Q3 2024 Tronox Holdings PLC Earnings Call
Good morning, ladies and gentlemen.
And welcome to the Tronox Holdings plc, Q3, 'twenty 'twenty four earnings call.
Speaker Change: At this time all lines are in listen only mode.
Speaker Change: The way the presentation, we will conduct a question and answer session.
Speaker Change: If at any time during this call you required immediate assistance. Please press star zero for the operator.
Speaker Change: This call is being recorded on Friday October 25th 2024.
Speaker Change: I would now like turn the conference over to Chad, Jennifer Gunther Chief Sustainability Officer head of Investor Relations and external communications. Please go ahead.
Speaker Change: Thank you and welcome to our third quarter 2024 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.
Speaker Change: We'll be using slides as we go through today's call you can access the presentation on our website at Investor Dot Tronox Dotcom moving.
Speaker Change: Moving to slide three.
Speaker Change: [noise] 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.
Speaker Change: These risks and uncertainties the company undertakes no obligation to update or revise any forward looking statements during.
Speaker Change: During the conference call, we will refer to certain non U S. GAAP financial terms that we use in the management of our business and believe are useful to investors in evaluating the company's performance reconciliations to their nearest U S. GAAP terms are provided in our earnings release and in the appendix it'd be accompanying presentation.
Speaker Change: Additionally, please note that all financial comparisons made during the call are on a year over year basis, unless otherwise noted.
Speaker Change: It is now my pleasure to turn the call over to John Romano John Thanks.
John Romano: Thanks, Jennifer and good morning, everyone. We'll begin this morning on slide five with some key messages from the quarter.
John Romano: Tronox as third quarter results demonstrated continued demand recovery compared to the prior year. So ultimately we came in below our expectations as a result of softer than anticipated market conditions as the pace of the recovery slowed late in the quarter.
John Romano: Orders in North America, and Latin American met our expectations, while demand in Europe, and Asia Pacific was softer than forecasted in the last month of the quarter.
John Romano: Our T O two volumes declined 7% sequentially compared to Q2 outside of our guidance of a 2% to 4% decrease the lower demand, which was more pronounced in September was influenced by short term impacts from anti dumping and a shifting competitive behaviors.
John Romano: Work on volumes declined 12% sequentially below our guidance of relatively flat volume versus 'twenty to the second quarter due to orders that rolled into Q4 and weaker than expected demand in China.
On the operation side, we successfully achieved our targeted average pigment utilization rate of approximately 80% in the quarter. However, we have not yet begun to see the benefit of lower cost inventory flowing through to the bottom to the bottom line due to the weaker than forecasted demand in the quarter.
John Romano: This weaker demand environment resulted in an adjusted EBITDA of $143 million slightly below our previously guided range of $145 million to $165 million and a margin of approximately 18%.
John Romano: If market demand had been in line with our guidance, we would've delivered an adjusted EBITDA well within our range.
John Romano: We have seen continuation of demand recovery from the 2023 trough levels CIO to volumes are up 16% on a year to date basis zircon volumes were up 42% on a year to date basis, but we are now seeing a slowdown in the recovery.
John Romano: There are various tier ones, including interest rate cuts in the U S stimulus in China, and anti dumping investigations in EU, Brazil, India and most recently in Saudi Arabia. We firmly believe these will be a net positive in the mid to long term and the short term will need to continue to navigate the moderation we're seeing in demand.
Speaker Change: We will discuss these macros in further detail a little bit later in the call, but I'd like to now turn the call over to John to review some of the financials from the quarter in more detail John Thank you John turning to slide six.
John: We generated revenue of $804 million, an increase of 21% compared to the prior year, driven primarily by higher T O to zircon and other products sales volumes.
John: Income from operations was 54 million in the quarter, we reported net loss attributable to tronox of $25 million.
John: Our tax expense was $26 million in the quarter as we generated income in jurisdictions, where we accrue taxes and are utilizing our existing deferred tax assets. As a result, our adjusted diluted loss per share was <unk> 13 cents as John previously mentioned, our adjusted EBITDA in the quarter was $143 million and our adjusted EBITDA margin was 17, 8%.
Capex for the quarter was 101 million free cash flow was a use of $14 million in the quarter.
John: Now, let's move to slide seven for a review of our commercial performance.
John: Q3 continued to see recovery from the 2023 trough levels, but came in below our guided expectations.
John: <unk> revenues increased 10% versus a year ago quarter as sales improve 20th 12%, partially offset by a 2% decline due to price and product mix.
