Q4 2021 Tronox Holdings PLC Earnings Call
<unk> recorded I would now like to turn the conference over to Jennifer Jennifer Gunther Vice President of Investor Relations. Please go ahead.
Thank you and welcome to our fourth quarter and full year 2021 conference call and webcast on our call today are John Romano and John Prince Watch her Zhang 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 the presentation on our website at Investor Dot Tronox dotcom moving to slide three.
A friendly 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.
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. Additionally, please note that all financial comparisons made during the call are on a year over year.
Year basis, unless otherwise noted moving to slide four it's now my pleasure to turn the call over to John Romano, John Thanks, Jennifer and good morning, everyone and thank you for joining us today.
I'll start this morning by setting the stage with a quick overview of Tronox.
We're the world's largest vertically integrated T O two producer with nine pigment plants six mines five upgrading facilities across six continents.
2021 revenue totaled approximately $3 $6 billion, which was fairly evenly distributed across the Americas, Europe , Middle East and Africa and Asia Pacific.
Our $1 1 million tons of pigment capacity supports our well balanced space of approximately 1200 global customers.
Our vertically integrated business model supplies, approximately 85% of our internal feedstock needs and this ensures consistent and secure supply for our customers. In addition to T. O. Two we also generate significant value as the world's second largest producer of zircon with approximately 297000 tons of capacity.
We are proud of the organization. We've created following the transformative acquisition nearly three years ago and the value we have and will continue to generate for our stakeholders now, let's turn to slide five for some of the highlights.
21 was a record year for Tronox on a number of measures.
During the year, we maintained our strong execution and delivered on our commitments to all of our stakeholders.
Our record revenue of $3 $6 billion was driven by robust customer demand and our ability to meet this demand with our unmatched global footprint.
Our adjusted EBITDA of $947 million and margin expansion to 26, 5% is attributable to our vertically integrated business model, our primary driver of our lower integrated cost per ton.
Improved pricing across all product lines and cost savings through programs, such as neutron offset higher commodity and freight costs and.
In 2020 , one we invested just over $270 million and key capital projects. This included neutron are project to digitally transform our global portfolio, which is expected to meaningfully reduce production costs by 150 to $200 per ton on a run rate basis by the end of 2023.
We're pleased with the progress, we're making and we're tracking to our plan.
We also invested in Atlas capacity, our mining project in Eastern Australia to maintain our advantage vertically integrated position as it will replace our ginkgo snapper minds.
We generated a record $468 million in free cash flow from our strengthened and differentiated business model, allowing for deleveraging ahead of our targeted objectives, we paid down $745 million of debt in 2021 ending the year at $2 $6 billion with a net leverage of two and a half times ahead of our previously.
Stated timeline of achieving $2 $5 billion in gross debt and two to three times net leverage by 2023.
We plan to continue to pay down debt beyond our previously stated targets to ensure our business remains well positioned to withstand a range of economic scenarios.
And last but certainly not least we continued our progress towards achieving our sustainability goals that we published in 2020 , one, including another solid year from a safety performance perspective, thanks to the unrelenting focus by our employees.
Turning to slide six I'll review, our sustainability accomplishments for 2020 one in more detail.
In 2020 , one we made significant strides forward on our ESG efforts.
In July we formalized our commitments to align with a global warming scenario of below two degrees centigrade and set a target of net zero greenhouse gas emissions and zero waste to external dedicated landfills by 2050 as well as other ESG related commitments such as targeting zero workforce injuries. Additionally, tronox joined the United Nations Global compact.
We mapped our long term targets to the UN sustainable development goals and committed to the 10 principles incorporating the UN standards into our strategies and procedures will help us protect our privilege drop rate and set the stage for long term success.
In August we announced the reorganization of our Board committee structure to enhance our oversight of our ESG efforts. Most recently, we achieved a platinum rating by <unk> the highest level of recognition awarded and a validation of our efforts. This represents a significant improvement over our silver rating in 2019, and 2020 and puts tronox.
The top 1% of companies evaluated.
The step change in our 2021 rating reflects how deeply embedded sustainability and corporate social responsibility had become and our business practices and the advancements we've made in our public disclosure on these topics.
Additionally, we've committed to be fully compliant with the applicable T. C. F D. In SaaS B disclosure standards when our next sustainability report as public published by mid year.
While sustainability has long been a part of everything we do at Tronox, we remain committed to continuous improvement and further enhancing how we disclose our progress and efforts.
Turning to slide seven I will briefly review our full year financial highlights before turning to the fourth quarter review.
Revenue of $3 $6 billion represented a 30% increases versus the prior year.
Income from operations of $577 million grew 113%, while net income of 303 million was lower due to a tax benefit of $903 million in 'twenty 'twenty that did not repeat.
Our effective tax rate in 2020 , one was 19% our GAAP diluted earnings per share was $1 81, and our adjusted diluted earnings per share was $2.29 more than 300% higher than 2020.
Adjusted EBITDA of $947 million represented a 42% increase over 2020, and our margin increased 230 basis points.
Free cash flow of $468 million increased 200%.
Let's turn now turning to slide eight let me provide more detail into our fourth quarter.
Our fourth quarter results came in line with our previously issued guidance revenue in the quarter increased 13% driven by higher average selling prices sequentially. This represented a 2% increase our.
