Q2 2023 Tronox Holdings plc Earnings Call
Good morning, ladies and gentlemen, and welcome to the tour next holdings second quarter 2023 earnings call and webcast at this time all lines I know listen only mode. Following the presentation. We will conduct a question and answer session. If at any time during this call you require immediate.
Assistance, Please press star zero for operator.
I would now like to turn the conference over to Jennifer Gunther, Chief Sustainability Officer, and head of Investor Relations and financial planning. Please go ahead.
Thank you and welcome to our second quarter 2023 conference call and webcast turning to slide two on our call today are John Romano and Cianfrance, Walter Zhang Co Chief Executive Officer, and John <unk>, Senior Vice President Chief Financial Officer.
We will be using slides as we move through today's call 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. This information represents our best judgment based on what we know today. 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.
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 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.
For those joining today, who may be a bit newer to tronox with the world's largest vertically integrated <unk> producer with sales in 2022 of $3 $5 billion that were fairly evenly distributed across the Americas, Europe , Middle East and Africa, and Asia Pacific Our strategy is focusing on positioning Tronox has the advantage global tier two liter to the production of <unk>.
<unk> quality low cost sustainable tonnes.
More information on Tronox.
It is available on the website.
We've added a new video to the homepage that does a great job of outlining the value that we bring to our customers through our vertically integrated sustainable mining and upgrading solutions.
Now, let's turn to slide five for a review of a few key messages for the quarter.
Our solid second quarter performance was a result of continued market recovery from the first quarter and our ongoing discipline around costs.
<unk> delivered adjusted EBITDA at the high end of our previously guided range and adjusted EBITDA margins above our expectations. Additionally, as a result of the team's proactive approach to aligning the business with the current market conditions, we generated $81 million of free cash flow above previously anticipated levels.
<unk> results continue to demonstrate the strength and advantage of our vertical integration.
These results would not be possible without the hard work and dedication of our global employees and we thank the team for their commitment to Tronox.
As an update on our operations at our Atlas mining in Australia. The primary roads are open and we're currently using utilizing them for hauling which is allowing us to move more material.
And reduce inventory levels at the mine.
Additionally, we published our 2022 sustainability report in the second quarter outlining the targets that we've set for our business to become an increasingly sustainable operator in our ever evolving world.
Turning to slide six I will briefly review the sustainability related targets, we've set for Tronox.
We are very focused on our sustainability efforts of Tronox is this area is becoming an increasingly significant significant focal point and part of our conversations externally with investors customers and other key stakeholders.
<unk> has reinforced our previously disclosed path to carbon neutrality by 2050. Additionally, we committed for the first time to targets to reduce scope three emissions intensity by 9% by 2025 and 16% by 2030 against the 2021 baseline.
We recommitted to our target of zero waste to external dedicated landfills by 2050, and we continue to prioritize safety and have also enhanced efforts internally to improve diversity within the organization. We are excited about the continued progress we make each year to become more fully aligned with the expectations of our key stakeholders.
Review, our sustainability report, which is available on our website for more information.
Now, let's move to slide seven for a review of our second quarter financial performance in more detail.
Revenue of $794 million improved 12% sequentially due to the improved sales volumes across all products.
This represented a decline of 16% relative to the prior year due to continued market softness income from operations was $84 million in the quarter, we reported a net loss in the quarter, a $269 million, which included a $293 million valuation allowance in Australia relating to our deferred tax assets.
Our normalized Q2 effective tax rate was 20% adjusting for the evaluation allowance and non benefiting items and our adjusted diluted earnings per share was <unk> 16 cents.
Adjusted EBITDA in the quarter was $168 million and our adjusted EBITDA margin was 21, 2%.
Free cash flow in the quarter was $81 million.
Now, let's turn to slide eight for a review of our commercial performance.
<unk> revenues increased 9% versus the first quarter driven by 9% increases in sales volume.
<unk> pricing was 1% lower compared to the first quarter as expected, which was offset by a 1% tailwind from exchange rates Tio, two pricing increased 1% compared to the year ago quarter.
We continued to deliver against our commercial strategy and realize relatively stable pricing trends despite volumes remaining well below seasonal normal levels.
Zircon volumes increased 33% compared to the first quarter, representing a 21% decline year over year zircon pricing was lower by 1% compared to the prior quarter, which represented an increase of 7% year on year.
Revenue from other products was $88 million, an increase of 35% to the prior year, largely driven by improved pig iron volumes and higher sales of rare Earths, which increased 87% year over year.
As a result of our unique portfolio.
We are continuing to evaluate a range of options to leverage our expertise to further unlock the value of the rare earths generated from our operations.
Our differentiated integrated positions sets us apart as a global leader in sustainable mining and upgrading solutions.
Looking ahead, we expect pigment volumes to be relatively flat to the second quarter as we expected our demand to remain higher than the trough levels seen in Q4 of 2022.
While we previously anticipated volumes might continue to increase into the third quarter, the weak market conditions in China, as well as broader Asia, Europe , and the middle East have brought our expectations down.
Our commercial strategy and differentiated offering have enabled more stable pricing trends than during previous years of demand decline. However, we do anticipate that the softer demand conditions will result in slightly lower <unk> pricing in the third quarter compared to the second quarter.
On zircon, we do expect a more challenging second half of 2023 than we previously anticipated.
At this time based on our current market outlook, we expect zircon volumes for the third quarter to declined by 15% to 20000 tons from the second quarter 'twenty three levels.
Zircon is a critical mental mineral and a key part of our portfolio approximately half of the total zircon market is consumed in China, which is heavily influenced by housing market completions.
