Q1 2024 Tronox Holdings plc Earnings Call
Operator: Good morning, ladies and gentlemen, and welcome to Tronox Holdings' Q1 2024 earnings conference call. At this time, please note that all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session, and if at any time during this call you require immediate assistance, please press star 0 for an operator. Also, please note that this call is being recorded on Thursday, May 2, 2024, and I would like to turn the conference over to Jennifer Guenther, Chief Sustainability Officer and Head of Investor Relations. Please go ahead.
Good morning, ladies and gentlemen, and welcome to the Tronox Holdings Q1, 2024 earnings Conference call. At this time note that all participants are in a listen only mode.
Following the presentation, we will conduct a question and answer session and if at any time. During this call you require immediate assistance. Please press star zero for an operator also note that this call is being recorded on Thursday may 2nd 2024, and I would like to turn the conference over to Jennifer Gunther Chief Sustainability Officer and head.
Jennifer Guenther: [noise] of Investor Relations. Please go ahead.
Jennifer Guenther: Thank you, and welcome to our first quarter 2024 conference call and webcast. Turning to slide two, on our call today are John Romano, Chief Executive Officer, and John Servisol, 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. Moving to slide three.
Thank you and welcome to our first quarter 'twenty 'twenty four conference call and webcast turning to slide two on our call today are John Romano, Chief Executive Officer, and John Service, All Senior Vice President Chief Financial Officer.
Jennifer Guenther: It will be using slides as we move through today's call you can access the presentation on our website at investor that Tronox dotcom moving to slide three a friendly reminder, that comments made on this call and the information provided in our presentation and on our website include certain statements that are forward looking and subject to various risks and uncertainties, including but not limited to the specific factors.
Jennifer Guenther: 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.
Jennifer Guenther: As summarized in our SEC filing this.
Jennifer Guenther: This information represents our best judgment based on what we know today. However, actual results may vary based on these risks and uncertainties. The company undertakes no obligation to update or revise any forward looking statements.
Jennifer Guenther: The company undertakes no obligation to update or revise any forward-looking statements. During the conference call, we will refer to certain non-US GAAP financial terms that we use in the management of our business and believe are useful to investors in evaluating the company's performance. Reconciliations to their nearest U.S. GAAP terms are provided in our earnings release and in the appendix of the accompanying presentation. Additionally, please note that all financial comparisons made during the call are on a year-over-year basis unless otherwise noted. It is now my pleasure to turn the call over to John Romano. John?
Jennifer Guenther: During the conference call, we will refer to certain non U S. GAAP financial terms that we use in the management of our business and believe are useful to investors in evaluating the company's performance.
Jennifer Guenther: Reconciliations to their nearest U S. GAAP terms are provided in our earnings release and in the appendix of the accompanying presentation.
Jennifer Guenther: Additionally, please note that all financial comparisons made during the call are on a year over year basis, unless otherwise noted.
Jennifer Guenther: It is now my pleasure to turn the call over to John Romano, John Thanks, Jennifer and good morning, everyone. We'll begin this morning on slide five with some key messages from the quarter.
John D. Romano: Thanks, Jennifer, and good morning, everyone. We'll begin this morning on slide five with some key messages from the quarter. As mentioned in our preliminary results announcement, we delivered a stronger first quarter than anticipated. This was driven by production costs through our global operations, lower production costs through our global operations, de-stocking having largely run its course through the supply chain, paired with the demand trajectory outpacing normal seasonal levels and our ability to respond to that demand through the strength of our global footprint.
John D. Romano: As mentioned in our preliminary results announcement, we delivered a stronger first quarter than anticipated.
John D. Romano: This was driven by production costs through our global operate lower production costs through our global operations Destocking, having largely rights course through the supply chain paired with the demand trajectory outpacing normal seasonal levels and our ability to respond to that demand through the strength of our global footprint.
John D. Romano: Our revenue increased 13% compared to the prior quarter or 20% on TO2 and Zircon revenue alone, excluding other product sales, which decreased due to non repeating sales of ilmenite and a portion of our rare earth tailings deposit in South Africa. The 18% increase in CO2 volumes from the fourth quarter exceeded both our guidance of 12 to 16% and the growth that would be more typical for this time of year. However, this type of rebound is indicative of what we would expect to see on the front end of a recovery.
John D. Romano: Our revenue increased 13% compared to the prior quarter or 20% on T. O. Two in zircon revenue alone excluding other product sales, which saw a decrease due to non repeating sales of ilmenite and a portion of our rare Earth tailings deposit in South Africa.
John D. Romano: The 18% increase in T O to volumes from the fourth quarter exceeded both our guidance of 12% to 16% and the growth that would be more typical for this time of year. However, this type of rebound is indicative of what we would expect to see on the front end of a recovery.
John D. Romano: Demand improved across all regions and outperformed even more so in Europe, the Middle East, and Africa and Latin America, where volumes declined more significantly over the past six quarters. Zircon continued to recover from the trough volume seen in July of 2023, driven by stronger underlying demand, despite the market in China remaining relatively muted.
John D. Romano: <unk> improved across all regions and outperformed even more so in Europe, Middle East and Africa, and Latin America, where volumes declined more significantly over the past six quarters.
John D. Romano: Zircon continued to recover from the trough volumes seen in July of 2023, driven by stronger underlying demand. Despite the market in China remaining relatively muted R.
John D. Romano: Our volumes increased 54% versus Q4, which was well above our guidance of 15 to 30%. However, pricing for TiO2 and Zircon was in line with our expectations. On the operational side, we incurred significant costs in 2023 from running our assets at low utilization rates due to softer underlying demand. As we saw the market beginning to turn late last year, we began increasing our operating rates, which had a positive impact on our manufacturing costs.
John D. Romano: Our volumes increased 54% versus Q4, which was well above our guidance of 15% to 30%.
John D. Romano: <unk> for Tio to zircon zircon was in line with our expectations on.
John D. Romano: On the operational side.
John D. Romano: We incurred significant costs in 'twenty, two 'twenty three from running our assets at low utilization rates due to softer underlying demand.
John D. Romano: As we saw the market beginning to turn late last year, we began increasing our operating rates, which had a positive impact on our manufacturing cost as.
John D. Romano: As a result, our first quarter cost improved when compared to both the prior quarter and the prior year. This helped drive a better than anticipated EBITDA margin of almost 17% and adjusted EBITDA for the quarter totaling $131 million, which was above our guided range. As the high-cost inventory continues to move through our internal supply chain, efficiencies from investments made in the business to reduce costs will enable margins to return to levels realized prior to the downturn. The first quarter has been a true inflection point.
As a result, our first quarter cost improved when compared to both the prior quarter and prior year.
John D. Romano: This helped drive.
John D. Romano: Better than anticipated EBITDA margin up almost 17% and adjusted EBITDA for the quarter totaling $131 million, which was above our guided range as.
John D. Romano: Is the high cost inventory continues to move through our internal supply chain efficiencies from investments made in the business to reduce costs will enable margins to return to levels realized prior to the downturn.
John D. Romano: The first quarter has been a true inflection point, we believe the trends both on the demand side and in reducing our costs will continue going forward.
John D. Romano: We believe the trends both on the demand side and in reducing our costs will continue going forward. We're well on our way to delivering a step change in our earnings power, having already worked through much of the remaining high-cost inventory on the balance sheet. Our free cash flow for the quarter was a use of $105 million, but we will begin clawing back this use beginning in the second quarter and expect to generate positive free cash flow for the full year.
John D. Romano: We're well on our way to delivering a step change in our earnings power, having already worked through much of the remaining high cost inventory on the balance sheet.
John D. Romano: Our free cash flow for the quarter was a use of $105 million, but we will begin clawing back. This us beginning in the second quarter and expect to generate positive free cash flow for the full year.
John D. Romano: I'll let John run through more of the first quarter numbers and the balance sheet, but we're comfortable with where we are from a liquidity and debt position. We recently consolidated and repriced two tranches of our term loan, which will result in an estimated annual savings of approximately $5 million.
Speaker Change: I'll, let John run through more of the first quarter numbers and the balance sheet, but we're comfortable with where we are from a liquidity and a debt position.
Speaker Change: We recently consolidated and repriced two tranches of our term loan, which will result in an estimated annual savings of approximately $5 million I'm proud of how our team has continued to work to strengthen the business and as we stand here today, we are well positioned to continue to capitalize on the recovery that is underway.
John D. Romano: I'm proud of how our team has continued to work to strengthen the business. And as we stand here today, we are well positioned to continue to capitalize on the recovery that is underway. On the sustainability front, we're happy to confirm that we officially began receiving power from a 200-megawatt solar project in South Africa. This is not only a significant development on our journey to net zero by 2050, as we will realize an additional 13% CO2 emissions reduction from this project alone, for a total of 18% relative to our total 2019 baseline, but it'll also provide some cost avoidance benefits from increasing electricity costs in South Africa.
Speaker Change: On the sustainability front, we're happy to confirm that we officially began receiving power from the 200 megawatt solar project in South Africa. This is not only a significant development on our journey to net zero by 2050, as we will realize an additional 13% in C. O. Two emissions reductions from this project alone for a total of 18% realm.
Speaker Change: So our total 19 2019 baseline, but it will also provide some cost avoidance benefit from increasing electricity costs in South Africa.
John D. Romano: We're already working on our next power purchase agreement in South Africa, this time on wind, as this is the highest cost contributor to carbon emissions, so it remains a high area of focus. We expect to publish our 2023 Sustainability Report this quarter that will outline these and other key initiatives across emissions and waste reduction, water management, social initiatives, and more. We firmly believe that preserving our privilege to operate is critical for our strategy today and for our future.
Speaker Change: We're already working on our next power purchase agreement in South Africa. This time on wind as this is our highest cost contributor to carbon emissions. So it remains a high area of focus.
Speaker Change: We expect to publish our 2023 sustainability report this quarter that will outline these and other key initiatives across our emissions and waste reduction water management, social initiatives and more.
Speaker Change: We firmly believe that preserving our privilege to operate is critical for our strategy today and for our future at the end of the day, our people and our planet and enable us to carry out our work and as a result, we have a responsibility to do so in a manner that is both safe and sustainable.
John D. Romano: At the end of the day, our people and our planet enable us to carry out our work, and as a result, we have a responsibility to do so in a manner that is both safe and sustainable. I'll now turn the call over to John to review some of our financials from the quarter in more detail.
John Patrick McNulty: Thank you, John. Turning to slide 6. We generated revenue of $774 million, an increase of 9% compared to the prior year and or 13% sequentially, driven by higher revenue from both TIO2 and Zircon. Income from operations was $41 million in the quarter, and we reported a net loss of $9 million. While our profit before tax was $2 million, our tax expense was $11 million in the quarter. This was due to the fact that we generated higher than expected earnings in jurisdictions where we pay taxes, driven mainly by higher Zircon sales. As a result, our adjusted diluted earnings per share was a loss of $0.05.