Our effective tax rate in the quarter was 16% and our net income for the quarter was $87 million or 53% improvement.
Diluted earnings per share was 52 and adjusted diluted earnings per share was 53 cents an improvement of 179%.
Adjusted EBITDA of $233 million improved 14% and our adjusted EBITDA margin was 26, 4% and we generated free cash flow of $50 million in the quarter.
Moving to slide nine I will now review, our fourth quarter commercial performance in more detail.
Our fourth quarter results were in line with our expectation with our team managing strong customer demand, while navigating a number of macro challenges, including input cost inflation and supply chain disruptions.
Total revenue increased versus the prior year as higher selling prices were partially offset by lower feedstock and other volumes and the unfavorable euro exchange rate.
T O to revenue of $675 million increased 15% versus the prior year due to higher prices across all markets volumes were flat year on year, and lower by 4% versus the third quarter within our anticipated and communicated range.
The T O to supply demand balance remains tight due to continued strong demand while T. O. Two inventories remained well below seasonally normal levels and delivery times are extended by shipping delays and supply chain disruptions.
Zircon revenue increased 26% versus the prior year due to continued pricing momentum as volumes were in line with the strong volume levels in Q4 of 2020.
Sequentially zircon volumes were lower due to higher sales from inventory in the third quarter.
And 2022 zircon volumes would be more in line with production as we have sold the excess inventory out of the system.
Feedstocks and other products declined due to the internalization of all feedstock sales in the quarter compared to the prior year, partially offset by increased pig iron revenue from higher average selling prices on a quarter over quarter basis. The increase in revenue was driven by higher pig iron pricing.
J F and I are grateful to the approximately 6500 global employees, whose dedication and perseverance and ingenuity allowed us to deliver outstanding performance in spite of numerous external pressures, we're working tirelessly with our dedicated team of employees to ensure we are the supplier of choice for our customers.
By leveraging our unmatched global footprint and our vertically integrated business model, we remain well positioned to continue managing through and overcoming these challenges.
Our global footprint positions us close to our customers won't vertically integrated business model ensure security of supply.
Customers are increasingly recognizing our reliability as a differentiator, which is a significant advantage.
But for example in 2020 , one we were able to substantially increase the number of long term volume contracts with our global customer base, securing our market share well beyond 2022.
We anticipate T I O to market demand to grow in line with GDP in 'twenty, two and we will be supported by the need to replenish inventory throughout our customer supply chain channels.
In the first quarter demand is expected to continue to be very strong and while distribution remains challenged we are anticipating the first quarter T O two volumes to increase sequentially in the upper single digits as we work to meet our customer needs.
Pricing will continue to increase in the quarter and offset recent inflationary pressures to allow for continued margin expansion.
Zircon sales volumes are expected to remain elevated above 2002 thousand 2019, and 2020 levels. However volumes in the first quarter will be lower than those in the fourth quarter more in line with production levels.
Zircon pricing improvement in the first quarter is expected to more than offset the volume headwind on an EBITDA basis, and we expect this trend to continue for the full year I will now turn the call over to J F for a review of our operating performance and profitability in the quarter J F. Thank you John moving to slide 10, as John mentioned.
Our adjusted EBITDA growth of 14% to $233 million was driven by higher had rage selling price across all product.
Surely offset by lower volume and I are costs to serve our customer including increase in raw material natural gas and freight and unfavorable FX rate.
Freight rates globally have remained elevated driving increased costs to deliver product to our customer.
Given the need to use non contracted line to deliver product.
In particular escalating, let's see in freight rate out of Australia, and demurrage expense in South Africa drove incremental costs.
Inflation pressure, including boat external all approaches and commodity price continued to increase in the fourth quarter.
On a per ton basis, 75% to 80% of the sequential cost increase was driven by higher processed chemical and utility costs.
While we saw more favorable movement in the Saar in Australian dollar in the fourth quarter versus the third.
Unfavorable impact to revenue from the euro largely offset the majority of these benefits.
Turning to slide 11, I will review, how our strategy will enable us to continue differing Qing our business in 2022 and meet our financial targets.
We remain committed to executing on our strategy to become an advent age vertically integrated global T Ao two leader.
<unk> two our strategy is to produce low cost high quality pigment for our customer and sustaining our integrated global footprint to ensure security of supply for our customer and optimize our global footprint.
Our mining and upgrading facility continue to run at high operating rate at a time when feedstock are critical.
This combined with our integrated planning capabilities will allow us to increase production and produce an additional 40000 ton of T. Ao two this year versus 2021 .
Our effort.
And capital expenditure will continue to be dedicated to pursuing these pillars true project like neutron and Atlas can pass b.
Our strategy drives our ability to leverage our unique portfolio to optimize our asset and secure our position as the most adaptable resilience T Ao two industry leader, allowing us to continue to deliver and the store.
<unk>, leading financial performance.
Turning to slide 12, I will now provide an update on our key capital project.
If we look at our major strategic capital projects. They can be divided in two category, the first being grow and costs, reducing capital and the second as vertical integration related capital.
Neutron fall under the first bucket.
Neutron if our strategic multi year global digital transformation project.
