Q4 2019 Earnings Call
Ladies and gentlemen, like you're standing by and Whats The Tronics Holdings plc, Q4, 2019 earnings conference call.
This time all participants are in listen only mode. After the speakers presentation. There will be a question answer session unless of course, north, especially the press star one on your telephone.
Please be advised as today's conference is being recorded fear require any further systems. Please press Star then zero I would now like to be shelf News conference call Mr. Brennen Arndt Senior Vice President Investor Relations you may begin Sir.
Thanks, Kevin and welcome everyone to our fourth quarter and full year 2019 conference call and webcast on our call today, our Jeffry Quinn Chairman and Chief Executive Officer, John First watch or your own Chief operating Officer, John Romano, Chief commercial and strategy Officer, Tim Carlson, Chief Financial Officer and Jennifer.
Gunther incoming vice president of Investor Relations.
We'll be using slides as we move through today's call those would be listening by internet broadcast to our website should already have them those listening by telephone if you haven't already done. So you can access them on our web site at Tronox Dot com.
Moving to slide two.
A reminder, that comments made on this call and information provided in our presentation on our website includes certain statements that are forward looking and subject to various risks and uncertainties.
Putting but not limited to the specific factors summarized in our FCC filings. This information represents our best judgment based on today's information. However, actual results may vary based on these risks and uncertainties. The company undertakes no obligation to update or revise any forward looking statements.
During the conference 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 when evaluating the company's performance reconciliations should their nearest U.S. GAAP terms are provided in our earnings release and in the appendix of this presentation as you're showing our earnings release, we provided.
Results on both the reported basis and a pro forma basis to assist in our discussion or fourth quarter 2019 performance compared to the fourth quarter of 18 and full year 2019 performance compared excuse me to the till the full year 2018 show.
Our primary focus on those comparisons will be on the pro forma results to enhance your understanding all the underlying trends in our business performance.
Our markets in the appendix our earnings release, and this presentation or a statement of operations and adjusted EPS and adjusted EBITDA Reconciliations all on a pro forma basis for the fourth quarters of 2019 or 2018, and the full year 2019, and 2018 moving to slide three it's now my pleasure to turn the call.
Over to Jeff when Jeff Thanks, Brian Good morning, everyone and thank you for joining us today before diving into the financials I want to take just a brief moment to reflect on last year on 2019, 2019 marked a transformative year for Tronox, what the close of the Crystal acquisition through which we formed awards worlds.
Largest vertically integrated t. out to producer now with nine pigment plants and eat mineral sands facilities across six continents, we operate with an unmatched global footprint that footprint allows us to continue to grow with our customers as they grow anywhere in the world. It continued to benefit from our alignment with customers.
We're growing faster than the overall market.
The success of our be spoke when when margins to build the initiative has enhanced the stability of our topline world relative to historic industry patterns. This stability is reflected in our global average T O two selling price, which remain essentially level on a sequential basis across 2019.
We over delivered on our 2019 synergy targets and our increasing our synergy targets for 2020 to 2022 as we discover additional an increase value added opportunities in the new Tronox, which I'll cover in more detail in a couple of slots.
We returned approximately $315 million to shareholders in 2019 through share repurchases and our regular dividend and made a 100 million dollar discretionary debt payment.
We've maintained a relentless focus on safety and enhanced our commitment to sustainable sustainability, including the appointment of our chief sustainability officer to manage our yes Ci initiatives.
Of course, none of this would be possible without our employees investing in and developing our people is a key focus area of mine to this and we've renewed our employee development initiatives, including improving diversity and inclusion.
20 to 2019 wasn't accomplish year, a tronox despite channel a challenging macroeconomic environment. We believe we are well situated to create value for our shareholders. As we move board now turning to the next side I'll walk you through the financial highlights for the year.
Our financial performance in 20, not key was driven by strong execution on the many operating in commercial initiatives that were within our control. So says delivering centrifuge through our accelerated acquisition integration program optimizing our global global vertically integrated footprint managing our cost structure.
And wisely allocating capital despite macroeconomic challenges our adjusted EBITDA margin remained strong at 23% and we generated free cash flow of $214 million.
I'm happy to report that the synergies from the Crystal transaction continued to exceed our targets.
We achieved total acquisition synergies of 89 million produced through December exceeding our investor day target by $44 million and our third quarter increased target by $24 million given our outperformance we are increasing our synergy targets once again, which I'll review in more detail in a moment go.
Mobile T ao to volumes and average selling price remained relatively stable across 2019 look volume's down, 2% and pricing down 5% on an FX adjusted basis, owing to the success of our win win commercial margin stability program.
We saw a slight pickup zircons in the fourth quarter due to shipment timing and some restocking in India and China.
While demand.