Speaker Change: I'll now turn the call over to John who will review some of our financials from the quarter in more detail John. Thank you John turning to slide six we generated revenue of about $774 million, an increase of 9% compared to the prior year or 13% sequentially driven by higher revenue from both tio too in zircon.
John D. Romano: Income from operations was $41 million in the quarter and we reported a net loss of 9 million, while our profit before taxes 2 million our tax expense was $11 million in the quarter.
John D. Romano: This was due to the fact that we generated higher than expected earnings in jurisdictions, where we pay taxes, driven mainly by higher zircon sales.
John D. Romano: As a result, our adjusted diluted earnings per share was a loss of five cents.
John Patrick McNulty: As John previously mentioned, our adjusted EBITDA in the quarter was $131 million, and our adjusted EBITDA margin was approximately 17%. Free cash flow was a use of $105 million, of which $76 million was from capital expenditures. Now, let's move to slide seven for a view of our commercial performance.
John D. Romano: As John previously mentioned, our adjusted EBITDA in the Port where it was 131 million and our adjusted EBITDA margin was approximately 17% free.
John D. Romano: Free cash flow was a use of 105 million of which 76 million midstream capital expenditures now.
Let's move to slide seven for a review of our commercial performance.
John D. Romano: As John mentioned, the recovery outpaced our expectations and drove TAO2 and Zircon volume growth versus the prior quarter and prior year. However, pricing was largely in line with our expectations and consistent with our Margin Stability Program. TIO2 revenues increased 8% versus the year-ago quarter and 17% versus the prior quarter as sales volumes improved 18% in both comparisons. The volume increase was driven by both organic demand and restocking, which we saw across all regions, with a higher recovery rate in Europe, the Middle East, Africa, and Latin America, where volumes declined more notably in the past six quarters. As expected, T.L.
John D. Romano: As John mentioned, the recovery outpaced our expectations and drove T Ao, two and zircon volume growth versus prior quarter and prior year.
John D. Romano: Pricing was largely in line with our expectations and consistent with our margin stability program.
John D. Romano: T Iot revenues increased 8% versus the year ago quarter, and 17% versus the prior quarter as sales volumes improved 18% in both comparisons.
The volume increase was driven both organically by both organic demand and restocking, which we saw across all regions with a higher recovery rate in Europe, Middle East Africa, and Latin America.
John D. Romano: Where volumes declined more notably in the past six quarters.
John Patrick McNulty: Pricing, including NICS, saw a 1% decrease quarter over quarter. Zircon volumes increased 54% sequentially. We've continued to see recovery from the trough levels of July 2023 with stronger underlying demand in Q1. Zircon pricing was leveled the prior quarter.
John D. Romano: As expected TL pricing, including next a 1% decrease quarter over quarter.
John D. Romano: Zircon volumes increased 54% sequentially, we've continued to see recovery from the trough levels of July 20th twenty-three with stronger underlying demand in Q1.
So what kind of pricing was leveled to the prior quarter.
John Patrick McNulty: Revenue from other products decreased 26% compared to the prior quarter, driven by an opportunistic sale of ilmenite and a portion of our rare earth tailings deposit in South Africa in the fourth quarter that, as we had communicated last quarter, would not repeat. Turning to slide 8, I will now review our operating performance for the quarter. Our adjusted EBITDA of $131 million represented a 10% decline year-on-year driven by lower average selling prices in mix and higher SG&A. This is partially offset by improved sales volumes, exchange rate tailwinds, and favorable reductions in input costs for materials such as chlorine, coke, and caustic soda.
John D. Romano: Revenue from other products decreased 26% compared to the prior quarter driven by an opportunistic sale of ilmenite and a portion of our rare Earth tailings deposit in South Africa in the fourth quarter that as we had communicated last quarter would not repeat.
Speaker Change: Turning to slide eight I will now review, our operating performance for the quarter.
Speaker Change: Our adjusted EBITDA was $131 million represented 10% decline year on year, driven by lower average selling prices and mix and higher SG&A.
Speaker Change: This was partially offset by improved sales volumes exchange rate tailwind and favorable reductions in input costs for materials, such as chlorine Coke caustic soda.
John Patrick McNulty: Additionally, we saw favorable fixed cost absorption and freight costs as compared to Q1 2023. Sequentially, Adjusted EBITDA improved 39%. As we mentioned last quarter, we expected to see improvements in costs as we increased our operating rates beginning late last year and continuing into this year. Compared to Q4, production costs improved $57 million. This was comprised of $32 million relating to favorable adsorption and lower cost of market charges from higher production.
Speaker Change: Additionally, we saw favorable fixed cost absorption and freight costs as compared to Q1 2023.
Speaker Change: Sequentially adjusted EBITDA improved 39%.
John Patrick McNulty: $15 million from the Q4 bottleneck idle facility charge due to the supplier outage that did not repeat in Q1, and $10 million for lower mining costs, primarily from outlets. By the end of the year, we expect to recover approximately $15 million from insurance claims leading to the downtime at Bottlick due to the supplier outage. The TiO2 and Zircon volume benefit to EBITDA was partially offset by the non-repeating opportunistic sale of Illinois in a portion of our rare earth tailings deposit in Q4. Other headwinds versus the prior quarter, as expected, were price mix, FX, freight costs from the Red Sea impact, and higher SG&A.
Speaker Change: As we mentioned last quarter, we expected to see improvements in costs as we increased our operating rates beginning late last year and continuing into this year.
Speaker Change: Compared to Q4 production and costs improved 57 million. This was comprised of 32 million relating to favorable absorption and lori cost or market charges from the higher production.
Speaker Change: 15 million from the Q4 about like Idaho facility charge due to the supplier outage that did not repeat in Q1 and $10 million for lower mining costs, primarily from Atlas.
Speaker Change: By the end of the year, we expect to recover approximately $15 million from insurance claims related to the downtime at bought lake due to the supplier outage.
Speaker Change: The tier two and zircon volume benefit to EBITDA was partially offset by the non repeating opportunistic sale of ilmenite and a portion of our rare Earth tailings deposit in Q4.
Speaker Change: Are there headwinds versus the prior quarter as expected where price mix FX freight costs from the Red Sea impact and higher SG&A.
John Patrick McNulty: Turning to slide nine, I will now review our balance sheet and cash position. We entered the quarter with total debt of $2.8 billion and net debt of $2.7 billion. Our net leverage at the end of March was 5.2 times on a trailing 12-month basis. Our balance sheet remains strong with ample liquidity ahead of anticipated critical vertically integrated integration related to capital expenditures. As John mentioned, we successfully completed a repricing transaction on two of our existing term loan tranches, which will result in approximately $5 million of annualized interest expense savings.
Speaker Change: Turning to slide nine I will now review, our balance sheet and cash position.
Speaker Change: We ended the quarter with total debt of $2 8 billion and net debt of $2 7 billion. Our net leverage at the end of March was 5.2 times on a trailing 12 month basis.
Speaker Change: Our balance sheet remains strong with ample liquidity ahead of anticipated critical vertically integrated integration related capital expenditures.
Speaker Change: As John mentioned, we successfully completed a repricing transaction on two of our existing term loan tranches, which would result in approximately $5 million of annualized interest expense savings.
We also extended the maturity of one of these tranches to 2029.
John Patrick McNulty: We also extended the maturity of one of these tranches to 2029. Our nearest term significant maturity remains 2028, and we have no financial covenants on our term loans or bonds. Our weighted average interest rate in Q1 was 6.5%. We maintain interest rate swaps 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 earliest tranche of our term loan.
Speaker Change: Our nearest term significant maturity remains toward 2028, and we have no financial covenants on our term loans or bonds.
Speaker Change: Our weighted average interest rate in Q1 was six 5%.
Speaker Change: We maintain interest rate swaps such that approximately 73% of our interest rates are fixed through 'twenty 'twenty four and approximately 64% are fixed from 2024 through 'twenty 'twenty eight aligning with the maturity of our earliest tranche of our term loan.
John Patrick McNulty: Total available liquidity as of March 31st was $629 million, including $152 million in cash and cash equivalents that are well distributed across the globe. Capital expenditures totaled $76 million in the quarter. Approximately 44% of this was for maintenance and safety, and 56% was for strategic growth projects. Working capital was a use of $127 million in the quarter.
Speaker Change: Total available liquidity as of March 31st with $629 million, including $152 million in cash and cash equivalents very well distributed across the globe.
Capital expenditures totaled 76 million in the quarter approximately 44% of this was for maintenance and safety and 56% was for strategic growth projects.
Speaker Change: Working capital was a use of 127 million in the quarter. The vast majority of this was related to higher revenue driving an increase in accounts receivable for.
John D. Romano: The vast majority of this was related to higher revenue, driving an increase in accounts receivable. As for inventory, we would normally expect to see an increase in the first quarter in preparation for the spring coating season. While we did plan for the upturn by running at higher production rates, the increased demand across our business resulted in inventory being a source of cash for the quarter. Counts payable were a decrease, which is typical of our Q1 profile.
Speaker Change: For inventory, we would normally expect to see an increase in the first quarter in preparation for the spring coating season.
Speaker Change: While we did plan for the upturn by running at higher production rates that increased demand across our business resulted in inventory being a source of cash for the quarter.
Speaker Change: <unk> payable was a decrease which is typical of our Q1 profile.
John D. Romano: We declared a dividend of 50 cents per share on an annualized basis in the first quarter that was paid to shareholders in the second quarter. I will now turn the call back over to John Romano for some comments on the year ahead in our outlook.
Speaker Change: We declared a dividend of <unk> 50 cents per share on an annualized basis in the first quarter that was paid to shareholders in the second quarter I will now turn the call back over to John Romano for some comments on the year ahead, and our outlook John Thanks.
John D. Romano: Thanks, John. So, with the first quarter behind us, we can confidently reaffirm what we stated in the last quarter. 2024 has already demonstrated a reversal of several trends from the last 18 months, and we anticipate the recovery to continue on the market. We've already begun to see an uptick in demand that is indicative of what we would see on the front end of a recovery. On pricing, we expect TIO2 pricing to reverse its downward trend and improve as we move through the remainder of 2024.
John D. Romano: Thanks, John So with the first quarter behind US we can confidently reaffirm what we stated in the last quarter.
John D. Romano: 'twenty 'twenty four has already demonstrated a reversal of several trends from the last 18 months and we anticipate the recovery to continue on.
John D. Romano: On the market, we've already begun to see an uptick in T. O to demand that is indicative of what we would see on the front end of a recovery.
Rising we expect T O two pricing to reverse its downward trend improve as we move through the remainder of 2024.
John D. Romano: Regarding Zircon, volumes continue to improve from the trough levels realized in July of 2023, and there was a significant improvement in the first quarter. Further recovery will be somewhat reliant on China, given its significant share of the overall Zircon market. Nevertheless, demand has rebounded, even in the absence of a major shift in China.
John D. Romano: Regarding zircon Bakken volumes continued to improve from the trough levels realized in July of 2023, and there was a significant improvement in the first quarter.
