Q2 2021 Tronox Holdings PLC Earnings Call
Good morning, and welcome to the Tronox Holdings plc second quarter.
2021 earnings Conference call, all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
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Please note. This event is being recorded I would now like to turn the conference over to Jennifer Gunther Vice President Investor Relations. Please go ahead.
Thank you and welcome to our second quarter 2021 conference call and webcast on our call today are John Romano.
Mono NGL price Watson, John Co Chief Executive Officer, and Tim Carlson, Chief Financial Officer, we.
We will be using slides as we move through today's call and 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 day at Tronox Dot com.
Moving to slide 2.
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 todays 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 and the management of our business and believe are useful to investors and evaluating the companys.
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 3 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.
We'd like to start today's call by thanking all of our <unk>.
<unk> profit around the world for all the continued hard work and support which allowed us to deliver these great results. Our second quarter results were very strong despite multiple supplier and logistics headwinds. This was another record and <unk>.
A record quarter for Tronox on T O 2 sales volumes revenue earnings per share adjusted EBITDA.
<unk> and free cash flow all enabled by the continuation of the market recovery the strength of our differentiated vertically integrated business model and the support of our customers.
Revenue and the second quarter increased 4% sequentially to $927 million, primarily driven by higher T O 2 and zircon average selling prices.
This represented a 60% increase year over year.
Net income for the quarter was $77 million and diluted earnings per share was 46 cents.
While adjusted earnings per share was <unk> 61 cents.
The difference between diluted EPS and adjusted EPS is due to debt redemption costs associated with our Q.
Q1 refinancing.
Our adjusted EBITDA was $237 million setting yet another record for Tronox.
This figure came in at the top end of our guided range due to improved commercial performance as expected offset by higher inflationary pressures and operational disruptions.
J F will review this in more detail.
And in a few minutes.
Adjusted EBITDA margins improved to 26% for the quarter.
We generated $150 million and free cash flow after investing $60 million and capital expenditures, we repaid $135 million and debt and the second quarter and an additional $70 million in July for a total of 205.
Our total debt balance as of today is $2.8 billion and our trailing 12 month net net leverage ratio was 3.2 times.
We have $300 million away from our total debt target of $2.5 billion and 0.7 times from the midpoint of our targeted net leverage ratio representing.
Million progress in light of the strength of the cycle are positioning and cash flow generating capabilities.
Moving to slide 4 I'll now discuss our commercial performance in more detail as I previously highlighted the second quarter was a very strong quarter from a commercial perspective Tio 2 revenue was $740 million and increase.
Increase of 6% quarter over quarter, and 59% year over year, driven by continued strength and customer demand sales volumes grew 1% quarter over quarter on the low end of our guided range, mainly due to supply chain challenges that limited vessel and container availability at a time when inventories were already.
Below seasonal norms. The sequential growth was led by North America and Europe.
T O 2 volumes increased 45% versus the second quarter of 'twenty, and 'twenty, which was the quarter most greatly impacted by COVID-19.
Volume growth in Europe, and Asia Pacific led the year over year recovery, though all regions saw double digit growth.
Tio 2 price increase initiatives continued throughout the quarter, resulting in a 5% sequential increase this equates to a 9% increase year over year on a U S dollar basis or 6% on a local currency basis.
Revenue from zircon sales declined slightly due to lower zircon volumes and the quarter as expense.
<unk>, partially offset by improved pricing <unk>.
Demand continues to be very strong for zircon and we've been able to serve this growth and demand with inventory, which will continue to benefit us throughout the end of the year.
Due to the tightness and the market coupled with the increase in demand and pricing increased 5% from Q1 levels or 1.
Percent over Q2, 2020.
Despite the higher pig iron selling prices feedstock and other product revenue declined 8% sequentially as some pig iron and volumes rolled into the third quarter due to timing impacted by logistics issues on a year over year basis revenues increased 50% due to significantly.
Improved pig iron and volumes and pricing driven by strong and market recovery.
There were no external CP slag sales in Q2 of 2020, so the year over year comparison. This quarter is on a like for like basis.
Our global supply chain and logistics in order to delivery employees navigated yet another quarter of disruptions to.
<unk> and commitments and serve our customers to the best of our ability. So I'd like to thank all of those employees again around the world for a job well done.
We believe we are still and the early stages of the cycle regional price initiatives are continuing across both tier 2 and zircon.
Demand remains very strong throughout the supply.
To meet are driven by the recovery across all of our end markets and we believe inventory levels throughout the supply chain continued to be well below seasonal norms.
As we look ahead to the third quarter, we are balancing strong customer demand against our ability to deliver based on continued supplier and logistics constraints.
Fly checking these factors into consideration, we expect T O 2 volumes to decline, 5% to 10% sequentially, which would still represent the strongest third quarter volume on record.
Zircon sales volumes are expected to remain elevated above 2019, and 2020 quarterly volumes benefiting from sales from inventory.
And those volumes will be lower than the second quarter levels.
Zircon pricing improvement and the third quarter is expected to more than offset the volume headwind.
