Tronox Holdings plc Q1 2023 Earnings Call

Speaker 1: I.

Speaker 2: Good morning and welcome to the Tronex Holdings First Quarter 2023 earnings call and webcast.

Speaker 2: My name is Brika and I will be your event specialist running today's call.

Speaker 2: All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, we will conduct a question and answer session.

Speaker 2: To ask a question at this time, please press star followed by 1 on your telephone keypad. If you change your mind at any time, please press star then 2 to remove your request to speak.

Speaker 2: And for operator assistance at any point, please press the star zero key.

Speaker 2: Jennifer Gunther, Chief Sustainability Officer and Head of Investing Relations and Financial Planning to begin today's call. So, Jennifer, please go ahead when you're ready.

Speaker 3: Thank you, Brika, and welcome to our first quarter 2023 conference call and webcast. Turning to slide two, on our call today are John Romano and Jean-Francois Turgen, co-chief executive officers, and John Trivisal, senior vice president, chief financial officer.

Speaker 3: 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.

Speaker 3: This information represents our best judgment based on what we know today. However, actual results may vary based on these risks and uncertainties.

Speaker 3: The company undertakes no obligation to update or revise any forward-looking statements.

Speaker 3: During the conference call, we will refer to certain non-US GAAP financial terms that we use in the management of our business and believe are useful to investors in evaluating the company's performance. For more information, visit www.usda.gov

Speaker 3: Reconciliations to their nearest US 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 basis unless otherwise noted. Moving to slide four, it is 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.

Speaker 4: I'd like to start the call today with a brief summary on Tronox for anyone who may be a little bit newer to our story.

Speaker 4: We're the world's largest vertically integrated TI02 producer with nine pavement plants, six mines and five upgrading facilities across six continents.

Speaker 4: Our sales are fairly evenly distributed across the Americas, Europe , Middle East, and Africa, and Asia Pacific, and our 1.1 million tons of pigment capacity supports our well-balanced base of approximately 1,200 customers globally.

Speaker 4: Our vertically integrated business model supplies about 85% of our internal feedstock needs at full effective capacity.

Speaker 4: This ensures consistent and secure supply for our customers. In addition to TiO2, we also generate significant value as the world's second largest producer of zircon with approximately 300,000 tons of capacity. Our strategy is focused on positioning Tronox as the advantage global TiO2 leader through the production of safe, quality, low-cost, sustainable tons.

Speaker 4: So now let's turn to slide five.

Speaker 4: In the first quarter, we saw the recovery from the fourth quarter trough levels we predicted and guided on our fourth quarter earnings call.

Speaker 4: Sequentially, TI02 volumes improved 14% within our previously guided range, while average TI02 selling prices improved 1% from the fourth quarter, or 3% compared to the prior year, despite 30% lower volumes year over year.

Speaker 4: As we emphasized to our investors over the last few years, we have continued to transform our business and our first quarter performance is a demonstration of that. We delivered adjusted EBITDA of 146 million dollars exceeding the top end of our guided range by 16 million dollars.

Speaker 4: And we delivered adjusted EBITDA margins of 20.6% above the high teens range we previously anticipated.

Speaker 4: Our outperformance was due to several factors including favorable exchange rates relative to our assumptions.

Speaker 4: inventory in the quarter versus what we anticipated.

Speaker 4: We're proud of the team's focus this quarter, and despite the continued macroeconomic challenges we face, our team continues to step up and deliver.

Speaker 4: We also wanted to provide a brief update on the fourth quarter events we spoke about last quarter.

Speaker 4: We're happy to report that our upgrading operations that cased it in in South Africa are back to full utilization levels for following a fire in the fourth quarter that impacted production rates.

Speaker 4: There will be no further impacts from the case in an event in the second quarter or going forward.

Speaker 4: Additionally, our Atlas mining operations in Australia are also now up and running.

Speaker 4: We're continuing to work with local authorities towards being able to utilize the primary roads for hauling material offsite, which we anticipate will occur mid-2023.

Speaker 4: Until then, we're continuing to utilize the higher cost alternative haul roads and moving lower volumes compared to what we could ship on the primary roads.

Speaker 4: Our costs will remain elevated in the second quarter due to these higher hauling costs, and in the second half of the year as we consume the higher cost feed stock at our pigment plants.

Speaker 4: Our free cash flow for the quarter was the use of $172 million primarily due to increased inventories, including design slag, higher accounts receivables driven by improved sales, and lower accounts payable.