We realized $20 million in EBIT, the saving in 2021 due to the benefit primarily in full block chain and procurement savings.
In total we anticipate 150 to $200 in per ton annual run rate cost saving by the end of 2023.
The second bucket relates to sustaining our vertical integration.
Our business model is our source of differentiation and investing in our mine is critical in sustaining that advantaged had.
Atlas can pass B has represent the next phase of our mining plant and this year, we had the name Aqua and Februarys extension to our investment.
Atlas capacity as a reminder, is our new mining development in Eastern Australia that is expected to come online in the second half of 2022 to replace the snapper Gingko mine as they reach end of life.
These tenement are abundant in natural rutile, I value zircon, and I grade ilmenite suitable for synthetic rutile and slag processing or direct pigment production.
The investment in Atlas capacity will also put in place the infrastructure for this new mining area.
Where we have other important future resource in our portfolio.
Additionally, given significant market demand for <unk> and our anticipated production grow we will also be pulling forward. The expansion of two of our mine in South Africa, the Macquarie and Februarys to ensure sustained production in 'twenty.
24 and 2025.
They are similarly, rich in ilmenite, rutile, and zircon and will extend our mine life in South Africa.
Well beyond 2035.
In total we anticipate investing approximately $150 million in 2022 across our mining projects.
Which will sustain tronox, 85% internalization of feedstock supporting approximately $300 per ton saving.
Relative to have rage high grade feedstock market price.
Turning to slide 13, I would like to spend a bit more time on the various elements of neutron and provide example of why this project is so transformational for Tronox.
New trunk will transform our business, enabling us to remain among the lowest cost producer and then service to our customer.
We will achieve this through an optimized global supply chain efficient maintenance spend and then automation and throughput and standardized process.
As an example of an optimized global supply chain or new vendor management system allows improve enlink of catalogs purchase order and invoice, enabling the optimization of our sourcing activity globally.
As an example of and then automation.
We have seen significant stabilization in our chlorinate or at Sterling borrow as a result of program being trialled today.
This has increased the uptime of the plant and as also led to reduced coke consumption.
We are very excited about these initial result, and what this means for tronox future.
Efficient maintenance mean, our plant employee have improved capabilities to plan and schedule maintenance before equipment failure.
To optimize production schedule and downtime.
The standardization across our function will lead to improve visibility and a streamlined order to delivery process, enabling better data visibility and decision, making it also facilitate the transfer of best practice from one site.
To another.
Do you anticipate 150 to $200 per ton cost saving by the end of 'twenty 'twenty three will come from all four of these areas with clearly identify benefit.
Finally, I'd like to provide a brief update on our Slagging operation in Japan.
The first flag was stopped at the end of November .
The ramp up is progressing according to plan.
<unk> has been shipped to yanbu pigment plant for us this quarter.
At the time were tight feedstock condition are impacting the T. Ao two industry <unk> is a clear advantage and an important part of Tronox vertical integration strategy.
The site will continue to ramp up from here forward, ensuring a safe and sustainable operation.
As a reminder.
Slag production must reach sustainable operation before Tronox will assume ownership of the site.
Based on the current plant the site could achieve sustainable operation in the second half of 2022 .
We will continue to update the market on the progress of the site.
I will now turn the call over to Tim Carlson to cover our balance sheet and outlook, Tim. Thank you J F.
On slide 14, we provide an overview of our financial position liquidity and capital resources. We ended the year with net leverage at two to five times down from four one times at the end of 2020 and within our previously stated targeted range of two to three times.
We reduced our debt by a total of $745 million in 2021, ending the year with $2 6 billion significant reduction from the $3 3 billion balance at the end of 2020.
Total available liquidity as of December 31 was $677 million, including $228 million in cash and cash equivalents.
Which is well distributed across our global operations.
Capital expenditures totaled $272 million in 2021, approximately $120 million of this was for maintenance and safety capital $56 million was for project neutron $97 million was for operational vertical integration projects, which included Atlas capacity.
Appreciate <unk> depletion and amortization expense was $297 million for the year, our free cash flow totaled $468 million due to our strong cash earnings. We also returned $65 million to shareholders in 2021 in the form of dividends year to date, which we increased by a total of 43%.
On an annualized basis.
Turning to slide 15, I would now like to share our outlook as John mentioned, we anticipate strong demand trends to continue for both T. Itunes Zircon. In addition to continued supply chain disruptions and inflation pressures, including elevated commodity pricing.
Due to these ongoing cost pressures, we expect first quarter adjusted EBITDA to be $230 million to $245 million driven by higher cost of goods manufactured in the fourth quarter impacting our results in both the fourth and first quarters as those tons are sold.
This trend is expected to reverse beginning in the second quarter as we've seen favorable manufacturing cost per ton in the first first quarter versus the fourth in addition to improved tio too and zircon pricing.
For the full year 2022, we are reinstating our practice of providing annual guidance on the following metrics. We expect 2022 to the to be the year, we meet and exceed our ambitious 1 billion EBITDA target.
We expect margins to expand throughout the year.
Full year adjusted EBITDA is expected to be between one five and 1.125 billion reported diluted EPS is expected to be between $3 <unk> and.
And $3 52 per share.
Adjusted diluted EPS is expected to be between $3 eight and $3 59 per share and we anticipate generating at least $400 million in free cash flow.