T I O 2 and zircon prices are expected to continue to increase as we make progress with our regional price initiatives.
I'll now turn the call over to J F for a review of our operating performance.
Take some profitability in the quarter J F. Thank you John moving to slide 5 as.
As Joan mentioned adjusted EBITDA of $237 million was another record for Tronox.
The increased volume and pricing.
Performance on outline support significant increase in EBITDA.
And which were offset by headwinds from unfavorable foreign exchange rate inflationary pressure and operational disruption.
These operational disruption include.
Jud the EBITDA headwinds, we discussed on our first quarter earnings call, which were the $10 million impact from the planned 5 year maintenance shutdown of our synthetic rutile production facility and a 4 million dollar impact.
Pack from the longer than anticipated downtime at our bottleneck pigment plant due to and unexpected supplier shutdown.
Additionally, we had a 5 million EBITDA impact from unexpected downtime at our styling boral pigment plant.
And due to mechanical issue.
All of these operational disruption will roll us into occurred in the third quarter.
Digging a bit further into the comparison adjusted EBITDA increased 67%.
<unk> year over year, driven by improved volume and selling price across all products as well as improved production costs, including synergy, partially offset by unfavorable FX rate and the operational disruption.
Yeah.
Production costs were favorable year over year due to the improved operating rate at the mining site due to the COVID-19 impact and smelter relying costs in South Africa in 2020.
Sequentially adjusted EBITDA improve.
<unk>, 5% due to the improved pricing and production costs, partially offset by operational disruption.
Unfavorable FX rate and lower co product volume production.
Production costs were favorable partially due to.
On improvement at our Yanbu pigment facility, which continued to deliver above expectation.
Inflationary pressure, including both external or purchase and raw material, such as energy and sulfur price as well as interest.
Increased logistic costs continue to impact our earnings.
Additionally, you would have seen the news about the riot that are cured in South Africa we.
We want to assure you that our operation we're not directly impacted.
However, there were disrupt this.
Rupture and 2 the key that and port which at this point haven't materially affect us.
However, there is some risk that some of our shipment could be delay as the port continued to work through the backlog.
While the operational disruption for the second quarter, our net recurring pressure on the cost side of the business couple with chlorine availability issue are expected to partially offset continued price increase in the third quarter.
As a result, we anticipate third quarter, adjusted EBITDA of $245 million to $260 million.
Turning to slide 6.
This is a critical time for Tronox.
While over.
Overcoming these various challenge we remain focused focused on progressing project neutral on our enterprise wide cost reduction initiative that will transform our business and more than offset raw material and fixed cost inflation.
And enabling us to remain among the lowest cost <unk> to producer and and in service to our customer.
We will achieve this true and optimize global supply chain.
Reduce maintenance spend.
And then just operation improved.
<unk> throughput and.
And standardized process.
This project is especially important given the increasing cost we are facing.
We expect neutron to unlock cost reduction of 150 to $200 per ton by the end of 'twenty.
'twenty 3.
And we look forward to updating you on our progress.
Our vertically integrated business model continues to differentiate us from our competitor providing security of supply.
Our global footprint that we can leverage to our customer ads.
And then page and co product that contribute significant value to our portfolio.
We are on a journey of transformation and continue to deliver on our commitment to our stakeholders.
We demand a lot of our organization.
And our people.
2018, you to respond.
We are grateful for the ongoing effort of our colleague around the world to deliver safe quality low cost sustainable ton for our customer.
Thank you.
Turning to slide 7.
On this last point.
Oint producing safe quality low cost sustainable fun is a key part of our strategy.
And how we strive to.
Differentiate ourself.
Though sustainability as long been a part of everything we do at Tronox.
We are improving how we disclose our progress and effort related to our ESG performance has it become and increasingly critical focus area for our stakeholders.
This week, we published our 2020 sustainability.
And report that I lights, our commitment to improvement for the future.
It provide detail on how we will align ourselves with our global warming scenario below 2 degrees Celsius and achieve an aspirational goal of net zero greenhouse gas.
<unk> and zero waste to external dedicated landfill by 2050.
The report also reinforce our journey to zero to achieve zero injury zero incident and zero arm.
We invite all stakeholders.
And to review this report on our website to learn about our accomplishment to date and the aggressive goals, we have set for the future.
I will now turn the call over to Tim Carlson Tim.
Thank you J F on slide 8 on the left hand side, we have outlined.
And our liquidity and capital resources at the end of the quarter.
And we have $767 million and total available liquidity, including $303 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 to the right hand side of the page capital expenditures and the second quarter were $60 million Capex is expected to increase in Q3, and Q4, reflecting the pacing of expenditures related to neutron and Atlas capacity capital projects and the year as well as other maintenance spend.
Though we are bringing our.
Book down to $300 million to $325 million, given our mid year reassessment of where we are in terms of capital deployment.
Depreciation depletion and amortization expense was $71 million and the quarter and we expect DD&A to be approximately $300 million to $320 million for the year.