John: On a sequential basis T O two revenues decreased 6% driven by a volume decline of 7% as demand in Europe, and Asia Pacific were softer than anticipated. This was partially offset by a 1% improvement in price from regions, where pricing had declined more in recent years.
Zircon revenue increased 124% over the trough levels of Q3 2023 as sales volumes increased 134%, partially offset by a 10% headwind from price and product mix.
John: Sequentially Zircon revenues declined 13% driven by a 12% decrease in volumes and a 1% headwind from price and product mix.
John: Revenue from other products increased 61% compared to the prior year, partially due to opportunistic sales of ilmenite and heavy mineral concentrator tailings sequentially other products revenues increased 39%.
John: FX was a tailwind for revenue for both year on year and sequential comparisons with favorable your euro movements.
John: Turning to slide eight I will now review, our operating performance for the quarter.
John: Our adjusted EBITDA of 143 million represented a 23% improvement year on year, driven by higher T O to zircon and other product volumes and lower production costs year on year production costs were an improvement of $3 million driven by improved fixed cost absorption as we started to increase the utilization rates of our assets.
John: These were partially offset by inflationary impacts.
Headwinds versus prior year include exchange rates and other company costs, including labor inflation.
John: Sequentially, adjusted EBIT or EBITDA declined 11%.
John: Favorable commercial impacts were more than offset by higher production costs unfavorable FX and higher freight costs.
John: Production costs were $32 million higher quarter over quarter. This was driven by the $15 million of higher cost pigment tons manufactured in the second quarter that sold in the third quarter as we had previously communicated.
John: The remaining amount was related to the weaker market demand, which delayed the benefit of selling lower cost tons produced in the third quarter as well as higher maintenance costs.
John: Freight costs also saw a slight increase as we strategically reposition products ahead of the U S Port strike.
John: We also realized headwinds from the Aussie dollar and the South African Rand.
Speaker Change: Turning to slide nine I'll 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 ratio at the end of September was 5.0 times on a trailing 12 month basis.
Speaker Change: During the third quarter, we refinanced our existing term loan due March 2029, with a new seven year term loan due September 2023, this transaction extended our debt maturity profile and further optimize our capital structure. Following the successful repricing and extension of our other term loan tranche, which we completed in April with the completion of.
Speaker Change: Our latest refinancing our next significant debt maturity is not until 2029.
Our balance sheet remains strong with ample liquidity ahead of continued critical vertical integration related capital expenditures, our weighted average interest rate in Q3 was $5 97 per cent and we maintain interest rate swaps such that approximately 73% of our interest rates are fixed through 2028.
Speaker Change: Total available liquidity at the end of September was $668 million, including $167 million in cash and cash equivalents that are well distributed across the globe.
Capex totaled 101 million in the quarter approximately 41% of this was for maintenance and safety and 15, 9% for strategic growth projects heavily weighted on the mining side of the business, which we previously disclosed.
Speaker Change: Working capital was relatively neutral in Q3 weaker than expected market demand drove our finished good inventory balances higher this was offset by lower <unk> and higher AP balances.
John: We returned $21 million to shareholders in the form of dividends in the quarter I will now turn the call back over to John Romano for comments on the market and our outlook John Thanks, John Although we have seen significant market demand improvement over 2023 we are not yet back to the normalized volume levels on either tier two or zircon as <unk>.
John Romano: As he mentioned there are significant positive indicators in the market that we see in the mid to long term opportunities for tronox, such as anti dumping investigations and provisional duties that have currently been announced interest rate cuts in the U S and stimulus in China to give an update on the anti dumping in addition to the EU provisional duties that.
John Romano: Our in place, Brazil trade authorities, just approved provisional duties to be applied to imports of titanium dioxide from China. The provisional duties were effective as of October 21st. Additionally, the investigation in India is still underway in Saudi Arabia officially launched an antidumping investigation on October 9th we have not yet seen the burner.
John Romano: Eight of these trade defense measures. However, we should start to see the positive impacts as we roll into 2025.
John Romano: On the operational side the headwinds we experienced during the previous two quarters related to ramping up our assets are now expected to be a tailwind as we enter Q4.
John Romano: The average utilization rates in Q3 were in the 80% range and we expect to continue running at these rates with a focus on reliability and operational efficiency, which will result in lower costs and a step up in earnings momentum into 2025, we are continuing to invest in our assets with a significant portion of this year's expenditures dedicated to the extension.
Two of our South African mining projects. The Fabry is expansion and the Mark what you still with us so that we can sustain our current vertical integration level.