Incorporated into our free cash flow assumptions are the following uses of cash we expect working capital to be a use of $75 million to $100 million as we get begin to rebuild inventories to more normalized levels.
Net cash interest expense of $120 million to $130 million 45 to 55 million of cash taxes and capital expenditures of $375 million to $400 million. These.
These represent our best estimates based upon our current outlook.
However, this does not represent a ceiling for our potential we have significant runway ahead and expect to see earnings expansion driven by growing the top line, reducing our cost per ton through high return capital projects.
<unk> focused on disciplined expense management and leveraging our tax attributes.
Our record financial results of 2021 are evidence of our strengthened and differentiated business model and we're confident this will continue to distinguish tronox in 2022 and beyond.
Turning to slide 16 with respect to capital allocation.
With our $2 5 billion gross debt target in sight, we expect to prioritize capital expenditures continue annual dividend increases and continued reducing debt, while opportunistically repurchasing shares for.
For 2022, we estimate capital expenditures will be between 375 and $400 million are maintenance and safety capital will be approximately $125 million investments in sustaining our vertical integration will be approximately $150 million inclusive of Atlas capacity in the mining extensions in South Africa.
Sure.
Growth and cost reduction projects will total $100 million, the majority of which will be for project neutron and.
In other smaller strategic projects will total approximately $25 million.
We estimate our average annual returns and total capital expenditures to be between 25 and 30%.
As announced in November we anticipate increasing the dividend to <unk> 50 per share on an annualized basis, beginning with our first quarter dividend and we anticipate continuing to reduce our debt load. The previously stated target of $2 $5 billion, while opportunistically buying back shares under the 300 million.
Program authorized by the board.
I'll now turn the call back over to JF for closing remarks.
Thank you, Tim and moving to slide 17, as we wrap up todays prepared remark I want to take a moment to acknowledge the outstanding position Tronox is in.
Due to the commitment of our employees throughout the last several year.
This would not be possible without them. So thank you to everyone for your ongoing effort.
With our portfolio of assets and market position, we are confident in our ability to capitalize on our momentum.
Execute against our objectives and deliver our commitment to our stakeholder 2022 is an exciting year for tronox.
We are planning to old our second Investor day in June and look forward to presenting the market with more details on our long term strategy.
Our key operational and financial aspect of the business.
ESG related practice and more.
We will provide additional logistic detail at a later date.
We continued to navigate the current macro economic challenge.
Transforming our company, which will ensure our future remains bright.
That concludes our prepared remark with that I'd like to turn the call over for question. So Jason.
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 if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from John Mcnulty from BMO capital markets. Please go ahead.
Yes, good morning, and thanks for thanks for taking my questions. So when we look at the the outlook that you have for 2022, there theres a heck of a ramp up from the from the <unk> levels to kind of the the latter part of the year. So I guess can you give us can you speak to your confidence around the improvement on the manufacturing costs and how that plays into.
The guide throughout the year, and then and maybe give us some some examples around it and then also how should we think about what it means for pricing in terms of what your assumptions are as we kind of roll through the year.
Yeah. Thanks, John I'll start that and then I'll, let Tim add a little color to it. So when you think about the first quarter and that's one of the reasons, we reinstated annual guidance. So that you guys could get full of confidence that we are confident that we can actually recover from where we are in the first quarter. The first quarter number is impacted really by three things.
You can put it in three buckets energy and process chemicals planned maintenance that impacted fixed cost absorption in the fourth quarter, which had an impact on our cost and then volumes that rolled from the fourth quarter ended the first quarter and I'll touch on that and then I'll, let Tim pick up on the other two pieces. So in the first quarter, we were successful in.
Increasing our prices across the board in every region, but we had significant volume that rolled out of the December shipments into the first quarter predominantly in January which came in at that lower price, which had an impact on the revenue that the revenue and the margin that we were able to capture but it was only because the volume.
<unk> had nothing to do with our ability to increase the price Tim why don't you touch on the other two buckets, yes, John when we talked during our third quarter call. We talked about an additional expectation of $30 million of additional costs from Q3 to Q4 around natural gas energy process comes in freight that actually came in.
Closer to $45 million to $50 million, so those higher costs.
So those flowed through in the months in terms of products sold.
A lot of those costs get capitalized in inventory and are going to flow through into in January and February .
In addition to that as part of our normal planned maintenance, we produced $3 to 4000 less tons in Q4 than we normally would so.
That's just the hire of overhead cost per ton, which again flows into <unk> and into the year with the increased volumes that we see both from a production and from a demand standpoint, we see that overhead cost trends improving as we go through the course of the year and as it relates to our natural gas energy <unk>.
<unk> Chem costs, we did see those moderate them quite a bit as we start the year this year versus Q4 and that combined with the price increases that John talked about we're very confident with our margin expansion and with our full year guidance.
Got it no that's.
That's helpful really helpful color and then I guess can you can you speak to your kind of indicated earlier on that inventories are still lean or appear lean I guess can you give us some granularity as to where you see the inventory levels at your between your own and your customer level.
As we kind of go into the kind of heavier paint season, as we as we kind of kick off in the spring like I guess are we going to be is there a chance that we can get back to normal by then or is it really going to be going to be a hand to mouth kind of situation through through most of the paint season. This year, how would you characterize it.