Our outlook.
Our free cash flow for the quarter was $150 million due to our strong cash earnings.
We also returned $28 million to shareowners in the form of dividends year to date, given the continued strength and our cash generation capabilities, our confidence and our business model and our view on the cycle where income.
Increasing our quarterly dividend by 2 cents per share to 10 cents, bringing our annualized dividend to <unk> 40 per share.
We expect to continue to generate significant cash flow and believe that we'll be able to sue and achieve our debt target and we'll continue to evaluate our capital returned to shareowner policies moving forward.
Year.
Turning to slide 9 I'd like to share our outlook.
And as John mentioned, both <unk> and zircon prices are expected to increase as we make progress with our regional pricing initiatives.
Oh, 2 market demand remains very strong, though we are balancing our market outlook with the supplier and logistics.
And <unk>.
Including chlorine availability issues, we expect third quarter T. I O 2 volumes to decline, 5% to 10% from record second quarter levels.
Zircon sales volumes are expected to remain elevated above 2019, and 2020 quarterly volume levels, though lower than Q.
Q2 levels.
We expect our Q3.2021, adjusted EBITDA to be and the range of 245 million to $260 million due to lower volumes inflation raw material price increases and coring availability issues, partially offsetting expected price improvements and the second quarter.
Constrained operational disruptions rolling off.
FX rates have come off of their recent lows that we continue to be a headwind year over year.
Recall that a 1 move and the Saar is equivalent to approximately $7 million to $8 million on a quarterly basis, a 1 cent move in the Australian dollar is equivalent to approximately 1 to 2.
And $2 million on a quarterly basis, taking into account, our current hedge position, which will benefit us through the second quarter of 2020 to.
Beginning in the third quarter of 2022, it will increase to $2 million to $3 million per quarter, excluding the hedge.
Moving on to our expectations for full year 2021, we anticipate.
And uses of cash.
Net cash interest expense of $140 million to $150 million.
40% to $50 million of cash taxes, and increase of $10 million given our increased earnings expectations for the year cash.
Capital expenditures of $300 million to $325 million, which includes expenditures related to neutral.
The filing and Atlas capacity and pension contributions of less than $5 million. We continue to actively manage working capital to be a source for the year.
Net net and we expect strong free cash flow generation despite cost pressures on the business that will be used to continue to delever over the remainder of the year. These.
These represent our estimates based upon our current market outlook I'll now turn the call back over to John for closing remarks before opening the call up for questions.
Thanks, Tim.
J F. Tim and I are very proud of the organization's accomplishments and the first half of this year. This is a critical time for Tronox, we remain confident.
<unk> that our portfolio of assets and market position, we are prepared to continue to capitalize on the momentum and delivering on our commitments to our stakeholders.
And we've continued to operate with a future and mind and are diligently progressing on the previously identified key capital projects to reduce costs and ensure we sustain our advantaged position.
That concludes our prepared comments and with that I'd like to turn the call over for questions operator.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone zone. If you are using a speakerphone. Please pick up your handset before pressing and Keith to withdraw from the question queue. Please.
<unk>.
The first question is from John Mcnulty of BMO capital markets. Please go ahead.
Yes. Good morning, Thanks for taking my question.
Maybe we can dig into the into the supply and freight issues a little bit more can you give us.
Whatever clarity you might have as to the timing of when we might be able to start to see some of these issues.
Get resolved and I know there is certainly kind of moving targets right now, but any color that you might be able to give us would be great.
So John I'll start.
And with that and I'm sure John can had.
We see day issue that will last until the end of the year and.
Look I know that at the beginning.
<unk> of the year, we thought that for the second half of 2021 and that.
Would improve but.
Really the reality is everything is still very very tight and the visibility that we have at the moment and bring us to the end of 'twenty, 1 and it's still a challenge to get.
So to get container to put the material in and to move things around.
John I guess from the standpoint of and it's.
Kind of 2 things also still logistics, which again to Jf's point, we would hope by the end of the year that we'd start to see and get some early from that but.
It's really hard to say at this stage.
Net vet it hasn't gotten any better and then from our ability to continue to work with our suppliers. We've had other issues clearly there was some disruption and the first quarter that had to do with.
And the storm here that has been exacerbated by other issues that we've talked.
Regarding chlorine not only in the U S, but also and all.
Our plant and Stalin barrel.
Got it and then and then assuming that these issues arent just specific to Tronox I guess can you speak to what all this means for the ability for the industry to start catching up in terms.
In terms of building inventory kind of getting back back on track because it does seem like things are pretty thin and and I would imagine. This this makes it thinner, but I guess I'd love some color from you guys on that.
And look from the standpoint of we think the entire supply chain with regards to inventory is below what FERC to seasonal norms.
And our ability to build inventory between now and the end of the year and meet customer demand with all the challenges that are going on is it going to be difficult. This has absolutely nothing to do with demand. So I would suspect maybe to directly answer what I expect you're hedging for that is that demand will continue.
To be pent up and will likely elongate the cycle and.