Overall remains solid and prices declined in the second half a 2019. This high value coproduct continues to deliver strong profitability and margin enhancement.
Brad the week back half of the year resulted in us entering 2020 at a lower starting point that's on a slight father declined we have experienced in the the start of 2020 is reflected in our guidance that Tim will discuss in a few minutes, we maintain a disciplined approach to capital allocation returning 359.
In dollars to shareholders, such as I mentioned through the reach share repurchase and our dividend and made the 100 million dollar discretionary debt payment.
Our global team as we move forward and 2020 together as one new Tronox, we remain focused on execution and deliver delivery of our vertical integration strategy, which is creating the enterprise displays greater stability and financial performance and cash generation throughout the cycle.
We will continue to manage what we can control achieving the increased synergy targets investing in our business through well conceived well executed high return projects de leveraging the balance sheet and returning capital to the shareholders through an increase there, but we believe 2019 evidenced the capability.
Is that we have as an organization and we look forward to continue to demonstrate those on a full year basis in 2020.
Now I'd like to turn to slide five to discuss the synergies in more detail.
Your call. This as the slide we had been using to track our progress since our Investor day do the ended the fourth quarter. We achieved total synergies of 89 million of which 47 billion was asked was actually reflected in our 2019 EBITDA slightly over half of this figure is SG.
I mean, they related savings with the balance coming in from additional realized speed spot benefits from our intergraded footprint and pigment relate to supply chain benefits 22 million of the achieved synergies will be reflected in EBITDA in future quarters. This figure reflects feedstock and other mining related supply chains.
Synergies achieved an all in our balance sheet, which we'll see what you'll see in the pinedale in future quarters, and 20 million or other cash synergies not reflected in EBITDA consistently of interest and tax savings.
Increased target for 20, knocking set during our third quarter earnings call was $65 million, which was exceeded about 24 million.
Given our continued strong performance in delivery synergies, we're increasing our 2020 target 200, and non email our 2021 target to 275 million <unk> and our 2022 target to 325 million.
These new targets represent a significant increase over the targets. We originally said on Investor day, which were which were increased from the original estimates at the time of the acquisition.
Every day, we find additional value, creating opportunities new tronox and we're excited to continue to do on these opportunities.
I'll now turn the call over to John Romano, Our Chief Commercial Officer, who will report on our commercial performance no trends, we're seeing in our global markets. John Thanks, Jeff and good morning, moving to slide six first the year on year comparison, which is Brennan said focus is on the pro forma numbers to give you a clear understanding of our.
Commercial performance and the trends in our markets.
Revenue of $693 million was 5% lower than a year ago.
Yeah. The two pigment sales of 544 million were 1% lower.
Sales volumes increased 3%, while selling prices were 4% lower on a local currency basis.
The U.S. dollar basis, selling prices were 5% lower as FX translation, primarily the euro was a 6 million dollar headwind on revenue.
The sales volume increase reflects the continued strength in North America offset by the completion of de stocking in Europe and Asia.
Inventories across regions and across the value chain largely appeared to be at normal levels today.
The reason for the lower year on year average T O two selling price is once again, primarily our prior year issue due to crystals commercial approach in 2018, we will see this carry forward to the first quarter as price harmonization was completed in Q2. Shortly after we closed the acquisition as we've discussed.
As you'll see in the sequential comparison, our global average selling prices. Once again have remained essentially stable as they did in each sequential comparison in 2019.
Moving to zircon.
Sales of $71 million were 34% lower than a year ago sales volumes were 29% lower when compared to Q4, 2018, which was one of our strongest quarters on record as well as softer market conditions, primarily in China with a continued impacts of the trade war environmental regulations and generally slower growth.
Yes.
Selling prices were 6% lower primarily due to increased competitive activity from lower quality circon products, which had a negative impact on product mix and price. However that decline was backend loaded in the third and fourth quarters and has impacted our starting starting point in 2020.
Our sales of standard grades are can products versus premium grade continued to run at a higher rate in Q4.
And in feedstock and other products sales of $78 million increase 10% on higher CP slag sales now moving to slide seven for the sequential comparison versus the third quarter.
Revenue of $693 million was down 10% from the prior quarter on lower tier two and feedstock another sales volumes, partially offset by higher zircon sales.
Oh, two pigment sales of $544 million were 10% lower compared to $603 million sales volumes were 9% lower within the seasonally typical range for Q4 and selling prices were 1% lower on a local currency basis, and the U.S. dollar basis moving to moving to zircon.
Sales of $71 million increased 4% from the previous quarter sales volumes were 7% higher due to some restocking in India, and China and the timing of zircon shipments from Q3 to Q4 as we discussed on the last earnings call.
Zircon continues to deliver strong profitability in margin enhancement for Tronox, we're still forecasting volumes to recover in the second half of the year and the medium to long term fundamentals for zircon remain positive.