John D. Romano: Further recover would be recovery will be somewhat reliant on China, given its significant share of the overall zircon market. Nevertheless demand has rebounded even in the absence of a major shift in China.
John D. Romano: On the operational side, we incurred significant costs in 2023 in the range of $25 to $35 million per quarter from running our assets at lower utilization rates due to soft market demand. However, at the end of 2023, we began increasing our operating rates in line with the demand improvements we were beginning to see in the market, which has and will continue to have a positive impact on our manufacturing costs. Although we still have some high-cost inventory to move into the business, with sales outpacing our previous guidance, our EBITDA margins will now be in the range of 20% this quarter.
John D. Romano: On the operational side, we incurred significant costs in 2023 in the range of $25 million to $35 million per quarter from running our assets at lower utilization rates due to soft market demand.
John D. Romano: At the end of 2023, we began increasing our operating rates in line with the demand improvements we were beginning to see in the market, which has and will continue to have a positive impact on our manufacturing costs. Although we still have some high cost inventory to move to the business with sales outpacing our previous guidance, our EBITDA margins will now be in the range of.
John D. Romano: 20% this quarter, we will.
John D. Romano: We will continue to deploy technology at our sites to reduce costs and improve efficiencies, which will also benefit our cost position as we ramp up, and we're investing in key capital projects to sustain our vertical integration. From a growth perspective, our R&D efforts remain focused on product and process innovations to enhance profitability.
John D. Romano: <unk> to deploy technology at our sites to reduce costs and improve efficiencies, which will also benefit our cost position as we ramp up and we're investing in key capital projects to sustain our vertical integration.
John D. Romano: From a growth perspective, our R&D efforts remain focused on product and process innovation to enhance profitability. Additionally, we are continuing to explore opportunities in the rare space.
John D. Romano: Additionally, we're continuing to explore opportunities in the rarest, Moving to slide 11, I'll now review two key capital projects in more detail. As a reminder, this year we're investing approximately $130 million in two key mining projects in South Africa to replace our existing mines reaching end of life. These projects are critical to continuing our vertical integration strategy and are important to pursue now to ensure a smooth transition to replace existing minds reaching the end of life.
John D. Romano: Moving to slide 11, I'll now review two key capital projects in more detail.
John D. Romano: As a reminder, this year, we're investing approximately $130 million in two key mining projects in South Africa to replace our existing mines, reaching end of life. These.
John D. Romano: <unk> are critical to continuing our vertical integration strategy and are important to pursue now to ensure a smooth transition to replace existing mines, reaching end of life.
John D. Romano: These investments will maintain our more than $300 per ton advantage relative to market pricing for feedstock and are very high-return projects with internal rates of return in excess of 30%. Turning to slide 12, I'll review our outlook for the quarter and year ahead in more detail. For Q2, we expect TIO2 volumes to increase between 7 and 10% and Zircon volumes to remain relatively flat, both compared to the first quarter, and we expect TIO2 pricing to increase slightly versus the first quarter.
John D. Romano: These investments will maintain our more than $300 per ton advantage relative to market pricing for feedstock and our very high return projects with internal rates of return in excess of 30%.
John D. Romano: As a result, we're expecting Q2 2024 adjusted EBITDA to be $160 to $180 million and adjusted EBITDA margins to be in the range of 20%. Our expectations for 2024 cash uses are as follows. Our capital expenditures are expected to be approximately $395 million. Our net cash taxes are expected to be less than $10 million as the significant capital expenditures in South Africa are deductible.
John D. Romano: Turning to slide 12, I'll review, our outlook for the quarter and year ahead in more detail.
John D. Romano: For Q2, we expect T O two volumes to increase between 7% and 10% in zircon volumes to remain relatively flat both compared to the first quarter and we expect ti to pricing to increase slightly versus the first quarter.
John D. Romano: As a result, we're expecting Q2, 'twenty 'twenty four adjusted EBITDA to be $160 million to $180 million and adjusted EBITDA margins to be in the range of 20%.
John D. Romano: Our expectations for 2024 cash uses are as follows our capital expenditures are expected to be approximately $395 million or net cash taxes are expected to be less than $10 million as the significant capital expenditures in South Africa, our deductible.
John D. Romano: Our net cash interest expense is expected to be $140 million, and we're expecting working capital to be a tailwind. The magnitude of the cash flow will depend on how significant the market recovery is as we move through the year. Our capital allocation strategy remains largely unchanged. We are prioritizing investments in the business that are critical to furthering our strategy and driving value from our vertically integrated portfolio. And even at this investment level, we expect to generate positive free cash flow for the full year.
John D. Romano: Our net cash interest expense is expected to be $140 million and we're expecting working capital to be a tailwind the magnitude of the cash flow will depend on how significant the market recovery is as we move through the year.
John D. Romano: Our capital allocation strategy remains largely unchanged. We are prioritizing investments in the business that are critical to furthering our strategy and driving value from our vertically integrated portfolio and even at this investment level, we expect to generate positive free cash flow for the full year. We will also be focused on bolstering our liquidity and as the market recover.
John D. Romano: We will also be focused on bolstering our liquidity. And as the market recovers, we'll look to resume debt payback. We will continue to prioritize our dividend, and finally, we will continue to evaluate strategic high-growth opportunities as they arise. Currently, we're focusing on the rare earth space, and we will keep the market updated on any key developments as they arise.
John D. Romano: We'll look to resume debt pay down we will continue to prioritize our dividend and finally, we will continue to evaluate strategic high growth opportunities as they arise currently we're focusing on the rare space and we will keep the market updated on any key developments as they arise.
Operator: That concludes our prepared comments. We'll now move to the Q&A portion of our call, so I'll hand the call back over to the operator to facilitate. Operator.
Speaker Change: That concludes our prepared comments, we'll now move to the Q&A portion of our call. So I'll hand, the call back over to the operator to facilitate operator. Thank.
Operator: Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by 1 on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by 2. And if you are using a speakerphone, please lift the handset before pressing any keys.
Speaker Change: Thank you, Sir ladies and gentlemen, if you would like to ask a question. Please press star followed by one on you touched on something you will hear a prompt that your hand has been raised should you wish to decline from the polling process. Please press star followed by two and if you are using a speaker phone. Please lift the handset before pressing any keys.
David L. Begleiter: One moment for your first question, and that will be from David Begleiter at Deutsche Bank. Please go ahead. Thank you. John, Chinese exports were at an elevated level in March. What do you think's driving that?
Speaker Change: One moment for your first question.
Speaker Change: And that will be from David Begleiter at Deutsche Bank. Please go ahead.
David L. Begleiter: Thank you good morning.
David L. Begleiter: John Chinese exports were at a elevated level of March what do you think is driving that is it.
David L. Begleiter: Sustainable and how much of a concern is it to your forecast for higher prices in the back half of the year.
David L. Begleiter: Okay.
John D. Romano: Yeah, thanks, David. Look, the March numbers were significant. If you look at February and March, they were significant, but you know, February numbers were down. And I would say they were not really consistent with what we saw with our volumes in February for Chinese New Year. That being said, if you compare Q4 to Q1, it was a significant move.
Speaker Change: Yeah. Thanks, David.
Speaker Change: Look the Ah <unk>.
Speaker Change: March numbers were significant if you look at.
Speaker Change: February and March.
Significant but February numbers were down and I would say they were in <unk>.
Not really consistent with what we saw with our volumes in February for Chinese new year that being said.
Speaker Change: <unk> Q4 to Q1, there was a significant move.
Speaker Change: And there's a lot of discussion going on around the anti dumping and I would expect part of what's happening. There is some repositioning of some inventory again, what youre looking at is exports out of China not imports into Europe. So I think there's an element. There. There's also you know I think that moved from February.
John D. Romano: There's a lot of discussion going on around anti-dumping, and I would expect part of what's happening there is some repositioning of some inventory. Again, what you're looking at is exports out of China, not imports into Europe. So I think there's an element there.
John D. Romano: There's also, you know, I think that move from February to March, with March being significantly higher, probably had something to do with shipping delays. So there's no question that volumes are moving up. But, you know, I think part of that was maybe, you know, normally you'll see a bump in the first quarter, again, that 500,000 ish tons, if you look at the number for the first quarter, was higher than what we saw last year.
Speaker Change: March with March being significantly higher probably had something to do with the shipping delays. So no question that the volumes are moving up.
Speaker Change: But yeah, I think part of that.
Was maybe normally you'll see a bump in the first quarter again that 500000 ish tons. If you look at the number for the first quarter was higher than what we saw last year, but I think part of it might be repositioning volume in anticipation of something that might happen later in the year, maybe in the third quarter with dumping.
John D. Romano: But I think part of it might be repositioning volume in anticipation of something that might happen later in the year, maybe in the third quarter with the dump. And just on the anti-dumping case, do you expect provisional duties to be enacted, and if so, is it two, three, or earlier, and is there any change yet that you're seeing in customer buying behavior in Europe due to these? Yeah, so look, I'd say I'm not going to presume on what's going to happen.
Speaker Change: And just on the anti dumping case do you expect provisional duties to be enacted and if so is it Q3 or earlier.
Speaker Change: And is there any change yet that you're seeing in customer buying behavior in Europe due to these anti dumping investigations.
Yeah. So look it's I'd say I'm not going to presuppose, what's going to happen, but I think theres clearly an indication that if duty as go into place provisional duties should happen sometime at the end of June maybe a latest early July. So there is an assumption that that is going to happen.
John D. Romano: But I think there's clearly an indication that if duties go into place, provisional duties should happen sometime at the end of June, maybe latest, you know, early July. So there's an assumption that that is going to happen. In addition to the EU investigation, in the last three weeks, there have been two other formal investigations launched, one in India and one in Brazil.
Speaker Change: And in addition to the EU investigation.
Speaker Change: And the last three weeks, there's been two other a formal investigation launched one in India and one in Brazil. So there's lots of moving parts on dumping when we think of our forecast as I mentioned in the last call because we don't expect a lot of dumping.
John D. Romano: So there are lots of moving parts when it comes to dumping. When we think of our forecast, as I mentioned in the last call, because we don't expect a lot of dumping, actual duties to be imposed, or provisional duties to be imposed before the end of the second quarter. There's not a lot of volume moving in our numbers. With regard to that, could there be some positioning as possible? It's hard to really tell at this stage. And we should, we ought to get some better visibility on that as we kind of move through the balance of this quarter.
Speaker Change: Actual duties to be imposed a provisional duties to be imposed before the end of the second quarter.
Speaker Change: Theres not a lot of volume moving in our numbers with regards to that could there be some positioning as possible. It's hard to really tell at this stage I wish we ought to get some better visibility in that as we kind of move through the balance of this quarter.
Speaker Change: Thank you very much.
Speaker Change: Yeah.
Speaker Change: Thank you.
Operator: The next question will be from John McNulty at BMO Capital Markets. Please go ahead.
