Q3 2023 Tronox Holdings PLC Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Tronox Holdings Q Free 2020 free earnings call. At this time all lines are in listen only mode. Following the presentation, we will conduct a question and answer session.
Anytime during the cold if you want immediate assistance. Please press star zero for a breakthrough system. This call is being recorded on Thursday October 26 tons 20 free.
I'd now like to turn the conference over to Jennifer Gunther Chief Sustainability Officer, I'm head of Investor Relations and financial planning. Please go ahead.
Thank you and welcome to our third quarter 2023 conference call and webcast turning to slide two on our call today are John Romano and John Friends Water, 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 Dot com 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 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 companys performance.
Reconciliations to their nearest U S. GAAP terms are provided in our earnings release and in the appendix of the accompanying presentation. Additionally.
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 is now my pleasure to turn the call over to John Romano, John Thanks, Jennifer and good morning, everyone. On slide four we've included an introductory overview of Tronox as a reference for anyone who may be newer to our story for more information. Please visit our website.
We also have a video on our homepage that does a great job of outlining the value that we bring to our customers through our vertically integrated.
Hannibal mining and upgrading solutions.
Before turning the call over for our first quarter highlights I want to briefly comment on the situation in the middle East while our exposure is minimal our hearts go out to those impacted by the conflict and we offer our support to those who are affected.
Now, let's turn to slide five to review a few key messages from the quarter.
We delivered third quarter performance within expectation, despite softer market conditions by maintaining an unrelenting focus on managing what is within our control.
Q3 saw relatively modest pricing declines across both tier two and zircon is expected. Despite depressed market volumes. This is a direct result of tronox is differentiated offering and the value customers place on tronox as a supplier.
T O two volumes improved sequentially in the Americas, while volumes worse sequentially weaker than other regions. Most prominently in the Europe Middle East and Africa.
This contributed to an overall weaker demand environment in Q3 than anticipated.
<unk> sales volumes recovered in August and September from the low level seen in July as anticipated and communicated on our last earnings call.
While overall market demand levels remain muted we are confident that the July represents the trough as inventory levels are relatively normal throughout the supply chain.
On the operational front, we are continuing to prudently manage utilizing rates at our pigment mining and upgrading sites as a result of lower customer demand to reduce inventory levels and generate cash.
At our Butler T O two facility, we experienced a supplier outage that resulted in our plant being taken offline in September.
We have been working closely with our supplier I believe the plant will be restarted by November the 11th.
Importantly, this is not disrupted our ability to fulfill customer demand as we had sufficient inventories on hand due to our ability to reposition product from other facilities as the benefit of our global asset footprint. We have however incurred incremental charges from unexpected downtime due to unabsorbed fixed costs and idle facilities charges and we will provide.
Further details on that a little later in the call.
Our finished goods inventory decreased in the quarter, driven primarily by lower pigment inventory, partially offset by higher zircon inventories as Atlas ramped up against a backdrop of softer market demand.
Additionally, in the third quarter, we bolstered the balance sheet by proactively raising of $350 million incremental term loan the proceeds of which were used to enhance available liquidity and will enable us to prepare for critical vertical integration capital expenditures in 2024.
This is a demonstration of our commitment to balancing the medium and long term strategic needs of the business to position <unk> for future success, while ensuring we're making the right decisions to manage what is within our control in the short term against the current macroeconomic landscape.
Our performance quarter after quarter is made possible by our tronox team to whom we extend our thanks and for their dedication and commitment.
On slide six we will review a few updates on some of our key sustainability initiatives.
First the solar project in South Africa, with South African independent power producer Solar group continues to progress and construction remains on track to be completed completed in December of 2023 delivery of first power as expected April 1st of 24. This is an incredibly impactful project for Tronox and our progress.
Toward reducing our carbon emissions.
We're running a full power will convert approximately 40% of our electricity to solar power in South Africa and is expected to reduce our global emissions intensity by 13% against our 2019 baseline.
Renewable power projects remained the highest return highest impact opportunities in progressing towards our stated greenhouse greenhouse gas emissions reduction targets, we are exploring green energy opportunities at all of our sites around the world.
We are also progressing in other areas of sustainability as well, including reducing waste through external landfills. Our R&D teams are currently exploring alternative uses for waste in a number of opportunities, including cement road base bricks and water treatment chemicals Adil.
Additionally, we're continuing to evaluate opportunities to extract valuable minerals and metals from waste, including rare Earths scandium in vanadium.
We firmly believe that these initiatives and many others ongoing at Tronox will continue to be key not only preserving our privilege to operate but differentiating tronox for key stakeholders. We look forward to continue updating you on our journey.
Now, let's move to slide seven for a review of second quarter financial performance in more detail.
Revenue of $662 million declined 17% sequentially due to lower pricing and sales volume across all products. This represented a decline of 26% relative to the prior year due to continued market softness income from operations was $32 million in the quarter and we have reported a net loss in the quarter.
$14 million or normalized Q3 effective tax rate was 14% adjusting for non benefiting items and our adjusted diluted loss per share was eight adjust.
Adjusted EBITDA for the quarter was $116 million and our adjusted EBITDA margin was 17, 5%.
Free cash flow in the quarter was a use of $37 million.
Now, let's move to slide eight for a review of our commercial performance.
T Ao two revenue decreased 9% versus the second quarter, driven by a 5% decrease in sales volume and a 4% decrease in average selling prices.
<unk> sales volumes declined 14% compared to a year ago quarter, while average selling prices decreased 5%, partially offset by a 2% tailwind from favorable exchange rates.
The modest decline in <unk> pricing relative to volume levels continues to prove tronox differentiated position and the success of our commercial strategy.
Zircon volumes decreased 61% compared to the second quarter, representing a 71% decline year over year due to significant market sources market softness experienced in July as a result, zircon pricing was lower by 4% compared to the prior quarter, which represented a decrease of 3% year over year.
Revenue from other products were $71 million, a decrease of 24% to the prior year, largely driven by lower pig iron pricing and volumes. This was partially offset by higher sales of rare earth, which improved 27% year over year.
As a result of our unique portfolio. We are currently evaluating a range of options to leverage our expertise to further unlock the value of the <unk> generated from our mining operations in South Africa and Australia.
Our differentiated integrated positions sets us apart as a global leader in sustainable mining and upgrading solutions.
Looking ahead to the fourth quarter.
We expect pigment volumes to be relatively flat compared to the third quarter. This represents an approximate 20% increase compared to trough levels realized in the fourth quarter of 2022.
We anticipate little to no seasonality in the fourth quarter as we believe customers have largely completed destocking. We do believe that we will see some restocking in the fourth quarter as customers prepare for 2024, which is reducing some of the seasonality impact we expect that more stable pricing trends over the last year compared to the previous years.
A demand decline will continue.
On zircon, we expect volumes to continue to recover substantially from the third quarter of 2023 trough levels. We strongly believe in our 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 J F. Thank you John and good morning, turning to.
Slide nine our adjusted EBITDA of $116 million represented a 53% decline year on year, driven by lower sales volume lower product pricing and unfavorable fixed cost absorption due to lower production rate.
This was partially offset by favorable exchange rate tailwind lower freight costs and lower corporate costs.
<unk> adjusted EBITDA decreased 31% due to lower product sales volume and lower average selling price and unfavorable fixed cost absorption due to lower production rate. This was partially offset by lower freight costs.
Favorable exchange rate tailwind and lower corporate costs.
As John mentioned, we are continuing to run our operating site at the reduced rate as a result of lower demand levels in order to manage inventory and cash as a result year over year production cost stay increase of $43 million in.
Include $13 million of higher costs associated with lower absorption and higher input costs and $13 million of lower cost or market and hydro facility charge due to lower production rate.
Looking to the fourth quarter as a result of the market dynamic John previously outlined we anticipate adjusted EBITDA to be 105 two.
$225 million.
Turning to slide 10.
We will continue to balance the medium 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 macroeconomic landscape. This include disciplined action to reduce costs optimizing our fixed costs and driving additional supply chain initiatives. We are prudently managing working capital this quarter, we reduce being meant that.
Inventory, though we built feedstock and zircon inventory.
As a reminder, our mining and upgrading assets have higher fixed costs than our pigment fight, but while we have reduced production level as a result of current market demand we.
We are balancing running at optimal rate and we will as a result build some inventory.
While our long term strategy.
Yet is to be approximately 85% vertically integrated on feedstock as a result of the current lower T. Ao two production level driven by customer demand, which was down 30% year on year in Q1, 21% year on year in Q.
Two and 14% year on year in Q3, we are continuing to run our pigment asset at lower rate.
This has resulted in higher costs this year, which will continue in the fourth quarter.
On capital expenditure as we have highlighted previously we will invest approximately $217 million this year to adapt to the macroeconomic environment as it on foil by delaying investment primarily associated with volume.
<unk> will not require in the short term.
While this will delay our ability to realize the benefit 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 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.
Okay.
I wanted to briefly provide our latest comment on Japan.
As we have disclosed in our finding.
Feeling the original Javan option agreement expire on May 10, 2023.
We extended our agreement with task knee such debt until November 1st 2023, all chloride slag produced by the swagger.
Will be delivered to tronox as repayment in kind of the $125 million tronox loaned to the project.
We receive shipment of the chloride slag, which reduce the loan balance and the related accrued interest by $27 million in the third quarter.
Full repayment of the Tronox loan is required by January 2025 in either cash or in kind through chloride slide delivery.
Tronox and test knee. Additionally agreed to extend the term of the technical service agreement to November 1st to enable Tronox continue support to the Japan smelter complex, while negotiations are going on.
We will keep the market update on the status.
Before I turn the call over I would like to provide a few word on yesterdays announcement of my upcoming retirement I'm extremely honored to have played a part in tronox transformation over the last 10 year.