And we have a lot of requests from customers.
For additional volume I don't think Tronox is on an island with the transportation issues that are going on and the industry right now.
Got it and then maybe just 1 last question there was a lot of a lot of noise around <unk>.
Our supply throughout the quarter and a lot of a lot of kind of data points picking up can you speak to your thoughts on on global or supplies and what it could mean for <unk> pricing as well as as well as the ability for the industry to either add capacity debottleneck et cetera.
It would be great.
Yes, John look.
And look you were referring to Luca announcing that they will shut down their mine that produce natural rutile, and Sierra Leone, and Rio Tinto issue in and coil.
<unk> Zulu net how shutting down their mine and feed their big smelter there so look.
I think display into the strength of Tronox, we're vertically integrated so we have our own mine and our own concentrate or and upgrading facility, where 85% vertically integrated and the 15% that we buy on the market I mean, we have had long.
The contract in place and we'll we're well equipped.
And 2 to deal with that tight market.
And you also know that we're going to start just on towards the end of the year and so I think we're in a very good position for a facing that reality, which I think will.
Turning to our strength because we will see our competitors are seeing their feedstock costs moving up at a time, where we're working hard on lowering the cost of producing out of our own operation.
Great. Thanks, very much for the color.
The next question.
<unk> is from Josh Spector of UBS. Please go ahead.
Yeah, Hey, guys. Thanks for taking my question.
And just when you talked about tier 2 volume sequentially and the quarter you talked about improvements in North America, and EMEA can you give us some color on what Youre seeing and Asia Pacific and if any of the demand patterns change their customer.
And we'll play patterns change through the quarter.
Yes, Josh so from the standpoint, and we saw growth and every region. We made reference that we saw more growth in Europe and in North America, and the second quarter, but we have not seen demand weaken at all the growth has moderated a bit in China.
Anna and I think that's where maybe there is some concern around what's happening we don't see China weakening we see that demand continuing to be significant there's clearly some obstacles, we have an operation and China freight.
Freight rates out of China, and other regions of the world are very expensive right now and it's not only at the expense of the containers.
Or logistics, it's the port congestion so on.
All of what's happening I think in China right now from the standpoint of demand is still positive. There's some comments coming out with regards to what what's happening could be deemed as weakness and we don't see that at this stage.
Okay. Thanks, appreciate that and just and in line with some of the comments around the volume constraints last quarter into 3 third quarter is there any region, which you would say is seeing a bigger impact on some of those supply constraints and perhaps getting less and material and is that playing into your ability to get pricing.
And that region.
I think all of them.
And then Jeff if you want to make another comment please feel free to.
Sure.
It depends on the timing, we mentioned the UK, having a problem. The Korean issue there was basically a power a power outage that created a problem for the Korean provider and the U K.
So that was an issue there's been a lot of discussion about chlorine availability and North America.
On the logistics issue plays into our ability to export out of Australia, quite frankly, and that's a very congested market for us we ship a lot of material out of Australia and in other regions.
And so the world So I would say that theres not really any 1.
Region Thats more significantly impacted over the first half I'd say and the second quarter. We may have saw a bit more in Europe and North America.
Although we still had very strong numbers.
And North America.
Okay. Thank you.
The next question is from Frank Mitsch Fermium Research. Please go ahead.
Hey, good morning, and nice results I wanted to follow up on the on our feedstock supply issue on the ore supply issue.
Certainly theres going to be some inflation there I'm just curious what you.
Our crystal ball is forecasting in terms of ore pricing over the next 6 to 12 to 12 months, what sort of order of magnitude would you anticipate or prices moving up given the supply difficulties that we're seeing there.
So Frank.
Well you know that we.
Don't speculate on what price will we.
We'll do going forward. So I think that your guess is as good as ours.
Look we certainly see a tight market.
But we feel that as tronox wear and a good position with with our own production and because we don't sell any.
And.
And the feedstock onto the market I mean, we're not trying to speculate what will happen with price.
JF with all due respect your guess is way better than mine.
And the outlook there but.
Understood and I believe you mentioned at Yanbu.
I.
And I ask you about your saying startup year and what's your confidence level there what's the what's the progress. There can you can you give us and them a more granular update.
Yes, sure and look and we're very confident that we're going to start look mechanical completion is almost done.
We're looking.
And once it's at the end of August to have.
Net author that complete all of the change that we wanted to the facility.
And look we have in parallel start coal commissioning.
And of the equipment, the new equipment that were installed and the change that were put in place.
And we're looking at.
Commissioning starting in October.
And look this is in line with what I mentioned at the last earnings call.
A bit of delay because of COVID-19, and getting some of the material to final.
Finally, as the modification on site, but all of that material is now on site all modes, while we're at 96% completion.
And of the installation of that and.
And then look we should see our first slag in the and the last quarter of the year.
So.
Basically the update not a lot of change since last quarter, but still continue to progress.
Got you understood and then lastly on Yanbu operating above expectations can you provide a little more color there.
Yes sure.
Look we we broke a record of.