Global supply and demand for zircon will come back into balance with China recovers.
As quickly as the decline has impacted us on the downside, we will see the benefit of the upside when the market improves we strongly believe in the strategy of being vertically integrated and the value that our zircon provides to our customers I'll now turn the call over to J F for a review of our operational performance, Jeff. Thank you John and good morning, turning to slide <unk>.
Nine our adjusted EBITDA of $168 million represent 39% decline year on year, driven by unfavorable fixed cost absorption due to lower production rate lower sales volume and lower pig iron price.
Partially offset by a favorable exchange rate and lower freight costs.
Sequentially adjusted EBITDA increased 15% due to higher product sales volume and exchange rate tailwind, partially offset by lower average selling price and higher freight costs associated with higher volume.
We are continuing to run our operating site at reduced rate as a result of lower demand level in order to manage inventory and cash.
As a result, the second quarter include $25 million of impact to EBITDA of lower cost to market an idle facility charge.
Looking to the third quarter as a result of the market dynamic John previously outlined we anticipate adjusted EBITDA for the third quarter 2023 to be $115 million to $135 million.
This range includes $35 million of impact to EBIT.
Resulting from adjusting the production rate of both our pigment and mining site to better align with the latest market demand level and manage working capital and free cash flow.
Turning to slide 10, we will continue to balance the midterm and long term strategic need of the business to position Tronox for future success, while ensuring we are taking the right decision to manage what is within our control in the short term.
Against the current macro economic landscape.
This include disciplined action to reduce costs, we have 380 different cost reduction initiatives happening at all our different sites around the world, we are optimizing our fixed costs and driving additional supply chain initiatives.
We are prudently managing working capital capital this quarter, we were able to relieve some of the working capital build in the first quarter as a result of our actions.
While our long term strategic target is to be approximately 85% vertically integrated on feedstock as a result of current lower <unk> production level, driven by customer demand, which was down 30% year on year in Q1.
And 21% year on year in Q2, we are continuing to run our feedstock assets at lower rate.
This result in slightly higher mining and upgrading costs in the second quarter, which will continue in the third quarter of the year.
On capital expenditure as we have highlighted previously.
We will invest less than $275 million this year to adapt to the macroeconomic environment as it on <unk> by doing investment primarily associated with volume grow not required in the short term.
Why does 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 it's consistent with our ability to flex our capital spend.
We do believe it is important to continue to invest in the business throughout the cycle and we will continue to proceed with the business critical projects that will contribute to future growth of the business.
We will continue to balance cash generation, while ensuring we have the product necessary to meet our customer need and are effectively positioning <unk> for future success.
Before I turn the call over I want to briefly provide an update on Japan as we have disclosed in our filing the original Javan option agreement expired on May 10 2023.
We agree with test knee that until September 32023, all chloride slag produced by the <unk> will build deliver to tronox as a repayment in kind of the $125 million tronox loaned to the project.
The first shipment of chloride slag to reduce the loan balance is expected in the third quarter.
Full repayment of the Tronox loan is required by January 2025 in either cash or incurring through chloride slag delivery.
Tronox and task knee. Additionally agreed to extend the term of the technical service agreement to September 30th to enable Tronox continue support to the <unk> smelter complex. We are currently conducting a value and generating exercise and we will keep the market update on the statue.
<unk> of this assessment.
I would now like to turn the call over to John <unk> for a review of our financial position John Thank you JF turning to slide 11.
We ended the quarter with total debt of $2 7 billion, our net leverage at the end of June was three eight times on a trailing 12 month basis in the first quarter, we amended and extended our interest rate swaps such that approximately 76% of our interest rates are fixed through 2024, and approximately 67% are fixed for 2024 through 2000.
Eight aligning with the maturity of our term loan.
Our balance sheet remains strong with no near term significant maturities until 2028 and no financial covenants on our term loans or bonds.
Total available liquidity at June 30 was $447 million, including $167 million in cash and cash equivalents, which is well distributed across our global operations.
Capital expenditures totaled $55 million in the quarter approximately 60% of this was for maintenance and safety capital and 40% was for strategic growth projects.
Depreciation depreciation and amortization expense was $68 million for the quarter.
As John mentioned earlier, our free cash flow was $81 million. This is above our expectations, primarily due to the team's proactive approach and aligning the business with current market conditions.
We returned $50 million to shareholders in the form of dividends, we paid both the first and second quarter dividends equivalent to <unk> 50 per share on an annualized basis in the second quarter.
Moving to slide 12.
Based on the current view that John and Jeff outlined we anticipate third quarter, adjusted EBITDA to be $115 million to $135 million.
Pivoting to our expectations for our 2023 cash uses our working capital assumptions increased to a use of approximately $150 million to $175 million due to softer market demand than previously anticipated.
Our net cash interest expense assumption remains unchanged at $130 million.
Our expectations for cash taxes were lowered to approximately $40 million and our expectations for capital expenditures remain unchanged at less than $275 million for the year we.
We will continue to assess and execute against the levers we can pull to ensure sufficient liquidity and continued alignment of our production and costs to respond to the economic environment. We are operating in.
We remain focused on delivering on our commitments that.
That concludes our prepared remarks with that I'd like to turn over the call for questions operator.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
Do you have a question. Please press star followed by the number one on your touch downtime again that star followed by the number one on your Touchtone sign if you would like to buy a request. Please press star followed by <unk>.
Your first question comes from the line as David Begleiter from Deutsche Bank. Please go ahead.
Good morning, and thank you.
John Jeff You mentioned, some pricing pressure in <unk> could you talk a little bit more about how much of that pricing pressure is and where it's coming from by region.