I strongly believe the company has never been better position to continue navigating the current environment and generate meaningful value for shareholder.
I look forward to the future ahead for Tronox and I wish John the best as he takes over.
Absolute confidence he is the right choice to continue to lead the company.
I would like to thank the board John and my colleagues for an incredible journey at Tronox is the effort of all of our employees that make tronox. What it is today and with John's vision and leadership. This will continue to evolve for the better.
I will now turn the call over to John <unk> for a review of our financial position John.
Unknown Executive: Good morning ladies and gentlemen and welcome to the Tronox Holdings Q3 2023 earnings call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session.
J F and congratulations we are all grateful for their invaluable contributions you have made to tronox.
Turning to slide 11, we ended the quarter with total debt of $2 8 billion and net debt of $2 6 billion. Our net leverage at the end of September was four eight times on a trailing 12 month basis.
Unknown Executive: At any time during the call, if you require immediate assistance, please press star zero for off-roader assistance. This call is being recorded on a Thursday, October 26, 2023.
The incremental term loan of 350 million raised in the third quarter reinforced the strength of our balance sheet and bolstered available liquidity ahead of anticipated critical vertical integration integration related capital expenditures in 2024.
Jennifer Gunn: I would now like to turn the conference over to Jennifer Gunn for Chief, Sustainability Officer, and Head of Investor Relations and Financial Planning. Please go ahead. Thank you and welcome to our third quarter 2023 conference call and webcast.
This transaction increased total available liquidity by approximately $350 million, while net leverage remain net neutral as we use the proceeds to pay down outstanding borrowings on our revolving credit facilities with the remaining going to cash.
Jennifer Gunn: Turning to slide two, on our call today are John Romano and John Francois Torgion, Co-Chief Executive Officers, and John Srievisal, 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.tronox.com.
Our nearest term significant maturities remained too that in 28, and we have no financial covenants on our term loans or bonds.
We maintain interest rate swaps such that approximately a 73% of our interest rates are fixed through 2024, and approximately 64% are fixed or in 2024 through 2028 aligning with the mature do you of our term loans.
Jennifer Gunn: Moving to slide three, a friendly reminder that comments made on this call and the information provided in our presentation and on our website includes 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. Company undertakes no obligation to update or revise any forward looking statements.
Total available liquidity as of September 30th was $726 million, including $246 million in cash and cash equivalents, which is well distributed across our global operations.
Capital expenditures totaled $54 million in the quarter.
Jennifer Gunn: During the conference call, we will refer to certain non-USGAP financial terms that we use in the management of our business and believe are useful to investors in evaluating the company's performance. Reconciliation to their nearest USGAP 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-rear basis unless otherwise noted.
Currently 55% of this was for maintenance and safety and 45% was for strategic growth projects.
Depreciation depletion depletion and amortization expense was $67 million for the quarter.
As John mentioned earlier, our free cash flow with a use of $37 million.
We reduced our pigment inventory levels in the quarter.
Setting this benefit was increased feedstock levels due to lower pigment plant production as well as higher zircon inventories as Atlas ramped up against a backdrop of softer market demand.
John Romano: Moving to slide four is now my pleasure to turn the call over to John Romano. Thanks, Jennifer. Good morning, everyone.
John Romano: On slide four, we've included an introductory overview of Tronox as a reference for anyone who may be newer to our story. For more information, please visit our website. We also have a video on our home page that does a great job of outlining the value that we bring to our customers who are vertically integrated, sustainable mining and upgrading solutions.
We returned $19 million to shareholders in the form of dividends.
Moving to slide 12.
Based on our current view that John and Jay outlined we anticipate fourth quarter, adjusted EBITDA to be honored and $5 million to $125 million.
John Romano: Before turning the call over for first quarter highlights, I want to briefly comment on the situation in the Middle East. While our exposure is minimal, our hearts go out to those impacted by the conflict and we offer our support to those who are affected.
Pivoting to our expectations for our 2023 cash uses.
Our working capital assumption increased to a use of approximately $185 million. While we are continuing to actively manage working capital, including continuing to reduce pigment inventories through year end. The increase as a result of the softer market conditions driving higher than expected zircon inventory levels.
John Romano: Now let's turn to slide five to review a few key messages from the quarter. We delivered a third quarter performance within expectation despite softer market conditions by maintaining an unrelenting focus on managing what is in within our control. Q3 saw relatively modest pricing declines across both TI2 and Zircon as expected, despite depressed market volumes. This is a direct result of Tronox's differentiated offering and the value customers place on Tronox as a supplier.
Our net cash interest expense is expected to be 125 million, our cash taxes are expected to be approximately $40 million and our capital expenditures are expected to be approximately $270 million for the year.
We remain focused on delivering on our commitments I.
I will now turn the call back over to John Romano for a few closing comments before we get to questions. John Thanks, John.
John Romano: TI2 volumes improve sequentially in the Americas, while volumes were sequentially weaker in other regions, most prominently in the Europe, Middle East and Africa. This contributed to an overall weaker TI2 demand environment in Q3 than anticipated. Zircon sales volumes recovered in August and September from the low level seen in July as anticipated and communicated on our last earnings call. While overall market demand levels remain muted, we are confident that the July represents the Troph as inventory levels are relatively normal throughout the supply chain.
I wanted to also congratulate J F on his upcoming retirement and thank him for being an extremely valuable partner and of course, a positive change in our company over many years, it's been an honor to serve in this role as co CEO together with him and especially with someone for whom I hold an immense amount of respect I am excited about the future for <unk>.
And I'm confident they will be a smooth transition over the next six months and with that we'd like to turn the call over to questions operator.
John Romano: On the operational front, we're continuing to prudently manage utilizing rates at our pigment, mining, and upgrading sites as a result of lower customer demand to reduce inventory levels and generate cash. At our BotlikTO2 facility, we experienced a supplier outage that resulted in our plant being taken offline in September. We have been working closely with our supplier and believe the plant will be restarted by November the 11th. Importantly, this has not disrupted our ability to fulfill customer demand as we had sufficient inventories on hand due to our ability to reposition product from other facilities as a benefit of our global asset footprint.
Thank you we will now begin the question and answer session should you have a question. Please press star followed by the one on your telephone Touchtone telephone you hear of free time prompt acknowledging your question. Your question. We polled in the order. They are received should you wish to decline from the polling process. Please.
Stoffel and point to if.
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Our first question comes from the line of Duffy Fischer at Goldman Sachs. Please go ahead. Your line is open.
Yes, good morning, guys.
John Romano: We have however incurred incremental charges from unexpected downtime due to unabsorbed fixed costs and idle facility charges and will provide further details on that a little later in the call. Our finished goods inventory decreased in the quarter driven primarily by lower pigment inventory, partially offset by a higher zircon inventories as Atlas ramped up against a backdrop of software market demand.
Just a question on your expectations going into the fourth quarter. It seems like you guys are more bullish on volumes for both.
T O two and zircon I think most others have kind of commented they see things continuing to be down can you just walk through you know.
What underscores your belief that volumes will be flat you know what are you seeing in the market.
John Romano: Additionally, in the third quarter, we bolstered the balance sheet by proactively raising a $350 million incremental term loan, the proceeds of which were used to enhance available liquidity and will enable us to prepare for critical vertical integration capital expenditures in 2024. This is the demonstration of our commitment to balancing the medium and long term strategic needs of the business to position tronox for future success while ensuring we're making the right decisions to manage what is within our control and the short term against the current macro economic landscape.
For both zircon MTO too please.
Yeah, Yeah. Thanks, Duffy so on Tio too.
We said relatively flat.
And part of that has to do with <unk>.
The market is already has been significantly down for the last eight quarters, we've seen volumes down and we called the bottom in the fourth quarter of 2022, and we've continually seen that uptick we do believe that.
All of the Destocking has run its course and when we look at our order book for the fourth quarter.
John Romano: Our performance quarter after quarter is made possible by our tronox team to whom we extend our thanks and for their dedication and commitment.
At reference too little to no seasonal demand that we're seeing some areas in areas like Asia Pacific, where our volumes are actually up in the fourth quarter. So is that because the market has recovered significantly no part of it is just because customers are starting to order again, so we feel pretty confident in where we are at this.
John Romano: On slide six, we'll review a few updates on some of our key sustainability initiatives. First, the solar project in South Africa with South African independent power producer solar group continues to progress and construction remains on track to be completed completed in December of 2023 delivery of first power is expected April 1st of 24. This is an incredibly impactful project for tronox and are progress toward reducing our carbon emissions. Running a full power will convert approximately 40% of our electricity to solar power in South Africa and is expected to reduce our global emissions intensity by 13% against our 2019 baseline.
Dave's, where a third of the way through the quarter, we've got good visibility and.
Where our order book is at this particular stage I mean, there is a range that we provided but at this particular stage on the volume side of the equation. We are continuing to see things move in the right direction as we move into <unk>.
First quarter next year, and we'll provide more guidance on 'twenty four but we're cautiously optimistic that we're moving in the right direction for our recovery on tier two.
John Romano: Renewable power projects remain the highest return highest impact opportunities and progressing towards our stated greenhouse greenhouse gas emissions reduction targets. We are exploring green energy opportunities at all of our sites around the world. We are also progressing in other areas of sustainability as well, including reducing waste through external anfills. Our R&D teams are currently exploring alternative uses for waste in a number of opportunities, including cement, road base, bricks and water treatment chemicals.
Zircon.
Third quarter was the lowest quarter we've had.
And many many years and when we think about where we are we called the bottom in July we saw volumes pick up significantly in August and September and so when we look at the fourth quarter based on our forward order book, our volumes are expected to be up over the third quarter by more than 50%. So we're coming from a very low base.