John Romano: These investments will ensure that we maintain our three to $400 a ton advantage for feedstock sourced internally.
John Romano: From a growth perspective, our R&D efforts remain focused on product and process innovations to enhance profitability sustainability related product and process innovations and we continue to explore opportunities in the rare space.
Moving to slide 11, I'll now review our outlook.
John Romano: Looking ahead into the fourth quarter, we anticipate in North America, Europe, and China will experience higher seasonal demand declines based on the current customer sentiment and we therefore expect T O two volumes to decline, 10% to 15% from the third quarter.
John Romano: We expect zircon demand to remain relatively flat compared to the third quarter.
John Romano: Additionally, our expectations for pricing improvement in the fourth quarter have moderated.
John Romano: From our previous forecast, reflecting our current demand and competitive dynamics, we anticipate T O two pricing to be relatively flat and zircon pricing to be slightly down.
John Romano: We expect our operating rates to remain in the range of 80%. This will drive an improvement in our cost structure is primarily from fixed cost absorption and we will start to see the benefit of selling through the lower cost tons in the quarter.
John Romano: As a result of these market and operational assumptions combined with the recent unfavorable exchange rate moves we expect our fourth quarter adjusted EBITDA to be in the range of $120 million to $135 million and our adjusted EBITDA margin to be in the high teens range with regards to cash we expect the following for the year our.
John Romano: Our net cash interest to remain unchanged at $140 million or net cash taxes is now expected to be less than $5 million a significant capital expenditure pod for projects in South Africa, our deductible our capital expenditures are now expected to be approximately $380 million for the year as we have seen some.
John Romano: I'll shift into early 2025, and we're expecting working capital to be a cash use of approximately $90 million to $100 million driven by the weaker than expected market demand driving higher finished goods inventory levels in the fourth quarter.
John Romano: For the full year, we now expect free cash flow to be a slight use owing to the shift in our market outlook.
John Romano: We do expect to see a tailwind from our inventory levels as the market recovers.
John Romano: Turning to slide 12, I'd like to briefly remind investors of our capital allocation priorities before turning to questions.
John Romano: Our capital allocation strategy has not changed we continue to prioritize investments in the business that are essential for advancing our strategy and maximizing our value from vertical integration.
John Romano: We also remain focused on strengthening our liquidity and resuming debt pay down as the market recovers and our dividend remains a priority and finally, we will continue to assess strategic high growth opportunities as they emerge, including the rare Earth space, which is an active focus area of ours at the Perm at the time.
John Romano: We will provide an update on any developments as they happen and with that we'll now move to the Q&A portion of the call. So I'll hand, the call back over to the operator to facilitate operator.
Speaker Change: Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the wondering you touched on phone usually hear prompt that your hand has been raised should.
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Speaker Change: One moment. Please for your first question.
Speaker Change: And your first question comes from John Mcnulty with BMO capital markets. Your line is now open.
Yeah. Thanks for taking my question and good morning.
John Mcnulty: I guess.
John Mcnulty: 2024 has had kind of a lot of lot of puts and takes I guess when you look to 'twenty five there are a couple of things that stand out on the cost side that start to reverse that you were alluding to one is the high cost inventory that you had to work through in 2024 and the second would be you know there were some operational efficiency issues in 'twenty.
Speaker Change: For in some downtime because you were running at lower utilization rates can you help to quantify how those bridge into 2025 in terms of a benefit now that you are running at higher levels and you'll be through all of that high cost inventory.
Speaker Change: Yeah. Thanks, Sean look so from the standpoint of Oh, maybe I'll just start with some of the things that we referenced previously you know we've talked about a lot of these operational issues running at the lower rates of call it roughly $25 million a quarter on the downside, where that's an LCM or idles. So that's a piece of it I also made.
Some reference about some of the work that we're doing on operational efficiency and reliability.
Speaker Change: And I started to think about I've been in this sole CEO role now for about the last seven months and I've spent I'd say.
Speaker Change: Probably 80% of my time, working with our operating team to try to spend more time, focusing on what we can do to actually extract more out of the assets in the absence of volume. If you remember we spend a lot of time when we were talking about neutron talking about all the benefits that could come from neutron and there were some elements of neutron theyre going to come from volume.
Speaker Change: Now what we're doing is we're focusing on this operational efficiency in the Iraq Zubair.
A liability that will lead to better uptime and lower cost supported by the work that we've done through this neutron implementation through automated process control advanced predictive maintenance and using that technology to improve the ROI.
