Q1 2021 Tronox Holdings PLC Earnings Call
Pardon me the conference will begin in a few minutes. Thank you for your patients again the conference will begin in a few minutes.
[music].
Yeah.
Good morning, and welcome to the Tronox Holdings first quarter 2021 earnings call all participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note. This event is being re.
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And I'd like to turn the conference over to Jennifer Gunther Vice President of Investor Relations. Please go ahead.
Thank you and welcome to our first quarter 2020, One conference call and webcast on our call today are John Romano and John Prince What's your zone co Chief Executive officers, and Tim Carlson Chief Financial Officer.
We will be using slides as we move through today's call. Those of you listening by Internet broadcast through our website should already have them for those listening by telephone if you haven't already done. So you can access them on our website at Investor <unk> Docs Tronox Dot com.
Moving to slide two.
A reminder, that comments made on this call and the information provided in our presentation and on our website include certain statements that are forward looking and subject to various risks and uncertainties, including but not limited to the specific factors summarized in our SEC 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 and believe are useful to investors in evaluating the company's performance reconciliations to their nearest U S. GAAP terms are provided in our earnings release and in the appendix of the accompanying presentation moving to slide three it's now my pleasure to turn the call over to John Romano.
John Thanks.
Thanks, Jennifer and good morning, everyone and thank you for joining us today.
I'd like to start the call with a comment on safety safe.
Safety is ingrained in the culture at Tronox, it's our leading value and we start every meeting with safety to ensure it stays top of mind.
In previous earnings calls, we've spoken about our journey to zero zero harm to our employees zero harm to our environment and zero harm to the communities in which we operate and we're happy to report that we continued our positive safety trends in 2020 ended the first quarter of 2021, delivering on our target to zero.
Now moving onto our financial highlights for the quarter.
Our first quarter performance outpaced our expectations driven by exceptional demand across all regions and end markets, resulting in a record quarter across a number of metrics achieve.
Achieving our highest sales volume quarter in the company's history is an incredible accomplishment and as evidenced of continuation of the recovery of the <unk> cycle.
<unk> sales volumes also broke company records and beat our expectations driven by robust global demand led by China.
We were prepared to meet the production as well as inventory on hand.
Revenue in the first quarter increased 14% sequentially to $891 million driven by robust market demand and higher <unk> prices. This represented a 23 per se increase year over year.
Net income for the quarter was $26 million and diluted earnings per share was <unk> 12.
Adjusted earnings per share was <unk> 43 says the difference between diluted EPS and adjusted EPS is primarily due to costs associated with the Q1 debt refinancing transactions and the break fee associated with the <unk> transaction.
Adjusted EBITDA was $225 million another record for Tronox.
This figure came in ahead of our previously guided range due to stronger zircon sales volumes and higher pricing than we than we expected at the time, we issued our outlook.
This also drove EBITDA margins to 25 per cent for the quarter.
We generated $77 million in free cash flow after investing $58 million in capital expenditures.
Given the strong free cash flow generation, we will have repaid an additional $100 million of debt by the end of the month on top of the $300 million, we committed to repay during the first quarter.
During the quarter, we restructured our restructured our balance sheet, which both lowered interest and extended maturities.
After adjusting for the redemption of the $450 million of 575 senior notes, which were redeemed on April one of 2021 after the quarter closed our total debt balance was $3 billion and our trailing 12 month net net leverage was three eight times, Tim will discuss these transactions in more detail a little bit later on the call.
But overall, we are very pleased with the outcome given the improvement in our balance sheet and an anticipated increase of free cash flow from the interest savings, which will enable us to continue to progress towards our $2 5 billion gross debt target.
Moving to slide four I'll now review, our commercial performance in more detail.
As I previously highlighted the first quarter was a very strong quarter from a commercial perspective revenue increased 23% versus the year ago quarter to 891 billion million draw.
Driven by double digit growth in both T O two in zircon volumes and low single digit percentage increase in T O two average selling prices.
<unk> sales volume grew 15% quarter over quarter, driven by the global economic recovery and led by growth in Europe and Asia.
South America, and Asia Pacific led volume growth in the year over year comparison, while North America also grew sequentially and year over year, but comparatively low at comparatively lower growth levels given the overall resiliency.
The reason throughout 2020.
Increases in <unk> selling prices in all regions resulted in a 3% sequential improvement globally.
This equates to a 4% increase year over year on a U S dollar basis or 1% on local currency basis.
Revenue from zircon sales increased 31% sequentially the.
The strong recovery in China as evidenced by their recently released Q1, GDP data and a rise in architectural completions. During the quarter was one of the primary drivers that led to a 30% increase in sequential zircon sales volumes.
Reising for zircon in the quarter remained level.