Speaker 4: As we communicated on our last earnings call, while we reduced our pigment production rates as a result of lower demand, we did not bring production levels down to a line with market demand since we projected demand would not sustain at the Q4 trough levels. Additionally, we slowed some of our upgrading operations in South Africa and we continue to purchase swag under our contract with...

Speaker 4: We anticipate generating positive free cash flow for the remainder of the year to more than offset the first quarter use of cash.

Speaker 4: We anticipate generating positive free cash flow for the remainder of the year to more than offset the first quarter use of cash. Moving to slide six.

Speaker 4: We are relentlessly focused on our sustainability efforts at Tronox, as this is areas becoming an increasingly significant focal point, and part of our conversations externally with investors, customers, and other key stakeholders.

Speaker 4: In an effort to create a centralized approach to communicating our sustainability efforts, we appointed Jennifer Gunther to the role of Chief Sustainability Officer and Head of Investor Relations and Financial Planning. Having Jennifer lead these efforts will provide greater insight externally into the exciting ongoing work around ESG and ensure our efforts continue to align Tronox towards a profitable and sustainable future as we believe these two go hand in hand. I also wanted to highlight that we'll be publishing our 2022 Sustainability...

Speaker 4: Now let's move to slide 7 for review of our first quarter financial performance in more detail.

Speaker 4: Revenue of $708 million improved 9% sequentially due to improved TI02 revenues, but represented a decline of 27% to the prior year due to continued market softness. Income from operations was $62 million in the quarter and net income was $25 million.

Speaker 4: Our effective tax rate in the quarter was 26%, and our GAAP diluted earnings per share and our adjusted diluted earnings per share were both 15 cents.

Speaker 4: Adjusted EBITDA on the quarter was $146 million and our adjusted EBITDA margin was 20.6%, both exceeding our previous guidance.

Speaker 4: Our free cash loan quarter with a use of $172 million as pre-sale outlined.

Speaker 4: Now let's move this light 8 for review of our commercial performance. Our TIO2 volumes came in within our previously guided range. Volume increased 14% versus the fourth quarter driven by increases in Europe , Middle East, and Africa, Asia-Pacific, and the Americas. TIO2 pricing continued to improve by 1% sequentially and 3% on a year-over-year basis in line with our expectations.

Speaker 4: We continue to deliver against our commercial strategy and realize favorable pricing trends despite the current macro backdrop. Zircon volumes declined as anticipated due to lower production as a result of the fourth quarter events. Zircon pricing remained relatively flat to the prior quarter, which represented an increase of 10% year on year. Revenue from other products was $76 million, a decrease of 10% to the prior year, largely driven by lower pig iron volumes and pricing.

Speaker 4: Partially upsetting the lower pig iron sales were sales of rare earths which increased 62% year over year. We're continuing to evaluate opportunities in the rare earth space to enhance our earnings potential from what was previously considered a waste stream.

Speaker 4: The euro was a headwind of revenues compared to the prior year but represented an improvement sequentially as currencies strengthened in the first quarter versus the fourth.

Speaker 4: As we stated on our last earnings call, we expected the fourth quarter to be the trough for T-O-2 volumes and it was.

Speaker 4: We saw the rebound in the first quarter and expected to continue in the second quarter, albeit still at lower levels relative to the second quarter of 2022.

Speaker 4: We expect second quarter pigment sales volumes to increase from the first quarter in the mid to high teens range.

Speaker 4: This would represent a decline in the mid-teens range versus the prior year as the recovery in volumes begins to close the gap into the prior year.

Speaker 4: We continue to see the benefits of our margins stability initiatives and our financial results.

Speaker 4: Even with the recent significant volume reductions, we anticipate our overall TOTU pricing to be flat to slightly down from the first quarter to the second quarter, largely driven by pricing declines in the Middle East and Latin America.

Speaker 4: As we've communicated previously and demonstrated over the last several quarters, we do not expect pricing to move as significantly as it has in previous economic transitions, owing in large part to our commercial approach we've successfully implemented over the last several years.

Speaker 5: I'll now turn the Color Manage JF for a review of our operational performance. JF, thank you John and good morning, turning to slide 9, or adjusted EBITDA of $146 million represent a 39% decline year-on-year.

Speaker 5: driven by unfavorable fixed-cost absorption due to lower production rate, higher process chemical costs, higher mining site costs, and lower sales volume.

Speaker 5: This was partially offset by improved pricing, favorable exchange rate, and lower freight costs.

Speaker 5: Adjusted EBITDA margin was 20.6% for the quarter.

Speaker 5: On a sequential basis, adjusted IBITDA improved 29%.

Speaker 5: due to improved freight and corporate costs.