John Romano: Additionally, we're continuing to evaluate opportunities to extract valuable minerals and metals from waste, including rare earth, scandium and benedium. We firmly believe that these initiatives and many others ongoing at tronox will continue to be key and not only preserving our privileged operate, but differentiating tronox for key stakeholders.
But those volumes are up and we feel confident what those numbers are looking like in the fourth quarter at this stage. So I hope that answered your question.
No that is helpful. Thank you and then.
On the comment did I hear that right working capital is going to eat a $185 million in cash this year and if that's right what do we need to see next year for that to be released.
John Romano: We look forward to continue updating you on our journey.
John Romano: Now let's move to slide 7 for review of second quarter financial performance in more detail. Revenue of $662 million to client 17%, sequentially due to lower pricing and sales volume across all products. This represented a decline of 26% relative to the prior year due to continued market softness.
Yes, definitely that's correct. We are gaining 185 million used for the full year. Obviously, we do expect Q4 to be a generator of cash you have gone through L. P. M that first nine months of the year, we're roughly at $218 million a year. So we will have a benefit for the fourth quarter.
John Romano: Income from operations was $32 million in the quarter and we have reported a net loss in the quarter of $14 million. Related loss per share was 8 cents. Adjusted even off of the quarter was $116 million and our adjusted even on margin was 17.5%.
We do see.
We have managed our inventory down pretty pretty well, so we brought down production levels.
But frankly the driver here on inventory as we mentioned is the zircon market. So continue to produce obviously, we're running our mines.
Zircon is a product that comes out of it we're building inventory by roughly 50 million build in the second half of the year, that's driving that so as we look towards Q2.
John Romano: Free cash low on the quarter was a use of $37 million.
John Romano: Now let's move to slide 8 through review of our commercial performance. TiO2 revenue decreased 9% versus the second quarter driven by a 5% decrease in sales volume and a 4% decrease in average selling prices. TiO2 sales volumes declined 14% compared to a year ago quarter while average selling prices decreased 5%, partially offset by a 2% tailwind from favorable exchange rates.
2024, we do expect to be working capital to be a use obviously I'm sorry.
Working capital to be a source of cash for 2024.
As we do expect as John mentioned, we do expect the market to recover so we do expect to sell the inventory draw that down.
And generate significant cash.
And Duffy I would add we obviously, it's a zircon, but it's also high grade feedstock because we have slowed down our mine, but we have not slowed them down as much as our pigment plant and because of that we have built some feedstock right. Obviously, you brought down pigment production, but we're not using the feeds.
John Romano: The modest decline in TiO2 pricing relative to volume levels continues to prove Tronox differentiated position and the success of our commercial strategy. Zircon volumes decreased 61% compared to the second quarter, representing a 71% decline year over year due to significant market softness experienced in July. As a result Zircon pricing was lower by 4% compared to the prior quarter, which represented a decrease of 3% year over year. Revenue from other products was $71 million, a decrease of 24% to the prior year, largely driven by lower pig iron pricing and volumes. This was partially offset by higher sales of rare earths, which improved 27% year over year.
So that's building this year as well.
Great. Thank you guys.
Thank you. Our next question comes from the line of David Bank leads.
I'll switch bank. Please go ahead your own monocytes.
Thank you good morning, just going back to the Q4 volume expectations.
And two how good is your visibility and you mentioned some potential restocking.
How confident are you on that occurring either in Q4 or Q1.
John Romano: As a result of our unique portfolio, we are currently evaluating a range of options to leverage our expertise to further unlock the value of the rarest generated from our mining operations in South African Australia. Our differentiated integrated position sets us apart at the global leader and sustainable mining and upgrading solutions.
Well look we provided guidance for Q4 and again based on our forward order book at this particular stage of what we're seeing in the month of October which is largely passed we're seeing some of that rebuild happening again.
It's not happening in every region so.
That those that rebuild is having an impact or dampening effect on what we would normally see as seasonal demand down downturn. So in a normal year and again you got to go back a while to find a normal year, but I'd say high single digits kind of a.
John Romano: Looking ahead to the fourth quarter, we expect pigment volumes to be relatively flat compared to the third quarter. This represents an approximate 20% increase compared to trough levels realized in the fourth quarter of 2022. We anticipate a little to no seasonality in the fourth quarter as we believe customers have largely completed destocking. We do believe that we will see some restocking in the fourth quarter as customers prepare for 2024, which is reducing some of the seasonality impact.
Decrease in demand in the fourth quarter for seasonal adjustments, we're seeing nothing in that range. So a lot of it has to do with customers, having destock significantly and having to start rebuilding some of the inventory. So I'd say in some areas, it's going back to normal buying patterns.
John Romano: We expect that more stable pricing trends over the last year compared to the previous years of demand decline will continue. On zircon, we expect volumes to continue to recover substantially from the third quarter of 2023 trough levels. We strongly believe in our strategy of being vertically integrated in the value that our zircon provides to our customers.
They have not been on for more.
More than three quarters and John will get ahead, obviously Q3 was a very low volume quarter. So that's why being flattish for Q4 is.
JF Torgion: I'll now turn the call over to jf for review of our operational performance, jf. Thank you, john. And good morning, turning to slide nine or adjusted EBITDA of $116 million represented a 53% decline year on year driven by lower sales volume, lower product pricing and unfavorable six costs absorption due to lower production rate. This was partially offset by favorable exchange rate tailwind, lower freight costs and lower corporate costs. Sikwenshaly adjusted EBITDA decreased 31% due to lower product sales volume, lower average selling price, and unfavorable fixed costs at function due to lower production rate.
It's not a great quarter.
Yes.
Understood that's helpful and just on the Capex for next year.
Can you talk to the increase and is there any potential for further delays with the <unk>.
Macro remains where you can get some more challenging from here. Thank you Luke.
Maybe I can cover that look we we obviously wanted to be in a good position to continue to invest in our vertical integration and we had a couple of project in our mine in South Africa that will create a lot of value and when we talk investing in mine Youre talking of.
JF Torgion: This was partially offset by lower freight costs, favorable exchange rate tailwind and lower corporate costs. In order to run or operate in sight at reduced rate, as a result of lower demand level, in order to manage inventory and cash. As a result, year over year production costs increased of $43 million, include $30 million of higher costs associated with lower absorption and higher input costs, and $13 million of lower costs, or market and high-doll facility charge due to lower production rate.
Object that will take couple of year to realize but then they had 10 year of benefit to the company and we will obviously adjust that capital requirement based on what we will see the economy of the world do we always said, we have some flexibility with our capital, but there is some good.
Project that will add value to the business that we consider doing at the moment based on what we're seeing I mean, we we expect 2024 to be better than 2023, I mean, we call the downturn for Tio too in Q4, 2022, and we're still commit that that was the case.
And the downturn for zircon was in Q3 this year and we're seeing things improving and we expect 24 that will continue to improve for zircon as well.
There was some sort of unforeseen event of war escalated somewhere and we needed to make adjustment, we do have flexibility on that $3 50, and we would adjust accordingly.
JF Torgion: Looking to the fourth quarter, as a result of the market dynamic, John previously outlined, we anticipate adjusted EBITDA to be $105 to $125 million. Turning to slight dent, we will continue to balance the medium 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 macroeconomic landscape. This includes discipline action to reduce costs, optimizing our fixed costs, and driving additional supply chain initiatives.
Obviously, you guided to 70 for this year and as John as John mentioned, we expect to in the mid three hundreds next year not at the levels that we had in 2022, but we do have flexibility even in that $3 50 number.
Very good thank you.
Yeah.
Thank you. Our next question comes from the line of John Spencer at UBS. Please go ahead your line of sight.
Yeah.
Yeah, Hey, guys. Thanks for taking my question.
Thanks, Jeff for all the contributions over the years and congrats John.
So I wanted to ask on the fourth quarter guidance on volumes, but on the EBITDA side.
So if you see a 50% uptick in zircon my math is it that kind of gets me to the top end of your guidance alone.
So I'm just wondering within the other puts and takes outside of tier two volumes is there something else you're assuming on price or is there some additional roll through of cost because of the idled facility charges that ramps in the fourth quarter and how would that progress into early next year.
JF Torgion: We are currently managing working capital. This quarter, we reduce pigment and inventory, though we build feedstock and zircontinventory. As a reminder, our mining and upgrading asset have higher fixed costs than our pigment fight. While we have reduced production level as a result of current market demand, we are balancing running at optimal rate, and we will, as a result, build some inventory. While our long-term strategic target is to be approximately 85% vertically integrated on feedstock as a result of the current lower TIO2 production level driven by customer demand, which was down 30% year on year in Q1, 21% year on year in Q2, and 14% year on year in Q3, we are continuing to run our pigment asset at lower rate. This has a result in higher costs this year, which will continue in the fourth quarter.
Yes, I think that the key drivers of the the range for our Q4 EBITDA Guide is primarily commercial so.
You're right Josh that obviously pricing is going to play a part of it outside of these archon volumes are big driver. There also is as we've mentioned earlier, we did have an outage at <unk> due to our supply iron next door and that's really a driver as well it's $5 million in Q3, and so just depending on we expect it to get up in November 11th and a couple.
A day is now couple.
A couple of weeks now but.
You know that.
It may create.
Some further burden depending on Monday.
That's a third party provider of steam, which we need to actually finish the pigment. There. So we believe and we have confidence in what they've been telling us on coming up on November the 11th but that's definitely something that could create some sort of variance in that number.
Okay. Thanks, and just kind of looking into early next year, not necessarily anything volumes or price related but more of the cost side I guess with how you're operating your mines I guess I just want to understand that you guys kind of changed how they operated mid this year youre, taking more charges now as we look at your plan.
JF Torgion: On capital expenditure, as we have highlighted previously, we will invest approximately $217 million this year to adapt to the macroeconomic environment as it on foil by delaying investment primarily associated with volume growth not required in the short term. While this will delay our ability to realize the benefit 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.