Revenue from the feedstock and other products declined 29% sequentially, primarily due to the conclusion in the fourth quarter of 2020 of the mandated chloride slag sales per the FTC consent order as a remedy for the Cristal transaction.
Allowing us to utilize more of our feedstock produced internally, which will benefit us from the on the cost side starting in the second quarter as we outlined on our year end earnings call.
The lower CP slag sales were partially offset by stronger pig iron volumes and pricing.
Our Q1 performance would not have been possible without the dedication of our tronox team and in particular, our global supply chain logistics and order delivery employees to successfully navigated numerous challenges and disruptions to meet our commitments and serve our customers. So I would like to thank all of those employees around the world.
We continue to see very strong demand as we've entered the second quarter.
It will continue into the second quarter and given the lower than typical inventory levels throughout the supply chain, we anticipate <unk> sales volumes to increase in the low to mid single digit range over record breaking first quarter levels setting us up for another very strong quarter on volume.
Zircon sales volumes are expected to remain elevated above 2009, and 2000 22019, and 2020 quarterly volume levels, though off of the first quarter peak driven by global economic recovery, which.
Which is led by the stimulus that's been recently announced in China.
We remain well positioned to meet the demand, giving our given our consignment inventory levels and our ability to source zircon from multiple locations and finally tio too in zircon prices are expected to increase as we progress with our regional price initiatives.
And now I'd like to turn the call over to JF for a review of our operating performance and profitability in the quarter JF. Thank you John moving to slide five.
As John mentioned adjusted EBITDA of $225 million was another record for Tronox.
Anticipated first quarter cost headwinds outlined during our fourth quarter earnings call <unk>.
Including the impact of unfavorable foreign exchange rate on our operation as well as the higher cost of pigment inventory sold in the quarter.
Were offset by favorable price and volume leading to an adjusted EBITDA well above our previously forecasted range.
Digging a bit further into the comparison.
Adjusted EBITDA increased 29% year over year, driven by improved tio to zircon and pig iron volume and T Ao, two and pig iron selling price.
As well as improved production costs per.
Partially offset by unfavorable foreign exchange rate.
Production costs were favorable year over year due to the improved operating rates at our Australian mines and less overburden cost.
Sequentially.
Adjusted EBITDA improved 10%, primarily driven by improved <unk> and zircon volume.
Partially offset by headwinds from FX and increased pigment cost.
As projected on our fourth quarter earnings call.
The latter of which will roll off after this quarter.
We saw a greater sequential improvement than anticipated.
Due to <unk> volume coming in at the high end of the range.
This resolved in lower cost tons produced in January being sold in March as our global inventory level has dropped below seasonal norm.
In addition to the typical cost inflation, we see every year in our global network.
We began to see increased raw material and logistic costs during the first quarter.
And expect to see continued cost pressure for the rest of the year.
As one example, electricity costs in South Africa have increased 15% in 2021.
Excluding impact from FX, we will more than offset the increase with continue saving and benefit from our synergy program and the near term saving from neutron throughout the year.
The volume and price tail when John mentioned previously are also going to help offset increase.
Taking into consideration the anticipated impact from FX.
The cost inflation.
A $10 million impact in the second quarter from the plant maintenance shutdown of our synthetic rutile production facility and an extended downtime at bottleneck due to a longer than planned chlorine supply youre shut down we are anticipating a Q2 2021.
Adjusted EBITDA of between 225 million to $240 million.
This type of plant maintenance at our <unk> plant only a cure.
Four to five years.
We believe in our recent quarterly results, we believe that our recently in our quarterly results demonstrate the strength of our vertically integrated business model and the strong free cash flow that it can generate.
Taking into consideration the pricing momentum in the market and the expected incremental synergy and cost saving from neutron.
Even after accounting for headwinds from exchange rate and cost inflation based on our current assumption.
The 1 billion dollar adjusted EBITDA target set at Investor Day is shown to be very achievable in the short to mid term.
On that last point I wanted to expand on project neutron to remind investor about why we are pursuing the project what the project encompassed in how we will achieve neutron vision.
Turning to slide six.
As a reminder.
Neutron is our multi year digital transformation strategy project.
That will standardize process and technology globally.
New trunk will enhance the benefit of our vertical integration and further reduce our integrated cost per ton.
The cost savings will come from four key area.
First the project will optimize our global supply chain using state of the art procurement tools business process and capabilities to better leverage our global footprint.
Second it will improve the operation and maintenance of our assets by reducing our spend through enhanced predictive maintenance schedule.
Third it will provide and then automation through linking our integrated business planning process throughout our organization more seamlessly, enabling debottlenecking at or plan.
And finally, it will provide benefit across a variety of business function through automation and standardization reducing costs.
We are very excited about the opportunity new tranche will unlock for our portfolio.
Including the expected cost reduction of 150 to $200 per ton by the end of 2023.
We look forward to continuing to update you on our progress.