Yes, Thanks, David.
China is only about 35% of our total selling of zircon at this stage compared to 50%.
That being said in the second quarter, we were selling pretty much everything we were making and we were restricted by what we what.
We can produce and that's when we talked about the Atlas transition moving into the third quarter.
So what's happened in China has happened relatively quickly and.
I would say over the course of the last 30 days, we just finished the quarter and we had a pretty strong quarter on zircon. So it's happened relatively quickly we do not believe there is a significant amount of inventory and the chain right now.
At 45 to 60 days, depending upon the region and.
Because there.
What we're seeing in China, Although China has not been strong for the last two quarters, we have seen it start to turn down and it didn't pick up after Chinese new year. It didn't pick up after the opening from Covid and I would say, it's worse than what we would expect and so we are now seeing some of the zircon that would have been sold in China moving into other markets. So even though.
Our position in China is not as significant as it was China zircon moves around a little bit more freely than we would say tio. Two does so short answer to your question is we would expect that there's not much inventory in there and as our customers start to get a better feel for what's happening in the market, we should start to see a a.
Turn in the volume in the fourth quarter.
July was a very low month, we're already seeing the August and September order pick up but the range that we gave him that 15 to 20000 tonnes assumed that we'd see a pickup in July and August I mean, excuse me, It's August and September and we would expect that we'd start to see that same kind of a similar rebound moving into the fourth quarter.
But the recovery is largely going to be dependent on what happens in China, how quickly that market recovers and that's something that we're just not really in control of.
Thank you.
Thank you.
My next question comes from the line of Josh <unk>. Please.
Yeah, Hi, Thanks, So just within T O two and the charge you're taking this quarter from the lower operates with 35 million. Just curious how we should think about that on a go forward basis, you know I know some of it's bringing down your inventory levels, but if operating rates stay at this level is that 35 million.
The charge something weeks, you'll be extrapolating another quarter or two beyond three Q until we see volumes really pick up and what's the the threshold.
Thanks.
Yeah. Thanks, Josh if you take a look at we did say that we were gonna be burden. This in Q3 by $35 million, primarily due to fixed cost leverage that we brought down our production.
We do expect to see that and we have been operating most of the year at lessons 70 per cent of our our capacity and expect to continue add that the rest of the year. So you would expect a similar amount in queue for uhm, obviously, we have significant leverage in our business as volumes increase we will bring back production and I expect that.
You know 35 million charged to go away pretty quickly once the market recovers.
And when we think about the market recovery again.
Called the bottom of the fourth quarter was a 14% increase in the first quarter, 9% increase in the second quarter, which was below what we initially anticipated and that recovery is just not coming back as strong. So when we think about third quarter bond with reference flattish as we think about the fourth quarter, where you would normally see some sort of.
Maybe a seasonal downturn, because we are lower levels than what we would have historically been we don't expect the fourth quarter at this particular stage to see much of a seasonal downturn from Q3 and Joe So I'd like to add that I mean, the the drop in T. I O. Two has as John mentioned running or plant at <unk>.
<unk> and 70 per cent capacity, we had to adjust or mine and upgrading facility as well and we have lower production on that side of the business. So it's it's a double impact for us, but as soon as there is a recovery it will have a double positive impact on our costs.
And you said I I appreciate that and just going back to the earlier question around pricing and we are talking about there's more pressure.
How do we think about the pressure is Chinese T O two in those market and what that means for market share so you're holding pricing better than maybe the market in total but do you have any view on if you're losing some incremental share and therefore, the recovery maybe comes back to a lower than lower levels nurses. The prior couple of.
<unk>.
Well, thanks, Josh and again, we just mentioned the numbers on it maybe pick up from the fourth quarter. So again, 14% increase in the first quarter nine per cent increase in the second quarter and if you look at exports of T. I O two which were high last year, they're up 10 per cent. If you look at the last.
Year to date, so 10% a year today compared to adhere to they previously so they're not growing at the rate that they were what I would also say is that most of the Chinese suppliers. We believe almost all of them are operating at a loss right now recently as recently as this week, we've seen China increase.
<unk> two pricing both inside of China and on the export market and we do believe that's gonna stick.
Anecdotally, we're hearing some other issues about the high temperatures in China, which are causing plants to have to actually slow down to manage energy consumption. So there are a lot of things that are happening that we believe could lend itself to China starting to pull back. So short answer is are we losing some.
Market share and less strategic areas answer is probably yes.
We're managing our business to ensure that we're also continuing to compete when we talk about small price reductions like 2% to 3%.
The price gap between Chinese materials, and western tier to a significantly different than that so we're making some small adjustments, but our customers are also seeing us for other things other than just price. They they <unk>. They appreciate our regional footprint. They appreciate a lot of what we're doing on the ESG effort.
And we're spending more and more time as we clearly identify what we're doing on our scope on in scope to as our <unk>. Our customers are looking at scope three we're starting to become a lot more valuable and <unk>.
Pricing is not the only thing that our customers are looking at us when we think about our strategic value to them, yeah, and we were in a downturn. So obviously customer has choice, but the know how it's important as stink will turn up to have a reliable supplier you know and I think I'd or vertical integral.
<unk> position is a key advantage in that regard.
Okay. Thank you all.
Thank you.
Next question comes on the line is Jesse Fisher from Goldman Farm. Please can I help.
Yes. Good morning, if you look at your volume on it to your stack over the last three quarters, it's down 34%, 36% and 31%.
Clearly your customers paint and plastics folks you know aren't down anywhere near that much. When you look at your cell in versus their sell out how much longer do you think you can continue to be significantly more negative than your in customers.