Yes, John we're doing all we can to try to increase our service levels by building that inventory, but the inventory is so depleted throughout the supply chain not just our inventory, but even our customers' inventory.
Quite frankly, we don't have any confidence that we're going to be able to replenish that by the time. The coating season starts we're doing our best to do that we're repositioning inventory to ensure that we can mitigate some of the transportation issues that we outlined but the market is still very strong right now and the supply chain.
<unk> is still pretty depleted.
Got it thanks very much for the color.
The next question comes from Josh Spector from UBS. Please go ahead.
Yeah, Hey, guys. Thanks for taking my question I guess just to follow up on maybe the margins and the cost into this year.
You highlighted a lot of the increase was processed chemicals utilities et cetera are there any contract resets that happen over the course of this year or next year, either freight raws et cetera that we should be building into our bridge as we look further out.
Well adjust it for it's J F look we have obviously renegotiate.
Most of our contract like we do as we start the year and the freight you know is one where we secure or normal route but we still have a lot of freight costs that are spot based on customer and the customer demand and we see those freight cost being very high at the moment.
And look it's hard to tell when this will completely change I mean, we assume that that would remain high for whole of the year and look there's all other things like natural gas and energy that we expect that it will continue to improve.
In the second half of the year, but I.
I guess time will tell as one where we were anticipating I think mid year last year that we'd start to see the transportation issues abate, but were still having problems and it's it's across the board with just availability, although there's a lot of backlog.
Really shows that didn't look the economy and everything is moving properly at the moment and we obviously adjust our own product to reflect that reality. So everything we could control we do it I mean, the element outside of our control I mean, we manage it we manage it yet.
Yes.
Okay. Thanks, that's helpful and just curious on tier two volumes.
It seemed to get pretty bullish outlook GDP growth I mean, your comments for first quarter, it's pretty strong growth do you see you guys gaining share and do you guys grow above that GDP level. This year and I guess related to that do you have the feedstock kind of aligned to capture those opportunities as you see them through this year.
Yeah, Josh so from the standpoint of capturing share I think what we're doing is maintaining our share, but we've aligned ourselves with customers that we believe are growing faster than the market. So by definition, you could gain share that way, but that's.
We're trying to fill our existing customer's needs. We noticed and were noted in the prepared comments that we were able to go out and secure significant contracted volume.
In 2022, which will help us maintain our share well beyond 2022.
So.
Our volume uptick in the first quarter has a lot to do with some of the volume that rolled out of the fourth quarter and our ability that we can continue to produce more tons last quarter. We told you we were going to produce approximately 40000 additional tons and we have the ore that we need to accomplish that goal and therefore, our sales should continue to grow.
Okay. Thank you.
The next question comes from David Begleiter from Deutsche Bank. Please go ahead.
Thank you good morning.
Pricing for this year, how are you thinking about zircon pricing given the strength you saw late in the year do you expect that pricing strength to continue for the rest of this year.
Yes.
In the prepared comments, we talked a little bit about the volume being down because we've displayed the inventory last year, but price will continue to allow us to grow the EBITDA. So the short answer is yes, we continue to see opportunities to move price.
Our first quarter pricing will move up and we would expect that to continue into the balance of the year as well.
Very good and just on until two pricing analysis since this subject, but what are your what are your thoughts on maybe yours or industry pricing for this year.
Versus up versus last year.
Yeah.
Well you know what happened last year and when we think about the first quarter.
I would say our pricing is in range, maybe even a little higher than what we saw in the fourth quarter and from the standpoint of how we will continue to progress that price moving into the balance of the year has a lot to do with supply demand imbalance, which we've just talked about so we would expect to see pricing continue to move up in 2022.
Very good thank you.
The next question comes from Frank Mitsch from for Me for Me I'm Research. Please go ahead.
Yes. Good morning, I was wondering if you could drill down a little more into the worst situation given that you are buying 15% of your needs.
On the open market what are you know theres a lot of talk about the tightness in the market I'm curious what your outlook is there. It seems like you anticipate that that's going to continue for a while because you are pulling forward some mining expansions as well, but could you give us your take on the on the on your situation.
Frank Thank you for the question and look obviously this split to our strength being vertically integrated at 85%.
Look the 15% that we buy on the open market. These long term contract that we have signed and the value of having our own mining and upgrading facility allow us to see what's happening on that market ahead of the situation being tight so we obviously secure ourself.
To be in a very good position for 2022 and combined with the success that <unk> is having at the moment I mean, we have more than than what we need for 2022 and beyond.
Alright, Thank you and just a follow up on the on the <unk> you know it sounded fairly promising that.
That you might actually.
To reach a sustainable operating rates in the second half this year, where where do you see yourself today in terms of operating rates of the of that smelter and you mentioned that.
That's some of the ore is being processed by by your own facility in Yanbu, how is the quality of that.
All of the output.
Yeah, <unk> using the <unk> material.
So Frank I think that you have heard me say about July and that it's a big experiment.
What I can tell you is I feel much better today that I felt adult Ayatollah less earnings call. Because obviously, we have been produced for the last three months, we have elaborate a ramp it's ramping curve that these cautious for Japan and we're following.