I will now turn the call over to Tim Carlson.
Tim.
Thanks, J F I want to first review the benefits of the refinancing transactions, we completed in the first quarter.
As a result of the great work by our Treasury controller ship and legal teams, we extended our debt portfolios weighted average maturity by approximately three years.
Our term loan now matures in 2028, and our newly issued senior notes are due in 2029, which replaced the senior notes previously due in 2025 and 2026.
We also reduced our interest costs in 2021 by approximately $20 million given the timing of the transactions, we will see a reduction of approximately $30 million in 2022.
We expect an even further reduction in 2022 with continued deleveraging all of which will directly benefit free cash flow.
Our total debt after the redemption of the five and three quarter Senior notes on April 1st was $3 billion and our trailing 12 month net leverage was three eight times.
Given our strong free cash flow in the quarter, we will have repaid an additional $100 million of debt by the end of this month on top of the 300 million, we completed committed to repay during the first quarter.
This will reduce our total debt to $2 9 billion at the end of this month.
Preserve sufficient pre payable debt and remain committed to using incremental free cash flow to reduce our gross debt gross debt balance to achieve our target of $2 5 billion given current market conditions and the strength of our vertically integrated business model. We believe we can achieve our goal of net leverage of two to three times.
And gross debt levels of $2 5 billion well in advance of our previously stated target of 2023.
On slide eight on the left hand side, we've outlined our liquidity and capital resources. After the redemption of our $455 million senior notes as of April one, we had $740 million and total available liquidity, including $302 million of cash and cash equivalents.
Which is appropriately distributed across our global operations.
Our current liquidity is more than sufficient to operate the business moving.
Moving to the right hand side of the page capital expenditures in the first quarter were $58 million per.
First quarter Capex is usually the lowest of the year. So we expect an increase in Q2, Q3, and Q4, reflecting the pacing of expenditures related to neutron and our Atlas capacity capital projects as well as other maintenance spend to reach our anticipated level of $350 million for the year.
Depreciation depletion and amortization expense was $84 million in the quarter and we expect DD&A to be approximately 300, that's greater than $20 million per the year.
Our free cash flow for the quarter was $77 million due to our strong cash earnings.
Despite approximately a $25 million working capital headwind given a significant increase in our accounts receivable in March as March was our strongest sales months of the quarter.
Turning to slide nine I'd like to share an outlook for the remainder of the year.
As John mentioned market demand remains very strong.
We expect the second quarter volumes to increase in the low to mid single digit percentage range over a record breaking Q1 level setting us up for another strong volume quarter.
Zircon sales volumes are expected to remain elevated above 2019, and 2020 quarterly volume levels, though they are expected to come off slightly from the Q1 peak.
Both <unk> and zircon prices are expected to increase as we make progress with our regional pricing initiatives.
We expect our Q2 2021, adjusted EBITDA to be in the range of $225 million to $240 million as J F stated the business has done a great job of managing our costs, but will see headwinds from planned maintenance at our synthetic rutile production facility, increasing costs and continued headwinds from FX.
Perfectly the South Africa, Rand and the Australian dollar a continuation of the trends from the first quarter.
The Rand is trading sub 14, five versus <unk> 18, a year ago and recall that a one moving the Saar is equivalent to approximately $7 million to $8 million on a quarterly basis.
The Australian dollar is trading today around 78 cents versus <unk> 66, a year ago recall that a one cent move in the Australian dollar is equivalent to approximately $1 million to $2 million on a quarterly basis, taking into account, our current hedge which will benefit us benefit us through the second quarter of 2022, beginning in the third quarter of 2000.
'twenty two that will increase to two to 3 million a quarter.
Moving to our expectations for the full year in terms of uses of cash due to the refinancing transactions, we have reduced our anticipated net cash interest by $20 million to a $140 million to $150 million, we expect $30 million to $40 million of cash taxes narrowing of the range to the high end given increase.
<unk> earnings expectations for the year capital expenditures of $350 million, which include expenditures related neutron and Atlas capacity and net pension contributions of less than $10 million. We continue to actively manage working capital and are currently expecting it to be a modest source for the year.
Net net we expect strong free cash flow generation that will be used to continue to delever over the remainder of the year.
This represents our estimates based upon the current market outlook.
We also remain confident in our ability to generate strong free cash flow for the year high return internal investments and debt Paydown remain our highest capital priorities as I mentioned based upon our current outlook, we anticipate achieving our $2 5 billion gross debt target well ahead of our 2023 goal. We also want to remind investors of our significant.
Tax attributes with approximately $5 6 billion in total Nols and $4 5 billion of that in the U S. We do not expect any material impacts from our current from any current currently contemplated changes in the U S tax code.
Our total deferred tax assets are in excess of $1 billion I'll now turn the call back over to JF for closing remarks before opening the call up for questions.
