Q4 2020 Tronox Holdings PLC Earnings Call
And both of which are foundational and reducing our cost and enabling tronox to be a technology leader and Atlas capacity will.
Reinforce our distinct advantaged feedstock integration.
We will continue to invest in these projects and delever with incremental free cash flow, while continuing to improve our safety track record and drive progress and enable achievement across all of these pillars as we've conveyed on this call. We have a great year in front of us our strategy drives our ability to leverage our unique portfolio to optimize.
<unk> of our assets and secure our position as the most adaptable resilient tio two industry leader and allow us to continue to deliver industry, leading financial performance that concludes our prepared remarks and with that I'd like to open the call for questions. Operator, yes. Thank you. We will now begin on the question and answer session.
The question you May Press Star then one on your Touchtone phone. If he was named Speakerphone. Please pick up your handset before pressing the keys to try your question. Please press Star then two.
This time, we will pause momentarily to assemble the roster.
And the first question comes from John Mcnulty with BMO capital markets.
Yes. Good morning, Thanks for taking my question I guess, maybe the first one would just be on on the volume strength that you are looking at for the first quarter. So youre seeing youre looking for a pretty strong sequential improvement I guess, how do you think the spin.
And it's certainly stronger than the normal seasonality I guess, how do you think about or how are you thinking about the seasonality and how it plays out throughout this year in 2021 should we see kind of the usual jump from from <unk> into <unk> and <unk> and then it faded again or is it going to be a little bit different. This time I guess, how are you thinking about that.
Yes. This is John Romano, So I'll answer that one.
So the fourth quarter as we mentioned strain significantly away from normal seasonality, we had a fourth quarter that was very strong in the first quarter is coming out to be very strong as well. So I would say that the normal seasonality is not in place because of the strong demand that we're seeing.
There is a true.
The a fair amount of.
Side, even moving into the second quarter based on the volume patterns that we're seeing right now so normal seasonality I would say is not the case in Q4 and not what we're projecting in Q1, either so I hope that answers your question.
And then I guess can you speak to the how.
How youre thinking about pricing as we look through the year I mean, we've certainly started to see some some pretty chunky price increases and announcements.
On a global basis, but.
Can you can you kind of speak to how youre thinking about.
Pricing progressing throughout the year and then how some of your.
Some of your longer term contracts that you are locking in like how should we be thinking about what impact that may have on your pricing for this for this year.
Yes so.
We are experiencing good development on pricing globally and in every market segment that we're selling into in the first quarter and some of that depends on where we are in China. We saw on what we do have an operation there and we saw net pricing moving up towards the end of last year and in the first quarter, we're seeing pricing move in Europe Middle East Africa.
APAC and North America, So we're seeing pricing moving up.
Most of the spectrum.
With regards to long term contracts and I assume you're referring to the margin stability. We do have some of those contracts in place.
But as we think about are the momentum on pricing moving into 2021.
And we're not going to be running probably at the pace of increase that we were back in the last.
Financial crisis in 2010, when it recovered, but we do we expect on.
The opportunity to see good movement on pricing moving into the year.
Got it thanks very much for the color.
Youre welcome.
Thank you and the next question comes from Frank Mitsch with a firming of research all of the policy.
Hey.
Good morning folks a sense of the year.
I was struck by the comment on zircon volumes in <unk> being a record of expected to be of record I guess I've been kind of accustomed net debt would be kind of of lumpy type of business very strongly on one quarter and not the song and another quarter of obviously, you're coming off of very strong.
Fourth quarter. So can you talk about the the.
The end users there and what's driving the very strong volume you're expecting in <unk> and then if you could talk about the sustainability is as you see it.
Thanks, Frank This is John again.
We did have a very I'd say strong recovery in the fourth quarter and moving into the first quarter.
China is the big driver of demand on zircon and we've seen a significant uptick there. So it's not only in China, it's pretty much in every market that we're selling into.