<unk> at Yanbu in.
In May so we were very pleased with that as a record of halt all time for the plant. So that's in line with US telling you that we would be able to deliver synergy.
By transferring the know how of our Hamilton and plan to this yanbu plant.
And KFC, and then and I guess it looks good for 2022.
And as we continue to see a strong demand that we'll be able to grow our production to meet our customer needs and.
And Frank just to add to that that capability has also allowed us to transfer some of the legacy Tronox.
<unk> over to Yanbu, which is also helping us and there's times, where we need more production at a variety of different plants.
Got you understood. Thanks, so much.
Thank you.
The next question is from Matthew <unk> of <unk>.
Bank of America. Please go ahead.
Great. Thank you.
So Casey and sands is fairly close to RPM.
And throughout the province.
And clearly an uptick in violence and unrest and I know you had mentioned outside of the court your operations were.
Kind of somewhat on.
On impact.
Just wondering how that's the case and how you've been able to stay open.
Given the backdrop and what we've seen in operations.
A couple of miles down the road.
Yes, so Matthew.
Trying to give you some color well or plant is an unplanned Guinea, which is inland from.
And I'm, just Richards Bay and look.
It's true that there was riot look it's all related to Mr Zuma and.
I think that that was the drop that makes the things start.
And.
And look what happened is you have people with.
With extreme poverty in that part of the country and lots of unemployment and.
And people vandalize, the shopping center and grocery and.
Fuel station and all that you saw that on the news and.
And but our people.
And we put a lot of effort in creating.
Special enrollment within Tronox with our value with our outward mindset and and our people are our ambassador and they knew that something was to happen and the community and we stopped trucking.
And material and between the mine and the smelter and we put our truck back at our site ahead of those event happening because our people knew that would happen and so then things kind of blowed.
Went out of proportion, but nothing happened at our site, we had our people taking.
And care of our asset and look when government took back the control and Polish and the army came.
Well, we were able to restart right away with no damage and basically minimum impact to our operation and production and that that show.
Truck case to the the importance.
Working with your people your employee and.
And I'd say that South Africa is probably better today than it was before that event because I mean, the good people took control of what happened I mean, the era of Mr Zuma and not to judge.
Judge, but I mean that was a bad time for South Africa, and I think that things are improving.
Okay and.
Thank you for that channel.
It seems like if I if I read your statements correctly your commentary that there is some zircon inventory liquidation.
So going on right now at Tronox, which is kind of boosting your numbers.
If I were to think about next year and the type of volumetric headwind that could represent business what.
And should we think about.
How should we size that.
And so in 2022 are on zircon.
On the revenue will migrate back to early 1918 levels pre pandemic levels on the inventory that we built and.
2020, as a result of the pandemic.
We're actually beneficial for us because we were able to meet all of the market needs over the last couple of quarters, but with that being said you know.
Asian, and given how tight the market is we have been able to.
The offset some of that volume with price in fact more than offset that in the quarter and we expect that to continue in Q3 and Q4. So I will have a volume headwind year over year in Q3, and Q4 price were more than offset that.
Okay, and you had mentioned that.
Revenues will be kind of consistent with 2019.2018.
With that on volume comment or is that kind of consistent with what you would expect price to do between now and then as well that was a volume comment again.
At this point and I think we said on the prepared comments even in Q.
Kidney.
We are expecting and lower volumes price would more than offset the.
On downturn actually helping on revenue yes.
And.
And to be very clear on the demand is very strong at this particular stage and that's why we think now moving into the second and into next year with.
3 volume.
Atlas capacity becomes more and more important as we replace some of the mining assets that we have so the money that we're spending to reinvest and the business throughout the cycle is going to help us, but it's going to take some time to get some of that capacity up and running.
Understood. Thank you.
The next question is from Hassan Ahmed of Alembic Global. Please go ahead.
Good morning, guys.
And wanted to revisit.
Question around or supply or supply demand fundamentals over there.
And again understood on the net I'm, sorry to say it we've seen issues.
Lastly, on we've seen some issuers and South Africa as well, but.
If I take a look at U S buyer, obviously, it's been and industry, which has been under supplied underinvested for a while right.
And now here, we are with the issuance here early on the.
Issue in South Africa, how are you guys thinking about supply demand fundamentals.
And at near to medium term.
And in ore and on a relative basis in terms of availability.
How are you guys thinking about the availability and supply demand fundamentals of low grade.
And theater and high grade ore.
So I'll try to give you a little bit more color on this look we feel that we're doing our part and though in the sense that.
We announce our Atlas can pass be mine.
And almost a year ago and.
And we're going to start that operation and next year and that would allow us to maintain our 85% vertically integrated position, even if we're increasing our pigment production to grow with our customers. So that's all part if you want and look we have ordered.
Their project in our pipeline that we're looking at to continue to maintain that position and even <unk>.
Increase our vertical.
Position, if we need to.
And we kind of like to be slightly short because that allow us and you know to be on the market.
By from the supplier have a good understanding of what happened and.
And.