John Tim and I are very pleased with the result would deliver in the first quarter.
This is an exciting time for tronox.
We remain confident that with our portfolio of assets and market position. We are prepared to continue capitalizing on the momentum and delivering on our commitment to our shareholder.
We have continued to operate with the future in mine in our digital and Lee progressing on our previously identified key capital projects to reduce costs and ensure we sustain our advantage position.
Much like John started with a comment on safety.
I'd like to conclude with a comment on sustainability.
You've often heard us talk about vertical integration has an advantage.
One being the opportunity for positive impact across the full spectrum of our operation.
We see the elements of sustainability as adding been embedded in our company for years.
We look forward to sharing more detail with you in our upcoming sustainability report that will be publish mid year and through our regular dialogue.
That concludes our prepared remarks, and with that I'd like to open the call for questions.
Operator.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Our first question comes from John Mcnulty from BMO capital markets. Please go ahead, yes.
Yes, good morning, congratulations on the on some really solid results and thanks for taking my question. So when I think about the <unk> guide, you're calling for sequential volume growth.
It looks to be in the low to mid single digits admittedly off of a really high base I guess when you think about any potential gating factors in the event that the demand environment is stronger what would those gating factors be.
If there if there are any but maybe hold you back.
Yeah. Thanks, John look from the standpoint of to your point, we had a very strong first quarter quite frankly from a seasonality perspective, Q4, and Q1 are normally quarters, where we would be building inventory and we drew inventories down in Q4 and significantly drew that down in Q1 as well so.
Growth of <unk>.
We had a record volume in Q1, so a growth of low to mid single digits is what we see as achievable from the standpoint of where we are today to the extent.
Volumes grow over and above that.
Obviously, we'll do what we can to make sure we fill those requirements, there's a fair amount.
I'm sure, we'll get to talk a little bit about China, but from the standpoint of.
A lot of the demand that we have been seeing has been coming from China, it's been coming from a lack of exports into the rest of the world. So when we think about how we're making commitments to fill that volume. We're looking at trying to tie the additional volume to longer term agreements. So I hope that answers your question to the extent there is.
Stronger pull on demand.
What we can to make sure we can meet that.
Got it okay, no that definitely answers. The question and then just as a follow up you spoke to inventory levels. It sounds like not only your own but the industry is kind of below normal levels have you seen much in the way of restocking yet or is it really kind of hand to mouth at this point in the restock is is still on.
Com.
Yes look from the standpoint of restocking, we do believe that inventory levels throughout the supply chain had been reduced clearly cut.
Customers are trying to rebuild the supply chain, but based on order patterns at this particular stage and quite frankly to your point I can't speak to the industry, but our inventory levels are well below seasonal norms I just don't think that there's a tremendous opportunity for those inventory builds to be actually completed based on current supply constraints.
Got it and maybe if I can if I can just sneak one last one in I know you had indicated on the last call that you were going to have some high cost T. O. Two inventories kind of working through your system I guess with regard to zircon did did it have any knock on effects for that too did you have higher cost inventory I know its kind of more of a derivative.
But was there any knock on effect in zircon profitability as we think about how some of the higher cost or fixed cost absorption heavy kind of inventories worked through the system.
Hey, John It's J F look on the zircon side.
Fluctuation is very small the reason being as you know we're vertically integrated but we're slightly short so that allows us to always run or mine at full capacity and maximize the fixed costs absorption by doing that and that's obviously makeover zircon costs.
More even than what happened with the Tio too when we had slowed down the plant in Q3 2020, and when you think about the volumes that we delivered in the first quarter.
The production that we had in Q3 of 2020, we did slow down a bit we started to pull that capacity back up in Q4, and Q1, but to Jeff's point, we never slowed the mining process down and that's really what allowed us to meet a lot of the increased demand through additional production.
From the zircon side and inventory.
Thanks, very much for the color good luck on the quarter guys.
Thanks.
The next question comes from Frank Mitsch from Fermium Research. Please go ahead.
Good morning, folks and nice start to the year.
We're certainly struck by the comment about European strength is that really.
Predominantly driven by the.
The pullback in Chinese exports or are you actually seeing some underlying demand take place there and any comments you can offer about regional pricing would be helpful as well.
Frank It's J F look I'd see that the stimulus that all the government around the world have put in place as create a very strong demand word while and China is experiencing a huge grow at the moment so more of the local tio too.
Sales in China, but look that growth has been experienced everywhere I guess, it's and we call. It a different economy I mean people are obviously not traveling and theyre not.
Entertain the same way that they used to be because of COVID-19, but that has created demand for basic product like ours.
And that's what we see and from the standpoint of pricing Frank We don't typically provide guidance on regional pricing, but as we noted in the call we're progressing towards regional price.
Initiatives and expect additional price improvement in both zircon in tier two in the second quarter.