It's it's a difficult question does see I think that John kind of explain it with what's happening in China.
Look the Chinese have build capacity and increase export in a market that is not growing I mean, our customer have obviously in a drop in volume as much as we did but the Chinese has continued to increase their market share had that time and they're doing it.
At no profit in fact, they are doing it as a loss you know what I mean, it it's clear that.
They're kind of subsidizing more specifically D.
The government one entity in China.
Or <unk>.
<unk> has not moved down you know so their their cost structure is just wrong and and and I think that even the best player like L. B in China have a margin that is lower than tronox at the moment. So we don't see that as sustaining and we continue to work on our cost to be a.
More stronger competitor and we have to prepare our business for a rebound because we believe that will happen and I think it's a great question. Because we don't think it can last very much longer I mean, the reality is a lot of our customers, which you hear reports from are talking about.
They're not holding Destocking is complete some of our customers even talking about building inventory in the fourth quarter and preparation for coding.
Coating season next year. So it is a valid point a lot of that was attached to Destocking, we talk about China, we talk about the recovery and we can't control when the market recovers, we can control what we do to manage the business between now and then we definitely believe or well beyond mid point of a downturn and an upturn is coming.
Just a little bit you know, China, I think is creating a little bit more uncertainty on when that might happen, but it's a it's a great point and we don't think that can continue much longer and when you think about again.
The two year stack.
We don't typically look at it that way, but on we look at it sequentially moving into the third quarter kind of with what we talk about on flat pricing.
We should be down 99% to 10% compared to the prior year quarter, which is again not great, but it's a significant improvement from where we were in the first quarter and significant improvement for when we were in the second quarter.
Sure enough and then two other areas that you haven't talked about price, but that are seeing weakness one is <unk> and the second is in jail. If you're just kind of mentioned that the or side, you know both high grade and low grade ilmenite with the.
Weakness, we're seeing in volume should we expect to see pricing and those three products start to wane.
So does he I I covered your and I'll, let John talk about <unk>, but on the other side look starting with ilmenite.
Illinois price has been very stable <unk> increase, but they haven't moved down and that is true word while you know and and look obviously ilmenite is used to make high-grade feedstock like flag and we haven't seen flag price going down in fact flight.
<unk> has continued to slightly creek Cree pump.
And same thing with natural rutile natural rutile has been very stable. So so I think this reflects the fact that remember only a year ago, we were talking about a shortage of raw material and nobody has invest you know to develop new mine.
And significantly increase so I think it's it's a market that look obviously because of the slowdown in T. I O two at the moment.
There is enough feedstock.
But as soon as the market will turn I think that that's where you will see the advent age of a company like Tronox step on its own mine as invest recently in your mind and continue to invest in the mining side of the business and that will differentiate ourselves you know and from.
The competition, but very stable price on that side of the business yeah on zircon. So zircon, yeah, there's a lot of moving parts on that the biggest shortfall for us in the quarter is going to be the volume. There has been some movement. We you know we had a 1% drop in price that we reference Oh Q2 or Q1.
Q too and a lot of that was attached to probably the the lower end I'd say quality of his work on that we said we refer to that as <unk> as opposed to high grade. So we have seen some movement. The pricing has not been significant there has been some mix and again a lot of that you know I.
I think that's one of the reasons that the market kind of slowed down so much when China slowed down you saw a lot of what historically for instance, there's about 60 to 70000 tons of zircon that comes out of Indonesia, typically goes into China, when China's slowdown you're starting to see that inventory.
Start getting quoting into India. So there's some assumptions out there that I think are driving this drop off in volume that are associated with what our customers might think happens in the market. So not a lot of movement on price. The biggest issue on zircon is the volume, it's one of our higher margin products.
Again as.
As I sat on the prepared comments and dropped off quickly and as China recovers, we believe it will pick back up quickly.
Alright, Thank you guys.
Thank you Yeah. Our next question comes from the line of giant Mcnulty fan BMO capital markets. Please go ahead.
Good morning, just a question on how to think about cash flows as we progress through the year I think there was.
There was certainly some some hope you'd start to unlock some working capital and drive some greater free cash flow I guess given the further pullback in your operations is that something that we should see as kind of a good counterbalance where the ebitdas off but the but the cash flows accelerate or is that not the case that gets how should we be thinking about that as to your progress.
Yeah, John Thanks for the question.
Your assertion that is correct I mean, we are taking significant action in light of this market environment, and we brought down production pretty significantly to help drive cash. Additionally, we we do have a lot of Ah cost initiatives as well that we will help drive improvement throughout the rest of the year, but generally speaking we do.
I think there's a logical chance realistic chance that we can cloud back the sniffing cashews that we've had in the first quarter Uhm. Obviously, you know the first quarter, although as significant use was as we'd expected. The second quarter was above our expectations and you can see that was clearly driven by actions that.
We actively took and we intend to do that in Q3 and Q4.
Okay from a cash flow perspective, although it's not it hasn't impacted tremendously in the third quarter, yet we're starting to see the impacts of raw materials, starting to move down so not only raw materials were seeing freight moved down container for a bulk rate. So we're starting to see a lot of the things.
That were headwinds for us that although we've got a long way to go and will start to be a tailwind and we would expect that to start to impact us in the third quarter and will start to get more men them and the more momentum in the fourth quarter.
Okay. So just just to be clear do you think working capital will be of use our source of funds. This this full year like full twenty-three.
Yeah, I mean, we've got it working capital for the full year as negative of 150 to negative 175 million. Okay. Does you know the biggest used was in Q1. So we're <unk> taken Q1 and Q2 net net the rest of the year, it's flat to slightly positive.