And finally feedstock and other products sales of $78 million decrease 20% driven by lower sales of CP slag and pick out pig iron.
Now moving to the next slide I'd like to comment on our outlook for the T O two market.
As I've mentioned previously this last cycle has been the longest demand contraction in my 30, plus years and T. O. Two we're cautiously optimistic that the contraction is showing signs of a reversal. We are seeing early signs of stabilization, indicating a general market recovery.
Back in May we introduced a slight outlining the data we track, which we believe has served as a good leading indicator of the T. Rowe to market conditions. We've updated the chart, which is what you see on this page.
The bars on this slide represent changes and the trailing three month moving average total reported imports a T O two pigment from net importing countries in Asia Pacific. We found that this dataset has historically served as a proxy for Asia Pacific demand and a leading indicator for global T O two demand using this latest data.
As you can see we're seeing an uptick in demand, which we haven't seen in the last 17 months.
We are encouraged by the trends, we're seeing in both the data and the market, including an earlier than normal uptick in demand in Europe in Q1.
We're cautiously optimistic about the current outlook and still believe demand will continue to increase over and above the normal seasonal increase as we approach the second half of the year as we've mentioned previously given the current supply demand fundamentals of T. O two even a modest rebound in macro economic conditions should result in a recovery in T O to them.
And and Tronox is well positioned to capitalize on recovery given our sales mix is balanced across the world.
One of the key factors were currently monitoring is covert 19 and the impact of will have on our sales. Both T. O. Two ends are gone at this point, it's still too early to determine the full impact of that outbreak may have on the markets that we serve the short term effects have been modestly positive as we've seen a slight increase in orders coming in from Europe and Asia.
There Ryan there remains however, uncertainty in the medium to long term.
We will continue to monitor the such situation day by day, but believed that our global network of assets and our vertically integrated business model, we are well positioned to respond to changing market conditions as they develop and with that I'll now turn the call over to Jeff will review of our operating performance and profitability for the quarter, Jeff Thanks, John and good morning.
Hi, everyone.
Moving to slide nine, let's first review the year on year pro forma adjusted EBITDA from Ericsson.
Adjusted EBITDA of 156 million dollar was 28% lowered than pro forma adjusted EBITDA of the year or go quarter.
As John discussed lower tier two selling price related to legacy Crystal commercial approach in 2018 and lowers their work on volume were the primary commercial driver.
Additionally, we were met with higher production costs, including general inflation higher ore costs and normal seasonal maintenance in our integrated operation.
Actually offsetting this factor was favorable foreign exchange on costs, primarily the South African Rand and the Australian dollar.
In addition, synergy contribute an improvement to EBITDA of 25 million dollar we are very pleased with the synergy delivery to date.
As Jeff outlined and we continue to find additional value add opportunities from the combination.
Driving the increase star get we previously mentioned.
And the benefits are coming from through cost saving grounding opportunity to use feedstock across our network to benefit our operation.
And realize significant cost saving in our supply chain.
In 2020, we will continue to realize incremental savings in days area and start to see additional operational synergy such as improving the cost position and quality of fall product produced at Yanbu.
Utilizing best practice across our operation and reducing costs at legacy Crystal plan such has Brazil on the last point, we are already seeing cost reduction out of Brazil. This year and are excited about the additional opportunity the team.
As identify which we will realize we will start to realize in the reminder of 2020.
Deliberating Dis synergy is only one part of our operational Excellence program. All global team is relentlessly driving to lower our cost per tonne across all our operation.
Increasing product quality, optimizing all global footprint and most importantly continually improving our safety performance on our journey to zero as we call. This initiative within trauma.
Moving to the sequential comparison adjusted EBITDA of 256 million dollar decreased 15% from Hundredd, an 84 million dollar.
Driven primarily by seasonally normal lower T O two sales volume.
Lower feedstock and order sales volume and the absent in the fourth quarter of the one off time integrated margin benefit realized in the second and third quarter.
[noise] synergy contribute 10 million to EBITDA compared to Q3.
I'm pleased with all fourth quarter result, and look forward to what we can deliver in 2020.
Before turning the call over I would like to discuss the impact caused the 19 add add on our operation in China.
With the acquisition of Crystal, we had to our footprint the 46000 tons sulfate plant in foods.
In John She province.
Which is over a five hour drive from.
And where the Colby 19 outbreak originate.
The safety and welfare reform employee as remain our top priority true this on certain time.
To that end and in cooperation with the local authority, we shut down our operation at June for 22 days around the Chinese new year holiday.
This add less than a 2 million dollar impact on our hibbett.
In addition, there have been no impact of Covidien 19 on our global supply chain.
To date, we haven't had no case of the outbreak at our site.
Safely review operation on February 18, and have been fully operational since February 23rd.