And on top of the stimulus, though we are seeing a demand pull in Europe. It's not just the stimulus generated it's a what we believe to be true demand and it's we clearly see it through our order book and there is an element of.
Some of the Chinese volume that may not be exported over there that we're also picking up some share on unlocking that in luck with longer term agreements.
Got you very helpful. And then if I could just follow up on Saudi Arabia.
Any update that you can provide in terms of <unk> and any update you can provide in terms of production out of yanbu.
So let's start with discern look there's there's not a lot of change since our last earnings call.
Net thought of decades still working at the modifying the smelter and look I talked to you about some of the delay created by COVID-19, and the difficulty to have some of the people.
Going to Saudi Arabia.
Look the Swift can now believe it or not also had an impact on some key components that are being shipped to Japan. So I'd say that we're probably.
The four week beyond where we thought we would be.
In the last three months. So we lost basically another four week because of COVID-19 and logistic related issue. So that's basically where we are on Japan and yanbu.
Look we have.
Crank-up Yanbu, I mean, with what we see from a demand point of view for the Tio too. So we have the restart.
All of our line in Yanbu as we mentioned to you we have six.
Chlorinated align any <unk>.
In 2020 because of the low demand we were only running two and so we now hold back to six line operating and net this is what will allow us to create some of the synergy that we talked about by producing more T. Ao two out of yanbu running.
Harder.
Look I'd say that it's also challenging would COVID-19 to have some of our expat to travel to a KFC had the moment, but the good news is with vaccination and the border should reopen in June and that would facilitate the transfer of know how that that we want to win.
Courage to really ramp up yanbu to.
Through its best capacity.
I hope that answer your question Frank.
It does indeed, thank you so much.
The next question comes from Josh Spector from UBS. Please go ahead.
Yeah, Hey, guys. Thanks for taking my question.
At this time zircon volumes given the strength from the past couple of quarters and you are talking about somewhat modest decline I think sequentially into <unk>.
Or do you think volumes could be for full year 2021, or maybe another way to ask it is what's your capability to supply in 2021 based on the capacity that you guys have.
Yeah.
Yeah, Thanks, Josh I'm from the standpoint of inventory we.
We did finish.
The third quarter last year with a bit more inventory in the fourth quarter quite frankly was a good quarter.
And we drew additional inventory down in Q1, so we as we stated on the call are our inventories at this particular stage, we feel confident that we can deliver.
Delaware similar volumes in the second quarter.
A lot of what's being driven by this additional demand is actually coming from some additional pull in China.
A lot of that actually has to do with some additional ceramic production, that's being driven towards with trends to higher quality large format tiles and theres a lot of Chinese producers that have actually installed new capacity for that so that's driving demand. We're also getting.
Some additional volume through a bit of a challenge channel changed from the standpoint of where historically you would have seen.
Buildings being built for apartment complexes that Werent finished theres now a change our migration to finished buildings, where you've got contractors that are actually spending a tremendous amount of volume.
Buying a lot of volume upfront, so youre getting a shift in.
<unk> zircon is actually purchase for ceramic tile applications.
Maybe just I'll add that on the production side look with all production capability in with the inventory that we have in in and we feel very comfortable to meet the customer demand for zircon.
It's going to be really more in.
The logistic of distributing that material.
Okay.
Okay. Thanks, and I appreciate that and just if I could try another time on T. O two pricing so not looking for your forward commentary, but within <unk> can you talk about the difference in pricing that you might have achieved by each major region.
Yes, so with regards to pricing I would say.
In Asia Pacific, We saw a big push obviously in China that was the first place that we saw significant increases in pricing, which actually started in the fourth quarter.
And then with regards to the balance of the World I would say those were evenly distributed.
The exception of South America, where we again saw some significant increases.
As far as forward looking on pricing I cant provide a lot of detail on that.
Okay. Thank you.
The next question comes from Duffy Fischer from Barclays. Please go ahead.
Yeah, Good morning, guys.
First question is just on pigment. So if you look at your sales volumes in the first half and kind of that run rate.
How do those sales volumes lineup with your ability.
To produce pigment.
And this year, what would you estimate your maximum effective pigment production to be on a tonnage basis.
Yes, so look from the standpoint of.
Normal seasonality you would build inventory in Q1, and Q4 and you draw down in Q2 and Q3.
As I mentioned earlier, we drew inventory down in Q4, we drew it down in Q1, and we would expect to be somewhat closer to where our.
Our production levels in the second quarter, but they will probably be a bit of a draw there as well. So we will be able to continue to meet the demand through production, but there is an element of continued inventory drawdown and if we look at our forecast through the balance of the year, Jeff do you want to talk about.
And in the fee may be.