Into next year does that burden increase or decrease on your EBITDA as we think about the first half next year versus second half this year.
Yes, I think one of the things.
A question that came earlier about working capital. The other issue that's impacting working capital is also the cost of our inventories. So our costs have definitely gone up and it takes a little bit of time to work that through so we're still going to see we're going to be burdened with higher costs from the inventory that we have in the system as we make that high grade feedstock that ultimately goes into our T O two production so.
It will take a little bit of time for that to work its way through the system. John did you want to transact.
Exactly the answer.
JF Torgion: I want to briefly provide our latest comment on Jazzan, as we have disclosed in our finding, filing the original Jazzan option agreement expire on May 10, 2023. We extended our agreement with Tasney, such that until November 1, 2023, all chloride slag produced by the slagger will be delivered to Tronox as repayment in kind of the $125 million Tronox loan to the project. We received shipment of the chloride slag which reduced the loan balance and the related accrued interest by $27 million in the third quarter.
Got it alright, thanks, guys.
Thank you. Our next question comes from the line of John Mcnulty with BMO capital markets. Please go ahead your own monocytes.
Yes. Thanks for taking my question, maybe just a follow up to Josh is call. So.
Yes, I think you said earlier that <unk> had about a $38 million hit tied to higher fixed cost absorption and it seems like that's that's something that's going to going to continue to drag on to your point, you've got high cost inventory to work through.
Is this something that based on the higher inventory levels that you have on the ore front that can drag through most of 'twenty four or is that too draconian in terms of how we think about kind of the pressures that that that high cost inventory.
JF Torgion: Full repayment of the Tronox loan is required by January 2025 in either cash or in kind through chloride slide delivery. Tronox and Tasney additionally agreed to extend the term of the technical service agreement to November 1, to enable Tronox continue support to the Jazzan smelter complex while negotiation are going on.
High fixed cost absorbed inventory works its way through the system I guess, how should we be kind of gauging that as we look to next year.
Yes, yes, John good question, and I'd say you'd be at.
At three year, and we'd expect that cost to flow off in.
Our results within the first 454 to five months of next year.
And it's not just feedstock John either.
JF Torgion: We will keep the market update on the status.
We've been pretty open about how we're running our assets on the tier two sided 70% capacity utilization. So as we start to see the market picking up we will start to ramp those plants back up and that fixed cost absorption from those finishing facilities will start to come down.
JF Torgion: Before I turn the call over, I would like to provide a few words on yesterday announcement of my upcoming retirement. I'm extremely honored to have played a part in Tronox transformation over the last 10 years. I strongly believe the company has never been better positioned to continue navigating the current environment and generate meaningful value for shareholder.
And quite frankly, there are some assets that were already starting to move up in response to some of the things that were seeing but were still.
Running those assets well below full capacity.
Got it Okay. That's helpful. And then maybe just a little bit of color. I think you had mentioned in one of the responses just that you were actually starting to see some demand pull in Asia, and it's and it's probably not demand driven as more restock it sounded like but I guess do you have clarity or do you have much comfort in where.
JF Torgion: I look forward to the future ahead for Tronox and I wish John the best as he take over having absolute confidence he is the right choice to continue to lead the company. I would like to thank the board, John and my colleagues, for an incredible journey at Tronox. It is the effort of all of our employees that make Tronox what it is today and with John's vision and leadership, this will continue to evolve for the better.
Inventory levels are in Asia, or any of the major regions and how much below normal they may be at this point is there is there a way to kind of give us a little bit of color around that.
Well I think the simplest thing is that from our salespeople and the engagement that we have out with our customers they do get out and have Barry.
John Srievisal: I will now turn the call over to John Frivisal for a review of our financial position, John. Thank you, J.F, and congratulations. We are all grateful for the invaluable contributions you've made to Tronox. Turning to slide 11, we ended the quarter with total debt of 2.8 billion and net debt of 2.6 billion. Our net leverage at the end of September was 4.8 times on a trailing 12 month basis. The incremental turn loan of 350 million raised in the third quarter reinforced the strength of our balance sheet and bolstered available liquidity ahead of anticipated critical vertical and graded integration related capital expenditures in 2024.
A lot of dialogue with customers, where our inventory is I think at the end of the day.
There's there's still pricing activity going on there and when we start to pull back from request to reduce price and customers continue ordering at the same levels that gives you an idea that you are towards the end of what typically tends to be a downturn. So it's our belief that customer destocking.
John Srievisal: This transaction increased total available liquidity by approximately $350 million, while net leverage remained net neutral as we use the proceeds to pay down outstanding barrings on our revolving credit facilities with the remaining going to cash. Our nearest term significant maturity is remained in 2008 and we have no financial covenants on our term loans or bonds. We maintained interest rate swatch such that approximately 73% of our interest rates are fixed through 2024 and approximately 64% are fixed from 2024 through 2028, aligning with the maturity of our term loans.
<unk> has run its course orders are picking up I mean, even in China, we're seeing orders picking up that's not because China has rebounded significantly it's because our inventories and the inventories inside the industry there have gotten to a low level. It's not sustainable. So I think there is an element I mean, India for instance, India is still a very strong market.
For us that's an area, where there's a significant amount of Chinese exports that go into India, but our volumes and Andy are continuing to be strong and it's one of the bright spots.
Got it okay. Thanks for the color on J F. Congratulations.
<unk> enjoy enjoy the retirement for sure.
Thank you John.
Thank you. Our next question comes from the line of Frank Mitsch Fermium Research. Please go ahead. Your line is open.
John Srievisal: Total available liquidity as of September 30th was $726 million, including $246 million in cash and cash equivalence, which is well distributed across our global operations. Capital expenditures totaled $54 million in the quarter. Approximately 55% of this was remained in some safety and 45% was for strategic growth projects. Depreciation, depletion and amortization expense was $67 million for the quarter. As John mentioned earlier, our free cash flow was a use of $37 million.
Hey, good morning, and let me Echo my congratulations to you J F.
Pleasure working with you and of course looking forward to working with you John.
And you're in your new role.
I'd like to come back to price you indicated that.
The pricing weakness that you saw year over year and sequentially.
It was mainly in Asia, and Latin America I was wondering if you could give a little more color on that.
The pricing.
In North America, and Europe, and you know what your expectations are for the balance of the year and Tio too.
John Srievisal: We reduced our pigment inventory levels in the quarter. Offsetting this benefit was increased feed stock levels due to lower pigment plant production as well as higher zircon inventories as Atlas ramped up against a backdrop of softer market demand.
Yes, thanks, Frank so.
We don't typically have a lot of detail and color on regional pricing, but what you said is accurate right. We saw a lot of lot more movement on pricing activity in Asia Pacific and the middle East and even in Europe.
John Srievisal: We returned $19 million to shareholders in the form of dividends.
John Srievisal: Moving to slide 12, based on our current view that John and JF outlined, we anticipated fourth quarter adjusted EBITDA to be $105 to $125 million.
Yes, there has been what I would say.
Hi.
A fair amount of competitive activity.
In certain areas, where people are still struggling to try to pick up volume and we haven't been responding to those what I would call spot requests for price reduction on the offers that we don't think are reasonable.
John Srievisal: Pivoting to our expectations for our 2023 cash uses, our working capital assumption increased to a use of approximately $185 million. While we are continuing to actively manage working capital, including continuing to reduce pigment inventories through year end, the increase is a result of the softer market conditions driving higher than expected zircon inventory levels. Our net cash interest expense is expected to be $125 million. Our cash taxes are expected to be approximately $40 million and our capital expenditures are expected to be approximately $270 million for the year.
So.
Pricing is still.
Say moving in different regions, North America and size that we haven't seen any price erosion. There has been some but it's been more stable than most regions and in Asia Pacific I would say, we've seen most of the down cycle movement on pricing and not to say that thats going to start moving up.
John Srievisal: We remain focused on delivering on our commitments.
Got it.
In this particular environment in China, specifically, we have seen what we believe to be the bottom on pricing and we have a facility. There that we're now operating at a higher rate because we are seeing stronger demand and you've heard about price increases coming out in China, and we have had some of them have implementation of those price increases in China. So again, it's hard for.
John Romano: I will now turn the call back over to John Romano for a few closing comments before we get to questions. John. Thanks, John.
John Romano: I wanted to also congratulate JF on his upcoming retirement and thank him for being an extremely valuable partner and a force of positive change in our company over many years. It's been an honor to serve in this role as co-CEO together with him and especially with someone for whom I hold an immense amount of respect. I'm excited about the future for Tronox and I'm confident they will be a smooth transition over the next six months.
US to actually pinpoint exactly when we will see that complete bottom on price erosion and when they'll start to when that inflection point is on the upside, but we feel pretty pretty confident about what we said on the call and that is this stability that we've seen considering the volume environment that we're in.
Unknown Executive: And with that, we'd like to turn the call over to questions, operator. Thank you. We will now begin the question and answer session. Should you have a question, please press star followed by the one on your telephone, touch-tone telephone. You will hear a free term prompt acknowledging your request and your question will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by two. If you're using a speaker phone, please list the hands up before pressing any.
We would expect that to continue moving into 2024.
Okay got you.
That's very helpful.
And then and then I'd like to come back to the zircon.
Obviously volumes in July were very much the story and I believe you indicated on the last call.
You anticipated here zircon volumes to be down 15% to 20000, Kt or 10 15 to 20000 tonnes.
Duffy Fisher: Kees. Our first question comes from a line of Duffy Fisher at Goldman Sachs. We've got to head to your line is open. Yeah, good morning guys. Just a question on your expectations going into the fourth quarter. It seems like you guys are more bullish on volumes for both PO2 and Zürkan. I think most others have kind of commented they see things continuing to be down. Can you just walk through what underscores your belief that volumes will be flat?