That plant and it's progressing well, we're right on our plant as expected.
So that's all good news.
Well as you know <unk> is a site with two furnaces and its only furnace one that has been modify and obviously we need to work on how furnace two will be modify.
And so we can reach the full capability of jets and so there's still a lot of work to be done on Japan, but let's see that the timing of starting up. This asset is it's great. You know from the overall market situation on the quality of the product.
Japan also use new technology of granulation.
And what I can tell you is we were very pleased with the quality of the slag being produce we don't expect any issue with that using that flag. In fact, we have started using that flag. It and then so far so good so issue at all with the.
The quality of the pigment that's being produced with it.
It's working very well.
That's very helpful. Thank you so much.
The next question comes from Hassan Ahmed from Alembic Global. Please go ahead.
Good morning, John Jeff and Tim.
I'm wondering you know question revisiting the market share question.
Look I mean, I understand that you're not actively out there trying to sort of gain market share in call. It 2022, but just you know as I take a look at Q4, you know your your volumes were down 4% sequentially.
Some of your larger competitors had a 10% sequential volume decline your guidance.
Looking for sort of single digit Q1 sequential volume growth again seems to be better than some of your largest competitors out there now now in this world that we're living in with extreme sort of ore tightness and from the sounds of it theres sort of tightness in ore supply will continue at least.
Through 2022.
Could this be a year, where tronox really breaks away from the pack.
And again I know that you guys aren't looking to gain market share, but just because of the industry dynamics. The way they are and you guys being pretty much the only vertically integrated guys out there.
I mean is it fair to assume that you would do far better than the industry volumes right.
So from a thanks for the question.
It's a valid point from the standpoint of our ability to source and.
And produce tio too with the ore that we have the real vertical integration and as we mentioned we have the capability we've talked about it last quarter of adding 40000 tons of additional capacity a lot of that is actually going to come from yanbu was part of the synergy projects that we had through the act the transaction that was planned to come online.
So to the extent, we have the capability to add additional tons and we have the or to do it its possible that we could pick up share, but it's absolutely not being done with price, it's being done with our ability to supply our customers' needs. We made reference to some of those longer term contracts because our customers see.
The value and the vertical integration and have signed agreements that are based on volume, which gave us a good picture on where our market share is going to be well beyond 2022.
Understood understood very helpful and as a follow up.
Just a question around where you guys feel we are in the cycle and you know.
I mean I was very intrigued by you know a statement you guys made on the call and also it's a part of the press release, where you said that the 2021 earnings and the guidance that you guys have given does.
It does not represent a ceiling for your potential so that leads me to believe that we're nowhere near the peak, maybe we're at mid cycle somewhere slightly above mid cycle and if that's the case and I take a look at your guidance your EPS guidance.
Three O eight to $3 59.
US lazy satisfied as I mean, we have a tendency of stopping at 10 times p/e multiple onto that right. So if we are at mid cycle levels. So from a valuation perspective that would mean you know you guys are it should be somewhere between 31, and 36 months, which further leads me to believe Youre very undervalued. So you know.
If you could just help me think through this.
Look I think a sign what I would say is we're very confident with our outlook for 2022.
And look if you look at our track record of the last couple of years, you would see that I mean, when we put the range would deliver on that range and I can tell you John Tim and the whole 6500 employee are onboard to continue to deliver and.
And deliver value to our shareholder related to that and when do you think about where we are with regards to the economic environment.
The reality is a lot of the supply chain disruptions have absolutely had an impact on elongate ing that process. So there'll be there's less inventory in the system, we're still trying to replenish the inventory, but it's not just about that it's also about the cost reduction program. So when we think about when we say we still have a lot of runway.
150 to $200 a ton annualized run rate at the end of 2023, you can do the math on a $1 1 million tons, that's where we also see a lot of opportunity is in our ability to differentiate ourselves through innovation using neutron yeah and neutron also help us to grow.
<unk> with our customers, so and I call it the hidden factory.
It's really debottlenecking, our asset and as you do that I mean, you obviously improve their cost per ton significantly.
Very helpful guys. Thank you so much.
Our next question comes from Jeff Zekauskas from J P. Morgan. Please go ahead.
Thanks, very much in 2021, your SG&A expenses at least us their stated.
Consolidated income statement went from $3 47 to $3 18.
Why do you think go down.
If they went down and what do you expect for 2022.
Hey, Jeff It's Tim Thanks for the question.
Have been reducing SG&A.
Majority of the reduction over the last couple of years with the through the integration of the acquisition that we had with the Cristal transaction as it relates to SG&A for 2022, we do expect that to be relatively flattish.
We do have obviously inflationary cost pressures around labor and the like but we do believe we can offset that with additional cost reductions so relatively flattish off that 318.
And some of the improvement obviously.
We expect to start traveling a little bit more in 2022 than what we have done in the last couple of year. So that's why even with the benefit of neutron and some of the benefit we offset that by higher traveling costs.
Okay and.
Early in the call you talked about having more long term contracts.
Are those only volume related or is there a price component or can you describe how the pricing of titanium dioxide for tronox has changed over the past two or three years or is it the same in the way that you charge your customers.
Yeah. Thanks, Jeff. So this is John Romano from the standpoint.