You know that those plant or not like a switch that you turn on and off and look we slowed down last year. So in Q3 and in Q4 last year, we were not running our asset that full capacity and we obviously turned then up toward the end of the year and look I've mentioned.
And that's the biggest swing plant that we turn on but.
But I'd say all of our plants are in a good place and we expect to produce more in the second half of 2021 that we did in the first half of 'twenty well that we will do in the first half of 2021 and with the new Tronox and with the sin.
Energy target, we will continue to debottleneck those assets and we feel very confident that we can meet.
The demand of our customers look the reality is.
The demand cannot increased 15% quarter to quarter and you know I mean.
It's at.
At least that's not how we plan the medium to long term.
Fair enough.
And then just maybe a philosophical question on price.
Your reported price in Q1 is lower than when you close the deal. If you just follow the sequential pricing trends that you've given us each quarter, but yet if you look at almost every posted spot price globally Q1 would be much higher than what pricing was in 2019, obviously, you've got some long term.
Contracts, but philosophically how should your realized price frac.
Global spot prices that we would get over multiple years, how does that smoothed in in general.
Yeah, Doug again global spot prices are a bit different than our average selling prices in.
But when we think as we said in our last call. We lost globally about $300 ish of pricing over the last three years and that was predominantly in 18 and 1920 was relatively flat.
And we would expect to get that back quicker and again, the 3% increase that we got in the first quarter and the guidance that we provided with additional pricing opportunities moving into the second quarter give us confidence that we're making good progress and what we've defined as.
A recovering economy, we expect to continue well into the year and into 2022.
Great. Thank you guys.
The next question comes from Vincent Andrews from Morgan Stanley. Please go ahead.
Thank you and good morning, everyone maybe.
Maybe you could just talk a little bit about in tio to the sort of end market demand youre seeing whether its from coatings or packaging or even the paper markets, where you're seeing the where are you seeing particular strength.
Is there anything surprising you did you have any impacts from in the U S from all the outages on the Gulf coast from the plastics for packaging customers. So maybe you could start there.
Yeah, So look from the perspective of cash.
How the markets developed overtime I would say clearly the coatings market for us in North America for instance remained relatively strong even through 2020.
It depends upon the region, obviously, we had a lot of downturn due to COVID-19, but I would say coatings was doing very well and now we're seeing that every market, whether that's paper laminate plastic industrial coatings. All those markets are doing very well and from the standpoint of our ability to kind of forecast where that growth is coming from.
<unk>.
It's coming from all the regions specific to your question about what happened in the Gulf. We did have some customers that had some issues associated with the outages from that very cold weather spell that largely I think came from impacts in the Houston area.
And again that gives us some confidence that what we're seeing in the second quarter as some actual pent up demand. So it kind of goes back to the question where people building inventory.
There wasn't a lot of inventory to be built in that situation because there were some of our customers weren't running at capacity.
And then if I could just ask on the working capital.
If I heard you correctly, you expect working capital actually be a source of cash for the full year and I guess I'm just trying to bridge that with the idea that.
The volume you sell is going to be up the prices, presumably going to be up the cost of production are presumably going to be up.
So maybe the other thing I heard through the course of this was that you were probably expecting.
Do not have built much inventory yourself through the course of the year potentially have lower inventories. So is that the key driver of why working capital as a source or is it just particular things youre doing as part of your cash management plan or just how do we how do we bridge to working capital being a source of cash despite higher prices and higher costs and higher sales volume.
Hey, Vincent it's Tim Thanks for the question you had all the components with the exception of.
With the exception of payables, we have a current initiative with our supply chain team.
Two of them to extend terms on them.
Most of our <unk>.
Suppliers. So we will see an improvement in payable some year on year by the end of the year and.
And as you mentioned.
Inventory will be a source as well and given the timing of receivables.
Given that November and December typically aren't large sales months relative to other months and we should see a little bit of a pick up at the end of the year in terms of cash collections to help that that metric.
Okay. Thanks for the color congratulations guys.
Thanks, Ed.
The next question comes from Hassan Ahmed from <unk> Global. Please go ahead.
Good morning, guys.
It seems to me that.
When I sort of listen to certain industry consultants that.
There was a price hike on the table for January another one for April another one for July.
Now beyond that the backdrop.
Seems to suggest that the ore side of things is tight.
One of the largest oil producers talked about there.
<unk> production volumes being significantly lower.
Through the course of Q1. So so my question to you is you know.
What.
In terms of these price hikes that have been announced what is realization of these price hikes looking like.
And particularly now with order variability being quite tight.
What are you thinking in terms of.
Further price hikes.
And you guys as unique situation of being as integrated as you are relative to what the producers in the market.
Thanks Hassan.
Look I'm not going to comment on all of the announced price increases everybody has a different cadence and way of doing that we do that through direct communications with customers that being said the of your question where were we on price implementation I think.