We are grateful to the team in China, and they're safe management of the plant true this uncertain time.
We will continue to closely monitored the safety of for employee and work with the local government to ensure the operation of our plan comply with regulations.
With that I. Thank you I look forward to continuing to report on our progress in next quarter call and I'll turn the call over to Tim Carlson for a review of our financial position, Tim Thanks, JF moving to slide 10.
Starting with our balance sheet, we ended the year with total debt of $3 billion and net debt of 2.7 billion.
Given our strong free cash flow, we made 100 million dollar discretionary debt repayment on our term loan in December.
Liquidity was $648 million comprised of cash and cash equivalents 302 million and 346 million available under revolving credit agreements. In addition, we ended the year with $9 million are restricted cash.
Our net leverage was four times on a pro forma trailing 12 month basis, we continue to target a net leverage ratio of two to three times, which we're targeting to achieve by the end of 2021 consistent with the guidance given at Investor Day.
Our capital allocation policy remains unchanged, we continue to prioritize disciplined capital spending on high return projects and on deleveraging.
Capital expenditures in the fourth quarter were $58 million compared to our depreciation depletion and amortization expense of 75 million.
In 2018, our cash capital expenditures were $198 million slightly below our guided range of 200 to 215 million.
Approximately one third of our capital was focused on increasing our EBITDA per ton and the rain two thirds was on maintenance SG in other projects projects.
Our depreciation and amortization expense was 280 million inline with our guided range up to 80 to 90. Both figures are quoted on an as reported basis.
Regarding returning capital to Shareowners, we returned $315 million in 2019, so the repurchase of approximately 21, and a half million shares and our regular dividend payments.
As Jeff mentioned will be increasing our quarterly dividend by 56%, which results in an annual dividend of 28 cents per share, reflecting our confidence in the consistently strong cash generation capability of our vertically integrated business model across cycles.
Regarding our 2020 outlook, while global macroeconomic conditions remain uncertain.
And considering the near term softness in the dark on market, we remain confident in our ability to deliver the commitments within our control.
For the full year 2020, we expect achieved revenue of $3 billion to $3.3 billion adjusted EBITDA of 700 to 800 million.
Adjusted diluted EPS of 55 cents to $1.10.
Free cash flow of over 200 million.
Capital expenditures of 260 to 290 million and we're targeting our net leverage at three times by the end of 2021.
Before returning the call back to Jeff I'd like to take a moment to thank our global finance team for their dedication and efforts to account for and report on the Crystal acquisition.
We're still finalizing our purchase accounting analyses and disclosures and we'll take advantage of the 15 calendar day extension to file our 10-K, which will be on or before March 16th.
With that I'd like to turn the call back over to Jeff to add additional color to our outlook and key focus areas for 2020, Jeff. Thanks, Tim the numbers attempt just walk walk you through represent our current outlook balancing global macroeconomic uncertainty and near term softness deserved Khan with the beginning of an uptick in the.
T O two sector and our confidence in our ability to deliver our increased synergy targets at the midpoint our guidance range for adjusted EBITDA represents a 10% increase over 20 not team pro forma results, reflecting the macro conditions and market dynamics, we faced coming out of the back half of 2019.
And our expectations for an uptick in the back half for 2020, just as a reminder, a 100 dollar a ton increase in average pigment selling prices has a 20 to 25 dollar million dollar EBITDA impact from quarter and 100 dollar per ton increases zircon prices as an approximately a $4 million to $5 million EBITDA.
Pat quarter. So there is significant leverage in our system to an improved pricing environment. Our guidance also reflects an estimated an estimated $30 million EBITDA impact of the ongoing furnace rely on kazin, which we'll take one of our five furnaces offline for approximately 95 days.
The financial impact includes the expense of the realigned and the fixed cost impacts in the feedstock into pigment business advancing this rely on to this quarter will have a positive effect on the availability of feedstocks in future quarters as feedstocks continued to tighten and pigment prices likely increase our guidance also.
Reflects what we're seeing in terms of cost inflation and the current type feedstock market, while due to our vertical integration the impact of rising feedstocks on us is muted compared to our peers. It does have some impact.
Free cash flow of over $200 million reflects our plans to invest $275 million in high return capital projects during the upcoming year through our disciplined capital allocation program consistent with what we've laid out previously this level of free cash flow will also provide funds for de leveraging.
Which will continue to be a key priority.
Our guidance raise factors in the known impacts are co bid 19, including the short term shutdown of our Peugeot plant JF discussed in the near term positive effects John outlined Haubrich does not fully account for the unknown. We remain somewhat cautious as we are unable at this time to precisely Kwan.
About the potential impacts of the situation on our 2020 results the situation, which we continued to dose we monitor changes daily it really is a case of balancing the potential effects.