And the inventory that we were building a T O two which we have slowed down on I mean J F made reference to we are also adjusting minds, but we're still mining we're still mining heavy mineral concentrate so the zircon dropoff will also allow us to build some inventory, which quite frankly could be a positive as the market returns because.
As I mentioned before in the fourth quarter.
I'm in the second quarter, which was only two months ago, we were selling everything that we can make yeah and John you would remember that we talked about 150 of cash use earlier in the year. We have increased that number 275 and that that's linked <unk> yep.
Okay got a fair enough and then maybe just supposed to follow up.
To kill two industries had much better pricing resiliency than than we've seen in downturns, especially ones of this magnitude, which which I think was was believed that it would actually end or lend stability in general to the industry, but.
But with the Chinese producers running at at rates that are actually losing money I guess does it make you rethink the pricing strategy that you have for for your <unk> business going forward, if you're gonna have this this level of lapse in discipline from.
Some major producers in the industry I guess, how how would you how would you answer that.
I think the answer is no we would stick with this pricing strategy that we had it's ultimately designed to help us whether.
Downturn. This downturn is sick more significant than we would have expected it to be more significant than what we talked about an investor day, but at the end of the day, it's not just the Chinese suppliers that are losing money, it's pretty well known there are other.
Suppliers out there that are going through restructuring. So the industry is in a bad place our margins are still significantly better than we do believe that we are in a better position to make it through this than some other so.
I think there's an element of.
They'll they'll lossmaking of this industry is going to be.
It's gonna be the governor of that is gonna be how much it's about how much balance sheet that people have to manage that and so that's why we think when you start to see some of these I would say aggressive moves that were not necessarily responding to as I mentioned our pricing reductions.
We targeted.
What we ended indicated that two to three per cent of the quarter those aren't significant moves but their moves that we need to make sure that we're keeping what we need when we think about strategic share.
Got a very clear thanks very much.
Thank you.
Next question comes from the line of Mike <unk>. Please go ahead.
Alright. Thanks. Good morning. This first question I wanted to go back to working capital sweating sort of getting back to Jon's question. Just now I think last quarter U B a use of 150 million now you're taking actions rightfully so to reduce production rates to work down inventories.
Yeah, you were working capital use of caches going higher I would've thought it would've gone blower. So so why is that.
Yeah, Yeah, yeah. Thanks, Mike for the clarification question and you're right. I mean, we we did ended up guiding last quarter $150 million and kept the bottom end of that range and then range it up about $25 million.
Part of the the thing that's driving that changes what you have mentioned is the zircon inventory increase so while we are bringing down pigment production and we do see volume wise pregnant is going down across the year. We are a burden a little bit there from higher cost. So overall dollar value of inventory has gone up.
And combined with the the zircon ton increase as you know we are slowing our minds down a bit but we still are building circon inventory. So that's really driving that band. If we do end up selling more zircon. Then we expect obviously, we will be able to to lower the to the lower.
Part of our range and when John I think it's another point on that he rep John referenced.
We've been running it.
Slightly below 70% on capacity utilization our plan when we reported last was we'd be ramping up production because we were expecting to see a higher third quarter. So there's an element of that inventory costing that's just based on where we're running today versus what we might have anticipated we were going to be running three months ago.
Great. Thank you.
Thank you you know our next question comes from the lines Frank <unk>. Please go ahead.
Great. Thank you Uhm good morning, guys. It says <unk>.
Uhm from my first question I think genre mono included a comment on <unk> and prepared remarks, and your elaborate on the longterm strategy in that arena.
Yeah. Thanks, Azizah look it's something as I mentioned in the prepared comments that were continuing to look at its.
Something where we feel as a mining in upgrading company were uniquely positioned to do that the monazite that we had historically been I'd say stockpiling is a waste has now turned into a revenue stream in that revenue continues to generate so when we start to think about how we develop that we've got a plan on what word do.
Doing and we mentioned that we're going to let that we're going to let the revenue come from that be the investment in the initial stages. So it'll be self funding, but as we think about moving even between now and the end of the year. There's opportunities that we're looking at that will allow us to continue to expand that and we'll probably be in a better.
<unk>, maybe in the third quarter call to give you more clarity around that but it's absolutely something that we believe is could.
Could be a core part of our business and we're taking steps I'd say measured steps, though he's our way into that so that we're self funding it for right now, but it's it's an exciting part of our business I can tell you. There's a tremendous amount of our people that are engaged in looking at opportunities on how we can expand that.
Got it thank you and.
How should we be thinking about the expected lingering impact from the flooding in Australia as it.
As they flow through you know three Q and <unk> <unk>.
And on the Atlas project are you still expecting it to contribute 70 million or more than a normal year.
Yes.
The answer to that is the flood is is gone you know and everything is back to normal and look the unfortunate reality is with what's happening with the <unk> market, we would be in a very good position to supply at the moment, but.
The market has kind of dried out and but as soon as the market to recover and <unk> I mean I can tell you 30 days ago everything was fine we had no issue. It's in July that we had this huge dropped and it can turn.
Up the same way as quickly and we'll be in a very good position as mentioned by John will have built in <unk> N online you know will be ready to operate and produce and debate that market. The <unk>.
When you think about the roads being open now we are able to move that material from Atlas to broken Hill. So that we can upgrade it so it's and it's ready to ship Adzerk on so.
Not to say, we wouldn't have gotten any benefits in the third quarter, we would have but those roads opening allow us to build that inventory in a position where we can ship. It in the fourth quarter. So it's definitely having a drag on the third quarter, but if the market does come back, which we we're not saying it's going to come back completely but we do believe that's going to reap that's gonna bounce.