Speaker 5: The roll-offs of LCM and other abnormal charges from Q4 higher sales volume and improved product mix and improved pricing. This was partially offset by exchange rate headwinds.

Speaker 5: As John outlined, the quarter was impacted by the Q4 event at our K-ZN facility in South Africa, and the atlas can pass be mine in Australia.

Speaker 5: I'm happy to report the case that an impact are fully resolved. At last is up and running.

Speaker 5: and we are working toward being able to use the primary road in the middle of the year.

Speaker 5: Despite the Atlas Coss Edwin's to Ibidda, at this time in Q3, we anticipate achieving a run-rage level of adjusted Ibidda in the range of the low end of our previously guided recession case.

Speaker 5: In total, had Atlas been fully running on January 1st, our full year 2023 EBITDA would be approximately $70 to $90 million higher.

Speaker 5: Turning to slide 10. As a result of the macroeconomic backdrop, we are continuing to take action to navigate the current landscape and position Tronarchs for success.

Speaker 5: We continue to be laser focused on cost reduction and have a number of levels to optimize performance across a variety of scenarios.

Speaker 5: We have continued to execute against our cost reduction playbook, the result of which can be seen in our first quarter financial.

Speaker 5: We implemented a hiring freeze. We reduced professional fee, travel and other discretionary costs.

Speaker 5: We are also optimizing our fixed costs and driving additional supply chain initiatives.

Speaker 5: We are prudently managing working capital.

Speaker 5: while the first quarter saw a build of working capital in line with our expectation.

Speaker 5: We expect to see a release as we move through the remainder of the year.

Speaker 5: while our long-term strategy target is to be approximately 85% vertically integrated on feedstock.

Speaker 5: As a result of current lower TiO2 production level driven by customer demand, which was down 30% year on year in Q1, we took action to reduce our feedstock production.

Speaker 5: This resulted in slightly higher mining and upgrading costs in the first quarter.

Speaker 5: which will continue in the second quarter of the year.

Speaker 5: On capital expenditure, as we have highlighted previously, we have implemented plans to significantly reduce our annual capital spend to below $275 million this year to adapt to the macroeconomic environment.

Speaker 5: as it unfolds by delaying investment primarily associated with volume growth.

While this will delay our ability to realize benefits from our key capital project,

We do believe this is the appropriate decision for the business at this time and is consistent with our ability to flex our capital spend.

We anticipate these actions will enable Tronox to generate positive free cash flow across a variety of scenarios, including our recession case.

We will continue to balance cash generation while ensuring we have the product necessary to meet our customer needs and are effectively positioning Tranox for future success.

Before I turn the call over, I want to briefly provide an update on Jazan. As we have mentioned,

Before I turn the call over, I want to briefly provide an update on Jasan. As we have mentioned, one of the furnaces is operating

and we have continued purchasing the Jazan flag under the term of the agreement.

As we have disclosed in our filings, the Jevan Option Agreement expires on May 10, 2023.

We are in discussion with Tethne about under what circumstance we may extend the agreement.

Meanwhile, we have agreed to extend the term of the technical service agreement and continue to work with Tafni to support the Jazan Smalter complex.

the term of the $125 million we loaned to the project.

which can be repaid as late as June 2025, remain unchanged and can be paid in the form of cash or in kind. We will continue to keep the market update on the development on Javan.

I would now like to turn the call over to John Sribisol for a review of our financial position. John ? Thank you, JF. Turning to slide 11.

I would now like to turn the call over to John Sribisol for a review of our financial position. John ? Thank you, JF. Turning to slide 11. We ended the year with total debt of $2.7 billion.

Our net leverage at the end of the year was 3.3 times on a trailing 12 month basis. In the first quarter, we amended and extended our interest rate swaps such that approximately 77% of our interest rates are fixed through 2024, approximately 68% are fixed from 2024 through 2028, aligning with the maturity of our term month.

Our balance sheet remained strong with no near-term significant maturities until 2028 and no financial covenants on our term loan or bonds. Total available liquidity as of March 31 was $432 million, including $115 million in cash and cash equivalents, which is well distributed across our global operations.

Capital expenditures totaled $93 million in the quarter. Approximately 40% of this was for maintenance and safety capital, and 60% was for strategic growth projects.

Depreciation, depletion, and amortization expense with $71 million for the quarter.

As John mentioned earlier, our free cash flow was a use of $172 million.

This was due to inventory build for the reasons JF outlined.

higher accounts receivable owing to our improved sales, and lower accounts payable. In the first quarter, we declared a 12.5 cent dividend per share that we paid in the second quarter.

This equates to 50 cents per share on an annualized basis.