We referenced a lot of things that are going on on the stimulus, whether it's <unk> or zircon.
The stimulus has driven I think of lot of the uptick, but it's not the only thing thats driving it there's an increase in demand so.
It's clear that we have some inventory and were able to take advantage of that inventory and converting into cash as of the market is recovering.
And like we said in the prepared comments based on the trajectory of the demand. We're looking at right now we would expect Q1 to be of record.
<unk> sales quarter.
Interesting interesting.
And I guess, Jay if I could follow up on the Atlas project, which is going to replace.
Capacity.
The line, it's the near the end of life, but how does that impact your your vertical integration how should we think about the cost structures.
That that the the <unk>.
The project will have on on.
On the Tronox.
Thanks, Frank for this question looks like every mine.
When the reach their end of life the cost structure. He has all the way higher than when you start with the brand New mine.
Because at the beginning of the operation of the mine you're in the high grade zone. So you have to see debt our cost position from the mining point of view.
We will improve as we start Atlas and <unk>.
We closed the gain cold snap per mine will also benefit from more product coming out of the <unk> mine.
The first three year of the Atlas operation because of the combined have as a life of its own and obviously that the investment is the long term investments for the next 10 years.
And the Atlas deposit is even better than the snap for ginkgo and specifically in the first three year of operation that debt.
So I think that's going to be positive for us.
But we obviously need to build the mine one.
I hope that got you.
That's very helpful. So you're expecting.
Additional capacity of at least in the beginning of it and overall lower cost for Tronox.
That's correct right right. Thank you so much.
Thank you and the next question comes from Hassan Ahmed with Alembic Global.
Good morning, guys.
Yes.
The question around your Q1 guidance.
Initially when I read the press release the earnings release.
Looking at relatively sort of flat EBITDA sequentially with.
With the backdrop of 11% to 15% Tio true volume increments.
Surprised me a little bit, but obviously on the call you guys have talked about a series of one of the it.
On the CP slag side of things be it selling sort of.
Higher costs. The Iot, we produced in Q4 and Q1 and then obviously the all of the FX side of things as well.
I'm trying to understand is that if some of those one offs werent. There in Q1, how would you know I mean could you give us some sort of a measure of.
What sort of lost EBITDA you may have on the back of these one off Dick.
The absolute measure, albeit what sort of margin compression.
Is being caused by these one off.
Thanks for the question is on its Tim.
The three items that we mentioned and you just summarized FX.
Low feedstock sales and then the higher cost to address each one of them the FX impact in the quarter, there's going to be worth about.
We're estimating given the current rates of about $10 million of of headwind.
The the lack of the feedstock sales in Q1, given the the end of the FTC the consent order we.
We will get the benefit of that obviously in Q2, and Q3 and Q4, when we sell all of that feat.
Or where do we use that feedstock internally, so that'll be a high single digit.
The headwind EBITDA headwind.
In the quarter and then lastly of the <unk> cost structure. So on as we talked about in our Q3 on our Q4 calls as we reduced our production to match market demand, we had an increase in.
<unk> of the overhead absorption on a per unit basis, which cost us about one to two margin points in the quarter. So we should see that reversing in Q2 as well.
So once the once all three of those once of the two items flow through we will see a continued improvement in EBITDA in Q2, three and for and depending on what ends up with the with FX. The will either have a headwind or a little bit of a tailwind there.
That's very helpful very helpful and as a follow up on pricing.
It seems that there was some price hikes on the table for January and Thats, obviously, not even the seasonally strong period and it seems you know as things are evolving with demand looking at some of US as it is possibly the of more price hikes to.
So come on just trying to understand the realization of these pricing and equipment keeping in mind. The margin stability measures you guys have so so could you give us sort of help us think true how we should think about how you guys. The.
The mix of.
Longer term contract.
As a percentage of maybe.
Your overall portfolio is it 10%.
That is sort of long term contracted for is it higher than the lower than that just some sense around that please.