Speaker Change: The routine work management that will ultimately lower our cost position.
Speaker Change: We're in the process of sizing that opportunity. We've spent a lot of time on that we're not ready to come out with what that number is but we do believe that that will be a sizable improvement and we will be providing a little bit more color on that as our operational team and I confirm it and can put a timeline on it.
Speaker Change: Yeah.
Speaker Change: Okay fair enough and I'm, sorry, what was the what will be the benefit of having worked through the high cost inventory that you was that part of what you were talking about on the 25 million per quarter just to be clear. It's 25 on the low end as John mentioned and as we've mentioned previously up to $35 million 25 to 35 million a quarter. So when you think about those who can't again running at those lower.
Speaker Change: We talk about running at roughly 80% capacity utilization. So you can size that opportunity to you know 25 million to $35 million a quarter and multiply by four.
Speaker Change: Got it Yep, Okay. No that's fair and then I guess the second question would just be around tariffs. So you.
Speaker Change: You've had the EU ones put in place earlier. This year you have got Brazil, now I guess can you help us to think about.
Speaker Change: The playbook there for what the EU is may be telling us about how Brazil will play out and then some of the changes in behavior or if youre seeing them yet around the EU tariffs and how that should play out in 2025.
So specific to the EU first.
Speaker Change: So we would expect early in November.
Speaker Change: The he will come out with what they would recommend as a fight on duty and once that happens then the you know the EU member states have to go to the voting process. So no final duties ultimately being kind of solidified early in the first half early in the first quarter. We are probably in January early February so the process should come to an end with regards to what the E.
Speaker Change: Use work is recommending that final duty.
But the final duties have not been implemented yet.
Speaker Change: When we think about what China.
Speaker Change: China is doing in the near term there they continue to export to these potentially duty affected areas absorbing some of those duties are those tariffs.
Speaker Change: Tariffs.
They're trying to figure out what those final duties are before they make a decision on whether or not they're going to adjust their sales profile or exit markets. So.
Speaker Change: When we I would say that I made reference in the prepared statements that some of what we're seeing in the fourth quarter.
Has to do with some of the duty implications that are out there right now and that is really we're not taking we would've expected, we probably would have seen a little bit more volume from that we're not seeing it now.
Speaker Change: In some areas even in China, we're seeing a fair amount of competitive activity, where that repositioning some of that volume I think the Chinese are so I think from the perspective of Europe. That's.
Speaker Change: Not dissimilar to Brazil, Brazil, just came out with their duties, they just announced provisionals.
In October and that process you know we're early into that does provisional duties typically stay in place for about six months before they come up with what the ultimate duty is going to be so that's why we made this call I made the comment that it's short term that it's a bit choppy on what's happening with these duties that are out there but mid.
Speaker Change: Long term, we think it's gonna be a positive for us as we roll into 2025, we should start to see some of that volume improvement.
Speaker Change: Got it thanks very much for the color.
Speaker Change: Mhm.
Speaker Change: Your next question comes from Josh Spector with UBS. Your line is now open.
Yeah, Hi, good morning.
Speaker Change: A similar question on the cost side, but I wanted to ask specifically on fourth quarter. So as you do the bridge sequentially I mean, clearly the volumes down along with your guide makes sense there needs to be done with that but we're not really seeing some of that cost benefit come back can you just maybe bridge why that's the case or what's offsetting that as you look sequentially.
Speaker Change: Lee.
Speaker Change: And so maybe I'll start and then I'll, let John you can add to it but again.
Speaker Change: We are seeing lower cost tons roll through on the books, but we have inventory that's not moving as quickly as we would've thought again, if you remember when we on our last call I think we provided a little bit of guide on what we thought seasonality would be in the fourth quarter. We were assuming that was going to be 5% to 10%, we're seeing a little bit more seasonality.
Speaker Change: In the fourth quarter than we expected so now we're saying that.
Seasonality it could be 10, 10% to 15% so it's taking longer for us to work through some of that high cost inventory, although we should start to see and it's factored into the guide that some of that higher that lower cost inventory should start going into the bottom line as we right, but I'd say probably on the back end of the quarter as we are.
Speaker Change: The latter part of November and December John Yes, No and I think some of the gap as well that you're seeing in your analysis. Josh is we do see some other higher cost here. So for example, we are seeing a headwind in currency. Additionally, freight rates are being much more significant in the quarter just due to some of the lanes being not as available here.
Speaker Change: And then you do have.
Speaker Change: Some of the other revenue that we mentioned in Q3.
Speaker Change: Okay.