Moving to slide 12. At Tronox, we employ a robust bottoms-up analysis of our markets, operations, and the risks and opportunities in developing our forecast.

Based on this and our current view, we anticipate second quarter adjusted EBITDA to be in the range of 160 to 170 million. We are forecasting TO2 volumes will increase in the mid to high teens range from Q1 and assume Zircon volumes improve by approximately 15,000 tons.

Now that kids are done and Alice are up and running.

Additionally, for TI02, we are assuming that pricing will be flat to slightly down. We are also assuming to see continued cost impacts from Atlas.

Unfavorable product mix impacting margins as TI-02 volumes improve relative to Zürken volumes An unfavorable fixed cost absorption from lower mining and pigment production rates Pivoting to our expectations for our 2023 cash uses

Our working capital assumption remains the same at a use of approximately 150 million.

We anticipate flipping working capital into a source of cash for the remainder of the year, including further cash from AR securitizations.

Our net cash interest expense assumption remains approximately $130 million.

Our expectations for cash taxes have increased to approximately $50 million due to increased circum sales expectations and FX rates.

GF shared earlier the actions we are currently taking as a business. We will continue to assess and execute against the levers we can pull to ensure sufficient liquidity and continue the alignment of our production and costs to respond to the economic environment we are operating in. We will remain focused on delivering on our commitments.

That concludes our prepared remarks. With that, I'd like to turn the call over for questions. Brika? Thank you. We will now begin the question and answer session. To ask a question at this time, please press star and the number one on your telephone keypad.

Belonger from Deutsche Bank. You may proceed with your question, David.

Thank you. Thank you. Good morning. John J. F. Disequential Increase in Q2 versus Q1. It's about $19 million at the midpoint.

Is that a little bit less than normal seasonality? And if so, why is that? You know, I would, David, I wouldn't say that's necessarily less than seasonal.

I guess moving a coding season clearly we saw, you know, 14% increase from Q40, Q1, albeit off of very low levels. So what we had forecasted in the fourth quarter and communicated on last call is that there was a lot of the stocking going on mixed with demand that had dropped and that we would have seen the fourth quarter be the trough. That's in fact what we saw.

when we think about moving Q1 into Q2, we have pretty good visibility into where those numbers are. So it's April 27th. We have a pretty good idea what April's going to look like. Our order book moving into May is a lot more solid. We have a better picture on May. June orders are typically always higher than what we would see in June .

Q2 of this year will still be lower, but that is in line with the macroeconomic environment.

Understood. And just one more lesson on the Atlas mining operations. Can you quantify the impact this year and what the penguin might be for next year if that were to resume or we turn to more normal operations? Hi, David. It's John , service hall. Thanks for that question. And as you have mentioned Atlas.

If Alice had been up and running for the full year, it would be an additional 70 to 90 million of benefit for the year. Approximately 25 to 30 million of that was impacted Q1. We do see similar impact to Q2 and as we ramp up Atlas and get more productions and cost to improve, we will see that improve throughout the year.

Thank you very much. Thank you. We now have Josh Spector of UBS. Your line is open Josh.

Thanks for taking my question. I just want to follow up on something you said, JF. I wasn't sure if I heard it right that in 3Q you expect the run rate to be the low end of your recession case. Is that guidance or is that just a hypothetical scenario?

Look, I think that we feel confident with our recession case scenario, Josh, and I think that the

For Q3, I mean, being at the low end of the range of our recession scenario, I mean, we feel confident about that. Yeah, Josh, you know, I made a comment specific to that on the last call and that we thought it was appropriate to follow it up because we're still comfortable with the comment that we made last quarter with regards to how the product.

I mean seasonally 3Q is bigger than some of the other quarters. Would that imply greater than 200 million? And what do you need to get there? I guess in terms of CO2 volumes and I guess some of the cost on Atlas and everything else.

Well, Josh, there is so much unknown in what will happen in the second half of the year. We didn't want to give clear guidance. I think that what John explained related to the Atlas mine, we are expecting the road to open in the middle of the year. But as you know, we are expecting the road to open in the middle of the year.

So we also have Zircon volume moving up because of atlas mine. So, I mean, we feel confident about our business model. And not only Zircon volume growth, but there'll be Ti2 growth in that as well. So when we start to think about the comps, we made reference into...

you know, where our comps were for this quarter, but the third quarter comps going to be a lot easier because the third quarter of last year was significantly down. So, again, when we made reference to the recession case, you know, it's in the range of that. Again, we're not providing guidance on Q3, but we're confident that we're moving in the direction of the recovery as we've outlined over the last couple of quarters. Got it. Thank you.