And I was wondering.
Did that actually come in and can you can you revisit the air pocket that you saw in demand in July how anomalous is that.
How concerned are you about hitting another one of these air pockets.
As we progress through this year into next year.
Yes, so Frank I would say that was anomalous. So we don't expect that to recur you had a significant.
Downturn in China that basically nothing was rebounding there there's a significant amount of our zircon that's consumed there and there was an inflection point where customers started to think that they could actually get price reductions. So they just stopped buying.
Duffy Fisher: What are you seeing in the market for both Zürkan and PO2, please? Yeah, thanks, Duffy. So on PO2, we said relatively flat. Part of that has to do with, the market has already been significantly down for the last eight quarters we've seen volumes down. And we called the bottom in the fourth quarter of 2022 and we've continually seen that uptick. We do believe that all the destocking has run its course. And when we look at our order book for the fourth quarter, that reference to little to no seasonal demand, we're seeing some areas in areas like Asia Pacific where our volumes are actually up in the fourth quarter.
And that was July and we said that we would expect to see that pick back up in August and September.
10 to 15000 tons that we projected to be down we were down a bit more than that.
But what we've seen as we move into the third or the fourth quarter into October and in November as I mentioned the volumes are up.
Significantly from that low end, <unk>, III Q or the third quarter end.
We were expecting volumes to be up more than 50% from that third quarter number.
Okay, great. Thank you John.
Duffy Fisher: So is that because the market has recovered significantly? No, part of it is just because customers are starting to order again. So, you know, we feel pretty confident in where we are at this stage. We're a third of the way through the quarter. We've got good visibility and where our order book is at this particular stage. I mean, there is a range that we provided, but at this particular stage on the volume side of the equation, we are continuing to see things moving the right direction as we move into, you know, first quarter next year, and we'll provide more guidance on 24, but we're cautiously optimistic that we're moving in the right direction for recovery on PO2.
Thank you. Our next question comes from the line of Mike Lee at Barclays. Please go ahead your line of sight.
Great. Thank you. Good morning, just one for me I wanted to go back to the cash and inventory discussion I. Appreciate everything you've said about our focus on managing working capital, but just when I look at the numbers tronox or dollar amount of inventory has gone up for eight consecutive quarters now, whereas most all.
Companies are generating cash this year from working capital. So why is that not the case for tronox or maybe why are you not pulling back production rates, even more to generate faster cash.
Duffy Fisher: On Zürkan, the third quarter was the lowest quarter we've had in many, many years. And when we think about where we are, we call the bottom in July. We saw volumes pick up significantly in August and September. And so when we look at the fourth quarter, based on our forward order book, our volumes are expected to be up over the third quarter by more than 50%. So we're coming from a very low base, but those volumes are up and we feel confident what those numbers are looking like in the fourth quarter of the stage.
Yeah. Thanks for that question I think it's twofold, obviously, a while we have.
Reduced our pigment production down which is driving a significant.
Generator of cash.
Our mining is while we have slowed as well, but as I mentioned earlier zircon is building. So it was about 25 million in the quarter as I mentioned earlier is about $50 million increase for the second half of the year I think part of what you are seeing as well as our input costs continue to remain very high so is significantly elevated from about two years ago I think we.
Duffy Fisher: So I hope that answered your question. No, that is helpful. Thank you. And then on the comment, did I hear the right working capital is going to eat 185 million and cash this year. And if that's right, what do we need to see next year for that to be released? Yeah, and definitely that's correct. We are guiding 185 million use for the full year. Obviously, we do expect Q4 to be a generator of cash, you count through LPM the first nine months of the year, we're roughly at the $218 million use.
Quoted historically, it's over $400 million inquiry.
Increase.
From 'twenty.
2020 to 20 point too so.
That's part of the reason why were we arent seeing while were reduction in total volume is down pricing still remains.
Pretty elevated not dissimilar to our price. Some people have said, it's a bit stickier than it was before it's been similar on the raw materials, but we're starting to gain some traction on that so we're starting to see those raw material prices move down we would expect as we go through the fourth quarter and first quarter next year, we'll continue to see benefits from that.
Duffy Fisher: So we will have a benefit for the fourth quarter. You know, we do see, we have a manager inventory down pretty pretty well. So we brought down production levels. But frankly, the driver here on inventory, as we mentioned, is the Zircon market. So continue to produce, obviously, we're running our minds. Zircon is a product that comes out of it. So we're building inventory, a roughly 50 million build in the second half of the year that's driving that.
And as Jeff mentioned as well the feedstock is a big component of increase so we do slow down our production plans, but we are vertically integrated so we are running our mines in building that.
Feedstock inventory.
Great. Thank you.
Thank you. Our next question comes from the line of Hassan Ahmed of Alembic Global. Please go ahead your line of sight.
Duffy Fisher: So as we look towards Q2024, we do expect to be working capital to be a use. Obviously, I'm sorry, expect working capital to be a source of cash for 2024. As we do expect, as John mentioned, we do expect the market to recover. So we do expect to sell the inventory, draw that down, and generate significant amount of cash, and Duffy I would add we obviously it's it's zircon but it's also high grade feedstock because we have slowed down our mine but we have not slowed them down as much as our pigment plant and because of that we have built some feedstocks right you know absolutely brought down pigment production but we're not using the feedstocks so that's building this year as well. Thank you guys.
Good morning, John and Jeff.
Jeff first of all best of luck wishing you all the best for your retirement.
Unknown Executive: Thank you.
My question first question is around your margins EBITDA margins.
I mean, obviously the margin squeeze has been has been pretty extreme 17, 5% in Q3 of 2003 down from 21, 2% in Q2 and 27, 6% San.
Same period last year.
So my question really is I mean, I would imagine.
The margin squeezes, the fixed cost absorption side of things lower zircon pricing and the like.
But you guys always talk about the virtue of integration you guys are obviously, the most integrated guys out there I'm just trying to get a better sense of what the cost of goods are looking like right now right. I mean, if you guys have seen this sort of a margin squeeze in our reporting 17, 5% EBITDA margins I'd like to.
David Begleiter: Our next question comes from the line of David Begleiter or Deutsche Bank please go ahead to your line is it. Thank you. Good morning. Just go back to the Q4 volume expectations and to how good is your visibility and you mentioned some potential restocking. How confident are you in that occurring either in Q4 or Q1? [inaudible] but you say you know high single digits kind of decrease in demand in the fourth quarter for seasonal adjustments we're seeing nothing in that range so a lot of it has to do with customers having destox significantly and having to start rebuild some of the inventory so I'd say in some areas that's going back to normal buying patterns which they have not been on for you know more than three quarters.
Thank a large chunk.
Your global competitors or maybe even below breakeven levels right I mean, how should we be thinking about that as it pertains to call. It pricing on a go forward basis.
Yes, it's a great. Thanks for the question it's on <unk>.
<unk> a great question 17 in App EBITDA margins for us as we've been talking about being in the Twenty's for a long period of time part of ours.
<unk> was in fact due to zircon coming down significantly more than we thought it would but theres no question I mean, there's companies that are in the restructuring process right now we've stated.
At our last three calls that we believe that most of the Chinese producers are not making any money. So you've started at that inflection point on pricing moving in the other direction, we never got exports coming out of China in the one five to $1 6 million tonnes on a trailing 12 month basis.
And customers can only absorb so much of that even with that price difference. So I think that there's absolutely a point in time, where pricing needs to go in the other direction on the profitability of the industry is going to get to the point where people start closing down assets.
Unknown Executive: And John Muken had that obviously Q3 was a very low volume quarter so that's why being flatish for Q4 is it's not a great quarter I understood that's helpful and just on the cat-packs next year can you talk to the increase and is there any potential for further delays if the macro remains or even gets more challenging from here thank you. Look maybe I can cover that look we obviously wanted to be in a good position to continue to invest in our vertical integration and we have a couple of projects in our mine in South Africa that will create a lot of value and when we talk investing in mine you're talking of project that will take a couple of years to realize but then they had 10 years of benefit to the company and we will obviously adjust that capital requirement based on what we will see the economy of the world too we always said we have some flexibility with our capital but there is some good project that will have value to the business that we consider doing have the moment based on what we're seeing I mean we expect 2024 to be better than 2023 I mean we call the downturn for KiO2 in Q4 2022 and we still commit that that was the case and the downturn for Zerkont was in Q3 this year and we're seeing things improving and we expect 24 that will continue to improve for Zerkont as well.
And again I think Thats, where we are at this particular states theres not a lot of room fixed when we talk about the high grade feedstock pricing hasn't moved much on that.
Ilmenite prices going Edwards has remained north of $400 a ton so with input costs like that theres got to be a inflection point at some point in time.
Thanks.
Just sort of carrying on with that talked on the inputs input.
Input cost side of things.
Look I mean, there is some skittishness around sort of call. It chlorine pricing there is.
With housing doing what it's doing and the like I mean, there is a school of thought that chlorine pricing may come down on a go forward basis.
And similarly, you know I mean like you said.
Oil pricing through this entire downturn has held up quite well, but again.
He has more and more about there being ample supply of ore. So as you think about beyond Q4 call. It how do you think the input cost side of things will shake out broadly for the industry and specifically for you guys. Because obviously that's going to play a role in your sort of integrate.
Margins on a go forward basis as well.
Well, maybe I'll start by your second point on the or all day and look I think that there was a good response by the producer I think that the.
I mean, we have a big producer in Australia that has announced shutting down its production asset for the whole Q4, and you have the biggest producer in the industry that has furnace down and that's in the public domain. We have said that we have adjust our production is.
Unknown Executive: I mean if there was some sort of unforeseen event a war escalated somewhere we needed to make adjustment we do have flexibility on that 350 and we would adjust accordingly. Yeah and we've obviously guided 270 for this year and as John mentioned we expect to be in the mid 300s next year not the levels that we had in 2022 but we do have flexibility even in that 350 number. Very good. Thank you.