One thing we noticed in the prepared or we noted in the prepared comments that was pricing actually increased a bit more than what we had anticipated when we actually gave the outlook back in February.
And that was clearly due to higher implementation rates on.
Got it increases that we were working on regionally than we had originally anticipated and.
With regards to feedstock cost again, we're vertically integrated so 15% of what we need to make our pigment is sourced outside of.
Tronox, so we're not nearly as impacted as others might be due to inflation in ore, but we do see that as an element in our pricing strategy is largely driven more towards supply demand. So as long as supply demand continues to move in the right direction, which we anticipate it will we'll see pricing.
Initiatives.
Continue to move out regionally now.
We also have to remember that there are margin stability agreements that we have in place. So there will be some dampening effect as we get further into the year, but right now.
Again, a 3% increase that we had globally in the first quarter.
Given some indication that we will see additional pricing into the second quarter and we're confident that we're making good progress there.
Got it got it and now in terms of volumes you know obviously strong volumes in Q1, you guys came in at.
At the higher end of your guided two range and Youre guiding to again volume strength in Q2.
It seems there are a couple of puts and takes right I mean.
In Q4, one of the teams that was being talked about was how the Chinese producers were.
I guess lagging behind or not being able to meet their commitments.
And it.
It seemed that there was some market share gains.
In Europe in particular.
Where the western producers were benefiting from the sort of.
Production or supply curtailments on the Chinese side of things and then thereafter, obviously you have a large producer out there talking about regaining market share through the course of this year as well.
So could you could you talk about.
Your volume guidance, a little bit you know.
Like I said, obviously Q1 strong Q2 guidance fairly strong as well I mean are you seeing any sort of.
Continuing shifts in trade flows market share changes any any color around that would be helpful.
Yes Hassan so.
I'll go back to the comment that they made early around demand, we do see demand growing.
And it's again the point, Jeff made that started with stimulus and now we're seeing a.
Paul I think something over and above just stimulus it's demand growth in every region that we're supplying clearly.
If you go back to 2018 2019, there was a lot of additional exports coming out of China on a regular basis and thats when China wasn't very strong so quite frankly.
If you think about a lot of the commitments that were made as the market rebounded in China, a lot of what was being exported as being consumed internally prices in China moved much quicker and we talked about our pricing in the China region actually started moving back in the fourth quarter significantly so those exports from.
Chinese perspective, our betters are better suited to stay and country because the prices are higher and the cost of logistics are very expensive right now to export material out. So are we gaining have we gained some share in Q1 due to some of that we actually gained some share I would believe in Q4 and Q.
One on some of the share we may have lost historically against the Chinese and what we're doing now with customers is trying to make sure that we lock in those agreements for longer periods of time, so that we're just not a relief valve.
For some of this I'd say more tactical movement on the regional shifts.
Very helpful. Thank you so much.
The next question comes from Jeff Zekauskas from J P. Morgan. Please go ahead.
I've got two questions.
First is in terms of your share.
And your goal to reduce your costs by 150 to $200 per tonne.
How much progress have you made already.
And if it turns out that a big part of that is ramping up yanbu does that mean you have to do.
Lower production somewhere else to get the benefit.
How do you realize this Huntington 50 day.
$200 a ton how long will it take.
Where are you now.
So Jeff.
When we talk about the 150 to 200 additional cost reduction this is link with project neutral and.
And project neutron you know is is just starting for us. So I think that we were clear that we will see the benefit before the end of the project, but we haven't seen any of those cost reduction yet.
Look we should start to see some in Q4 this year.
And then it will continue to progress in 2022.
Achieving the full benefit in 2023 towards the end of 2023, and that's true the deployment of neutron.
We obviously had cost reduction based on our synergy and the work that we did in 2019 and 2020 and those synergies are real and they have improve our cost position. The synergy that we're talking for 2021 they are linked to volume.
And look we're not slowing down the order plant, we're just selling more than we're growing with our customer and that's where those benefits are also real so so I hope it helped clarify the difference Jeff.
Okay.
From my second question.
Why with titanium dioxide prices so bad.
I mean, if you look at oil polyethylene Seattle's propylene chlorine like every commodity in the world is up enormously and titanium dioxide is basically flat year over year and it's up a couple of percent sequentially what is it about the industry.
That doesn't allow it to capture more price is that Chinese exports into the into the rest of the world.
It's in everybody's operating at too low utilization rate.
Why a separate thing going in slow motion.
Jeff This is John Romano, So look I guess, it's all based on your perspective.
Over the last three years I think the prices remained relatively stable considering the market that we were in so we didn't lose a lot of price. If you think about where pricing went in the last down cycle.
It was significantly below that so I would just maybe make a different view on that that margin stabilization had cigna.
Significantly benefited us over the last three years the whole point of that was so that we could.
Continue to reinvest in the business throughout the cycle and then moving into the.