That's the Fisher of Goldman Sachs.

of Goldman Sachs. The line is now within.

Yeah, good morning. Question just around your comments on pricing being flat to down. Is that a mixed issue where you called out Latin America in Europe or you actually think the physical prices will be down in those regions and I'll drag down your printed price? Yeah.

Yeah, Duffy, so look, there will be some movement in pricing in Middle East and.

And that is largely driven with some of the areas where we're competing against the Chinese. So in Latin America, it's the same thing. So there is some mix, but there is some price movement as well. And we talk a lot about what's happening with the Chinese. Their price is still significantly lower than ours. There are areas where we're competing more directly with them.

and we're selectively determining how and when we make those adjustments to price. But there is actually price movement on the downside in Latin America and in the Middle East. And there's also some mixed issues there as well. But again, we're talking about, we said flat to slightly up in the first quarter, and we ended up at, you know, 1% up, and we're talking flat to slightly down in the second quarter. So there's not a lot of movement there.

have been year to date versus last year? Are they up, down, or flat?

They are up, and when we think about what they have, so we did get them in months. We don't have Aprils yet, but obviously we do have Marches. And March was, depends on which number you pull out, but somewhere in the 155 range. It wasn't up significantly sequentially.

One of the bigger areas obviously is Europe . So you saw Europe exports go down a bit, but a lot of that had to do with some of the more significant exports you had earlier in the year that were dropping off. So we get the question a lot about what's happening with China and China is something, we see them as a competitor. That's why we're focusing on our cost.

Our volumes are recovering. India is another example. We talk a little bit about volumes that have pulled back. Our expectations for India in 2023 is year over year. We're going to have a 25% increase in 2022 was a good year. So we're selectively...

managing, as I mentioned previously, on how we're dealing with price against the Chinese, but we feel confident that we're going to continue to be able to grow our business in line with the projections that we've put out. Great. Thank you, guys.

Thank you.

We now have joint mobility of BMI capital two markets. You may proceed. Yeah, good morning. Thanks for taking my question. I guess the first one was it sounds like you had lower cost inventory working through in the first quarter than what you expected. I guess.

One, how did that happen? And then two, I guess I'm a little bit confused as to why your margins in 2Q are expected to be in the high teens after something in the low 20s in the first quarter, despite you having, you know, you're going to be running the assets obviously a lot harder with volumes, you know, improving quarter over quarter.

by mid to upper teams. So I guess, can you help us to understand that as well? So I'll take the first part of that question. Maybe Jeff, you want to take the cost piece of it first? Well, I mean, John , I mean, the reason our costs are moving is obviously we're going to start to see the Atlas Zircon material in Q2.

And that has an impact on us because I mean this is high cost material because of the old role that is a different line. So that has an impact on us.

Yeah, can you, I'm sorry, can you go ahead and rephrase the first part of your question again, I apologize. Yeah, no, sure. The first part, I think you would said in the prepared remarks that you had lower cost inventory running through the PNL and you fought. Sorry, I guess how did that happen? What drove that? Yeah.

Okay, so a lot of that was Zircon. So we referenced that, you know, we have had orders that were well in excess of what we could actually ship. And because Atlas was off, we would have expected that we would have been able to ship more material out of Atlas. So we actually were able to reposition some of our inventory out of South Africa, which is lower cost inventory.

To fill some of the gap that we had for what would have historically been expected to come out or what we projected would have come out of Australia. So that was that. And then, I mean, we've also got some inventory positioned on to 2 and some of our other locations that. During the pandemic, we moved around that was at lower cost. So those are the 2 pieces that when we reference lower cost inventory. That was what was the.

As I mentioned, we expect TI2 to grow in the mid to high teams range, and that is growing faster than our Zircon sales. So as you know, Zircon gives a higher contribution to the bottom line, and that's impacting the margin.

Okay, got it. No, that makes sense. And then maybe just one last one on on Jizan. Can you give us an update as to how far off from kind of the target run rate that asset is right now? And if you think there's a realistic chance of it kind of getting to the finish line? Well, John , I mean, we're still working with task need to...

capacity.

Got it. Okay. Thanks very much for the caller. Thank you. We now have John Roberts of Credit Suisse.

Got it. Okay. Thanks very much for the caller. Thank you. We now have John Roberts of Credit Suisse. Your line is open.

much for the call. Thank you. We now have John Roberts of Credit Suisse. Your line is open.

Thank you. Just one question. One of the biggest changes you can make to achieve your carbon reduction targets. I'm thinking electrifying the mining operations and maybe using hydrogen to heat the conversion facilities. Can any of that happen by 2030 since those would be longer type projects?