Well, so so all of the key raw material producer have adjust to that slow demand market. So and that's I think that's why the price has hold stable for feedstock on on the supply.
Just a little bit on the input cost you made referenced to chlorine right that one has gotten a lot of publicity for many quarters and our procurement team did a really good job of creating some opportunities for us to try to leverage and opportunity to get lower pricing. We made reference on the last call that we were going to see a price decrease in the third quarter.
Josh Spector: Next question comes from the line, all to inspector at UBS. Please go ahead to your line. Is that? Yeah, hey guys, thanks for taking my question. And first of all, thanks, Jay up for all the contributions over the years and grads, John. So I wanted to ask on the fourth quarter guidance, not on volumes, but on the EBITDA side. So I mean, if you see a 50% off-tick in Zircon, my math is that that kind of gets me to the top under your guidance alone.
It's pretty public the chlorine prices have started to move caustic prices have started to move.
So that's what we talked about that with regards to flooring, we would expect us to continue to see some opportunity there.
And then on other raws John made reference that we hadn't seen as much down.
Josh Spector: So I'm just wondering, within the other puts and takes outside of the out to volumes, is there something else you're assuming on price or is there some additional roll-through of cost because of the vital facility charges that ramps in the fourth quarter? And how would that progress into early next year?
Downward movement on pricing on our raw materials that we had expected and work, but we're starting to see that moving into the end of this year and into the fourth first quarter next year as we start those negotiations for 2024 contracts.
Very helpful. Thank you so much guys.
Unknown Executive: Yeah, I think that the key drivers of the range for a Q4 EBITDA guide is primarily commercial. So I think the key drivers of the range for a Q4 EBITDA guide is primarily commercial. You're right, Josh, that obviously pricing is going to play a part of it outside of these Zircon volumes. A big driver there. Also, as we've mentioned earlier, we did have an outage at Balic due to our supplier next door.
Thank you. Our next question comes from the line of Vincent Andrews at Morgan Stanley. Please go ahead. Your line is open.
Hi, This is Turner on for Vincent I was wondering if you could provide some additional color on the supplier outage as it relates to building a bridge from your <unk> expectations will you be able to continue serving customer demand fully out of inventory and doesn't imply any additional logistical or other costs that we should consider.
Unknown Executive: And that's really a driver as well. It's five million in Q3. And so just depending on, we expected to get up in November 11th and a couple of days now, a couple of weeks now. But, you know, that may create some further burden depending on when it gets up. Yeah, that's a third party provider scheme, which we need to actually finish the pigment there. So, you know, we believe we have confidence in what they've been telling us on coming up on November 11th, but that's definitely something that could create some sort of variance in that number.
When building the bridge.
Yes, it looks so from the standpoint of being able to continue to supply customers. We made reference that we had inventory in place. We also have a footprint that allows us to move inventory around to make sure. We can meet that demand. So at this particular stage based on the November 11th startup that we talked about we don't expect to Miss any orders.
Unknown Executive: Okay, thanks. And just kind of looking into early next year, not necessarily anything volumes or price related, but more the cost side, I guess, is how you're operating your minds. I guess I just want to understand that you guys kind of changed how do you operate admit this? This year, you're taking more charges now. As we look at you plan into next year, does that burden increase or decrease on your EBITDA as we think about the first half next year versus second half this year?
There will be some additional cost attached to moving that material around John mentioned that the reality is there will be an opportunity for an insurance claim.
And we won't see that in the numbers, probably until 2024, but all of those additional costs that are attached to that outage that bottleneck will be factored into that at this particular stage.
I mentioned during the call are at some point in the Q&A that we were also ramping up some of our plants to make sure that we had inventory to meet the needs.
Unknown Executive: Yeah, I think one of the things we, you know, the question that came early about working capital, the other issue that's impacting working capital is also the cost of our inventory. So our cost have definitely gone up and it takes a little bit of time to work that through. So, you know, we're still going to see we're going to be burden with higher costs from the inventory that we have in the system as we make that high grade feedstock that openly goes into our TIO to production. So it will take a little bit of time for that to work its way to the system. John, did you want to make exactly the answer? Got it. All right.
Should there be any further downturn on that but at this particular stage based on what we're hearing from our supplier, we still feel pretty comfortable that November the 11th start date for <unk> is firm.
You mentioned.
Q3 was burdened by $5 million from Embolic outage since we're up pretty early in the month.
Many of the months you expect that.
Couple of million dollars burden.
In October.
Great. Thanks, so much for that color. Another one do you mind, providing some additional color to level set our expectations for underlying demand and the macro by region as well as what youre seeing for <unk> export trends.
Unknown Executive: Thanks, guys.
John Mcnulty: Thank you.
Unknown Executive: Our next question comes from the line of John McNulty, that BMO capital markets. Please go ahead to your line, is there? Yeah, thanks for taking my question. Maybe just a follow-up to Josh's call. So if I think you said earlier that 3Q had about a $38 million hit, kind of higher fixed cost absorption and it seems like that's, you know, that's something that's going to continue to drag on to your point.
Yes, so on the export trends.
Two out of China, where we saw a tick up in the month of September I made reference that on a trailing 12 month, it's been about one five to $1 6 million tons that number was positive.
Was increased because you had a couple of months that fell off that trailing 12 month that were very low.
Unknown Executive: You've got high cost inventory to work through. Is this something that based on the higher inventory levels that you have on the or front that can drag through most of 24 or is that to draconian in terms of how we think about kind of the pressures that that high cost inventory and high fixed cost absorbed inventory works its way through the system. I guess how should we be kind of gauging that as we look?
We continue to compete with the Chinese and areas, where we select to there are some instances, where we made some reference that we had to make some adjustments on pricing to maintain some what we would define some strategic share in Latin America, and the middle East but.
We're not expecting any significant change in exports at this particular stage as far as demand regionally, we don't typically provide.
Unknown Executive: next year. Yeah, John, good question. And I'd say you'd be, you know, at three-year rent, we'd expect that cost to flow off in our results within the first of four to five months of next year. Yeah, and it's not just speed stock, Johnny, either. It's, you know, we've been pretty open about how we're running our assets on the TIO two-sided, you know, 70% capacity utilization. So as we start to see the market picking up, we'll start to ramp those plants back up, and that fixed cost absorbs, and from those finishing facilities, we'll start to come down.
Specifics on a breakdown on where we're seeing growth by region I will make the comment that in the fourth quarter.
He made reference that we'd see it a little to no seasonality in some instances, we're seeing volumes specifically in Asia Pacific and even in the Middle East where volumes are up Q3 to Q4, and that's largely driven to destocking running its course and customers needing to make.
Refill their inventory.
Unknown Executive: And quite frankly, you know, there are some assets that we're already starting to move up in response to some of the things that we're seeing, but we're still, you know, running those assets well below full capacity. Got it. Okay, now that's helpful.
Okay. Thank you congrats to both Jeff and John as well.
Thank you.
Thank you. Our next question comes from the line of Jeff Secaucus at J P. Morgan. Please go ahead. Your line is open.
John Mcnulty: And then maybe just a little bit of color. I think you would, you had mentioned in one of the responses, just that you were actually starting to see some demand pull in Asia, and it's probably not demand driven. It's more restock, it sounded like. But I guess do you have clarity or do you have much comfort in where inventory levels are in Asia or any of the major regions and how much below normal they may be at this point?
Thanks very much.
Producer price indexes peaked in.
Maybe in November 2022.
Producer.
Price indexes have been dropping since that time.
Has that made any difference to your T. I O. Two pricing is that one of the factors that's pressuring them lower.
John Mcnulty: Is there a way to kind of give us a little bit of color around that? Well, I think the simplest thing is that from our sales people in the engagement that we have out with our customers, you know, they do get out and have very, a lot of dialogue with customers around where inventory is. I think at the end of the day, there's still pricing activity going on on there. And when we start to pull back from request to reduce price and customers continue ordering at the same levels, that gives you an idea that you're towards the end of what typically tends to be a downturn.
Thanks, Jeff.
<unk> indexes don't have anything to do with any of our contracts.
Maybe some of our competitors out there have had some PPI indexes that had an impact on their pricing or might be tied to contracts, but we don't use PPI as an indicator on tio tu for any specific tied to pricing.
Not to say that it hasnt had any impact if others are using PPI index as it could have had an impact on where what they're doing which could drive competitive behavior.
John Mcnulty: So it's our belief that customer destocking has run its course, orders are picking up. I mean, even in China, we're seeing orders picking up. That's not because China has rebound significantly. It's because our inventories and the inventories inside the industry there have gotten to a low level. It's not sustainable. So I think there's an element. I mean, India, for instance, India is still a very strong market for us. That's an area where there's a significant amount of Chinese exports to go into India, but our volumes into India are continuing to be strong. And it's one of the bright spots. Got it. Okay. Thanks for the color.
I hope that answered your question, yes. Thank you.
You talked about having to meet.
Prices of Chinese competitors.
Is that is chloride based titanium dioxide or sulfate based <unk>.
It's predominantly on the sulfate side in China and.
The gap between the sulfate and chloride has been significant so when we say make some adjustments to maintain strategic share. It doesn't mean, we're meeting sulfate pricing on Chinese it means that we had to be more competitive to prevent customers not migrating.
Unknown Executive: And JF, congratulations. And you know, enjoy the retirement for sure.
Unknown Executive: Thank you, John. Thank you.
More of their volume away from the chloride Tio too.
Frank Mitsch: Our next question comes from the line, all Frank Mitch at Fermi and Research. Please go ahead. Your line is open. Hey, good morning and yellow me echo my congratulations to you, JF. Been a pleasure working with you. And of course, looking forward to working with you, John, in your in your new role.
