10 years has not grown.
I think that has a lot to do with the Chinese companies that operate in China tend to buy from Chinese companies and there are there is a certain segment of chloride.
Thats still there.
We've got a competitor in China that's.
Adding chloride capacity and we'll continue to compete within long term, but I don't.
Yes, the general concept that there's more coming out of China into the export market I just don't see that.
Trend happening at least not recently.
Okay, great. Thanks, so much.
Thank you next question comes from Josh Spector with DBS. Your line is now open.
Hey, guys I was curious if there is update around the edges and smelter curious if you're still on track to start a point in fairness in early 2020 at this point.
Yeah, I think Josh I think that that will be more like with the updated timeline I think that we gave at Investor day and consistently is that we'll be sort of the.
More like the no third quarter of 2020 before before that first furnace starts up.
You know we're in the process of going through the.
Design changes that that would that have been agreed to out of the last no startup effort and that work is ongoing and.
Again, a startup and commissioning would be in the third quarter.
And when you talk about 78% integration next year does that include that does an incremental or would that be further upside to that.
That does not include any any.
No anything from design for the for the year.
It would not if with the start up in the third quarter there'll be some.
Incremental amount that could come from design, but Thats 78 is what will get with just the current existing sources, just as Jeff said optimizing the value and use the feedstocks across the portfolio.
Okay, Thanks, and just on a on the Gingko mine.
So it's great that it's up and running its point you highlighted 28 million year over year higher production costs, which it looks like you attributed mostly to that when I look at your bridge from June to 2020, you had around the 30 to 40 million benefit next year from that operating on I'm, just curious that 30 million kind of negative and one Q.
How does that not translate to more into 2020 or what's kind of the puts and takes there.
Look I think that what happened is that we assume that there will be price implication on feedstock from 19 to 20.
2020 that will kind of play negatively on what we need to buy on tuck in the market. So I don't know if that that helped put some.
Color so that bridge item that production cost item is really a combination of two things it's higher ore costs that from really 18 to 19 and it's also the crystal mining operating costs, primarily associated with it can go facility.
Okay. Thank you.
Our next question comes from Rochester, That's with Bank of America. Your line is now open.
Thank you good morning can you walk.
Some guidance on what Q4 19, working capital on outflow inflow might be.
Yeah. We're we're currently.
Forecasting a burn of about 10 to 15 million. However, we've got a number of different it an additional initiatives in place that we're working on as it relates to our inventory levels and also our year end collections in managing of payments that we hope to turn that to a $10 million to $15 million.
Positive is our objective.
But.
We'll see where we end up.
Hi.
When when tier two pricing model is there a split among your say coatings and plastics.
Customers on on who tends to be more.
And that model.
You mean, specifically the margin stability.
Correct, yes.
So I guess in general not every customer.
It is going to buy into our ideas around margin stability. So yes, I think there are.
It's not I would say specific to any segment it has to do in buying behaviors and.
The belief that stability is actually a positive thing some people agree with that and we're making good progress on that and I think as we make more progress the industry will trend in that direction. So we don't see the dichotomy between segments with our offering as some have stated maybe that they see with.
Other other stability offerings.
Thank you very much.
Thank you.
Next question comes from Travis Edwards with Goldman Sachs. Your line is open.
Hey, good morning, Thanks for taking my questions sounds like cap ex expectations have come down I think you said earlier to 200 to 215 million number. We had previously was 230 to 250 million from the last call. Just wondering if we should expect similar revisions downward and forecasts years to help support cash.
Generation.
Then you know with the new EBITDA and free cash flow guide has that changed the way that you're thinking about the cadence of de leveraging your out years.
So as it relates to capital.
We do have a number of projects that we're currently looking at in 2020 that will significantly improve our EBITDA per ton.
So obviously will be balancing those decisions as it relates to a decisions on deleveraging.
As it relates to deleveraging.
Has not our perspective on it has not changed at all.
Turning to get down to that $2.5 billion gross debt level in the next.
Two to three years, and we believe what the market recovery that John has talked about in our continued drive on synergies that will be able to get there.
Yes, I think our capex.
Guidance is this reflects the fact that June we find ways of doing things a bit.
Less no less capital plus we just know from our actual execution standpoint, oftentimes have trouble just the resources just executing all the all the capital. So it really doesn't reflect a pullback of planning or our projects. It's this reflects the the reality of the expenditure pace.
Got it that's helpful and maybe a quick follow up on the deleveraging I think you'd also mentioned last call that by the end of 2020, you'd hope to be down below three times leverage are you still kind of baking that into your expectations are you able to provide color on that.
Yeah, it's going be really dependent upon them, where the market ends up for 2020, we'll talk about that some more or call at the end of year.
Great appreciate the time thank you.
Thank you. Our next question comes from Jim Sheehan with Suntrust. Your line is now open.
Thank you good morning, with regard to the shutdown flag or what's what kind of EBITDA contribution potentially be in 2021, if you're successful with that project.
So for from from my perspective that that project has a furnace coming up that's two furnaces, one furnace comes up prior to the other furnace.
It's probably between 50, and 75 or 15 $80 million, a furnace of EBITDA and it really depends on how those furnaces ramp overtime.
Thank you.