Speaker Change: And just maybe get a little color on that that number on FX is somewhere between seven and $10 million.
Okay, no that makes sense I guess just to be.
Speaker Change: On the operational side, so the 30 million sequential headwind.
Speaker Change: I mean, it seems like it gets better but it doesn't entirely go away. So you answered jon's questions with 25 million a quarter. That's there's still something like that $20 million range, maybe in fourth quarter is that fair or would you characterize it differently.
Yes, that's about the right range.
Speaker Change: Okay, Thanks, and if I could one other follow up again, maybe off of John's points around the competitive dynamics I'm just trying to square what you said between repositioning in China I assume that means some material staying home and maybe taking some additional share there and not seeing any share.
Jane or movement in Euro so does that mean that some of the buyers are buying more Chinese material or other western producers, maybe capturing more share versus what you expected.
Speaker Change: I think it's a mixture of both but it's predominantly the China piece, because again as long as they're absorbing a lot of the duties that are put in place.
Speaker Change: Customers are looking at buying that because it may not be there forever.
The comment that I made around competitive activity.
Speaker Change: If you recall when we were on our last call. We actually had some forecast moving into the fourth quarter that we would get some price improvement we did get some price improvement in the first quarter and in the third quarter.
Speaker Change: It depends upon the region there was a lot of mix and like I said it was choppy, but we did have price increases that were implemented in the third quarter.
Speaker Change: And three months ago, we had some assumptions that that that would roll into the fourth quarter and we are seeing some competitive activity, which.
Speaker Change: Pretty much muted any price increases that we were able to implement in the fourth quarter. So when we think about the demand that's related to that as if customers say pricing are going is going to start moving up you would typically see a buying pattern that would have them buying inventory a little bit ahead of that price increase and now that pricing is not moving up and there is.
Speaker Change: A bit more competitive activity, we're not getting a I'd say that tailwind that we would have expected had we had a price improvement I hope that answers the question.
Speaker Change: Yes, that's helpful. Thank you.
Speaker Change: Your next question comes from David Beck.
Speaker Change: <unk> with Deutsche Bank. Your line is now open.
Speaker Change: Thank you good morning.
Speaker Change: All right.
David Beck: John on the efficiency efficiency initiatives. This is me you're looking at the T O two assets working through direct and indirect costs and that this could lead to at some point the more formal cost takeout plan related to these assets.
Speaker Change: Yes, well and again.
Speaker Change: We will come out at some point in time with the specific.
Speaker Change: Target for what that cost is again, I'm, but like I said I'm spending a lot of time with our operational team I want to make sure that you know we've actually got a program in place that's identifiable achievable and we have a timeline attached to it I will tell you that internally you know.
Speaker Change: We're close to having that put together, but the whole purpose of that is again when we went through the process of communicating I'd say at length. What we were doing around neutron there was a piece of neutron and technology enhancements that was going to allow us to get better costs through volume now we're thinking about what can we do.
Speaker Change: A liability efficiency.
Speaker Change: Working through our process working through automated process control.
Speaker Change: Improved maintenance and get that same or get a.
Speaker Change: Portion of what we were previously identifying there wasn't going to come through volume through better reliability in our assets. So a short answer to your question is we will come out with that with a more specific target on what the number is and a timeline just not ready to.
But that out as of today.
Speaker Change: Got it and does that mean for 25. In addition to the lower production cost is another layer of maybe calling quote neutral neutron savings as well to help us with the bridge to 'twenty five EBITDA.
Speaker Change: Yeah, but again I would say that it's not the same neutron number that are.
Speaker Change: So it's attached to neutron but.
Speaker Change: Okay, we talked about $200 million in new truck right. So I'm not saying that's another initiative on top of the neutron I'm, saying that.
Speaker Change: The 200 million that we attached to the advantages we were gonna get to neutral and we're going to come from volume what were saying is that we're not seeing that volume, we're going to put a process in place, which would allow us to use that same technology. All the reliability work efficiency work that we're doing to get a piece of that through operating our assets more.
Efficiently so it.
Speaker Change: And it will factor into 2025, we don't have a specific timeline, but it will factor into 2025, and we will provide more color on that one we have a solid plan put together.
Speaker Change: I think it's also important to note that we don't expect significant capital in order to achieve those savings.
Speaker Change: Very good point this isn't going to be another big capital number that we're going to throw out yeah. It's a great point. John This is what we think we can do with the implementation of what we've already put in place and a different dish.
Speaker Change: Our strategy around how we're going to operate those assets.