And that's what we have done and you know too to make sure that we would have the material that we need that being said.
Youre right when you said that.
And the industry probably.
And under invest in recent here because the price didn't justify to open new mine and to invest in.
Complex upgrading facility.
And look even if you talk about a mine for chloride ore mined for sulfate.
On the costs are the same.
The difference is really just the type of ore that you have and the ground, but I mean, it's much cheaper to open our sulfate ilmenite mine and then to open a chloride ilmenite mine it just depend on the resource and.
So I guess the chloride resource out of the ground or are more scare or they are rare and that's why you need upgrading facility like a like a smelter like what we have and South Africa or at Fr plants, like we have and Australia or our future Japan operation.
And so because those assets allow us to take and all of that is not really compatible to the chloride process and make it compatible as the feed ads and economy coal.
The value for the chloride process. So that's what that's what we're doing so I hope that.
And some color.
But we see that as positive for the industry because in the coming year I think thats what would limit pigment production is not building new pigment plant, it's going to be opening new mine to feed those pigment plant and.
<unk>, that's where when people panic about China over floating the market China cannot do that because they don't have the mind to feed their chloride expansion. So that's where the vertical integration of Tronox will really play in our favor.
Understood understood very clear and just sticking to the team.
And I think of raw materials.
And again and again on the call you guys talked about chlorine supply kind of being an issue in the second quarter, maybe into the third quarter as well, but it seems that.
As I sort of hear some of the commentary coming out of 1 of the biggest sort of chlorine producers in.
In North America, and particular, that's going to be an issue that's going to be here for a while right. How are you guys going to react or deal with it.
And the sort of.
Reduced availability correlate of chlorine, particularly in the North American market.
And how do you think the index.
Team, who deals with that and I guess, where I'm going with this question is and.
Everyone's talking about us being in the sort of.
Early innings of an up cycle within the <unk> sort of cycle cash.
Cash flows are improving and the like.
Do I mean is it fair to assume that maybe.
You guys or the industry you start thinking about building some of the auto on chlorine capacity I mean.
Is that something that you guys are thinking about.
Yes.
This is John Romano and we do have.
Outside of North America, we have a lot of purpose built chlorine plant. So clearly that's something we continue.
Continue to evaluate.
And it's not just chlorine, although that's been kind of the focal point here recently theres been other issues.
With nitrogen and oxygen and and other plants I mean, there are a lot of issues and the industry right now with regards to chlorine.
Coupled with looking at opportunities.
It might actually evaluate building our own chlorine facility. We're also looking at our ability to continue to work with other suppliers our supply chain team has a good plan in place.
And as we move into 2020, 2 that will continue to support our growth not only in the U S but globally.
And.
S on just to link it with the feedstock tronox, having 9 pigment plant and full control of its feedstock. We're obviously.
And sending lower whore to place and the world, where we have extra chlorine and we try to keep the high grade feedstock for or Hamilton.
And as where we implant and the U S. Because I mean, we're facing that reality.
And of the chlorine I mean, so, but we have kind of rearrange our feedstock to deal with that and if you think just we've referenced again, 5% to 10% decrease in Q3 year prior to Q2, a lot of that has.
And today at what JF, just said, we have been able to manage the chlorine issue by by moving higher grade feedstock to other facilities to have a higher head grade therefore, needing less chlorine and some of the issues that happened recently are now being a bit exacerbated by transportation issues and getting that order there quickly so.
It's not a long term issue for us it's more of a short term 1 nonetheless, it's an issue that we're dealing with.
Very helpful guys. Thank you so much.
The next question is from Duffy Fischer of Barclays. Please go ahead.
Yes, good morning from us.
Question just around the theoretical.
So as volume increase for next year. So if we assume that demand stays very strong and we assume that a lot of these logistical issues go away and your operations run.
And would plan how much more tier 2 would you be able to produce and sell next year versus what the plan looks like midpoint for this year.
Well I mean, we assume Duffy that day.
The <unk> will grow like GDP.
And we are aligning ourselves with customers that are growing slightly faster than the market, but I mean, we don't expect that type of growth that we have.
From.
Q1 to Q2 and going forward to less so I mean, we don't have plans of grow a double digit, but we have plant of growth mid.
Single digit growth for next year.
So clearly EMEA.
And the big part of that and how we're going to support that growth with production and we've talked about the synergies there those are going to continue into 2022.
We continue to work with our operational excellence programs and again, our vertical integration will allow us to continue to support the growth at our plants and where.
And looking at any specific expansions.
But it was continuing to debottleneck, our plants and we believe that we'll be able to continue to do that and capture the growth at least at our percentage share and probably more.
Okay, maybe I missed it.
I wasn't talking about kind of structural increases or like the long term 10 year average growth most of that I was talking.
And about is just physical operations, where it seems like obviously you had.
Stoneberg had an issue this year right I mean theoretically that doesn't happen next year. So just on a like on like basis 'twenty 1 into 'twenty 2 if we assume some of the supply issues.
How much more.
Or maybe a different way to ask at the midpoint.