Yeah. Thanks for the time this is John again.
From the standpoint of margin stability and we typically havent provided a lot of guidance on how many customers. We have on that our program is a little bit different.
These are win win situations that we've negotiated overtime I would say that we've got.
As I mentioned earlier plenty of runway on price moving into the quarter and then the second quarter from the standpoint of our ability and also depends on the region that we're selling into.
Margin stability is not.
Something that everybody.
Accustomed to or once so ours was not a mandated it was of choice with regards to what unique kind of setup, we could have the individual customers. So I would say.
I think upon the region.
We've got.
Specific to Asia Pacific Theres, not a lot of Martin of stability in there so.
Mentioned earlier on China for instance, our pricing is moving very quickly there we have of plant there.
Moving the price as costs have moved up since then.
I'd say the fourth quarter into the first quarter.
And we're seeing Chinese tier two pricing for.
Our facility in exports now approaching chloride pricing so the I'd say theres still some upside.
With regards to where thats going and it is having an influence on our ability to move the price on the chloride side as well.
Very helpful and as it is it fair to assume that even the these long term contracts will have some sort of pricing escalators, maybe a couple of times of year, which you could revisit based on maybe some sort of competitive pricing index or something like that.
I'm not going to go into the details of the contracts because they are not ours I would say again, it's not a standard process that generated by an index. These are contracts that are individualized the with customers.
They do have opportunities to move pricing during the year.
Perfect, Okay that debt.
The answer is it thank you so much.
Thank you.
Thank you and the next question comes from Josh Spector with UBS.
Yeah, Hey, guys. Thanks for taking my question.
Just on Ti the two volumes based on your <unk> Guide I was wondering if you can give us the feel of where your capacity utilization, but are expected to be in the next quarter and kind of with that in mind. How are you thinking about potential growth from the <unk> through the rest of the year and maybe even over the next couple of years.
Josh it's the.
J F.
Look obviously as Tim mentioned, we had the full production in Q2 and Q4 last year, but when we saw the strong pickup in demand at the inning.
We have restocked all of our assets and we are in the process of having all of our plants running at full capacity I would see the exception is our <unk> plant in the.
The middle East.
Were not as quick as bringing that plant to full capacity.
Because of the COVID-19 situation and I think you remember that our Investor day, We said that we would use the know how of our ammo can plant to help.
Bring the volume out of debt facility at the same level as Hamilton.
And the travel restriction has kind of delayed a little bit our success in doing that but it's certainly something that we're working on at the moment and as the market continued to to increase and we have more demand for our product will ramp up the capacity.
Of all of our assets to meet that demand.
Okay. Thanks Thats helpful.
Just on the zircon side two quick things.
And then kind of the follow up from the Franks question about the strength of the volumes of <unk>, where do you think zircon volumes could be for for 'twenty one.
If I kind of think about the 40 to 50 million ton range is kind of the more normalized quarterly basis can you get back to their <unk> Q3, Q or does that sustain higher and then related with that pricing has continued to kind of come down pretty modestly the past couple of quarters sequentially, what what turns that around or does that turnaround in your view.
Over the next couple of quarters here. Thanks.
Yes, so from the volume perspective, I would say that.
Again, we're going to I'm not going to suggest we're going to of a record sales quarters every quarter and I think to the point that was made earlier about shipments being somewhat lumpy we are still having.
Some disruptions items referenced debt on the call with regards to some of the shipping channels.
But I would expect two.
<unk> 2021 is going to be a better year than 2020 mile of measures on zircon.
And our volumes in the first quarter.
Typically not the peak, but.
We also I think there was there is a bit on.
The inventory rebuilding for.
From our customer base the.
That there are shipping issues and a lot of these shipments are based on bulk shipments.
We did a lot of work in the fourth quarter to reposition volume so that when the market did.
Did rebound we'd have volume located where we could have the customer able to buy that as opposed to having it in south Africa. So.