The sulfate so specific to sulfate and chloride not meeting it just having to make some adjustments to narrow the gap.
Is China more competitive and chloride now.
I think over time in China.
They've got the alumina has gotten more competitive theyre grades are more competitive we've heard they've had some quality issues here recently so.
Frank Mitsch: I'd like to come back to price. You indicated that, you know, the pricing weakness that you saw year over year and sequentially was mainly in Asia and Latin America. I was wondering if you could give a little more color on the pricing in North America in Europe and, you know, what your expectations are for the balance of the year in TI02. Thanks, Frank. So we don't typically have a lot of detail and color on regional pricing, but what you said is accurate, right?
I think the short answer to your question is over time, the quality of the chloride materials has gotten better.
And in certain areas, we're competing with loan and billions specifically.
On a head to head basis, but it's.
Yeah, I think there is an element of our customers not wanting to have all of their eggs in the Chinese basket and that's why there's a limitation to what we believe they can do to subs to toot Chinese material for western material.
Frank Mitsch: We saw a lot of a lot more movement on pricing activity in Asia, Pacific and the Middle East and even in Europe. You know, there's been what I would say, a fair amount of competitive activity in certain areas where people are still struggling to try to pick up volume. And, you know, we haven't been responding to those, what I would call spot requests for price reduction on offers that we don't think are reasonable.
Okay. Thank you very much.
Okay.
Thank you just as a reminder, if you do wish to ask a question. Please don't star one on your telephone keypad now.
Next question comes from the line of Roger Spitz Bank of America. Please go ahead your line is.
Thanks, very much good morning.
I know you don't want to give numbers on this but maybe you can just talk generally about your European Ti <unk> pigment EBITDA in Q3 versus Q2 can you can you talk about how much how that changed how much has changed.
Frank Mitsch: So pricing is still, I'd say moving in different regions. North America, it's not as if we haven't seen any price erosion. There has been some, but it's been more stable than most regions. And in Asia, Pacific, I would say we've seen most of the downed cycle movement on pricing and not to say that it's going to start moving up. But, you know, in this particular environment in China, specifically, we have seen what we believe to be the bottom on pricing and we have a facility there that we're now operating at a higher rate because we're seeing stronger demand.
To put numbers on it but you can talk in generalities.
Yes, I think just generally speaking in Europe Q2 to Q3 costs costs are up so we're seeing.
Some of the burden of that.
Okay got it.
Don't ever provide breakdowns by region on EBITDA sure sure.
So the free cash flow guidance.
Frank Mitsch: And you've heard about price increases coming out in China. And we have had some implementation of those price increases in China. So again, it's hard for us to actually pinpoint exactly when we'll see the complete bottom on price erosion. And when we'll start to, when that inflection point is on the upside, but we feel pretty, pretty confident about what we set on the call. And that is this stability that we've seen considering the volume environment that we're in, we would expect that to continue moving in 2024. Okay, gotcha. That's very helpful.
Oh, CF less capex that you've given that implies negative <unk> 75 for the full year is that am I looking at that correctly.
Correct.
Got it.
We previously quarter, we'd be relatively flat.
Free cash flow for the full year and a lot of that bridge. Obviously is what I mentioned earlier, the zircon built $50 million of it and then.
<unk> earnings is the impact of it is Paul.
Got it and I know you've had about this little bit, but I mean, if the economy remains relatively weak how quickly can you monetize.
Frank Mitsch: And then I'd like to come back to Zircon, obviously volumes in July were very much the story. And I believe you indicated on the last call you anticipated your Zircon volumes to be down 15 to 20,000 KT, or 15 to 20,000 tons. And I was wondering, where did that actually come in? And can you revisit the air pocket that you saw in demand in July? How anomalous is that? How concerned are you about hitting another one of these air pockets as we progress through this year into next year?
And held down that the big zircon and high grade slag inventory that you built up here recently and you know in 2024.
I guess, that's not easily knowable question, but that's my concern anyway.
Okay.
Thank Roger we're very confident in our free cash flow position I mean, that's why early in the year, John and I, We we borrowed an additional $350 million that was to pay down what I call. The short term debt to have liquidity to be in a very strong.
Frank Mitsch: Yes, so Frank, I would say that was anomalous and we don't expect that to occur. You had a significant downturn in China that basically nothing was rebounding there. There's a significant amount of PIO or Zircon that's consumed there. And there was an inflection point where customers started to think that they could actually get price reduction, so they just stopped buying. And that was July. And we said that we would expect to see that pick back up in August and September, that 10 to 15,000 tons that we projected to be down, we were down a bit more than that.
Long position for.
For any condition to happen in 'twenty four and look we are you know I mean, we feel like there is no risk look we have built $185 million of working capital as John mentioned, it's our con its feedstock, it's ilmenite its whole material debt.
Has no shelf life, no and that at some point, we will sell and we will convert into cash.
Look it's too bad that we had to accumulate that much in 2023, but it will obviously be a relief in 'twenty four and.
Frank Mitsch: But what we've seen as we move into the fourth quarter into October and in November, as I mentioned, volumes are up significantly from that low in 3Q, or the third quarter. And we were expecting volumes to be at more than 50% from that third quarter number. Okay, great. Thank you, John.
We don't have any risk of not being able to monetize the sales of zircon door flag or.
Mike Leithead: Thank you.
Tio tool for a matter and the only thing is that we don't sell slag in the market right. So when we talk about selling down slag, it's selling down slag to the production of Tio too. So we're not a seller of high grade feedstock out in the market. Yeah. I mean at Q2, we had 400.
Hassan Ahmed: Next question comes from the line of Mike Lee-Tetch at, Bob, please, please go ahead to your line, is there? Great. Thank you. Good morning. Just one for me. I wanted to go back to the cash and inventory discussion. I appreciate everything you've said about a focus on managing work in capital. But just when I look at the numbers, Tronox's dollar amount of inventory is going up for eight consecutive quarters now, whereas most all chemical companies are generating cash this year from work in capital. So why is that not the case for Tronox, or maybe why are you not pulling back production rates even more to generate faster cash?
<unk> million dollars approximate liquidity and obviously this has bolstered our liquidity and part of that was <unk>.
In both cases is very strong we weren't going to make any drastic decisions that will sacrifice the business in the longer term. So we would not sell zircon that at all costs.
Got it thank you very much.
Thank you and as there are currently no further questions in the queue I'll hand, the floor, Pat John Romano co CEO for closing comments.
Thank you for that and look thank you for joining us for the call today and our key priorities for 2023 remain unchanged and we're going to remain relentless on focusing on our sustainability and safety continuing to align our production with customer demand and prudently, reducing our costs managing our key capital projects without losing sight.
Hassan Ahmed: Yeah, thanks for that question. You know, I think it's twofold. Obviously, while we have reduced our pigment production down, which is driving a significant generator of cash, our mining is well, we've slowed as well. But as I mentioned earlier, Zorkon is building. So it was about 25 million in a quarter. As I think in half of the year, I think part of what you're seeing as well is our input costs continue to remain very high.
Of the long term benefits to tronox, including reducing our cost per ton.
Managing our working capital and free cash flow in the current market environment.
So with that I'd like to thank you all for joining and again, thanks, JF or all of the great work he has done.
Hassan Ahmed: So it's significantly elevated from about two years ago. I think we've quoted historically. It's over 400 million increase from 2020 to 2022. So that's part of the reason why we're we aren't seeing, while we're reduction in total volume is down, pricing still remains pretty elevated. Not dissimilar to, you know, our price, some people have said it's a bit stickier than it was before. It's been similar on the raw materials, but we're starting to gain some traction on that.
It really has been a pleasure to be co CEO with you and look forward to working with you between now and April one and as a board member. So thank you.
Thank you.
Thank you.
The conference. Thank you very much for attending you may now disconnect your lines.
Hassan Ahmed: So we're starting to see those raw material prices move down, but we would expect as we go through the fourth quarter and the first quarter next year will continue to see benefits from that. And as Jeff mentioned as well, you know, the feedstock is a big component of the increase. So we do slow down our production plans, but we are vertically integrated. So we are running our minds and building that the feedstock inventory. Thank you.
Hassan Ahmed: Our next question comes from the line of Hassan Ahmed of Olympic Global. Please has been pretty extreme, you know, 17.5% in Q3 of 23, down from 21.2% in Q2, and 27.6% same period last year. So my question really is, I mean, I'd imagine, you know, part of the margin squeeze is the six costs absorption side of things, lower zircon pricing and the like. But, you know, you guys always talk about the virtue of integration.
Hassan Ahmed: You guys are obviously the most integrated guys out there. I'm just trying to get a better sense of what the cost cuts are looking like right now, right? I mean, if you guys have seen this sort of margin squeeze in a reporting, you know, 17.5% EBITDA margins, I'd like to think a large chunk of your global competitors are maybe even below break even levels, right? I mean, how should we be thinking about that as it pertains to, you know, politic pricing on a both-forward basis?
Hassan Ahmed: Yeah, that's a great thanks for the question. It's on it and it's a great question. You know, 17.5 EBITDA margins for us is, you know, we've been talking about being in the 20s for a long period of time. Part of ours was, in fact, due to zircon coming down significantly more than we thought of would. But there's no question. I mean, there's companies that are in the restructuring process right now. We've stated last three calls that we believe that most of the Chinese producers are not making any money.
Hassan Ahmed: So you started at that inflection point on pricing, moving in the other direction. I mean, they've got exports coming out of China in the 1.5 to 1.6 million tons on a trailing 12 month basis. And customers can only absorb so much of that, even with that price difference. So I think that there's absolutely a point in time where pricing needs to go in the other direction of the profitability of the industry is going to get to the point where people start closing down assets.