Speaker Change: Next question will be from John Mcnulty with BMO capital markets. Please go ahead.
John Patrick McNulty: Yeah, thanks for taking my question. So in terms of the asset utilization rates, obviously a lot stronger, I think you had 32 million, which I think you cited as a reduction in fixed costs absorption. I guess, how should we be thinking about that as we progress through the year? And I guess, can you give us some relative assumptions for kind of maybe what utilization rates are at or the change that you've seen that might just give us some ability to calibrate how much more there may be ahead in terms of improvement there?
John Patrick McNulty: Yeah. Thanks for taking my question so.
John Patrick McNulty: So in terms of the asset utilization rates, obviously, a lot stronger I think you had $32 million I think you cited it as a reduction in fixed cost absorption I guess, how should we be thinking about that as we progress through the year and I guess can you give us some relative assumptions.
John Patrick McNulty: For kind of maybe what utilization rates are at or the change that you've seen that might just give us some ability to calibrate how much more there may be ahead in terms of improvement there.
John D. Romano: Yeah, so John, I guess from the standpoint of, you know, we were pretty clear last year talking about where our on, you know, for the 12 months, we averaged capacity utilization across our nine pigment plants at around 70%. You know, in some instances, we were lower than that. But on average, over those nine plants over that 12 month period, it was 70%. And I would say at this stage, you know, we're creeping up north of 80%. You know, talk a lot about the recovery and what's happening.
John Patrick McNulty: Yeah, So John I guess from the standpoint of where we were pretty clear last year talking about where are on for the 12 months, we averaged a capacity utilization across our nine pigment plants at around 70% in some instances, we've always done that but on average over those nine plants over that 12 month period. It was 70% and I would say at this stage we're creeping.
John Patrick McNulty: North of 80%.
John Patrick McNulty: Talk a lot about the recovery in what's happening.
Yeah, we have to think about where we're coming from right, we're coming from a pretty low base.
John D. Romano: You know, we have to think about where we're coming from, right? We're coming from a pretty low base. We had a very strong quarter with regard to volume. I do believe that that is the front end of a recovery. And those kinds of inputs are indicative of what's happening.
John Patrick McNulty: You had a very strong quarter with regards to volume I do believe that that is the front end of a recovery and its those kind of inputs are indicative of what's happening we saw some of that happening in the back of the end of last year and that's why we started ramping up and some of that high cost inventory that we said was going to take maybe more towards the end of the second quarter to <unk>.
John D. Romano: We saw some of that happening at the back end of last year. And that's why we started ramping up and some of that high-cost inventory that we said was going to take maybe more towards the end of the second quarter to work through because the volumes were moving a little quicker than we thought. We're running through that a bit quicker, so we'll continue to evaluate how we're going to run the assets.
John Patrick McNulty: Work through because the volumes are moving a little quicker than we thought we're running through that a bit quicker. So we will continue to evaluate how we're going to run the assets.
John Patrick McNulty: We're running at a rate now which is much more consistent.
John D. Romano: You know, we're running at a rate now which is much more consistent. Running assets at 70% on average is a difficult thing to do, so we're still bringing the assets back up. But at the rates we're running at right now, we believe we're running at a much more reliable rate, a lot of the downtime that we had from running at lower rates, we don't believe is going to happen again.
John Patrick McNulty: Running assets at 70% on average is it's a difficult thing to do so we're still bringing the assets back up but at the rates. We're running at right. Now we believe we're running at a much more reliable rate a lot of those downtime that we had from running at lower rates. We don't believe it's going to happen again. So those are some of the things that are in the rearview mirror, but we still have some.
John D. Romano: So those are some of the things that are in the rearview mirror, but we still have some upside depending upon how the market continues to evolve. And as it does, we'll continue to adjust our production through our integrated business planning process, which also factors in how we manage our ore blend. John, did you have a comment?
John Patrick McNulty: Upside depending upon how the market continues to evolve and as it does we will continue to adjust our production.
John Patrick McNulty: Through our integrated business planning process, which also factors in how we manage our ore blends John did you have a cough and I was just going to say you know as John mentioned as we've said before we did start ramping up in Q4 of last year and so just given our vertically integrated chain. It takes three to six months to flow through so you saw a big portion of that go through in Q1 and.
John Patrick McNulty: Did you have a comment? I was just going to say, you know, as John mentioned, as we've said before, we did start ramping up in Q4 of last year. And so, just given our vertically integrated chain, it takes three to six months to flow through. So you saw a big portion of that go through in Q1. And then we expect that higher-cost inventory to work through by Q2. You'll probably see not quite the same level as you saw in Q1, but pretty significant and close to that level.
John Patrick McNulty: Then we expect that lower the higher cost inventory to work through by Q2, Youll see probably not quite the same level as you saw in Q1, but pretty significantly close to that level.
John Patrick McNulty: Got it. Okay. No, that's a really helpful color.
Speaker Change: Got it Okay. That's really helpful color and then I guess as a second or follow up.
John D. Romano: And then, I guess, as a second or a follow-up, so it does look like volumes are coming in better than kind of the usual seasonal uptick, both from 1Q and from 2Q. So, how are you thinking about the usual seasonal patterns for TIO2 demand as we go into the back half of the year? Should we assume at this point that it does kind of return to a more normalized level, or could it be, you know, maybe a little less down as we go into the back?
Speaker Change: It does look like that.
Speaker Change: The volumes are coming in better than kind of the usual seasonal uptick both from in <unk> and in <unk> I guess, how are you thinking about the usual seasonal patterns for T O to demand as we go into the back half of the year should we assume at this point it does kind of returned to a more normalized level.
Speaker Change: Or could it be maybe a little less down as we go into the into the back half.
John D. Romano: Yeah, so I mean, we were guided to a seven to 10% increase in Q2. And I would say that's it.
Speaker Change: Yeah, So I mean, we guided to 7% to 10% increase and Q2.
Speaker Change: And I would say that's it depends on the year and we had a lot of different second quarters over the course of the last three years with Covid and the recovery from Covid. So I would say that's not a very abnormal than.
John D. Romano: It depends on the year. We've had a lot of different second quarters over the course of the last three years with COVID and then recovery from COVID. So I would say that's not very abnormal, maybe a little bit on the higher side. So it's a little bit early for us to determine exactly what's going to happen in the third quarter, although we're already kind of getting visibility on what that order book looks like.
Speaker Change: It may be a little bit on the higher side. So it's a little bit early for us to determine exactly what's going to happen in the third quarter, Although we're already kind of getting visibility on what that order book looks like.
John D. Romano: Typically, in some instances, you could see a third quarter being slightly lower, depending upon what year you're in and where you are in the cycle. But in a normal market, you'd see inventory being built in the first quarter. And typically, you'd consume that inventory in Q2 and Q3, and then you'd build inventory in Q4 as well. So I would expect it to be somewhat similar to the, but we're not expecting right now based on what we're looking to see a huge uptick in third-quarter volumes.
Speaker Change: Typically.
Speaker Change: In some instances you could see a third quarter being slightly lower depending upon what year, you're in where you are in a cycle, but in a normal market you'd see inventory being built in the first quarter and typically you would consume that inventory in Q2, and Q3, and then you'd build of inventory in Q4 as well.
Speaker Change: So I would expect it to be somewhat similar to the us.
Speaker Change: We're not expecting right now based on what we're looking to see a huge uptick in the third quarter volumes, but again, it's a little bit too early and again I'm not.
John D. Romano: But again, it's a little bit too early. And again, I'm not giving any predictions on what's going to happen with anti-dumping, but that could have an impact if duties are imposed, and I stress the word if.
Speaker Change: Giving any predictions on what's going to happen on anti dumping, but that could have an impact if in if duties are imposed and I stress the word if.
Operator: Got it. Thanks very much for the call.
Speaker Change: Got it thanks very much for the color.
Speaker Change: Thank you.
Patrick Duffy Fischer: And your next question will be from Duffy Fischer at Goldman Sachs. Please go ahead.
Speaker Change: And your next question will be from Duffy Fischer of Goldman Sachs. Please go ahead.
Patrick Duffy Fischer: Yes, good morning. Can you walk us through the major geographies when you look at your Q2 guide both on price and volume? Can you give us some color on how that will vary between Europe, the U.S., and Asia?
Patrick Duffy Fischer: Yes. Good morning can you walk through the major geographies. When you look at your Q2 guide both on price and volume can you give us some color on how that will vary between Europe, the U S and Asia.
John D. Romano: Yeah, Debbie. So look, when we think about the first quarter, as I mentioned in the call, we saw growth in every region. And we saw, I'd say, disproportional growth in the areas where we had further reductions over the last six quarters. So Europe, Middle East, Africa, Asia Pacific were a bit higher on the growth side.
Patrick Duffy Fischer: Yeah, Duffy so look.
Patrick Duffy Fischer: When we think about the first quarter as I mentioned in the call. We saw a growth in every region and that we saw I'd say disproportionate growth in the areas, where we had.
Patrick Duffy Fischer: Further reductions over the last six quarters, So Europe Middle East Africa Asia Pacific was a bit higher on the growth side moving.
Patrick Duffy Fischer: Moving into Q2, we're starting to see what we would normally project in the first quarter for our coding season build so the Americas is starting to pick up we're seeing some green shoots in Brazil.
John D. Romano: Moving into Q2, we're starting to see what we would normally project in the first quarter for a coding season build. So the Americas is starting to pick up, and we're seeing some green shoots in Brazil. But we're seeing, you know, pretty consistent growth. But I'd say the difference between Q1 and Q2 is that we're starting to see a little bit more growth in North America. Not to say we didn't see growth in the first quarter, but we're seeing what's more indicative of the Northern Hemisphere coding season with volumes picking up in North America and still getting increases in Europe, the Middle East, Africa, and Asia Pacific as well. But I'd say that we're getting a bit more of a push in North America as well in the second quarter.
Patrick Duffy Fischer: But we're seeing pretty consistent growth, but I'd say the difference between Q1 and Q2 is that we're starting to see a little bit more growth on our in North America.
Not to say, we didn't see growth in the first quarter, but we're seeing what's more indicative than in northern hemisphere coating season with volumes picking up in North America, and still getting increases in Europe, Middle East Africa, and Asia Pacific as well, but I'd say that we're getting a bit more of a push in North America as well in the second quarter.
Patrick Duffy Fischer: Okay, and then if you look at your debt ratio, you talked about. I'm obviously wanting to get that better. How should we think about how much of that repair comes from just EBITDA moving higher versus how much you actually want to pay down net debt or pay down gross debt from here?
Speaker Change: Okay and then if you look at your debt ratio, you've talked about obviously wanting to get that better.
Speaker Change: How should we think about how much of that repair comes from just EBITDA moving higher versus how much you actually want to pay down net debt pay down gross debt from here.
John D. Romano: So maybe I'll start with what our goal is. And it's still to get to, you know, we talk about 2.7 to 2.8, depending upon gross or net debt. We still have a goal to get to 2 billion. And I'll let John talk about that.