Speaker Change: Thank you very helpful.
Speaker Change: Yeah.
Speaker Change: Your next question comes from Duffy Fischer with Goldman Sachs. Your line is now open.
Speaker Change: Hey, good morning.
Duffy Fischer: Just a couple of questions on price, So first where do you see the relative prices between the three geographies today, China Europe and the U S. And then as we're going through the negotiations now for next year, where do you see those relative prices moving and then just the third one on that.
It's more indirect for you, but where do you see or pricing going for next year.
Speaker Change: Yeah. Thanks for the question so we don't typically.
Typically provide regional pricing, but what I would say is that there's a lot more competitive activity in China, and China pricing has historically always been low there is competitive activity in Europe, I would say that.
Speaker Change: We've had some questions over the course of the last.
Speaker Change: Several of them.
Speaker Change: Bonds prior to going into the quiet period around market share look we're almost to the end of the year and every year. We have a win loss board, where we gained volume when we lose volume we operate in a competitive activity. So there's areas, where we gained share with those areas, where we've lost share theres areas, where we've used price to protect share.
Speaker Change: And I would say a lot of that the latter part using price to protect share has probably been more in the middle East.
Speaker Change: I'm in Europe, and some in Asia, the Middle East is a very active market right now we talked about.
Duties that had been our duty investigation that had been lots in Saudi Arabia, Saudi Arabia is not the that's not actually it's not the biggest part of the middle East.
Speaker Change: And it's only about a 50000 ton market. It's a duty it's an area that we've obviously focused on because we have a plant there that being said the middle East is a pretty active area.
Speaker Change: For China to be moving volume into so.
If it was I'd say, it's mixed and there hasnt been any significant change I'd say regionally in our price profile, but more competitive activity.
Speaker Change: In Asia in Europe than in the Americas for sure.
And then views on or.
Speaker Change: Yeah look as the market picks up.
Speaker Change: Would expect oil prices to start to move up so oil prices have been relatively stable.
Speaker Change: And again.
When we think about moving into 2025, we talked about.
Speaker Change: At the end of this year, we saw a slowdown in the recovery we're expecting.
The stimulus that's going into China, although it hasn't done much at this particular stage to generate any.
Speaker Change: I'd say a significant change in demand patterns between now and the end of the quarter, but we do expect that'll help.
Speaker Change: Interest rate cuts.
Got a housing market that the Wall Street Journal reported I think two days ago was the worst since 1995 housing is a big part of our coatings business.
Speaker Change: So we should see that pick up so as the market starts to pick up customers R. R. T O. Two producers start running at higher rates, you would expect oil prices to start to move up they've been relatively stable all year long and a pretty suppressed market through 2024.
Speaker Change: Fair enough and then just one last one if I could.
Speaker Change: On the inventory you're running higher than you're selling this quarter, how much inventory will you build in T O two with your.
Speaker Change: <unk> is in the guidance and then we also build zircon volumes as well.
Speaker Change: So zircon volumes I'll start there.
Speaker Change: We made reference that so maybe I'll give you a little bit of color. So.
Speaker Change: In the third quarter, we gave an indication that we were going to be flattish to the second quarter and we were down 12%. So 12% call. It four to 5000 tonnes, that's kind of what 12% means about half of that were orders that rolled from Q3 to Q4 and the other half was weaker demand in China. So we forecasted.
Speaker Change: Flat sales in the fourth quarter, so theres not a lot of movement, we're not building a lot of inventory on the zircon side on Tio too the build in inventory is largely that.
Speaker Change: The delta between what we previously indicated between 5% to 10%.
Speaker Change: Seasonal demand now going from 10 to 15, so let's call it 5% to 7% above what we would've expected previously not.
Speaker Change: A material amount and again as we start to think about the recovery in the fourth and the first quarter of 2025.
Speaker Change: I don't think it's going to be significantly different than what we saw in the first quarter of 'twenty 'twenty, four which we saw a big bump again a lot of this.
Speaker Change: There's things that we can we can control and influence I can't control the economy I can't control housing, but we are feeling pretty confident based on feedback we're getting from our customers that as we move into <unk>.
Speaker Change: 2025.
Speaker Change: Although maybe the first quarter's a bit choppy, we should start to see a recovery.
Speaker Change: Terrific. Thank you guys.
Speaker Change: Your next question comes from John Roberts with Mizuho. Your line is now open.
John Roberts: Thank you.
John Roberts: In anticipation of the tariffs and duties do you think customers actually are building inventory at the customer level, it's just that they're buying Chinese so youre not seeing it.