And could you provide any updates on the lawsuit with Venator. Please.
Oh, I think the I mean that they'll also is in process and I think discoveries going on and I.
Trial and that matter will be.
I guess sometime in 2021, and that's that's no it's not a not something that we focus on significantly.
Around here every day and NAND.
The the court process will be what it isn't it will be resolved at some point in the future.
We still feel strongly about our position as we've stated.
To to defend the claim.
And our and prosecute our counterclaim, but.
That was this work itself through the course in normal course.
Thank you.
Thank you Sir our next question comes from Vincent Andrews of Morgan Stanley . Your line is now open.
Hi, This is Steve hands on for Vincent.
I appreciate all the commentary on 2019 in regards to 2020 tier two demand. It if we think about kind of where the base level of demand is and you've talked about there potentially being.
Just a if there were to be a demand pull in 2020, what's the upside from from kind of the underlying level of demand.
I guess they look it's a we're not going to provide guidance on 2020 at this stage, but what I would say is.
You thinking about normal GDP growth demand kind of what typically see tracking geo two and again.
Historically, when we think about cycles transitioning from.
Contractions two expansions you can see sometimes a significant uptick just from restocking. So I'm not going to I think I'm not prepared at this particular stays provide any kind of real guidance on what that might be.
Suffice it to say that we've got a range of outcomes that we're looking at when we think about our budgeting process moving into 2020 and as we have maybe a bit more information on that cycle moving into.
Next year will provide some of that Jeff, Yes, Steve I think the one thing there's as we as we've done our planning process. This year, we'll have our base case business plan and our operating plan based upon that.
We also have you know upside and downside scenarios and we will be fully prepared to move very quickly with identified decisive actions, depending on sort of where the actuals no actual economic circumstances end up and that's the one thing with the new footprint, we have a lot more levers that are.
Control to go in either direction and I think because of that we will we will fully participate in any upside and be able to mitigate any downside. So I think something it's given us a lot of confidence as we've gone through the planning the detailed planning process this year compared to previous periods.
Okay. Thank you guys.
Thank you.
Next question comes from.
Your line is now open.
Hi, Good morning, I want to go back to the second.
[noise] situation, you mentioned that you had kind of all.
Reversal in the percentage of kind of premium sales towards non premium from six to 40 to 40 60.
Do you see it is a one off or is that right.
Hey, good trend there and also you think this like on what is the inventory level at your various customer self serve.
Yes, so answer the first question.
To be specific I said that we typically sell 60% on the premium and 40% on the zircon and that that had slipped a bit it's not 40 60, but it's clearly in the third quarter, we sold more standard grade.
Because that was largely what was being sold in the market. So we compete in and that we can tend to compete with products that are like.
The ones that sold in markets like I don't think Thats, a long term event.
With regards to inventory I think our customer inventories and we've already started to see some signs specifically in India or reordering. So I don't think that a customer inventories are significantly over where they should be at this particular stage and in some instances they they are lower than they should.
And we will start to see some reordering I think in the fourth quarter.
Okay. Thank you.
Thank you.
Last question comes from by him all the with Barclays. Your line is now open.
Hey, good morning, guys. Thanks for been ma'am.
Maybe Tim.
Two questions, we've gotten already on de leveraging but maybe as you think about it appreciate and Theres still some uncertainty in the market could you help us frame up the.
The pace of of cash de leveraging versus additional share repurchases in the context of the the current market is it safe to assume that you know things don't you know I get better more quickly you'll you'll be biased towards de leveraging versus additional buybacks and I guess are there any limitations on on the stock buyback currently other than your.
Your own internal thoughts on liquidity and minimum cash balances. Thanks, No Brian Brian That's very fair I would.
I would agree with you that there's a higher priority on deleveraging.
Versus the share repurchase given the amount of shares that we have already repurchased.
There are limitations in terms of what we can repurchase for 'em section 382 to protect our Nols and.
That was the primary reason why we didn't execute.
The entire 100 million dollar program that we had because there is limitation on number of shares as well as dollar amounts, but I would completely agree with you over the near term the focus will be on de leveraging and not on on repurchase.
Got it is there a minimum cash or liquidity that you guys think about at the at the kind of corporate level.
Managing over the next couple of years, Although you know president you talked about.
Yeah just.
From my perspective, and we've talked to you know just given the change in our business model in our financial profile as a result of the benefits of vertical integration the benefits of synergies in the benefits of.
Zircon business I think a lot differently about it now than I did two to three years ago, and you know from a core liquidity standpoint, including cash in availability and on the $3 million to $400 million range is where I'm comfortable.
Got it that's helpful. Thanks.
Thank you Brett.
I'm not showing any further questions at this time I would now like to turn the call back over to Jeff Quinn for any further remarks.
Thank you Joe in closing I, just want to reiterate that we are very focused on execution. We're focused on what we control as we look through the remainder of 2019, we've been aggressive with a high level of confidence on our assumptions regarding things that we can control.
We've been cautiously prudent on our assumptions with respect to things that we don't control and now we also had a reflective of the the efforts we are making too well positioning ourselves to for 2020.
We have performed well through uncertain economic times, and we look forward to fully participating in the improvement. There is ahead of us. So thank you very much for your time today. Thanks for your interest in Tronox and have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.