Speaker Change: So maybe I'll start with what our goal is and it's still to get to you know we talk about two seven to $2 eight depending upon gross or net debt, we still have a goal to get to $2 billion.
Speaker Change: And I'll, let John talk about yeah, and I think if you look at the leverage obviously it is relating to net debt, which are you know obviously, it's either paying down debt or generating cash I think as John mentioned in his comments, we will look to bolster liquidity through the end of this year and then hanging on the market pay down debt, but.
John Patrick McNulty: Yeah, and I think if you look at the leverage, obviously, it is relating to net debt, which is, you know, obviously, it's either paying on debt or generating cash. I think, as John mentioned in his comments, we will look to bolster liquidity through the end of this year and then hang on the market and pay down debt. But, you know, as we mentioned, we do expect positive free cash flow for the year.
John: As we mentioned, we do expect positive free cash flow for the year Q1 was the extent of getting us. So we do expect a pretty significant amount of free cash flow in the last three quarters of the year, which will help that metric and secondly, if you take a look at our guide of 160 to $1 80, we were we will start producing.
John Patrick McNulty: Q1 was significant news. So we do expect a pretty significant amount of free cash flow in the last three quarters of the year, which will help that metric. And secondly, if you take a look at our guide of 160 to 180, you know, we will start producing much better EBITDA year over year, even as early as Q2, depending on where we land. But the second half of 2023 was, you know, a pretty easy goalpost that we will be able to beat through the second half of the year. So we do expect that our net leverage ratio will go down pretty significantly through the rest of this year and going forward. But I guess that that was kind of my question.
John: Much better EBITDA year over year, even as early as Q2, depending on where we land, but the second half of 2023 was.
John: It's pretty easy.
John: Goalposts that we are we will be able to beat through the second half of the year. So we do expect that our net leverage ratio will come down pretty significantly through the rest of this year and going forward.
Patrick Duffy Fischer: But I guess that was kind of my question. What's the baseline EBITDA you want to use when you look at that ratio? Would you want to use kind of the trough of the LTM as we sit today? Or is it just going to be the LTM float, you know, as we go through time, which will have a higher EBITDA number behind it?
Patrick Duffy Fischer: What's the baseline?
Speaker Change: But I guess that was kind of my question, what's the baseline EBITDA you want to use when you look at that ratio would you want to use kind of the trough of the LTE M. As we sit today or is it just going to be the LTM floating as we go through time, which will have a higher EBITDA number behind it.
Speaker Change: Yeah definitely at a higher level.
Speaker Change: Okay. Thank you yeah the ladder.
Speaker Change: Thanks, guys.
Speaker Change: Thank you.
Operator: Thank you. The next question will be from John Spector at UBS. Please go ahead.
Speaker Change: Thank you next question will be from John Spector UBS. Please go ahead.
Joshua David Spector: Yeah, hey guys, good morning. I wanted to ask if you think your volumes benefited in the first quarter from competitor outages or not, and to the extent that they did or didn't, is any of that a permanent shift in your view and share gains for Tronox that maybe you've locked down with contracts, or do you view any of that as more transitory?
Joshua David Spector: Yeah, Hey, guys good morning.
Joshua David Spector: I wanted to ask if you think your volumes benefited in the first quarter from competitor outages or not and to the extent that they did or did it.
Joshua David Spector: Is any of that a permanent shift in your view and share gains for tronox that maybe you've locked down with contracts or give you any of that is more transitory.
Joshua David Spector: Okay.
John D. Romano: Hey Josh, I guess, you know, when I made the comment that we ramped up our assets in anticipation of what we saw, as far as green shoots in the fourth quarter, where we saw demand starting to improve, and, you know, we were able to respond to that. Because I believe a lot of that has to do with the global strength of our footprint, or the strength of our global footprint, having, you know, assets on six continents who are located closer to our customers. There are a lot of issues with the Red Sea and the Panama Canal.
Speaker Change: Hey, Josh So look I guess, you know when I made the comment that we ramped up our assets in anticipation of what we saw as far as green shoots in the fourth quarter.
Josh: We saw demand starting to improve and we were able to respond to that.
Josh: Because of a I believe a lot of that has to do with the global strength of our footprint or the strength of our global footprint having.
Josh: Assets on six continents or located closer to our customers.
John D. Romano: So is there some volume that we're able to respond to because of how we're positioned? I think the answer to that is yes. You know, I'm not exactly sure if I would call that a share gain; I would call that being able to respond to what we indicated as the early signs of a pickup. And I wouldn't expect that, you know, when we think about that moving forward. I made the reference that we're continuing to see growth into the second quarter.
Josh: There's a lot of issues with the Red Sea in the Panama Canal. So is there some volume that we were able to respond to because of how we're positioned and I think the answer to that is yes.
Josh: I'm not exactly sure if I would call that share gain I would call that being able to respond to what we indicated as the early signs of a pickup and I wouldn't expect that.
Josh: When we think about that moving forward.
Josh: I made the reference that we're continuing to see growth into the second quarter. So.
John D. Romano: So there were a lot of things that were playing into our demand; there was our growth in our volume. So you had demand, you had, you know, The supply chain basically worked through all the inventory. So we're getting customers just back to a normal ordering pattern. And there was a little bit of, I'd say, our volume that did come from our global position and being able to respond to the demand in all the regions that we're supplying in because, as I mentioned, we saw an uptick in every region that we sold into in the first quarter.
Josh: A lot of things that we're playing into our demand there was.
Josh: Growth in our volumes. So you had demand you had.
Josh: The.
Josh: Supply chain basically had worked through all the inventory. So we're getting customers just back to a normal order buying pattern and there was a little bit of I would say of our volume that did come from our global position in being able to respond.
Josh: So the demand in all the regions that we're supplying them because as I mentioned, we saw an uptick in every region that we sold into in the first quarter.
Joshua David Spector: Okay, thanks. I appreciate that. And I wanted to ask about the cost side.
Speaker Change: Okay. Thanks, appreciate that and I wanted to ask on the cost side. So I mean, John you mentioned earlier I think pretty clearly on the sequential improvements that you guys expect but I guess, if I look back a year ago.
Speaker Change: Operating cost impacts at it was minus $100 million plus and it was negative the year before so just trying to think a little bit longer term.
John D. Romano: So, I mean, John, you mentioned earlier that I think pretty clearly about the sequential improvements that you guys expect. But I guess if I look back a year ago, you know, the operating cost impacts, it was minus $100 million plus, and it was negative the year before. So just trying to take a little bit longer term. Can you recover any of that as we look over the next couple of years? Is that higher operating rates, or is that related to some of the CapEx projects around the mine? Just help and frame how that will layer in over the next couple of years would be helpful. Yeah, and I think you should
Speaker Change: Can you recover any of that as we look over the next couple of years is that higher operating rates or is that related with some of the capex projects around the mine.
Speaker Change: Helping frame how that layers in over the next couple of years would be helpful. Thanks.
John Patrick McNulty: Yeah, and I think, you know, obviously higher production rates we will see, and as we mentioned, we should see that by the end of Q2. Additionally, I think the biggest increase that we've had over the past couple of years is general raw materials have been up from 2020 to 2022. We were up over $400 million if you look at constant volumes and constant currency. So we haven't seen quite the, you know, the lowering in costs there, you know, about 4% in 2023; we expect high single digits in 2024. So, you know, we do expect that even at those levels, it's unsustainable costs. So we do expect to see that, but likely not in 2024.
Speaker Change: Yeah.
Speaker Change: Obviously, the higher production rates, we will see and as we mentioned and you should see that by the end of Q2.
Speaker Change: Additionally, I think the biggest increase that we've had over the past couple of years as general raw materials have been up from 2020 to 2022 were up over $400 million. If you look at constant volumes in constant currency. So we haven't seen quite the.
Speaker Change: The.
Speaker Change: Lowering cost there about 4% in 2023, we expect high single digits in.
Speaker Change: 2024, so we.
Speaker Change: So we do expect that those even at those levels. It's unsustainable cost. So we do expect to see that but likely not in 2024.
Speaker Change: Okay.
Speaker Change: Okay. Thank you.
Operator: Thank you. The next question will be from Frank Mitsch at Fernium Research. Please go ahead. Good morning.
Speaker Change: Thank you.
Speaker Change: Next question will be from Frank Mitsch Fermium Research. Please go ahead.
Frank Joseph Mitsch: Good morning and congrats on the beat and raise. I want to drill down a little bit more into the fixed cost absorption production level issues. You indicated that this was a negative of over $100 million in 2023. So as we think about 2024, and you know, given the start that you're off to, is it fair to assume that, absent those costs, All else equal, EBITDA should be up over $100 million in 2024.
Frank Joseph Mitsch: Good morning, and congrats on the beat and raise I wanted to drill down a little bit more into the fixed cost absorption production level issues. He indicated that this was a negative of over $100 million in 2023.
Frank Joseph Mitsch: So as we think about 2024.
Frank Joseph Mitsch: And given the start that you're that you're off too is it fair to assume that absent those costs all else equal EBITDA should be up over $100 million in 2024.
Frank Joseph Mitsch: Now that's a fair statement. Okay, fantastic. Much appreciated because, obviously, the street's not there, but I suspect, as I said, given the beaten race, the street will get there. And then on the pricing side, you indicated that you anticipate a slight uptick here in 2Q versus 1Q. Can you comment at all with respect to the geographic expectations on that?
Speaker Change: No that's a fair suitable math.
Speaker Change: Okay.
Speaker Change: Fantastic.
Speaker Change: Much appreciate it because obviously the street is not there.
Speaker Change: But I suspect as I said, given the beat and raise the street will get there and then on the pricing side you indicated that you anticipate a slight uptick here in <unk> versus <unk> can you comment at all with respect to the geographic expectations are on that.
John D. Romano: Yeah, Frank. So, you know, in some of the areas where we saw the biggest decline in volume, so over the last six quarters, Europe, the Middle East, Africa, Latin America, Asia Pacific, that's where we're starting to see the market recover strongest. And that's where we're starting to see some, I'd say, progress on pricing. You know, there are a lot of announcements out there about pricing. And I think it's probably worth spending a little bit of time talking about it. It takes a little bit of time for price.
Speaker Change: Yeah, Frank so and some of the areas, where we saw the biggest decline in volume so over the last six quarters Europe Middle East Africa, Latin America Asia Pacific and that's where we're starting to see the market recover the strongest and that's where we're starting to see some I would say.
Speaker Change: Progress on pricing you know theres a lot of announcements out there on pricing and I think it's it's probably worth.
Speaker Change: Turning a little bit of time talking about it it takes a little bit of time for price. So anytime the market rebounds, and that's what we saw in the first quarter you wouldn't normally see that kind of a pickup in the first quarter. So again, what we saw was indicative but.