On the micro environment that is the t. out to industry dynamics with any potential macro effects on global GDP. However, based on what we know at this time, we do not see this situation as a significant headwind for the year.
But in any event as John said, we believe our global network of assets and vertical in there and vertically integrated business model positions us to respond quickly and as needed to changing market conditions as they develop.
Clearly economic and global macro uncertainty remain as we have entered 2020, but we believe are that the outlook for the t. out to market is strong as we emerged from our pro long, but shallow industry trough, we have seen the beginning of an uptick in volumes and believe that historically this has been a precursor.
Tune improving price environment.
Due to our competitive advantage of a vertically and vertical integration through a global footprint. We're confident that we will continue to outperform our industry peers in terms of EBITDA margin and free cash flow generation irrespective of the economic environment.
We believe 2020 will be a year, where we deliver industry, leading financial performance take a number of strategic actions to prepare us for the future all while remaining committed to safety and sustainable development.
With that we'd now like to open up the call for your questions Devin.
And ladies and gentlemen, if your question or comment at this time. Please press the star than the one key already touched on telephone. If your question. It's been introduced universal from the Q. Please press the pound <unk>.
First question comes from Frank Mitsch, but.
Premium secure research.
Frank Your line is open you can ask your question.
Frank Your line is really could you please I'm unit.
Hi, guys. It's as these on her Frank.
The first question I had.
You know on the synergy increases could you guys just elaborate more on a in within which areas you guys are seeing those increases.
Look it's it's basically and some of the work that we did last year that will start to generate on the best practice transfer. So obviously, combining the chlorination know how all this legacy tronox with legacy Chris.
The whole there was some and trick if I could use that term from operator of one business that had to be transferred to the operator of the order business and those like takes time.
And obviously the synergy on supply chain the synergy on moving our additional feedstock to the new assets that we quickly react and we will continue to get more out of those quick reaction, but the best practice transfer is really where we will start.
You eat the advantage this year.
It's a it's Tim and the follow on that when we.
Made our targets for synergies, we actually risk adjusted them and as we get into it.
End of the activities, where more and more comfortable in terms were ending up in terms of cost reductions across the system, whether it be SG, ne and operations in very very little on volume.
Great. Thank you for that and then as a follow up I know you guys touched on you know the early.
Supply demand you guys. The impact you guys are seeing from the Corona Bose, but could you guys just elaborate a bit more on industry supply tightening in the region and what you guys are seeing on the demand side as well.
Yeah. This is John Romano, so from the standpoint of supply demand and inventory as I mentioned earlier inventory. We believe is where it should be for this time of year. So I'd say, it's seasonal norms and the uptick that we talked about as a result of cobot 19 was just a short term impact we saw volumes picking up as.
As we begin entered the first quarter long before at least a month before cobot actually took hold so what we're seeing is in effect as I mentioned on slides are I think it was slide number eight where we saw the recovery.
From a 17 month downturn, we're starting to see a good indicator that demand has returned and supply and demand is in a position where as Jeff mentioned, we're likely to start working towards looking at ups upsides on pricing.
Second half the year, but it seems a clearly from from what we've seen from customer inquiries and just anecdotally from storage on the ground. This has impacted Chinese supply.
Got it thank you guys.
Our next question comes from Duffy Fisher with Barclays.
Yeah, good morning calls.
First question just on on Circon, because it's a market at least I don't spend as much time on is to go too. So you know volume down big prices hung in well like on like so can you talk about when you look at your footprint as you talked about mix shift being a little bit negative, but just like on like how much are price.
It is down from the peak in the last couple of years and then if you did like a 10 year look back where prices for your products today versus maybe a normalized number the last 10 years.
Yeah, if you look at.
The last 10 years includes a spike which is not I would say something that'll be duplicated where prices were in the 2400 range. So you know the 6% down is really from about where we peaked somewhere in the 15 60 range.
And when we look at how we're moving into the first quarter of 2020. The guidance. We provided had some additional price erosion factored in to the first quarter so from a.
Demand perspective, first half and second half were going to be kind of flip from where it was last year. So it's a kind of a tale of two years, where the first year, we'll continue to be a bit slower and as we move into the second half of the year well, we're planning for a recovery.
Okay, and then if you hit the midpoint of your Capex. This year the to 75, roughly how would that break down just regular maintenance versus efficiency projects versus kind of true growth in volume.
Hey, Duffy, it's Tim the of the 275, our or maintenance and safety capital ranges anywhere from 100 $125 million.
We've got seven capital in the plan for continuing cost reduction in terms of driving EBITDA per ton.
Then we've got some additional capital in our plan.
For a mine extension that we'll be doing.
In Australia associated with some leveraging our vertical integration benefits.
Great. Thank you guys.
Thank you.
Our next question comes from John.