Off the bottom.
We should start to see that inventory being consumed in the fourth quarter, but it is easy to your question. We do see once we're back up the normal the outlets will give us additional $70 million a benefit for the year.
Okay. Thank you day.
Mmm.
Thank you. Thank you.
Thank you next question comes from the line is Matthew <unk> from Bank of America. Please stop.
Good morning, everyone.
So.
There's the 70 to 90 million benefits you said, then obviously, there's the lower the headwinds from just the lower mine operating rates in general so if.
If we were to move to 2024, and new volumes aren't down 30 per cent, there down maybe they're up or down.
Down, 10% or whatever whatever it takes to get operating rates back at the mind, you know to full right I mean, how much.
How much of a tailwind is that.
If you think about just full rate operating at the mine site and then moving Atlas back to.
The full right so like what monetarily should we expect comes back to the company.
So that's you I try I try to help look obviously it all depends would say, but it has a huge a drag on the $35 million that we mention of running at low rate on the mining fight and the reason is simple mining or high fixed cost.
Proration and when you talk of mining you more at 60, 70% fixed us. So unfortunately has you slow down you're not saving as much with with the pigment plant. We have developed what I call a flexibility in our operation.
<unk> N and we're able to turn them down with less impact you know look obviously, there's a limit to what you can do but and being below 70% is not a great place to be but I'd say that in 24 were convinced that.
35 million of downturn, we could probably recover all of it.
It's a quarter number yeah, it's yeah and from an operational perspective I mean.
Mine is ready to go.
<unk> is running this is just a matter of now.
Having a market to support all the additional volume.
I understand and the 35 million is helpful, particularly for the context this quarter, but production costs had been about 100 million dollar headwind for the last two quarters I think presumably a fair amount of that is just from other mine operating.
<unk> <unk>, so I'm, just trying to contextualize a more normal operating environment.
Yeah, I mean, when we close to 35 million it really relates to fixed costs leverage of bringing our production down we absolutely have seen headwinds in cost, but we are seeing that as John mentioned tail off towards the end of this year. So we view it as you know obviously thirty-five is separate from.
Truck material costs, but it would be even more should we returned back to normal levels and as we've said before you know direct materials setting the context from 2020 today too.
2022 was up $400 million a year over year. So we do see a potential to clawed back and get closer to those levels were only seeing we had quoted last quarter that we would see 22 to 23 being two to three per cent down interacting materials, excluding or as John mentioned, we're seeing more of that as the year progresses more of it in Q4.
If you look at overall year to year.
We now expect it to be roughly down 4%. So continues to make progress on it. So as you mentioned 35 million is good from a fixed cost leverage and if we see further costs decline will be above the $35 million per quarter.
Just maybe a little bit more color on the Ross we've talked about chlorine a lot over the course of the last I'd say four quarters. According market in the U S is starting to soften and that's going to translate into prices are coming down from record high levels, and we're well positioned contractually to take advantage of that downturn as early.
Is this quarter.
So we would see chlorine as an opportunity and I'd say, our procurement team has done a really good job of establishing some strategic relationships will put us which will put us in a better position on that in the future as well.
Okay, and then if I can price was up year over your crossbow segments, but any prices a 4 million dollar headwind to EBITDA is that just mix or what's what's what's driving that pre.
Primarily pig iron.
Price.
Mmm interesting.
Thank you. Thank you.
Yeah next question comes from the line is drawn rabbit. Some credit. Please. Please go ahead.
Mmm. Thank you I just have one what's the rate in dollars, which is in concerned you chloride slang.
Yeah.
Well, John I mean, as you can imagine we're not going that we're not gonna give that type of details you know, but when we compare <unk> I need we would like that operation to be <unk>.
Producing at the similar cost than what we are producing in South Africa.
And at the moment I take that with only one furnace running and running at 50% of its original capacity and it's it's not meeting the the the level that we were expecting and that's why the option agreement just lapse.
Look at the moment you know in in the furnace is running and it still producing flag it and and it's obviously a task E. S. At the end they work with their supplier of technology to try to see all of that could be improved and Meanwhile, destiny is agree to supply that slot.
<unk> to us and to pay back the loan and look it's like the commercial agreement that we had in the previous year, we're paying market price for that flag.
And as opposed to paying cash for it's going against it.
We've mentioned before that assuming just an operator because it has historically, we expect that loan to be paid back soon and they apply all this lag to it some time.
About a year plus from now.
Thank you.
Thank you Yeah next question comes from the line of <unk>. Please go ahead.
Thank you very much.
Your T I O two demand with tower.
Volumes were down whatever was 22 per cent. If you look at your end markets plastics paper and coding.
Or the demand decreases different or where they are the same.
As best you can tell.
Yeah, Jeff I'd say, we saw more of us I'd say a downturn on the the <unk> the plastic segment than we did on coatings.
That being said, we're heavily weighted on coatings about 79 per cent of our volume goes into coatings, and that's broken down into a variety of different applications and coding so pay.
Paper and specialty which is even smaller than plastics was down as well. So you know a lot of paper and specialty is actually in a specific item of European market, where we saw that drop earlier. So short answer is I'd say coatings has held up maybe a bit better than plastics.
And paper laminate and specialty but it's.
It's not a huge swing either direction I'd say directionally, they're all down but what was probably the worst was the plastic segment and we're starting.
To see a little bit of at least I'd say green shoots of customer demand picking back up again on the plastics, although it's from a low level.