John D. Romano: So anytime the market rebounds, and that's what we saw in the first quarter, you wouldn't normally see that kind of a pickup in the first quarter. So again, what we saw was indicative of the start of a recovery, and it takes a little bit of time for prices to actually roll through. So when people make announcements, it takes time for those announcements to get implemented. Typically, you know, capacity utilization needs to get to a certain point before, and inventories need to get to a certain place before pricing actually starts to move. So we're making progress. Again, Latin America, Asia Pacific, Europe, the Middle East, and Africa.
Speaker Change: The starting as a recovery and it takes a little bit of time for pricing to actually roll through is when people make announcements takes time for those announcements to get implemented typically.
Speaker Change: Capacity utilization needs to get to a certain point before and inventories need to get to a certain place before pricing actually starts to move through so we're making progress.
Speaker Change: Again, Latin America, Asia Pacific Europe, Middle East and Africa.
John D. Romano: And as we move into the second half of the year, we'll start to make progress in other areas. But those are the areas where we're starting to make some progress. And like I said, it typically takes a little bit of time to get that pricing traction once the volume comes along. It doesn't happen overnight. And we got a lot of questions about why our price was down in the first quarter. That wasn't the case.
Speaker Change: And as we move into the second half of the year, we will start to make progress in other regions, but those are the areas, where we're starting to get some progress and like I said it typically takes a little bit of time to get that pricing traction once the volume comes along it doesn't happen overnight and we got a lot of questions about why our price was down in the first.
Speaker Change: Quarter that wasn't down 1% was in line with what we thought and that's largely just mix.
John D. Romano: One percent was in line with what we thought, and that was largely just mixed. So, you know, we have a good feel for where we are in the second quarter because we've already negotiated those increases. That's why we made that reference to a slight increase. But as we get into the second half and we kind of evaluate how the market's continuing to evolve, we'll continue to make that progress on prices. Terrific job.
Speaker Change: So we have a good feel for where we are on the second quarter, because we've already negotiated those increases that's why we made that reference to and a slight increase but as we get into the second half and we kind of evaluate how the market is continuing to evolve we will continue to make those.
Speaker Change: Progress on pricing.
Operator: Terrific John, thank you so much. Thank you. Next question will be from Mike Leesand at Barclays. Please go ahead. Great. Thanks. Good morning, guys. I just have one question, maybe for John.
Speaker Change: Terrific John Thank you so much.
Speaker Change: Thank you.
Michael James Leithead: The next question will be from Mike Leesend at Barclays. Please go ahead.
Speaker Change: Next question will be from Mike Lee at Barclays. Please go ahead.
Michael James Leithead: Great. Thanks, Good morning, guys.
Michael James Leithead: I just have one question, maybe for John or CFO John on.
Michael James Leithead: On inventory.
Michael James Leithead: Inventory decreased maybe 1% sequentially and your sales volumes improved something like 20% sequentially and you mentioned you recently burned through a lot of the high cost inventory.
Michael James Leithead: Inventories have declined more so so can you help explain that.
John Patrick McNulty: Yeah, I mean, that's a great question there. You know, obviously, we did see inventory levels lower, which would be normal seasonality in this quarter. So, you know, you have to take that into account versus looking from overall ending balance to ending balance. But you also have to take a look at, you know, we are a vertically integrated supplier. So it's not just pigment inventory, it's not just zircon inventory, which, obviously, we're very robust. It's also the mining side of it as well.
Speaker Change: Yeah, I mean, that's a great question there.
Speaker Change: Obviously, we did see.
Speaker Change: Inventory, lower which normal seasonality in this quarter would be a build of it. So you have to take down an account versus looking from overall ending balance ending balance.
Speaker Change: But you also have to take a look at we are a vertically integrated.
Speaker Change: Suppliers. So it's not just pigment inventories not just zircon inventory, which obviously were very robust. It's also the mining side of it as well secondly, you did mentioned some of the cost.
John Patrick McNulty: Secondly, you know, you did mention some of the costs have come down. But we still carry pretty significant costs on our books relating to the $400 million increase, you know, over the past couple years. So I think that's what's driving the change. But ultimately, we do expect that we will recover a good portion of that $400 million investment over time. Frankly, it's when input costs do go down that we will see that.
Speaker Change: Have come down but.
Speaker Change: But we still carry pretty significant cost on our books relating to the $400 million increase.
Speaker Change: Over the past couple of years, So I think that's what's what's driving.
Speaker Change: The change, but ultimately we do expect that we will recover a good portion of that $400 million build overtime.
John Patrick McNulty: Additionally, you know, once more robust commercial activity in the second half of the year, just like we saw in 2021, we will see that inventory turn into cash. If you look at 21 as a reference, we did generate $468 million of free cash flow. So the earnings potential and cash flow potential is there in the business.
Speaker Change: Frankly, it's when input costs do go down.
Speaker Change: We'll see that additionally, once more.
Speaker Change: Robust commercial in the second half of the year just like we saw in 2021, and we will see that inventory turn into cash.
Speaker Change: If you look at 'twenty, one as a reference we did generate $468 million of free cash flow. So the earnings potential cash flow potential is there in the business and specifically on the inventory that we said we drew down that was on Tio too I mean, we're ramping up Atlas now so I think John's point is it's you know we don't only have ti.
John D. Romano: And specifically on the inventory that we said we drew down that was on TIO2. I mean, we're ramping up Atlas now.
John D. Romano: So I think John's point is we don't only have TIO2 inventory; we've got pig iron inventory, we've got ilmenite inventory, we've got slag inventory, and natural rutile. So it's a whole mixture of things. And I think the key is, as to John's point, as our costs go down, the cost of that inventory goes down. So it's not, there's a day's element to inventory. And then there's also the value of that inventory, and we expect that to continue to go down throughout the rest of the year. And the other thing to note is, you know, obviously, we do.
Speaker Change: Inventory, we've got pig iron inventory, we've got ilmenite inventory, we've got the slag inventory.
Speaker Change: Natural rutile, so it's a whole mixture of things I think the key is to John's point as our costs go down the cost of that inventory goes down so its not theres a day's element of inventory and then Theres also a value of that inventory, we expect that to continue to go down throughout the rest of the year and the other thing to note is obviously, we do have a con.
John D. Romano: Unknown Speaker And the other thing to note is, you know, obviously, we do have a contract with Jazan. So we are buying feedstock, and that is building our inventory of feedstock.
Speaker Change: Tract with Japan.
Speaker Change: Our buying feedstock.
Speaker Change: It is building our inventory of feedstock.
Speaker Change: Got it thank you so much.
Operator: Thank you. The next question will be from Hassan Ahmed at Alembic Global. Please go ahead.
Speaker Change: Thank you.
Speaker Change: Next question will be from Hassan Ahmad.
Hassan Ijaz Ahmed: Alembic Global please go ahead.
Hassan Ijaz Ahmed: Good morning, John.
Hassan Ijaz Ahmed: Question on the guidance. You guys reported $130 million in EBITDA in Q1, and obviously $160 to $180 million is the guidance range for Q2. So, you know, I mean, taking the midpoint of Q2 guidance, you're roughly sort of guiding to around $300 million in the first half of the year. And it seems, you know, from all your commentary that, you know, earnings momentum is developing, right? So the back half should look far better than the first half.
Hassan Ijaz Ahmed: Question on the guidance.
Hassan Ijaz Ahmed: You guys reported $130 million in EBITDA in Q1, and obviously $160 million to $180 million is the guidance range for Q2.
Hassan Ijaz Ahmed: You know I mean, taking the midpoint of Q2 guidance, you're roughly sort of guiding to around 300 million in the first half of the year.
Hassan Ijaz Ahmed: And it seems you know from all your commentary that you.
Hassan Ijaz Ahmed: Earnings momentum is developing right sort of back half should look far better than the first half.
Hassan Ijaz Ahmed: And yet I take a look at consensus numbers and they are slightly shy of 600 million, so which with which to me you know themes. It seems highly beautiful I mean is that a fair way of thinking about 2024.
Hassan Ijaz Ahmed: And yet I take a look at the consensus numbers, and they are slightly shy of 600 million. So, which to me, you know, seems highly beatable. I mean, is that the fair way of thinking about 2024?
John D. Romano: Yeah, that's it. Another interesting way to ask the question that Frank asked, but look, I think your comments are reasonable, right? If you doubled 300, you're still shy of the number that we just kind of confirmed with Frank. So we've got some upside as we move through.
Speaker Change: Yes, that's it.
Speaker Change: Another interesting way to ask the question that Frank asked but look I think your comments.
Speaker Change: A reasonable right. It's if you doubled 300, you know you got your you're still shy of the number that we just kind of confirm with Frank So we've got some upside as we move through and I'm not supposed.
Hassan Ijaz Ahmed: And I'm not supposed to talk about consensus because Jennifer tells me not to do that. I won't reference that, but you did. But, you know, I think your comments are accurate.
Speaker Change: Talk about consensus because Jennifer tells me not to do that.
Speaker Change: I won't reference that but you did but you know.
Speaker Change: I think your comments are accurate.
John D. Romano: Fantastic, fantastic. And again, sort of digging a little deeper into that, you guys talked about fixed cost absorption being a 25 to $35 million penalty last year, right? So, you know, as your operating rates sort of move up, and you were talking about operating rates being sort of above 80% now, how much of that penalty was an offset in Q1? And how much of it is going to be an offset in Q2? And what does the back half look like?
Speaker Change: Fantastic Fantastic and again, just sort of digging a little deeper into that.
Speaker Change: You guys talked about fixed cost absorption being a 25% to $35 million penalty last year right. So you know as youre operating rates sort of move up and you know you were talking about sort of operating rates being sort of above the 80% now how much of that Daniel.
Speaker Change: He.
Daniel: It was an offset in Q1, how much of it is going to be an offset in Q2 and what does the back half look like.
John D. Romano: So we're not going to provide the back half yet, but I would expect if we continue running at this rate, so I'll let John kind of work through the numbers because we kind of gave you that. It was about 25 to 30 million in the first quarter. So, but you have to think about how those numbers worked out last year. It wasn't right. You know, we said 25 to 35 million a quarter, but there were quarters where that number was higher. So, John,
Daniel: So we're not going to provide the back half yet but.
Daniel: But I would expect if we continue running at this rate. So now I'll, let John kind of work through the numbers because we kind of gave you. It it was about $25 million to $30 million in the first quarter. So.
John: But you have to think about how those numbers work through last year. It wasn't right. You know, we said, 25% to $35 million a quarter, but there were quarters, where that number was higher so.
John Patrick McNulty: John, you might know, I mean, we said in Q1 versus Q4, production costs were up $57 million, $32 was favorable absorption and lower cost, lower cost or market changes, you know, $15 from the BALIC, EIDL, and then $10 million from higher mining. So, if you take a look at that $32 million or so, and then we did answer the Q&A recently, we do expect a similar amount, not quite the amount, but a similar amount in Q2.
Daniel: John you might know I mean, we said in Q1 versus Q4.
John: <unk> costs were up 57 million 32 was favorable absorption and lower cost.