And of your base case this year through the end of the year what production level is that relative to what you would call.
Your theoretical name plate. This year I mean, I'm just trying to understand is it a 75000 Casey bump is at 125, roughly how much more would we have to sell next year than this year.
Well, 1 color that I want to give Duffy is we are increasing our production. So from 'twenty 1 to 'twenty 2 will improve significantly the amount of tons that will produce but you have to realize that we started 21 with inventory.
And at the moment, we have absolutely no inventory well, where we're below seasonal norm as John said, so we need to rebuild that inventory.
And so and when we think so I guess generically though.
And we try to run at a 95% utilization rate you can't get to 100 on a regular.
And the basis, we have got 9 plants theres going to be issues and all that being said, we'd hope that we could probably get another maybe 40 to 50000 tons out next year, but to Jf's point, there has to be an element of that that goes back to rebuilding inventory because we're not on a sustainable level at this stage and we don't see that negatively because.
And you see we're not the only 1 facing that's reality. So it would just keep the the market from going to building huge inventory and then create and order cycle instead it will stabilize.
The situation and that's positive we found.
Very fair and then with things being so tight and with you guys kind of having the broadest plant footprint globally.
Have you pushed more people or more people ask this year are to move into kind of longer term arrangements, where maybe theres more sustainability or less volatility.
And that business over a longer period of time.
Yeah definitely I would say the answer to that question is yes, but I would differentiate that from longer term agreements. Yes, we haven't clearly theres been a lot of interest and margin stability as a as the market starts to recover and we don't typically provide detail.
And as on contract splits, but what we can say is that we have a very good balance of agreements that will allow us to continue to capture price as we move into the second half and longer term agreement commitments I think from some of the issues that have happened.
Because quite frankly.
On.
China has has.
Details and I only added some capacity, but there I would say a better attic, sometimes so and some of those areas and we have picked up longer term agreements moving into the balance of this year and into next.
Great. Thank you guys.
The next question is from Vincent Andrews of Morgan Stanley.
Please go ahead.
Thank you and good morning.
A question on pricing and your contracts.
And not be the case for you, but I believe it's the case for 1 of your competitors that also does the value stabilization contracts that there is a linkage on price to PPI and obviously.
The only seeing a lot of PPI inflation out there and so my question is should we assume.
And that your contracts, we will see positive price movement in line with something close to where PPI is going.
Yes, so just to be clear our contracts.
What you're referring to it as value stability.
We are and agreements are not.
Things like that we don't have anything thats tied to PPI. There are individual agreements that have capability of price to move up our price moved up 5% and the quarter as we noted we expect to get price.
Strength moving into the third quarter.
And we have the ability to adjust those.
<unk> as we do non margin stability agreements.
Again, not providing the split we still feel we've got a good balance between margin stability and regular long term agreements, which will allow us to continue to capture price.
Okay, and then as a follow up on.
On the volume and shipment situation.
And con.
Going to be down 5% to 10% sequentially.
And from from some of your presumably some of your customers during this reporting season already and.
Paint and plastics that they've had issues getting other raw materials, which has caused them to produce less themselves. So are those folks still taking all the tio too they.
I want because they know later on and Theyre going to make up their production or are they are folks that won't that will be part of that 5% to 10%.
A reduction in shipments on it on a go forward basis, and I'm, just trying to figure out who's not getting your product.
Particularly those that are having their own production problems.
Yes, so the 5% to 10% reduction is going.
<unk> be spread evenly around where were having the issues. So.
Depending upon where we're having a shortage.
You have to look at contracts based on agreements and allocate accordingly, so I would say that those decreases would be split it's not our opinion at this stage that theirs.
Any.
Any development of our raw materials being built up and the chain, we think that not only our inventory is low.
But our customers' inventories of Tio 2 are low as well.
Okay. Thanks very much.
Okay.
And again, if you have a question. Please press Star then 1 the next question.
And from Jeff Secaucus.
J P Morgan and please go ahead.
Thanks very much.
I think that the currency translation hit to your EBITDA was 83 million and the first half if currencies don't change.
And what would be the currency penalty to EBITDA for 2021 and.
And when your hedges if currency stayed the same and your hedges come off next year, what's the currency penalty to EBITDA and 22 in rough terms.
Hey, Jeff It's Tim.
On the the hedge them change year on year is worth about 30% to $35 million of decline next year of a headwind next year.
Oh and what.
What's the penalty for this year as if currencies stay where they are roughly.
If if currencies stay where they are roughly for the rest of the rest of the year there is no.
No penalty on our hedges because our hedges were locked in at that.
And at 59 spec and 2020.
What I meant to say was what's the negative currency translation effect and the second half you know and <unk>.
Volumes are more or less the same prices are more or less per se.
They're on a change.
And the third and fourth quarter.
And it'll still be a headwind just given the Q3 to Q4.
And.
<unk>.
And let me see if I can grab that quickly I think it's around $50 million, if I remember correctly and the back half.
Alright.
With that on your.