So when you look at your coatings customers is the way you think about it is that they're and market demand is flat to down and their inventories are 20% too high.
An order of magnitude and you know we're gonna go through a period and then depending on whether they build inventory next year or things stay pretty flat. That's the way T. I 022 is that your conceptualization or is it something different.
Well I think what you said absolutely related to what was going on in Q3 and Q4. So the <unk> last year. So the Destocking event was what what we were thinking actually did happen. So we've started to see pick up our customers are starting to order again, so we talked about the bottom in the fourth quarter, we had 14% <unk>.
And the first quarter, 9% growth, which was not quite what we expected.
So it's not as if it's getting worse in the third quarter is just hasn't rebounded. So I do not believe nor does J I believe that we have a significant amount of destocking complete now this is the market and as the market rebounds to the extent there was a coating season and next year and people start building inventory as I said, we've heard some cussing.
<unk> talking about building inventory in the fourth quarter will start to see the volumes move but.
A lot of it is going to be driven by macroeconomic activity, which.
Well we.
We can't control or influence yeah, Jeff year over a year in Q3 of this year, we're expect an improvement versus well versus the drugs that we had in queue too I mean, Q1 was 30% down Q Q2 was 20% down in Q3.
<unk> will be 10% down versus.
2022, so so so when we called the button that was Q4 22.
<unk> you too that that's still how would we believe the market is is is playing it's really <unk> in Q3 of this year that is a surprise to us at a time, where we had gear up to increase the zircon sales with our <unk>.
<unk> and unfortunately, the the market is not there, but look will be ready for when it turns.
So you have a certain amount of optimism around the <unk> I mean.
<unk> pricing was under $2000 <unk>.
From 2012 through 2020, and then Circon prices spiked beginning in 21 and I don't know maybe they got all the way up to like $3500 a ton and now may be.
Or something like 22 like why can't we go from $2200 upon the $1500.
What is it about the zircon market that makes prices more stable now and they've been historically.
Yeah. So the 3500 dollar number which I guess was regularly out there I'm Bloomberg was more of the spot market. So we didn't have a lotta I bought market.
So you know call it wherever it was yeah.
2000 range I think it all comes back down to supply it so.
When the market rebounded in 21 and 2022, we sold 100000 teller actually 21, we sold 100000 tons more than we produced we adjusted our footprint. That's how we made these adjustments to have a lower exposure into China and there hasn't been a lot of additional capacity added so up until the second quarter as we mentioned.
And we were selling pretty much everything that we were making and now China's slows down and that's why if 50% of the markets in China, you've now got prices at a point, where they are higher than what would have been historically, we didn't say prices weren't gonna move, but we said, we don't expect a lot of volatility in that area and the reason.
That we saw the significant drop off in July is because I think customers are thinking just what you're thinking and that is the market's changing I'm gonna hold off there there is not that much inventory in the system right. Now we believe there's maybe 30 to 60 days of inventory depending upon the customer in the area that we're selling into so there's.
Not a tremendous amount of time for customers to wait before they start repurchasing again, and that's why although we're not saying the market is going to rebound in the fourth quarter to where it was we think it's July was definitely bottom man. It was it was a very low number and that was we believe a lot of it was speculation on what was gonna happen.
Hello, Circon spot prices <unk> are they still fall.
Well I will tell you as recently as three months ago spot prices were starting to move back up Indonesia started raising their price again, and Indonesia is a good indicator for what's happening in the spot market and now they're <unk> I would say that installed out a bit because of what's happening in China with a with.
I would say no rebound at all and with 50 per cent of the demand there and call.
Call. It a significant portion of that that's tied to housing finishes a lot's going to depend on how quickly China recovers and there's there's things out that China's talking about more stimulus I'm not sure. How they can continue to put stimulus into housing and infrastructure, but they're talking about that so that could stand.
<unk> some growth in this area.
Same thing and the rest of the World, Jeff I think that we think that the bottom on new construction is over N. S things will improve I think that the <unk> is a key essentials material you know for for those construction to happen. So I think I think that we're not worry.
Read that there is a huge inventory in the pipeline.
And everywhere else that we sell has again, we were selling what we were producing and up until the second quarter in Europe , North America, Latin America Asia Pacific were already depressed so the real driver X X.
<unk> was China.
This most recent downturn okay. Thank you very much.
Thank you.
Our next question comes from the line of <unk> Bank of America. Please go ahead.
Thank you very much if the.
Impact on <unk> and Q3 is gonna be 35, 90, <unk> can you provide the numbers for Q1 and Q2. Please.
Roger we laid out for Q2. It was it was 25 million approximately an S. In the lower level for Q1, excluding the impact of the Atlas in in the case of then.
I didn't I missed that sorry, and then other otherwise.
Take my mind's been increasing substantially sequentially 14 per cent of nine per cent of you mentioned, so and you've been running your payment plan set lower rates to manage inventory you smoke about 70% of maybe that was for the entire system. So I mean is this because you had a large pigment inventory at December 31st that you're Gonna drive.
This increase in pigment by them sequentially like you're still having to run at low rates and if that is the case you know how should we think about 20 twenty-two EBITDA of 875, which presumably.
Would have benefited from overproduction or a benefit from.
French class absorption.
So Roger.
Recall, what we said in the fourth quarter with that we were going to bring down our our operating rates to align more closely with the market, but we didn't bring it down to align with that 35% year on year decline because that level. We did not believe what's sustainable and we've been right about that Q4 was the trough and we've seen tio to rebound from there.
So we've expected a continued step up in and pigment tons from that level. So we we've always been working to balance the replenishment of some of our inventory at your end, which was needed because we were well below safety stocks earlier in 2022, and then and then also planning for the expected demand to come as we mentioned.