Speaker Change: I don't think that it's.
Speaker Change: Look thanks for the question I don't think our customers are changing their buying behavior behavior significantly I think that if I was a buyer and I knew that the duties were out there would I be buying material I think theyre buying similar amounts than they would have historically.
Speaker Change: There's also a limit to how much that they can continue to use in their formulation remember do you think about where China pricing is versus a lot of the other western suppliers, there's a significant different in price and there's also a difference in quality so could they be buying inventory in front of it I believe they absolutely are.
Speaker Change: I don't believe they're buying significant volumes that should eat significantly into our volumes as those duties go into place because there is a portion of that volume that they need to buy from higher quality producers.
Speaker Change: Okay, and do you have a range yet for capital spending in 2025.
Speaker Change: So we mentioned that our capital spend in 2024 was going to be down about $20 million and that has nothing to do with the speed with which our projects are being implemented we're on track, but some of the spending is shifting into the first quarter and it's just a cash event.
I think we gave some guidance on the last call that we'd be around $350 million because we've still got some projects that are coming.
Speaker Change: We'll be working on you've got capacity in Australia, that's coming on so yeah, I'd say $3 50 to 370, but that extra $20 million is only attached to a shift from the 400, we were going to spend in 2020 for now 380, 20th that's going into 2025 and is.
Speaker Change: We get into 2026, we would expect that capital spend to start to tail off theyre getting the $300 million range, maybe even in the high two hundreds.
Speaker Change: Alright, thank you.
Your next question comes from Vincent Andrews with Morgan Stanley. Your line is now open.
Speaker Change: Vince.
Speaker Change: Operator, we're not hearing anything on our end.
Speaker Change: Your next question comes from Jeff is that Bruce Scott with Jpmorgan. Your line is now open.
Speaker Change: Thanks very much.
Speaker Change: If you look at European Tio to prices in September and you compare them to where they were say.
Speaker Change: <unk>.
Speaker Change: Have they changed very much.
Speaker Change: On average Jeff prices haven't changed a lot, but there has been some mixed shift so as I mentioned, you know that was one of the reasons regions in the third quarter, where we actually did get some price improvement.
There has been some competitive activity when we think about Europe middle East and Africa, we kind of grouped it all into one region and there has been some competitive activity, but no significant move on the downside again, our pricing was relatively flat in the in the third Q2 to Q3 and were expecting.
Speaker Change: Kind of a transition as we go into the fourth quarter, but that being said there is some competitive activity going on in that region.
Speaker Change: And we're offsetting that.
Speaker Change: We're doing the best we can to maintain our pricing, but making adjustments, where we need to to make sure. We protect what we would define as strategic share.
Okay.
Speaker Change: Thanks for that how much T I O two test China export to Brazil annually.
Speaker Change: About 100000 tons out of a market that has 180000 tons.
Speaker Change: Okay.
Speaker Change: Great and then lastly.
Speaker Change: It seems that zircon prices are under pressure.
Speaker Change: Can you talk about.
Speaker Change: What that stemming from is that Chinese production Malaysian production or.
Speaker Change: Just overall, yeah, it's great question.
Yeah.
Speaker Change: It's a mixture of all three but I would say one is just strictly mix because there is a I'd say a bigger demand for some of the lower grade zircon and we have a variety of different zircon grades that we sell so there's a bigger push for I'd say lower grade zircon and then there is higher grade zircon.
Speaker Change: But to your point there as you know.
Speaker Change: There is some.
Speaker Change: Zircon in the form of concentrate that goes into China and then it comes back out in the market that typically is a bit more lower priced. So there is some competitive pricing. We are actually seeing not just mix. There is some price reduction going on in the third and the fourth quarter.
Speaker Change: And again demand is driving that you know China is a big consumer of zircon, it's not as big a portion of our sales, but we did mention that some of the volume that we saw on the downside in the third quarter was actually related to China, and China's talking a lot about stimulus and that's <unk>.
But we haven't seen that reflecting into any real demand pick up.
Speaker Change: In the fourth quarter at this stage, so we're hopeful that.
Speaker Change: Those efforts will generate positive results as we move into next.
Speaker Change: Next year, but it's a it's a I think there's different there's a gray to implementation or a grade mix, that's causing it demand is having an impact on it.
Speaker Change: And as.
As a result of the demand there is a little bit more competitive activity going on.
Speaker Change: Thank you for that and then lastly, do you think that T. I O two market is growing this year.
That coatings demand doesn't seem to be growing in the U S.