John: Lower of cost or market changes 15 from the Balik idle and then 10 million from higher mining. So if you take a look at that $32 million or so.
Daniel: And then we did answer on the Q&A recently, we do expect a similar amount not quite the amount, but a similar amount in Q2. So if you take a look at that it's it's it's additional to this 32 million that we've quoted so you're already seeing a good amount of that and that will continue.
John Patrick McNulty: So, if you take a look at that, it's additional to this $32 million that we've quoted. So, you're already seeing a good amount of it, and that will continue through Q3 and Q4. So, that's why we've said that we expect it to recover that $25 to $35 million from running at lower through Q2.
Daniel: Through Q3 and Q4, so that's why we've said that we expected that to recover that in the third $25 million to $35 million from running at lower through Q2.
John D. Romano: And we're not, Hassan, I mean, we're not at the rate where we're running at full capacity yet because, again, we're seeing a recovery. We're on the front end of it, but we've still got some capacity to respond to further demand improvement as we see the recovery continue. So, you know, we're continuing to come off of, you know, we've been talking forever about the fourth quarter of 2022 being the bottom, and we saw, you know, 2023, there was some slow progression, and we finally saw, you know, what we would say is a good indicator of the front end of a real recovery.
Daniel: We're not in.
Daniel: I mean, we're not at the rate where were running at full capacity yet because again, we're seeing a recovery. We're on the front end of it but we've still got some capacity too.
Daniel: Respond to further demand improvement as we see the recovery continues so.
Daniel: We're continuing to come off of where we've been talking forever about the fourth quarter of 2022 was the bottom. It was and we saw 2023, there was some slow progression and we've finally seen what we would say is a good indicator of the front end of a real recovery.
John D. Romano: So as we continue to move through the rest of the year, we'll evaluate that, you know, China is still kind of an unknown. So, you know, if China recovers, you'll start to see impact not only on TiO2, but on Zircon as well.
Daniel: So as we continue to move through the rest of the year, we'll evaluate that China is still kind of an unknown.
Daniel: So if China recovers.
Daniel: You'll start to see impact not only on T O to bid on zircon as well.
Hassan Ijaz Ahmed: Very helpful. Thank you so much, guys.
Speaker Change: Very helpful. Thank you so much guys.
Speaker Change: Thank you.
Operator: The next question will be from Jeff Zekauskas at Shtapley Morgan. Please go ahead.
Speaker Change: Next question will be from Jeff Zekauskas JP Morgan. Please go ahead.
Jeffrey John Zekauskas: Thanks very much. When you take a step back and you look at the coding markets in the United States, they didn't grow in the first quarter, and maybe they shrank a little bit. The Coding Markets in Europe. Maybe they're going to fly. And when you listen to the commentary of PPG or Sherwin-Williams, what they say is that, you know, they have plenty of TIFs. So when you look at your volume growth... Where did it come from? And why isn't it simply just a restocking of lower inventories with volume to fall off? Because the TIO2 growth rate is so much higher than the end market coding growth rate? How do you assess those differences?
Jeffrey John Zekauskas: Thanks very much.
Jeffrey John Zekauskas: When you take a step back and you look at the coatings markets in the United States.
Jeffrey John Zekauskas: They didn't grow in the first quarter and maybe they shrank a little bit.
Jeffrey John Zekauskas: In the coatings markets in Europe.
Speaker Change: B they're flat.
Speaker Change: And when you listen to the commentary of.
Speaker Change: PPG or Sherwin Williams, what they say is that they have plenty of tio too.
Speaker Change: So when you look at your volume growth.
Speaker Change: Where did it come from and why isn't it simply just a restocking of lower inventories with volume to fall off because the T. I O. Two growth rate is so much higher than the end market coatings growth rate.
Speaker Change: How do you assess those different.
Speaker Change: Pulls and pushes.
John D. Romano: Thanks, Jeff. I think you have to go back to the last 24 months, right? So let's wind the clock back to 22 and 23, where volumes dropped 15% each year. So over that 24 month period, we lost 27% of our volume. That's not sustainable either, and you didn't hear that kind of a reduction from all of those coding companies.
Speaker Change: Yeah. Thanks, Jeff I think you've got to go back to the last 24 months right. So, let's let's wind the clock back to the 22, and 23, where volumes dropped 15% each year. So over that 24 month period, we lost 27% of our volume that's not sustainable lending either and you didn't hear that kind of a reduction from all of those.
Jeffrey John Zekauskas: So there is an element of a tremendous amount of inventory that was in the supply chain when we talked about the de-stocking effect. So part of it was de-stocking. And now we're just getting back to normal buying patterns. We're not back to where we were in 19 yet. To get to 21 levels, 2021 was a boom year for a lot of reasons for the TIO2 industry, because people were staying home, they weren't going out to eat, and they were, you know, using products that our products are in.
Speaker Change: Coatings companies. So there is an element of a tremendous amount of inventory that was in the supply chain that we talked about the destocking effect. So part of it was destocking and now we're just getting back to normal buying patterns, we're not back to where we were at 19 yet.
Speaker Change: To get to 21 levels.
Speaker Change: 2021 was a boom year for a lot of reasons for the tier two industry because people were staying at home they weren't going out to eat and they were using products that our products are in so we're not suggesting we're going to get back to 21 volumes, but.
Jeffrey John Zekauskas: So, we're not suggesting we're going to get back to 21 volumes, but, you know, what we saw over the last two years wasn't sustainable either. Now we're getting back to what we would refer to as just more normal buying patterns. There has been no significant replacement for TIO2, where 15% of the demand can just drop away on an annualized basis. So when you think about our growth, a lot of that growth is just getting back to normal buying patterns and feeding through that supply chain, which has been bloated with inventory and has now been depleted, and we're starting to see upticks in demand. And, you know, I'm not going to speak to what or who you're speaking to with regard to the customers, but we're supplying all of them.
Speaker Change: What we saw over the last two years wasn't sustainable either now we're getting back to what we would refer to as just more normal buying patterns. There has been no significant risk replacement for Tio two were 15% of the demand can just drop away on an annualized basis. So when you think about our growth a lot of that growth is just getting back to normal buying patterns and feeding.
Speaker Change: Through that supply chain, which has been bloated with inventory and has been now depleted and we're starting to see upticks in demand and I'm not going to speak to what.
Speaker Change: Or who you are speaking to with regards to the customers, but we're supplying all of them.
John D. Romano: Okay, thanks very much.
Speaker Change: Okay. Thanks very much.
Operator: Thank you. The next question will be from Vincent Andrews at Morgan Stanley. Please go ahead.
John D. Romano: Thank you next question will be from Vincent Andrews of Morgan Stanley. Please go ahead.
Turner Wills Hinrichs: Hi, this is Turner Hinrichs on behalf of Vincent. I'm wondering if you could provide some additional color on industry operating rates and how the supply and demand balance is trended by region.
Speaker Change: Hi, This is Turner henricks on for Vincent I'm wondering if you could provide some additional color on industry operating rates and how the supply and demand balance has trended by region.
John D. Romano: So on industry operating rates, you know, we're not going to really comment; it's hard for us to comment on what everybody else is doing. We gave you an indication of where we were. And I would expect as the market recovers, you know, everybody's going to start looking at how their operating rates are and how they're going to respond as the demand continues to recover. So, you know, with regard to the second part of your question, was it regional demand? Or could you?
Turner Wills Hinrichs: So on industry operating rates.
John D. Romano: We're not going to really comment that it's hard for us to comment on what everybody else is doing what we gave you an indication on where we were.
Speaker Change: And I would expect as the market recovers you know everybody is going to start looking at how the at their operating rates.
John D. Romano: And how theyre going to respond as the demand continues to recover.
Speaker Change: So with regards to demand.
John D. Romano: The second part of your question was it.
John D. Romano: Regional demand or could you repeat the iron demand balance.
Turner Wills Hinrichs: Can you repeat that? Buy and demand balance.
Hassan Ijaz Ahmed: Yeah.
John D. Romano: So, look, TO2 is a global market. So when we think about supply and demand, TO2 flows pretty freely in a normal market.
Turner Wills Hinrichs: Look tier two is a global market.
John D. Romano: So when we think about supply and demand T O to fly it flows pretty freely.
John D. Romano: Normal market I would say over the course of the last.
John D. Romano: I would say over the course of the last probably eight months, considering everything that's going on in the geopolitical environment, it's been a little bit difficult, more difficult to ship material around. And that's why I made that reference; our ability to capture maybe the front end of this recovery has been a little bit better poised for us because of our global footprint and having our assets closer to our customers. But Europe, Latin America, and the Middle East, over the last six quarters, have been down more significantly. We're seeing that rebound a bit more.
John D. Romano: Probably eight months, considering everything that's going on in the geopolitical environment.
John D. Romano: It's been a little bit difficult more difficult to ship material around and that's why I made that reference our ability to capture.
John D. Romano: Maybe the front end of this.
John D. Romano: Recovery has been a little bit better poised for us because of our global footprint and having our assets closer to our customers.
John D. Romano: But Europe Europe, Latin America Middle East over the last six quarters was down more significantly we're seeing that rebound a bit more China on the demand side, obviously has been a big part of the growth over the course of the last 10 years with regards to capacity the exports kind of.
John D. Romano: China on the demand side obviously has been a big part of the growth over the course of the last 10 years with regard to capacity, and exports kind of illustrate that. But as far as supply and demand go globally, there are puts and takes in those regions. But from a demand side, you know, we're starting to see inputs of growth, with the exception, as I mentioned, China's still a bit muted, but we're seeing growth everywhere.
John D. Romano: Identify that.
John D. Romano: But as far as supply and demand goes globally.
John D. Romano: There's puts and takes in those regions, but that from a demand side.
John D. Romano: We're starting to see inputs of growth with the exception as I mentioned, China is still a bit muted, but we're seeing growth everywhere as far as our demand goes those areas that were.
John D. Romano: As far as our demand goes, those areas that were further impacted over the last six quarters, we're seeing stronger recovery from a lower base at this stage. And then in North America, as I mentioned, we're starting to see in the second quarter and in the first quarter, but more predominantly in the second quarter, what we would normally see is a normal coding season. So the demand in North America is starting to impact us as well. Great.
John D. Romano: Further impacted over the last six quarters, we are seeing stronger recover recovery from a lower base at this stage and then in North America as I mentioned, we're starting to see.
John D. Romano: In the second quarter and in the first quarter, but more predominantly in the second quarter, what we would normally see as a normal coating season. So the demand in North America starting up.
John D. Romano: Impact us as well.
Turner Wills Hinrichs: Great, great. Appreciate all the additional color. Just to confirm, it sounds like there's been some improvement in local for local selling this year, perhaps due to higher freight trends. And if you don't mind providing, as well, just an update on how global trade flows have been so far this quarter, that would also be of interest.