Hassan Ahmed: And again, I think that's where we are at this particular stage. There's not a lot of room fix when we talk about the high grade feed stock pricing hasn't moved much on that. Ilmanite prices in the efforts has remained, you know, north to $400 a ton. So with input costs like that, there's got to be an inflection point at some point in time. Very, sir, very, and just sort of carrying on with that thought on the input cost side of things.
Hassan Ahmed: Look, I mean, there is some skitishness around sort of colloquial pricing. You know, there is, you know, with housing doing what it's doing and the like. I mean, you know, there is a school of thought that chlorine pricing may come down on a both forward basis. And similarly, you know, I mean, like you said, ore pricing through this entire downturn has held up quite well. But again, you know, one here is more and more about, you know, they're being ample supply of ore.
Hassan Ahmed: So as you think about, you know, beyond Q4 call it, how do you think the input cost side of things will shake out broadly for the industry and specifically for you guys? Because obviously that's going to play a role in your sort of integrated margins and go forward basis as well.
Hassan Ahmed: Well, Hassan, maybe I'll start by your second point on the or all thing. Look, I think that there was a good response by the producer. I think that I mean, we have a big producer in Australia that has announced shutting down its production asset for the whole Q4. You have the biggest producer in the industry that has furnished down. And that's in the public domain. We have said that we have a just or production as well.
Hassan Ahmed: So so all of the key raw material producer have a just to that that slow the man market. So and that's, I think that's why the price has hold stable for feedstock on on the supply. Maybe just a little bit on the input cost you made reference to chlorine right that one has done a lot of publicity for many quarters and our procurement team did a really good job of creating some opportunities for us to try to leverage an opportunity to get lower pricing.
Hassan Ahmed: We made reference on the last call that we were going to see a price decrease in the third quarter. It's pretty public but chlorine prices have started to move. Cost of prices have started to move. So that's what we talked about with regards to chlorine. We would expect us continue to see some opportunity there. And then on other laws, John made reference that we hadn't seen as much down downward movement on pricing on our raw materials that we had expected.
Hassan Ahmed: And we're, but we're starting to see that moving into the end of this year and into the fourth first quarter next year as we start to those negotiations for 2024 contracts. Very helpful. Thank you so much.
Unknown Executive: Thank you.
Unknown Executive: Now next question comes from the line of since and Jews at moment standing. Please go ahead to your line of zone. Hi, this is Turner Henry Clawner for Vincent. I was wondering if you could provide some additional color on the supplier outage as it relates to building a bridge from your three Q to your four Q expectations. Will you be able to continue serving customer demand fully out of inventory and doesn't imply any additional logistical or other costs that we should consider when building the bridge?
Unknown Executive: Yeah, look, so from the standpoint of being able to continue supply customers, we made reference that we had inventory in place. We also have a footprint that allows us to move inventory around to make sure we can meet that demand. So at this particular stage, based on the November 11th startup that we talked about, we don't expect to miss any orders. There will be some additional cost attached to moving that material around John mentioned the reality is there will be an opportunity for an insurance claim.
Unknown Executive: And we won't see that in the numbers, probably until 2024, but all those additional costs that are attached to that outage of bottleneck will be factored into that and at this particular stage. I mentioned during the call or at some point in the Q and A that we were also ramping up some of our plants to make sure that we had inventory to meet the needs. Should there be any further downturn on that?
Unknown Executive: But at this particular stage, based on what we're hearing from our supplier, we still feel pretty comfortable that November the 11th start date for bottleneck is is firm. And we've mentioned, you know, Q three was burdened by five million from the ballot outage, since we're up, you know, pretty early in the month. Around mid mid to the month, you know, expect that only to be a couple of million burden in October.
Unknown Executive: Great, thanks so much for that color. Another one, do you mind providing some additional color to levels that are expectations for underlying demand in the macro by region, as well as what you're seeing for TiO2 export trends? The number was positive, it was increased because you had a couple of months that fell off that trailing 12 month that were very low. We continue to compete with the Chinese in areas where we select to.
Unknown Executive: There are some instances where we made some reference that we had to make some adjustments on pricing to maintain some what we would define some strategic share in Latin America in the Middle East. But we're not expecting any significant change in exports at this particular stage, as far as demand regionally, we don't typically provide specifics on a breakdown on what we're seeing growth by region. I will make the comment that in the fourth quarter, we made reference so we'd see a little to no seasonality in some instances.
Unknown Executive: We're seeing volumes specifically nae specific and even in the Middle East where volumes are up Q3 to Q4 and that's largely driven to be stocking running its course and customers needing to make refill their inventory. Okay, thank you.
Unknown Executive: Congrats to both the JF and John as well. Thank you.
Jeff Cicocus: Our next question comes from the line of Jeff Cicocus at Shapy Morgan. Please go ahead. Your line is open. Thanks very much. Producer price indexes peaked in maybe in November 2022 and producer price indexes have been dropping since that time. Has that made any difference to your TiO2 price? Is that one of the factors that's pressuring them lower? Thanks Jeff.
Unknown Executive: PPI indexes don't have anything to do with any of our contracts. Maybe some of our competitors out there have had some PPI indexes that had impact on their pricing or might be tied to contracts, but we don't use PPI as an indicator on TiO2 for any specific tie to pricing. I'm not to say that it hasn't had any impact if others are using PPI indexes that could have had an impact on where what they're doing which could drive competitive behavior. That answers your question.
Unknown Executive: Yes, thank you. You talked about having to meet prices of Chinese competitors. Is that in chloride based titanium dioxide or sulfate based TiO2 or both? Predominantly on sulfate side in China and you know the gap between the sulfate and the chloride has been significant so when we say make some adjustments to maintain strategic share. It doesn't mean we're meeting sulfate pricing on Chinese. It means that we had to be more competitive to prevent customers not migrating, you know, more of their volume away from the chloride TiO2, the sulfate.
Unknown Executive: So specific to sulfate and chloride, not meeting it just having to make some adjustments to narrow the gap, is trying to work competitive and chloride now. I think over time, China, they've gotten more competitive, they're grades and more competitive. We've heard they've had some quality issues here recently, so I think the short answer to your question is over time, the quality of the chloride material has gotten better, and certain areas we're competing with low in billions, specifically on a head-to-head basis, but I think there's an element of our customers not wanting to have all of their eggs in the Chinese basket, and that's why there's a limitation to what we believe they can do to substitute Chinese material for Western material.
Unknown Executive: Thank you very much.
Roger Spitz: Thank you.
Unknown Executive: Just as a reminder, if you do wish to ask the question, please don't star one on your telephone keypad now.
Roger Spitz: The next question comes from the line of Roger Spitz at Bank of America. Please go ahead to your line. Thanks very much. Good morning. I know you don't want to give numbers on this, but maybe you can just talk generally about your P&K2 pigment EBITDA on Q3 versus Q2. Can you talk about how that changed, how much it changed? You don't have to put numbers on it, but you can talk just in general of these.
Roger Spitz: Yeah, I think just generally speaking in Europe, Q2 to Q3 costs her up, so it's we're seeing some of the burden on that. We don't ever provide breakdowns by reason on EBITDA. So the free cash flow guidance, OCF-less cop-backs that you've given, that implies negative 75 for the full year. Am I looking at that correctly? Correct. Got it. And let's. I think, you know, we've previously quoted we'd be relatively flat, you know, the free cash flow for the full year, and a lot of that bridge, obviously, is the, what I mentioned earlier, the Zircon build, 50 million of it, and then, you know, we obviously are earning for the impact of it as well.
Roger Spitz: Got it. And I know you've chat about this a little bit, but I mean, if the economy rent means relatively weak, how quickly can you monetize and sell down that the big Zircon and high grade slag inventory that you build up here recently, and, you know, in 2024. I mean, I guess that's not a easily noble question, but that's, I can turn anyway.
Unknown Executive: Okay, I think Roger, we're very confident in our free cash flow position. You know, I mean, that's why early in the year, John and I, we borrow that additional 350 million dollars that was to pay down what I call the short term debt to have liquidity to be in a very strong position for any condition to happen in 2024, and, and, and look, we are, you know, I mean, we feel like there is no risk.
Unknown Executive: Look, we have built 180, five million dollars of working capital. As John mentioned, it's Zircon, it's feed stock, it's Elmanite, it's all material that has no shell life, you know, and that at some point we will sell and we will convert into cash. Look, it's too bad that we had to accumulate that much in 2023, but it will, obviously, be a release in 2024, and we don't have any risk, you know, if not being able to monetize the sales of Zircon or flag or 302 for matter.
Unknown Executive: The only thing is that we don't sell flag in the market, right? So, when we talk about selling down slag, it's selling down slag through the production of TI2. So, we're not a seller of high grade feeds back out in the market. Yeah, and I mean, at Q2, we had, we had 450 million approximately liquidity, obviously, this bolstered liquidity, and part of that was, you know, both in both cases is very strong. We weren't going to make any drastic decisions that will sacrifice the business in the longer term. So, we would not sell Zircon at all costs. Thank you very much.
John Romano: Thank you and as there are currently no third questions in the queue, I'll hand the floor back to John Romano, KCO for the closing comments. Thank you for that and look, thank you for joining us for the call today. Our key priorities for 2023 remain unchanged and we're going to remain relentless on focusing on our sustainability and safety, continuing to line up production with customer demand and prudently reducing our cost, managing our key capital projects without losing sight of the long-term benefits to Tronox, including reducing our cost per ton, managing our working capital and free cash flow in the current market environment.
John Romano: So with that, I'd like to thank you all for joining in again. Thank you, J.F, for all of the great work he's done and really has been a pleasure to be co-CEO with you and look forward to working with you between now and April 1 and as a board member. So thank you. Thank you.
Unknown Executive: This now concludes the conference. Thank you all very much for attending.
Unknown Executive: You may now disconnect.