PMO capital markets.
Hi, good morning, Thanks for taking my question.
So with regard to the what looks like an early uptick in the in the supply demand balance I guess, how would you like what are you seeing in terms of demand for some of the margin stability initiatives that you've put out there have you seen a notable increase yet.
In customers looking to lock in or is that something that's maybe more on the comp.
Hi, Yes, it's John Romano, So from margin stability again. It has played a significant role I think and our profitability and the last 18 months and with regards to customers' interest in that program. It continues to accelerate.
When we think about cross segments regions, it's not just North America, where we're getting traction on that it's off also in the other reasons the world, including paper plastic and coatings.
Got it and then with regard to the free cash flow guidance for the 200 million that you're looking for 200 plus that you're looking for in 2020. So assuming that you can hit that even at the bottom of your range I guess if in terms of EBITDA range. If you come in at the high end as it is simple is you're going to come in closer to a 300 million dollar number or their leverage.
That you're pulling in that kind of downside scenario that you wouldn't necessarily pull is you're looking as you're looking toward the higher into that range like how should we think about the the cash flow variance.
Hey, John It's Tim excellent question. There are a couple levers that we can pull but you're spot on in terms. If we come in the higher end of the range. It.
We'll have a directly direct impact in terms of increasing our free cash flow.
We continue to work our our balance sheet in terms of optimizing working capital. We do have a 50 to 70 million dollar working capital burn.
In that that cash flow forecast, we hope to minimize that but at the same point in time, if there are opportunities, where we see incremental spend that we can do to increase EBITDA per ton by taking costs out are assisting we may increase little vote of capital spend in that regard.
Great. Thanks, very much for the color.
Thanks, Jeff.
Our next question comes from Jim Sheehan with Suntrust Robinson.
Good morning, this is Pete Osterlund on for Jim.
Can you comment on the pricing environment for titanium based orders and the magnitude of cost inflation you expect in 2020 for the or is that you do not.
[noise], so Pete it's Jay yes.
We are in 2020, 75% vertically integrated so we think that were to best position versus our competitor for end digesting those price increase look if you look at different product that we use in our pigment plant roots Tyler is the one.
That has increased the most and it's more than a double digit increases that we have experience on the price of rooted because look it's it's a product that is in high demand and its rare I mean, there's not that much available in the world flag and an MSR.
He is also very tight as a market and we had seen and significant price increase in that front.
And even ilmenite as recently as what we have seen out of China, the ilmenite price as Jones because of the.
Covino 19, and then look it's obviously positive for the whole P value to side of the business because.
Margin, specifically in China, or very tight and as soon as their feedstock increase tier two has to increase due to match, though so what that would be my comment on feedstock.
Alright. Thank you and then you spoke about de leveraging as a priority, but given where shares are currently valued would you consider share repurchases as well as a use of cash during 2020.
Yes, I mean, we always I know allocate sort of between those three priorities we've talked about.
But.
So de leveraging remains first and foremost among those so.
We'll we'll we'll look aggressively at that and then the high return projects. We have and then maybe look at a share repurchases, but I would I would think that in those priorities are sort of the in that and that relative border.
Jim It's Tim as a follow on we do have similar limitations on share repurchase as a result of our and a well limitations.
Thank you.
Our next question comes from just the caucus with JP Morgan.
Thanks very much.
Since you are a titanium dioxide producer in China or your prices going up already given the raw material inflation do you want to sell to the domestic market to want to sell to the export market have you see the world from the point of view, if you're trying to operation.
Yes, Hi, Jeff it's John so.
On both those questions as far as how we're going to sell on how we've been looking at selling the Chinese material out of our plant food show, we've been looking optimizing that margin, whether we sell in China or maybe take some of that product and move it to higher margin areas with respect to pricing in China, we have seen prices move up and that was before covert.
18 actually took hold so we started raising that price in China early in January and have gone through and implementation process. So we're seeing pricing move noted js quite a few minutes ago. This whole pans, while feedstock supply constraint is having a significant impact on companys ability to actually procure or at a price.
Yes, that's not inflated significantly and with lower percentages of T. O. Two it's you know by two tons to get a ton of pigments. So for a variety of reasons I think we're optimistic around where pricing is going for China.
Okay and then.
My follow up on slide nine.
You have your EBITDA purchase.
And on the left hand part of the slide you indicate that there were 45 million and higher production cost.
Year over year I was wondering why that was the case.
And then on the right hand side of the slide. It says there was an absence of integration margin benefit of 20 million sequentially in the fourth quarter versus the third quarter and I was wondering what that was can you clarify those two fred downward bars.
Sure Jeff I will start at you have to realize that in Q4 18. The business was was owned by someone was about to sell the business and I see that in legacy Crystal plant maintenance was not at the level that it should have been and.