The second quarter saw 9% increase versus what we had previously thought might be the high mid to high teens per cent increase so now instead of increasing the operating rates as we previously anticipated or keeping them lower end, so managing that inventory. So it's all it's all a trade off between.
Mean, looking at our cash inventory Bill and short term impacts to EBITDA, but again. These are these are just charges that were incurring in the short term. We believe it's the right decision to manage and generate a higher cash and the leverage our business will be significant when we ran back up our operations will see savings from the projects we've been investing in well.
I see the margin improvement and all of that will come back quickly as we as we bring the assets back up and what we think about where our inventory is now it's above seasonal norms, but.
<unk>. That's another reason why we were expecting a bigger uptick in the third quarter. Then we then we're seeing so we talked about flattish. So we've maintained our volumes at the same production level that we had in the second quarter and when we start thinking about if there is a built in the first quarter of <unk> I mean in the fourth quarter for the first quarter.
Coating season will still have enough inventory, where we can meet that uptick if there is one and when we see that pick up we would then start pulling production back up.
Thank you very much.
Thank you. Your next question comes from the line <unk>. Please go ahead.
Good morning, John and Jeff.
You don't want it to revisit the 35 million dollar charge you guys are talking about for Q3.
I didn't know whether you'd be able to sort of parse it out for me because obviously you guys are talking about.
Flat sequential T. I O two volumes. So obviously, you know production isn't going down over there. So so to me obviously it I'd hate is primarily from the mining operations and then you're obviously guiding 215 to 20000 tons of Laura Zircon volumes and you know I understand that's a high volume.
A high margin business with you guys and if I were to sort of run my number is you know based on some estimates I'd like to think that that 15 to 20000.
Dawn reduction in zircon volumes, maybe around a 20 million dollar hit to EBITDA. So I'm just trying to understand you know the different components of that $35 million.
Well the 20 million.
That you referenced on zircon is not part of the 35 anyway. So the $35 million does that let's just talk about fixed costs absorption on that T. O. Two side again, we were anticipating moving into Q3 that we would see a pickup. We also thought the Q2 was going to be more like 14, 13, 14% as opposed to nine so the.
Options that we had were that we were going to increase production as we saw demand increasing and we didn't see it to that level. So John reference. This 70 per cent ish kind of capacity utilization, which at this particular stage, we will probably continue to run it through Q3, which is having an impact.
On fixed costs absorption per tio to drive anyway, Yeah, no no that's exactly right and.
When you ask about our when we arrange a 115 and 135 the range was primarily related to zircon volumes.
Understood and and you know as a follow up where do you guys stand now obviously, you know market conditions sort of having moved away. They have and we're all sort of obviously learning of the impact but in terms of just you guys is view off the trough earnings power of the company I mean, you know it just seems that everyone.
The rain sort of.
You know it keeps getting more volatile right I mean, if I were to go buy you 115 to 135 million Q3 guidance that would imply annualized 460 to 540 million. If I were just sort of credited for that $35 million you hit that you guys are giving.
On an annualized basis that would imply $600 million to $680 million, you know and and quote unquote sort of trophy, but does so where where do you guys stand with your views around the 12th.
Yeah, I I don't think we've changed our view on where we think trough EBITDA is going to be you know if you start on this year. We did have and go through a couple of one off challenges primarily relating to outlets in case, it and that that is lowering the base of where we're starting from but as.
He also known we've chat about this entire call. We are up against market dynamics that are unprecedented from our view and and we don't have a lot of control over.
We did think that more demand would materialize from China, which it hasn't and that's at the big driver of both our T. I O two and zircon <unk>.
Performance and outlook for the rest of the year.
We don't think it's gonna stay depressed from these levels and we we do think we are past John mentioned, the mid point of the cycle and will expect you know to crawl out of them, where we are today.
Yeah, I I think the short answer is we do not believe where we are today as a multiplier by four to come to an annualized number and.
We use the recession word downturn pick the word you Wanna use.
We believe the teo to industry leaders in and out of one we believe we're in one and we're much further or much closer to a recovery.
So we still believe in the long term dynamics of this business to the points that were brought up on this call around the reality is our customers have managed their inventories down T. I O. Two has not been displaced at the rates that they know our sales have been the spice, it's not a permanent thing and we do believe the mark.
It is going to recover.
You know the zircon piece, which was quick at Johns point is the one that probably.
For this quarter was the most significant one and the one that turned the quickest then.
As recently as June the market was.
Looking at what was much stronger than it is in July is for sure the bottom with regards to our our what we're seeing on demand yeah, <unk> I'd like to finish on a positive note that would add to that and it's the rare hurt I mean this is a business that is growing.
Very fast the demand for <unk> material is very strong and will be very strong with the electrification of the world and thrown up is well positioned to become a key player on that space.
And I would also help you know be a bit counter cyclical two <unk> business.
Very helpful. Thank you so much.
Thank you there are no further questions at this time I'd now like to turn to call back as I can <unk> <unk> executive opposite of finally closing my mind.
Thank you Laura and thank you for joining the call every one or key priority for 2023 remain on change we will maintain a relentless focus on sustainability and safety continue to align production with customer demand and prudently reduce cost.
Accordingly manage our T capital project without losing sight of the longterm benefit to Toronto acts, including reducing our cost per ton and <unk> working capital and free cash flow in the current market enthronement, that's conclude or call have a great day. Thank you.
Thank you thanks, ladies and gentlemen does conclude your conference call for today <unk>. Thank you for participating and ask that you. Please disconnect your lines.