Speaker Change: Great Great. Appreciate all the additional color just to confirm it sounds like theres been some improvement of our local for local selling this year, perhaps due to higher freight trends and if you don't mind, providing as well just an update of how our global trade flows have been so far this quarter that would also be of interest.
John D. Romano: Global Trade. Well, look, there's been an impact on global trade flows, but it has been reduced.
Turner Wills Hinrichs: Global trade.
Turner Wills Hinrichs: Well look at it there's been an impact on global trade flows but got.
Speaker Change: Go ahead.
Turner Wills Hinrichs: Yeah, any updates on what you're seeing out of, you know, like Chinese exports since the, you know, high March figures or imports and exports in other regions? Just considering my, you know, additional sort of question on local for local selling?
John D. Romano: Yeah any updates on what youre seeing out of like Chinese exports since.
Turner Wills Hinrichs: Like high March figures or imports and exports in our other regions just.
Turner Wills Hinrichs: Just considering my additional sort of question on our local for local selling.
John D. Romano: Yeah, so clearly, there has been a big bump in March on exports out of China. And again, that's exports; they don't actually align with the imports going into Europe.
Speaker Change: Yeah. So clearly there has been a.
John D. Romano: Big bump in the March on exports out of China.
John D. Romano: And again that's exports.
John D. Romano: Those don't actually aligned with the imports going into Europe.
John D. Romano: So it's my opinion that some of that is probably pre-positioned and bonded warehouses and anticipation of what might be happening with dumping. There has been an impact on a company's ability to move material. And that the time to move material from one country to another has been impacted, but based on what's going on in the Red Sea and the Panama Canal. So, again, our global footprint allows us to take advantage of that because we have inventory positioned because of the location of our assets. It allows us to respond quicker to ups and downs in demand and not be impacted as much.
John D. Romano: So it's my opinion that some of that is probably pre positioned in.
John D. Romano: Bonded warehouses in anticipation for what might be happening on dumping.
John D. Romano: There has been an impact on company's ability to move material and that the time to move material from one country to another has been impacted but based on what's going on in the Red Sea and the Panama Canal. So.
John D. Romano: Yeah.
John D. Romano: Our global footprint, our global footprint allows us to take advantage of that because we have inventory positioned because of the location of our assets.
John D. Romano: How's us to respond quicker to ups and downs in demand.
John D. Romano: And not being impacted asthma, that's I'm not saying, it's no impact to us because we do ship globally, but the impacts of the Red Sea in the Panama Canal, probably have less impact to us than they do the balance of our competitor.
John D. Romano: I'm not saying it has no impact on us because we do ship globally, but the impacts of the Red Sea and the Panama Canal probably have less impact on us than they do on the balance of our competitors. Great, great. Thanks so much.
Turner Wills Hinrichs: Great, great. Thanks so much for all of the color.
Speaker Change: Great great. Thanks, so much for all the color.
Speaker Change: Thank you.
Operator: Once again, ladies and gentlemen, if you do have any questions, please press star one on your telephone keypad. And your next question will be from Roger Spitz at Bank of America. Please go ahead.
Speaker Change: Once again, ladies and gentlemen, if you do have any questions. Please press star one on your telephone keypad.
Operator: And your next question will be from Roger Spitz of Bank of America. Please go ahead.
Roger Neil Spitz: Thank you and good morning. It sounds like a number of the Ivatah and Kashlo questions have a large component of working capital. I'm going to talk about where you get your working capital from the excess costs and inventory from 2023. And just to be clear, am I correct in thinking that when you say 2024 is going to be a capital, working capital inflow, and you're also expecting higher fines and prices, that that inflow is being driven by working down the high-cost inventory, the high cost, I call it excess costs from running 2023 production slower, so you have the unobserved fixed costs in that inventory.
Roger Neil Spitz: Thank you and good morning, it sounds like a number of the EBITDA and cash flow.
Roger Neil Spitz: Questions have a large component of.
Roger Neil Spitz: Where is your working capital from the upfront.
Roger Neil Spitz: Costs in inventory from 2023, and just to be clear.
Roger Neil Spitz: Am I correct in thinking about when you say 'twenty 'twenty four is going to be capital.
Roger Neil Spitz: Working capital inflow, and you're also expecting higher volumes and prices for Pompe inflow is being driven by working bomb.
Roger Neil Spitz: The high cost inventory the whole car auction I'll call it excess costs from running 2023.
Roger Neil Spitz: Production was slower sungard, the unabsorbed fixed costs in that inventory.
Roger Neil Spitz: And then related to that, sort of how much is in there? So, December 23, in round numbers, inventory was $1425. 2022 was $12.75, December 21 was $10.50, and then December 19 and December 20 were both $1.125. Should we think about the one, one, two, five to kind of be like the sort of the normalized level once you work through this excess cost in your inventory through? How should we think about it?
Roger Neil Spitz: And then related to that sort of how much is in there so.
Roger Neil Spitz: Number 23 and round numbers inventory was 14 25.
Roger Neil Spitz: 2022 was 12 75 'twenty for summer 'twenty, one was from <unk> and then in December 19 in December 'twenty was both 1125 shall.
Roger Neil Spitz: Should we think about the 1125 to kind of be lifestyle sort of the normalized level. Once you work through this.
Roger Neil Spitz: Yes.
Roger Neil Spitz: Costs in your inventory through or how should we think about that.
John D. Romano: Let me just make one comment. In 2021, you've got to think about where we are on inventory. From a day's perspective, so forget about the value, we had inventory that was much lower than where we're comfortable doing it, where we're normally comfortable operating because that was when things peaked. We ran through 100,000 tons of Zircon inventory over and above what we produced. We got our inventory at our locations on the TiO2 side, way below where we normally would be. There are two things, and I'll let John answer this. One question is, what does that mean with regard to a normalized inventory as far as volume is concerned and then normalized based on value?
Speaker Change: Let me just make one comment where in 2021 you've got to think about where we were on inventory from a days perspective. So forget about the value. We had inventory that was much lower than where we're comfortable doing it where we're normally comfortably operate because that was when things peaked we ran through a 100000.
John D. Romano: Tons of zircon inventory over and above what we produced we got our inventory at our locations on the T O two side way below where it would normally would be so there's two things and I'll, let John answer. This one is kind of where.
John: What does that mean with regards to a normalized inventory as far as volume and then normalized based on value.
John Patrick McNulty: Yeah, and so, you know, that's exactly right. So obviously, in 2021, we had sold pretty much everything we could produce at that point. So we were at low values of inventory. So I wouldn't take 2021 as a normalized level. We did have to rebuild our inventory, as well as our safety stock there. So, you know, starting from 2021, as I mentioned, we did see a significant cost increase across the next couple of years, over 400 million.
John: Yeah, and so that's exactly right. So obviously in 2021, we had sold pretty much everything we could produce at that point. So we were at low values of inventory. So I wouldn't take 2021 is the normalized level, we do did have to rebuild.
John Patrick McNulty: Our inventory as well as our safety stock there so.
John Patrick McNulty: Starting from 2020, one as I mentioned, we did see significant cost increase across the next couple of years over $400 million. So you would expect to get a significant amount of that back, albeit in 'twenty. One we actually did have some pretty favorable contracts. So again I wouldn't expect the full 400 million to come back.
John Patrick McNulty: So you would expect to get a significant amount of that back, albeit in 21, we actually did have some pretty favorable contracts. So again, I wouldn't expect the full 400 million to come back. But you are right, Roger, in Q1, we did see some of the benefit from, you know, lowering our inventory, the higher cost, selling the higher cost, and replacing it with lower cost inventory. But the other thing was, as we mentioned, we did have a higher sales volume than we had expected. And so that did drive some of the good amount of the cash flow beat, if you will put it that way from an inventory perspective in Q1.
John Patrick McNulty: But you are right Roger in that Q1, we did see some of the benefit from lowering our inventory the higher selling the higher cost with replacing it with lower cost inventory.
John Patrick McNulty: But the other thing was as we mentioned we did have a higher sales volume than we had expected and so that did drive some of the a.
John Patrick McNulty: Good amount of the cash flow.
John Patrick McNulty: B, if you will put it that way from an inventory perspective in Q1.
Roger Neil Spitz: Got it, but of the $1,425,000 in inventory in 2023, which includes that excess inventory cost, is it an extra $100 million that we'll get out of cash flow as you run that through? Or, looking at the historical numbers, it feels like there's an extra $200 million of what I'm calling excess cost in your inventory. Which is the number we should focus on when we think about that?
Speaker Change: Got it.
John Patrick McNulty: Of the 14 25 in inventory in 2023, which includes that excess inventory cost.
Roger Neil Spitz: Is it be an extra 100 million that we'll get all the cash flow as you run that through or looking at historical numbers is it feels like there's an extra $200 million.
Roger Neil Spitz: What I'm, calling excess Clos in your inventory.
Roger Neil Spitz: Which is the right which is the number we should focus on when we think about that.
John D. Romano: Transcribed by https://otter.ai
Speaker Change: Yeah, it's about $100 million north of $100 million, it frankly, it'll depend it'll be yeah.
John D. Romano: Well north of a 100 million I think ultimately it will depend on.
John D. Romano: The <unk>.
John D. Romano: The size and scope of the recovery because a big part of it is selling down that inventory in excess of your production levels and secondly, ultimately if you if raw materials do turn tens how significant that that does turn into cost revert back to more normalized levels and we're not suggesting we're going to get that in 2024, it's going to be over a longer period of time.
Roger Neil Spitz: And we're not suggesting we're gonna get that in 2024. It's going to be over a longer period of time, but we should be able to recover north of $100 million of that.
Roger Neil Spitz: But we should be able to recover north of $100 million of that.
John D. Romano: I got it. Thank you very much for that.
Speaker Change: Got it thank you very much for that.
Operator: Thank you. And at this time, Mr. Romano, we have no further questions. Please proceed, sir.
John D. Romano: Thank you and at this time Mr. Romano, we have no further questions. Please proceed sir.
John D. Romano: Okay, well, thank you. And thank you all for joining us today. Look, we're very confident that our vertical integration strategies that we've talked about at length will continue to provide a competitive advantage for Tronox. We're optimistic about the short, medium, and long-term potential for Tronox and the value that we continue to create through, you know, what we're kind of referring to as our leading sustainable mining and upgrading solutions. So with that, we appreciate your time and thank you for your support and interest in Tronox. Have a great day.
Romano: Okay, well, thank you and thank you all for joining us today.
John D. Romano: We're very confident that our vertical integration strategy as we've talked about at length will continue to provide a competitive advantage for tronox. We're optimistic about the short the medium and long term potential for tronox and the value that we continue to create through what were kind of referring to is our leading sustainable mining and upgrading solutions. So.
John D. Romano: With that we appreciate your time and thank you for your support and interest in Tronox have a great day.
Operator: Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending, and at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.
Speaker Change: Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines and enjoy the rest of your day.
Operator: Yeah.
Operator: Okay.
Operator: Okay.
Operator: No.
Operator: Yeah.
Operator: Yeah.