I would say that based on what we're seeing right now we should see some of that.
Additional volume creep outside of the Q1 into Q2 as well on 2021 definitely going to get a better year for us on volume as far as pricing goes.
If we're looking into the second quarter.
I would expect that we would start to see some upside potential to move price on zircon moving into Q2.
Thank you.
Thank you.
Thank you.
Once again, please press Star then one if you would like to ask a question.
And the next question comes from Roger Spitz with Bank of America.
Thanks, very much come on.
On them.
Can you give an update on the does on smelter.
Not sure I saw on you mentioned on but on the press release.
Roger It's J F.
Look we as we said in our last quarter, we were expecting <unk> to start toward the second the <unk>.
End of the second half of this year.
And there is a little bit of the delay that the lease created by logistic issue debt. The main contractor mezzo auto tech is experiencing.
I think we talked about the <unk>.
Portal modification that were being made by the the provider of the technology to the smelter and because of COVID-19.
The some shipment of the.
Equipment that are critical.
Have been delayed.
And those shipments were happening true the the Christmas new year, and we're now expecting no debt.
We should be in a position to start the commissioning in the third quarter of 'twenty. One so we're talking about.
The six week delay versus what we had originally anticipate.
And it's all related to COVID-19.
And related to the I think from on number of correctly Youre looking for went up and running.
I think from the first phase of $12 million.
The EBITDA benefit.
That's still the case and kind.
Should we think about with this.
On modest delay that we really won't see.
That will get from the EBITDA realized in.
2021 from the <unk> on smelter.
Hey, Roger it's Tim.
That is correct just given the delay the the EBITDA of realization will be delayed as well, but our overall assumptions as it relates to the returns from that project remain unchanged.
Once we get the sustainable operations, which we're expecting in J F.
Later 2008 2022, that's right, we always said debt when we start the commissioning within a year after the the <unk>.
Start up we will know if the project is successful or not and obviously if successful as part of the agreement that we have with past me, we will acquire the facility and if not successful.
Well, we will reevaluate our upstream yes.
So that EBITDA benefit is probably 2023, Roger and not for.
For 2022, just given the delays that Jay has talked about.
Got it thank you very much.
Thank you and the next question comes from Travis Edwards with Goldman Sachs.
Hey, good morning, Thanks for the total of this morning.
Just maybe a follow up on the us on an overall of vertical integration I think.
After the canceled <unk> acquisition, just wanted to ask the future comfortable now with the current level of vertical integration with the low the projects outside of what you've already.
The highlight of debt.
Are you considering in order to get the hierarchy of the pass through or looking to get to sort of the 90, 95% which is on <unk>. So on.
If you have plans of our strategy of changed after.
Probably one of the recent acquisition ex.
Well. Thank you for the question look and it's clear that we were disappointed.
Not being able to realize this unique opportunity with TGI. It would have helped the chance of the Japan to be successful.
Because of technology transfer and it will have been in line with our vertical integration strategy.
But as the.
On the regulator did not.
I agree with our view of the industry.
We had to turn around and change.
What to do and it's clear that.
Developing atlas capacity as the project.
Is is the solution for us that will give us natural rutile that will give us the zircon and keep us in line with our vertical integration strategy. So instead of doing it through.
Musician, we're doing it with the brownfield development of our own mining assets at 85% vertically integrated we think that this is the best position.
For the company because obviously our mine will run at full capacity in any market situation.
And look we don't have to buy a lot of feedstock on the market.
To run our assets at full capacity, so I hope that answer your question charterer.
Yeah, that's really helpful and I guess the close of the 85% is pro forma for your current projects being completed the bulk of it.
Is that where you sit today.
No that's where we sit today as we said the atmos capacity will replace the <unk>.
Not for <unk> coal mine, so we're producing from snapper and ginkgo at the moment look I mentioned that Atlas will produce more but we're also planning to increase our pigment capacity going forward. So that's why.