The first quarter quite.
Quite frankly, I think our price increase was a good price increase from the standpoint of where we were we've got good momentum going into the back half of the year and.
Finally.
One thing about this particular price is that you can look at we don't give you a lot of guidance on it Theres No index index on Tio too so chlorine and some of those other products that you referenced are a bit different but our objective is long stable growth and I think the pricing strategy that we have out with our customers and we're working with us.
Something that will benefit our investors long term.
Okay, great. Thank you so much.
Again, if you have a question. Please press Star then one.
Our next question comes from Roger Spitz from Bank of America. Please go ahead.
Thank you good morning.
Regarding our 2021 free cash flow guidance.
Besides the items you spoke about.
Cash items, we should think about for instance, cash restructuring.
Et cetera.
Hey, Roger it's Tim there really arent.
Just given the nature of our vertically integrated business model and the fact that we've got the crystal integration completely behind us there aren't any other significant uses of cash.
Does that speak to.
Great.
And.
Share count quarterly volumes, if I remember correctly, they can be lumpy due to ship the parts of timing.
This occurred at all given your substantial.
Substantial volume moving.
Miss this quarter.
Look so from the standpoint of what happened in the quarter, we definitely did and we had a range in that EBITDA that we gave you for the first quarter and some of that had to do specifically with logistics and the risk of not getting volumes out in the quarter.
And our low.
Just ex group borrowed to OTT and supply chain group did a great job and we actually delivered a lot more on those shipments than we historically have we've also repositioned some of our volume.
The downturn not a lot of what we make on the zircon side of the equation actually is sold in South Africa, and Australia. So we mentioned we had inventory per.
<unk> to meet the additional demand so part of what we did in COVID-19 was repositioned a lot of the inventories so that when the market rebounded we would be well positioned to meet it. So that has helped a little bit too with that lumpiness that we historically talked about a lot on our calls so I hope that answers. Your question I think that's right.
I think what you're suggesting is by repositioning and basically keeping zircon inventory closer to the company you may have going forward reduced the historical lumpiness of volume that we've seen is that.
My reading that correctly.
You are reading that correctly, keeping the zircon volume closer to the customer helps us alleviate that and it also helps we can plan the shipments a little bit better than we do and it's just a planned shipment for a customer in it. It's a revenue move as opposed to an inventory move where it can be invoiced directly inside the quarter.
Thank you very much.
The next question comes from Travis Edwards from Goldman Sachs. Please go ahead.
Hey, Good morning, just a quick question from me I believe in your prepared remarks, you had mentioned raw.
Raw material and logistics cost inflation, starting I think it will electricity costs going up in South Africa. I was just curious if you can elaborate on.
Maybe those two factors as far as what you're seeing.
Moving South Africa, or maybe more globally. Its an entire business just what are you seeing in logistics and raw material and other cost inflation. Please.
Yes, Trevor I mean, we certainly see.
On the logistic front, we we established through being a vertically integrated producer, where we know what we will have to move internally and we did very well with contracted the cost for that but every spot shipment that we have to do which is outside of those nor.
More route we have seen increase in price that that how are you.
So it's clear that there's a high demand for vessels and for moving goods around the world and we're not immune to that reality.
So that's one element that we saw in Q1.
One thing that we decided to do.
Is the price of ilmenite in China has continued to go up in Q1, and we had excess ilmenite in our South African operation. So so we send some of our own ilmenite to feed our pigment plant in China, which was a huge cost.
Advantage too.
Instead of buying expensive Chinese ilmenite.
But there was a high logistic cost to <unk>.
Do it and so that because that's the route that we had not established earlier look we gave the example of electricity in South Africa.
Essakane is D.
Government entity that produce electricity in South Africa, and it's very difficult to predict.
How price will move.
Look, it's not really linked to inflation and index.
Dean is huge increase but the exchange rate was playing in our favor the Rand was devaluated versus the U S. Dollar so yet use electricity increase.
The Rand was going down what has been a difference in Q1 of this year is we had still that huge electricity increase but as Tim mentioned in his remark.
The rent went from 18 last year to $14 <unk> at the moment. So we have kind of a double impact with.
Huge inflation combined with exchange rate going against us so.
Say that the exchange rate is.
The most challenging cost that we're facing at the moment then.
Look that's why we have done a lot of work with project neutron and with the synergy to kind of mitigate the impact of those costs and continue to deliver good margin out of our product and we're very confident that those cost reduction are real and they're going to allow us.
Two.
Two to two five net inflation pressure that we see.
I hope that gave a discipline.
Question.
Yes that was great color really appreciate it and best of luck this quarter.
There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to John Romano Co Chief Executive Officer for any closing remarks.
Thank you I want to thank everyone on the call for your questions and your interest in Tronox. This is the end of the call. So have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yes.
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