We've talked for a number of years about our margin stability agreements. So let's be clear about the agreements that we signed in 2022 of those were not margin stability agreements those were volume based agreements and they were agreements that were put together because our customers wanted a long term commitment for us which was also.
So good for them those don't have.
Pricing limits in them, they have pricing mechanisms, but not limits to what pricing can do so those are market based pricing typically our pricing.
On average you could just say globally. It moves every quarter, we've got some margin stability agreements that have a little bit different mechanisms in them, but the agreements that we spoke about it on this call which are different than the MSA or the margin stability agreements that we have in place there based on volume and those volume contracts are multi year.
Okay, great. Thank you so much.
Thank you.
The next question comes from Matt Deyoe from Bank of America. Please go ahead.
Thank you.
So thank.
Good luck and annual year worth of inflation is something like $40 million in cost in the <unk> call you had mentioned.
That would probably double in.
In 2022, just given corrine and South African electricity prices, but where is that shaking out now and.
Yeah, I'll start with I'll start there.
Yeah.
Yeah, So Matt from a cost standpoint costs are up 21% to 20 too much more than that.
Just given energy prices are much higher than inflation.
So phyrric asset sulfur prices much higher than inflation.
So we are seeing year on year cost increases for process, Chems and energy north of $100 million.
Offset by obviously, the pricing that John talked about which is going to allow us to continue to expand margins.
And so if I think about your costs from <unk> right. You said they were elevated in the quarter, but theyre already alleviating.
<unk>.
Look I can see.
Nice curve for natural gas in Europe , and so I know, it's spiked in December and has come off is that what you're kind of referring to because.
Prices as your costs are still really elevated on a historic basis. So.
Is it is it just you're kind of thinking price will stay at these new levels and that lower quarter over quarter or do you expect a more seasonal pull back end and maybe utility costs as we move through the years.
Matt It's a combination of a number of factors there are a number of cost within our stack that are actually down slightly from a process can standpoint, but the bigger increases that we talked about in terms of natural gas is exactly moderating as you mentioned, but we still continue to consider continue to see the increases.
<unk> around a pet coke and.
And the like and sulfur and the like.
And in addition to that with our higher.
Production in the Q1 versus Q4, our overhead cost per ton are coming down.
Understood. Thank you.
The next question comes from Vincent Andrews from Morgan Stanley . Please go ahead.
Hi, guys. This is will hang on crude I think so.
My question.
I'm wondering if you guys could talk about what youre seeing in terms of the local CIO to supply and demand dynamics in China are you still seeing kind of I think it would be in production impacted the environmental controls there.
Yes.
We have a facility over there.
Our facility has not been impacted but there are still some facilities that have been impacted by these dual energy control policies. When you think about the demand in China and moving out of the fourth quarter into the first quarter, you always running into Chinese new year and this year. The Olympics I would say had a little bit more of a damper.
The effect on demand Chinese new year's over the Olympics will be over the over the weekend and we've already started to see volumes pick back up. So if you think about how much demand grew from 'twenty to 'twenty to 'twenty 'twenty. One it was about 800000 tons, obviously off a slow base or a low base in 2020.
China is continuing to produce but no more than what we would've expected and in line with the production output that we had actually anticipated.
And will one thing I'd add is that what we have seen in China is that the production of ore as been more impacted by the environmental impact than the production of pigment itself I think that now they're looking at the impact that some of those might have in the.
Legacy implication of that.
And then in the force those mind to put better practice and that create price increase and we see that the oil price in China is at the high level and will remain at the high level and limit really.
The production in China, a great point I mean as recently as this month the <unk> Ilmenite index went up again, along with sulfur. So there are still challenges.
That that create a situation where the pigment price in China has to be sold at high value.
Yeah.
Got it thank you and then.
I guess, just when looking at your full year guidance I'm wondering whether the higher low end of that on an EBITDA range really hinges on where the costs come in or I guess what are the.
Volume and price related assumptions built in there.
Yeah. So from my perspective will be the range in the guidance is really dependent not so much on cost just given our ability to pass through price.
Customers, but it's more in terms of how much volume that we can get out of our plants and we talk about additional 40000 tons. This year, it's possible to do more than you know.
If things happen it could be a bit less it's hard to say I mean, you consider all the disruptions we had in 2021 that we wouldn't have anticipated.
I think with him.
Is alluding to is that it depends on what happens a lot of that I would say would be things that maybe a little more out of our control than in our control with regards to some of the supply issues were capable of doing more than 40000 tons next year.
If all things go well, but right now we're planning on 40000 tons.
Got it thank you.
The next question comes from Duffy Fischer from Barclays. Please go ahead.
Yeah good morning.
Just to clarify that because I think you've said that a couple of different ways that 40000 ton increase 21 to 22 is that what you think you can produce more this year or that's what you think you can sell more this year and if it's the first produce more.
What will that do you know optimal sales if the demand is there if you run well you know when you think about did stuff come out of inventory last year or was there. Some sales in December they got pushed into January what does that 40000 number pushed.
Push forward to into our sales volume number if all goes well.
Yeah, that's a great question and I guess from the standpoint of we mentioned earlier in the call that our service levels aren't where they need to be we do have a working capital build built into the numbers.