We will remain at about 85%, even with an increased production from the mine.
And the answer.
Just a quick add on that Jeff.
We mentioned in the prepared comments.
The fact that.
The agreement that we had with the FTC to continue selling CP slag is the ended so we'll be internalizing that that gets us to the 85% as well.
That's all of us.
Hello, Yes.
We're also working on Debottlenecking.
Our existing assets to grow the mining and upgrading side at the same.
Right, that's enrolling and debottlenecking of our payment plan.
But of all hope for the color maybe one more quick one on for Louise.
You just touched on.
Maybe some of the potential logistical constraints impacting the operational so low.
<unk> timeframe I was just wondering if you could elaborate a little bit on that for what's in your control, what's not and do you expect to be concerned sort of beyond.
The next couple of weeks or so of principally.
So look the logistical issue has been going on I'd say.
System leads from Covid.
Speaking specifically to this fits.
For us it's been a lot of the ocean freight.
Having a lot of work.
Rollovers and things of that nature. So it's not something that I would say is critical at this particular sales, but its out there. There is no question that there are issues, it's absolutely not a demand issue on I referenced that that's why we had.
Variance on the guidance of 11% to 15% depending upon how we manage those so again, we feel like we'll come comfortably into the range. The range that we provided on the call.
I would expect as we.
Have continued to see these logistical issues around ocean freight lines continuing to be congested.
The congestion that's.
We're going to continue into Q2 as well, but we're managing it.
Awesome really appreciate the Thomas Thank you.
Thank you. Thank you.
And the next question is a falloff from John Mcnulty with BMO capital markets. Yes. Thanks for taking my follow up just just a question on project neutron.
You indicated that you could start seeing some of the returns actually even in 2021 can you help us to understand how much of that might be coming in and then how it phases into that $1 50 to 200 per ton by the end of 2023 is there a way to think about the sequencing of that.
Yes, John look I'll try to give you a bit of color around debt look neutron is the automation of our plant and the automation of our process and system and the first big initiative of neutron is linked to supply chain.
<unk>.
When I said that we will get benefit.
It's on the supply chain front in 2021 look it obviously more to where the fourth quarter of the year debt you will see those benefits. So there is none of those benefits in Q1 and Q2.
On it.
It's a multitude of small project neutron, but the pipeline is very healthy and we feel confident debt.
It is significant the savings that we will see even in 'twenty, one and it's obviously raising significantly in 'twenty two to reach the about $150 to $200 per ton toward the end of 'twenty. Three so you should see enable lucian from Q4.
This year and every quarter going on all of the weight to the last quarter of 'twenty. Three so so that could help you color how to distribute the saving per ton going forward.
Got it and Thats and Thats. In addition to the $60 million of of incremental benefits that you think youre going to get this year of next year on.
On the synergies and cost saving initiatives from from Crystal is that right.
That's right that's correct.
Look the.
As we said the synergy debt.
We have achieve up to now we are really real cost saving the synergy that we see going forward or more of a link to debottlenecking opportunities like we talked at Investor day transfer of best practice that takes longer to be implemented but.
We will still be implement on top of new tranche with the release.
As of different technology approach got it perfect. Thanks, very much for the color.
Thank you and this concludes our question and answer session I would like to turn the conference back over the long from sponsors.
On co Chief Executive Officer for any closing remarks.
Thank you of key.
In closing I want to convey our extremely proud John and I are.
Dedicated our entire Tronox team as remain throughout 2020, prioritizing safety and looking out for the health and well being of one and other while continuing to deliver safe quality low cost of sustainable ton for.
Of our customer.
Thank you to all.
Our colleagues around the world.
Our performance speaks to the resilience of our business and the dedication of our people.
Tronox is very well positioned in the recovery.
We are looking forward to the continued demonstration of the power of our vertically integrated portfolio.
To everyone on the call for your question and interest in Tronox have a good day.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.