In Q4 is always the quarter, where we try to do more maintenance and put the asset in a good condition to operate.
As we took control Q4 was the quarter, where we had time to assess what needed to be done and we probably did a little bit more than less on that front and that's obviously come at a cost and that's an increasing costs and that that's I'd see one of the end.
Important component.
And then you want to add some Jeff as it relates to the and the absence of the integration margin benefits.
Just as a reminder, in Q3 Q4 of.
2018, we made a decision to stop selling feedstock to the open market.
And as a result of putting that feedstock on our balance sheet and not selling into the open market. The all of the profit in our South African operation and our Australian feedstock operations that we would normally have realized by selling that the third product third parties.
We sold it internally to our pigment plants, we actually had to capture that incremental profit on our balance sheet, and we put about $40 million to $50 million a profit on our balance sheet and Q4 in Q1, and you'll probably remember if you look back at those calls it was actually a quite a bit of headwind and then we realized in Q2 in Q3 of this year as we.
We sold as we manufactured the pigment and sold the pigment with that or in it.
We realized the that the profit.
From that product and as a result, it's really just to shift of timing of margin benefit from Q4 Q1.
To Q2 in Q3.
The but both ends of a onetime theme that we we shouldn't see as we go as we go forward.
So if I understand what you said to me just just now your inventory costs and the fourth quarter were higher than they were in the third quarter.
No not not exactly Jeff what happened was all of the profit that we would normally have realized in Q4 in Q1 of last year as a result of selling to third parties. We sold internally so that profit actually went onto the balance sheet and that low cost inventory.
Three.
Flowed through just from a timing standpoint from Q4 Q1 into Q2 in Q3, So as Jeff mentioned it was a pretty just a onetime benefit in the ship the profit between those four quarters. Okay. Great. Thank you so much.
Your next question comes from Vincent Andrews with Morgan Stanley.
Hi, This is actually Steve on for Vincent I, just wanted to ask a question on Ansor ICANN.
Can you help us think about how much EBITDA was actually generated from zircon and.
In 2019, and what's kind of assumed at the high end in the low end of your guidance from 20 to 20.
So we havent disclosed publicly EBIT concert EBITDA of from from Zircon, but.
Zircon does generate higher contribution margins, then then T O too.
You know north of 50% so any.
Degradation in terms of.
Zircon volume does have a significant impact on our our overall EBITDA.
And then maybe just a quick follow up on on the working capital because I thought and maybe I misheard that you guys are going to have a headwind and.
2020, but it looks like there was a pretty significant element in 2019. So was there a timing benefit in 2019, that's reversing in 2020 or could you just help US bridge the two two pieces.
Yeah, it's really mix of working capital is the team did a phenomenal job but.
At the in the fourth quarter as it relates the DSO and depot work getting hurt a bit in.
2020 is around the inventory levels.
Inventory levels are building a bit I'm, just given the the recovery that John talked about we see we see them reversing and declining again in Q3 in Q4, but obviously any any acceleration in terms of of that recovery would.
Reduce or inventory balances and drive significantly more free cash it's normal for us to build inventory in Q1 in Q4.
Okay.
Thanks, Chris.
Thanks, Steve Smith.
Our next question from some Josh Spector with <unk>.
Right and this is bats cross can for Josh you mentioned, you're seeing early uptick in demand in Europe can you just provide a little bit more color what end markets, you're seeing this uptick I N and specifically, which markets are the strongest and then you also talked about back integration can you just remind us when you're feedstock contracts roll off.
Yes, so on the uptick in Europe, I'd say, it's largely across all segments, it's not focused and want to one particular area.
And as we enter as we exited the 2019, we had started to see the effects of the de stocking being complete and the order book started to improve moving into January and so we've got pretty good visibility as I've mentioned before our order book is a good indicator on what we're seeing and you know the numbers that were looking out.
Right now that go out past the first quarter would support this uptick that we're referring to.
And it's not.
Most of that is not on the back of coping 19.
And Matt on the on the back integration, we still have contract that we have to honor in 2020, but by 2021 will be out of all our commitment.
That's helpful. Thank you so much.
Our next question comes from Roger Spitz with Bank of America.
Thanks very much.
Would you be interested in give any EBITDA guidance for the first quarter 20.
No Roger I don't think Thats something that that we're prepared to do I think.
We we have a lot of moving dynamics in the marketplace right now and is as we've said were.
We're where we.
Optimistic about what we see as as what we believe is a.
An uptick and then we have no obviously offsetting that the the onetime issue with the furnace rely on occasion. So no. We we look at this business that over a longer term longer periods and you really.
I don't think it's appropriate to start said great into ended quarter by.
At that site in can you say, what the cash expenses.
To obtain this 2020 synergies that are not in capex at our instead.