Prices went up 5% sequentially. If you think about the U S and you think about Europe I I'd take it they were smaller and the U S and larger and Europe to get to that 5 per cent is that correct.
Thanks, Jeff This is John Romano, I would say that our price increases and the quarter were evenly split across the regions.
Meaning that they were the same percentage change both in the United States and in Europe.
And the same.
Same ballpark, yes.
Okay.
On.
And if you fully committed to buying the juice and swagger and can you remind us what the net cost of buying and that is.
So suggest the so the smelter and what's out of the original deal, but at the time, we said if the.
And the slag or can demonstrate that it operate and.
And meet the level of production that was guaranteed by the supplier Mezzo auto Tech.
We would acquire and so basically and.
And the arrangement is done that look we ask Toronto.
Had some doubt about the technology.
And.
We wanted to make sure that if we get the asset it would be value accretive for the business. So so that's why we say we have the advantage and that if successful.
We'll get a successful smelter.
<unk> had to the tronox portfolio, but if it doesn't work.
We're not we don't have the problem.
Of what to do next with the smelter. So that's how the arrangement. It's done basically look obviously, while the smelter is being tasked and produce material.
<unk> do we will and all that.
And that material. So we will buy the slag and buy the pig iron from.
And at <unk>.
<unk> and <unk> and we will use it.
Our plan, but it needs to reach a certain level of operation and success for us to acquire.
Method.
Right, but how much are you would you pay for the asset and I think you might've loan them some money and the past how do you net it out as to what the cash and net.
Net cash outflow inclusive of debt would be.
If you purchased what would that price spike.
And if the slager achieves sustainable.
And the operation So we assume the $322 million of debt and the 125 that we've already committed.
So $4.47.
<unk> hundred 47 loans, and all things being equal that would happen this year.
No that happens sustainable operations, which is probably a year out from startups. So.
Q4 next year.
Okay, great. Thank you so much.
Thanks, Jeff.
The next question is from Roger Spitz of Bank of America. Please go ahead.
Thank you very much I'm not sure I heard correctly.
Earlier.
Did you say that you could consider building a chlor alkali plant and to address supply issue should traditional Korean suppliers elect not to supply you and.
Did you say that you are actually currently producing coin somewhere outside the U S.
Yes, so what we said was that we're always evaluate.
And net.
And we.
Net building chloride or chlorine facilities for any of our sites is something that we've evaluated over time, we have purpose built Korean facilities at some of our locations and we buy merchant chlorine and others. So it's always something that we're looking at and have been evaluating on a year by year basis.
But as Roger Yanbu for example, which is a copycat of Hamilton as its own chlorine facility, we own that facility and we produce our own chlorine and in KSA and look as John said, there was never a plant in the U S, but depending on what happened.
With the market, we're going to look at it if it's a good business case for US we can do it it's not.
It's not something that is rocket science.
And it's something we have at our facility and quite on as well on another purpose built plants. So it's just something that we continue to evaluate based on where we are and the cycle.
Are you selling caustic soda and to the market.
We do.
Okay, Great Alright.
Alright, and I guess, just last 1 I.
And we'll get at the Q10-Q, but what was the $135 million of debt repayment in Q2, 'twenty, 1 and the $70 million of debt that was repaid.
He paid in July.
2021, I mean, which which item I'm, assuming that was a term loan and maybe it was a standard bank.
Yeah, Roger primarily the term loan there is a little bit and the standard bank and it's out there and part of it primary term loan and the U S.
Great. Thank you very much.
Thank you Roger.
The next question is from Travis Edwards of Goldman Sachs. Please go ahead.
Yeah.
Hi, good morning.
A little bit different direction and so the question on the sustainability side, just as you've highlighted various targets for English and waste reduction have you outlined what the cost is to you to achieve those targets.
Are those.
And that's just material enough that we should expect them to show up and cash flow items in the coming years and if so how much in loans.
So very good question Trevor and yes.
Yes look as part of our 5 year plan, we always.
Predict how much capital, we will need to invest and where.
And and its link.
And to that number that we make public so we talked about.
And 300 to 325 for this year and obviously, there is sustainable investment and waste reduction as part of that capital investment for next year, we had talked about.
And.
$350 million of capitalized as part of that capital investment and.
There is and ESG component and know that he is always built and you know year on year on that capital deployment.
Getting to our 2030 day.
And ultimately 2050 goals clearly.
There's more work to be done on determining what that capital spend is going to be.
Right now and we're working on a 5 year plan, which we've just finalized but getting out into 2030 and beyond there's still some work to do there, but clear projects identified to actually reach those targets at least 2030 and I'd add to that.
Trey this net some of those project called value creation.
They're reducing our greenhouse gas, but the also are.
And our good business project.
Help reduce cost.
And best of luck this quarter.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Mr towards young for closing remarks.
Thank you everyone and look this complete what we had prepared for you I just want to reinforce a big thank you to all of our employees.
And hold the people who make those revolt possible. So thank you everyone and thank you for your support and interest and Tronox.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.