2022, so will we sell all of that 40000 tons that we produce the objective would be our customers would love to have it but we need to fill some of that supply chain. So I would expect a portion of that would actually go to replenish inventory. So that we can improve our service levels J F.
Absolutely right and I think Duffy Tim.
Tim explained that.
And sometime you have things outside of your control that could affect slightly more production out of all of those nine plant or slightly less.
At the moment, we feel very confident you know about the 40000 ton but.
The range, we provided and the range that's right.
Fair enough.
With the mining projects you have underway. If you look out let's say three years from now how much more <unk> last would you have of iron ore byproducts in zircon byproducts to sell once these projects are done.
Well remember I talked about at less can pass b being a new mine and like any new mine.
In the first year of production you're in the high grade zone.
As opposed to in the end of the life mine like Gingko and snapper. So we expect that for when when Atlas can pass B is in full operation, which would be 2023, we will get a.
Slightly more natural rutile and zircon than what we will get in 2022.
And that would carry on into 2024.
And that's why we're starting to invest in some of our mine in South Africa. So by 2024 and 2025, we could maintain the 85% vertical integration because obviously, we're growing our tio to production. So we need to grow our feedstock to be in line.
<unk>.
To maintain the cost advantage that this gave us but we're very lucky.
With our mining asset because we have great reserve and we also have very important resource that we could transport will convert into reserve as needed and that's why knowing how the market is strong at the moment and how tight is the feedstock.
Doug.
And we're preparing ourselves to be in a good position for the future.
Terrific. Thank you guys.
The next question comes from Roger Spitz from Bank of America. Please go ahead.
Thanks, very much I wonder if you can give us a sense of what 2023 capex looks like or.
Maybe talk about are there any material capex additional amounts to be spent in 2023 for Atlas composite or what is a fair reason number.
Well look like for 2023.
Hey, Roger It's Tim Atlas capacity will go live.
Summer our summer.
And as a result, there'll be no spend next year.
However, we will invest in our South African mines as Jeff talked about pulling those forward. So I would expect a similar capital number of $3 75 to 400 next year with that ramping down a little bit when we finalize neutron in 'twenty three 'twenty four.
Perfect and.
Can you give us you talked about significant new volume.
Volume contracts.
Can you tell us what percent of your total volumes are here are under contract I mean.
How is it different from where you were in 2021 in terms of of Ti pure pigment is sold under contract.
Yes, Roger so what I can what I'll say is that.
We were able to secure long term volume contracts and that was in every region and I would say we more so in Asia Pacific picked up a lot more contracts than we would have historically.
We've never really disclosed a lot of detail about what percentage of our volume is under contract, but what I can say at this particular stage.
The volume contracts, we have in place that are long term multi year agreements are now well above 50% of our volume and it's going to allow us to make sure to confirm and hold our market share well beyond 2022.
Got it meaning.
Something well below 50% is sold on spot.
In 2022, and I would say nothing's mainly on spot.
At this particular stage and there's different types of agreements that may not be as long term, but.
Like it's a significant mountains beyond 50%, that's now multi year and a lot of that volume got contracted in 2021 got it short term contracts alright. Thank you very much.
Yeah.
The next question is a follow up from John Mcnulty from BMO capital markets. Please go ahead.
Yeah, just are just two of them. So the value stabilization contracts that you had in place.
Historically that was kind of a program that you were pushing for it I guess can you give us some clarity as to how much of your volume is committed to those where the pricing will go up with collars around them or what have you versus what will be a little bit more fluid with whatever the market moves out is there is there a way to think about that and then a second question would just be.
It sounds like Japan is heavily on track I think when you originally gave forecast for what the earnings power from one furnace in two furnaces would be.
You had oil prices that were noticeably lower than where they are now I guess can you give us an update as to how we should think about the economics of that on kind of a run rate basis. When when furnace. One is up and then when potentially furnace two gets up as well.
Yes, John So I'll take the first one and I'll, let Jeff take the second one so from the standpoint of our contracts and how they are broken down again, we haven't provided a lot of detail around margin stability agreements that's actually are.
MSA not DSA.
It's significantly less than we have on the long term contracts that are volume based so when you think about the cadence and how our pricing has moved through the last four quarters. We expect to continue to see that movement actually in the first quarter of 2021. Our 2022, we had some of those msas that actually reset.
In January which actually was a benefit for us, but the majority of our volume contracts. When you think about that isn't as a comparison to our msas, we have the ability to move price with the market.
Jeff you want to touch on design.
I think John wants to be more on the financial of Joanne. So Tim you want to yeah I'd be happy to John just as a reminder, as one furnace operates at that's not full capacity, but normal capacity, 80% to 90%.
For a full year, it's worth about $75 million of EBITDA for one furnace, obviously that assumes full operational for a year.
And the time and ramp up the second furnace has not yet been fully finalized yet.
Great. Thanks, very much for the color appreciate it.
Ladies and gentlemen that was the last question in the queue. This concludes our question and answer session I would like to turn the conference back over to John Romano for any closing remarks.
Thank you and we appreciate all of you joining the call today Hope you got from the comments that we made that we're extremely excited about where the company is heading toward headed in 2022 and the value we have and will continue to create for our shareholders. So thank you everybody for joining the call. This morning and 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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Yes.