Otherwise in your free cash flow guidance.
It's going to be minimal five or 6 million.
Okay.
And.
He said you know the Chinese tile industry is back to work or they.
Can't get to workers or because of Corona virus can you comment on on the demand on our Chinese hi.
Oh, yes, so look the majority I would say of our customers and again there are customers customers are starting the process backup as Jeff mentioned, our plant is now back up and running since the 20 seconds or 23rd of this month. So were start starting to see that process.
We have restarting plants, but they're not all up and running at this particular stage, but again as we look at our sales of Zarkana into first quarter Q4, Q3, I mean Q3 to Q4 19, we were up 7% and we're seeing numbers that are very similar to that in Q1.
Not actually haven't but in line Q4.
Got it thank you very much.
Our next question comes from Brian loudly with Barclays.
Hey, guys good morning.
[noise], maybe first just a on a housekeeping item on the EBITDA outlook and synergies I just want to make sure. We're thinking about this correctly on a year over year basis, if I am I correct me, if I'm wrong in its but if I take the six any want to.
Pro forma EBITDA and then you add the 22 million of basically future savings that were realized and enacted in 2019 is that a REIT starting point that we would then have the 100 million improvement on from a synergy basis I appreciate that maybe that Oneninety doesn't you know doesn't have all that in the EBITDA.
Number specifically and again I know there are a lot of pieces moving around furnished three lines are gone pricing that's would love to maybe summarize sort of the key puts and takes on the 700 800 outlook. If that's possible and then I'd follow up thanks.
Hey, Brian it's Tim the components of the EBITDA in 2019, we had 47 million that hit our EBITDA line, we had another 22 million associated with synergies in or pigment plants, and our mineral sands operations that that capitalize the inventory and the remaining 20 is.
Interest and taxes, and some miscellaneous items that that $22 million in the synergies we relate relies on our pigment plants in our mineral sands operations they roll into the the PNM on the pigment plants in two to three months and they roll through mineral sands in the pigment plants in a matter of probably five or six months. So there's always going to be.
Ponant as we flow through the year, that's going to be onto the balance sheet in terms of incremental synergies.
But I would expect that to at 22 to decline a tad and in 2020, then increase again in 21 as we ramp of some additional synergy items on the bottom of that page, we've actually tried to identify.
For the investors the amount of EBITDA that were actually expected new achieve in our calendar year for the PML and you can see that's a 140 million in.
In 2020.
Got it that's I appreciate that actually missed the bottom line I apologize.
No worries and then then Tim maybe just as a follow up you know again appreciate the.
On the turn priorities for capital allocation and continued debt repayment. You know is it fair or you still thinking about the 2.5 billion gross that as the target. So you'll basically another 500 million of debt reduction sort of in front of us over the next two years given that the 21 target is that the right way to think about it.
Absolutely Brian.
Okay, Great I appreciate the confirmation thanks guys.
Thank you.
Our next question comes from just for Taco JP Morgan.
Hi, Thanks, very much you may have answered this in 2020 when you.
Extract an incremental.
I don't know 90 million in cost savings.
Or 100 on a run rate basis.
How much will that cost to and how much will cost you incrementally versus 2019, I mean, what what are the cash outlays, that's what I mean by cost.
Yeah, the cash outlays as it relates to I'm SGN, a and some of the miscellaneous synergies will be pretty much flat year on year and the capital needed to achieve those synergies are within the 275 that weve outlined.
Right and so how much capital will be will be spent on that in 2020.
I My my guess JF correct me, if I'm wrong of the 275, maybe 15 to 20 million. Yeah. That's had been number yep and what happens Jeff obviously is a lot of the SGN. These synergies that are done you know you are able to deliver early have have cash calls, but some of the things and best practices and some of those.
The things that we're now starting to see impact for really don't have a significant cash cost that you start to get more and more benefit from those as you move move forward.
Okay, and then lastly are you seeing any new China.
Chloride based T O two coming into the global markets.
There's been nothing more than what has already been announced I mean, obviously theres companies that are continue to work on perfecting that technology, including woman, but theres been no significant announcements in China recently.
Do you feel it in the market that is if it being shipped at higher rates since the market.
No I don't know quite honestly, we don't.
Okay, great. Thank you so much.
Thanks, Jeff.
No I'm not showing any further questions Tom let turn the call back to just one for closing remark.
Oh, Thank you well I just wanted to thank you for your time today.
We are optimistic on the outlook for the T. as to how to sector. As we move forward. We continue the focused on execution of the things that we can control and we continued to be very focused on delivering industry, leading financial performance irrespective of whatever the macro economic conditions, we face that thank you very much.
And we look forward you're talking to you on our first quarter Carl call and a few months.
Ladies and gentlemen.
Presentation, you may now disconnect have a wonderful day.