Speaker Change: Doesn't seem to be growing in Europe, it doesn't seem to be growing in China.
Speaker Change: But you know maybe there are other areas.
You think overall see Iot demand is down a few percent or flat or up how do you see that.
Speaker Change: Well I can tell you with regards to what we see in our numbers right. So if you if we look at the range that we put out in the fourth quarter, which we look at the EBITA is saying, it's going to be $120 million to $135 million. There's obviously, a volume spread that we can get into that and.
Speaker Change: Even at the low end of the range, our volumes are going to be up 11%, 12%.
Speaker Change: From the prior year. So we are seeing an improvement. It's just a lot of that came in the front end of the year and as we entered.
Speaker Change: Q3, it's starting to slow down in Q4 was even softer.
Speaker Change: But I mean global market demand that is since the overall global T Iot market growing in 2024.
Speaker Change: It's growing in India significantly, but on a global basis I would say that it has not been very robust and slightly up to flattish.
Okay, great. Thank you so much.
Speaker Change: Okay.
Speaker Change: Your next question comes from Hassan Ahmed with Alembic Global.
Speaker Change: Your line is now open.
Speaker Change: Good morning, John.
Speaker Change: You know.
Hassan Ahmed: In the press release, you guys talked about how in Q4.
You guys sort of mentioned the regions North America, Europe, and China will experience sort of higher demand declines based on quote unquote customer sentiment.
Hassan Ahmed: One of the obviously all sort of Tcs.
Hassan Ahmed: On the T Ao two side of things is that.
Hassan Ahmed: Relative to other commodities I mean, the Destocking was so severe within tio too.
Hassan Ahmed: You know.
Customers were running at ridiculously lean inventory levels, So I would've thought that you know.
Hassan Ahmed: Totally understand the seasonality aspect, but you know me.
Maybe you would not have seen such.
Hassan Ahmed: Such significant demand declines so I'm, just trying to understand and reconcile what that customer sentiment is has that customer sentiment changed forever. I mean will this industry run act.
Hassan Ahmed: Very lean inventory levels should we expect the snapback should we not expect a snapback based off of.
Hassan Ahmed: Maybe.
Hassan Ahmed: Maybe a new paradigm in inventories.
Hassan Ahmed: Yeah.
Speaker Change: Thanks Hassan it's a great question and again I'll go back to yeah.
Speaker Change: Earlier this year, we saw the 18% pick up in the first quarter of 8% pick up in the second quarter and what we said was that was indicative of what we would've seen in the front end of a recovery and it was and as we got into the back half of the year things started to slow down and now I've made this reference about where the housing market is and again, our coatings companies that are big customers.
Speaker Change: A hours, they're not saying I'd say a lot of different things than we are so this recovery is slowing a bit interest rates have not really taken I would say a positive as we would've expected them to.
So maybe let's talk about North America to your point on inventory.
Speaker Change: Because we're heavily weighting and weighted in coatings and in the U S. A lot of our sales are sold in the form of slurry are predisposed T. I wont go too where you only have a certain amount of capability to inventory that it's my belief that at the end of the year a lot of our customers are looking at their balance sheet, managing working capital and <unk>.
Speaker Change: Looking at their finished goods inventory more so than they have piled up a load of T. I O. Two that's going to be a big backlog moving into the next year, we're going to be talking about inventory drawdowns forever. So I I would say that we don't think there's been a big inventory buildup in finished goods.
Speaker Change: As we move into Europe, and China I.
Speaker Change: I think that's just more sentiment around uncertainty.
Speaker Change: It's a bit unprecedented this year when you think about it you know the economist reported earlier that.
Speaker Change: 'twenty 'twenty four there were 84 elections.
In the world So there's lots of.
Speaker Change: There's lots of things that are playing into people's minds around what the economy's going to do again I can't even I can't control that I can try to manage what we have and what we can influence but I.
Speaker Change: I don't think that there's a paradigm shift I'm still confident that the market will recover again.
Speaker Change: I'll only use my age as a reference for how many cycles we've been through.
Speaker Change: And although this cycle has absolutely taken longer than we would've expected and we're just as frustrated as many of our investors are around where that recovery is and why it's delayed but we do believe it will happen I don't believe there's been a paradigm shift and I think that the market is going to recover.
Speaker Change: Fair enough fair enough very good and Oh.
Speaker Change: Follow up on the anti dumping side of things you know.
Speaker Change: I mean as recently as the last quarter. It was the EU, Brazil, and India, and if I recall correctly.
Speaker Change: The sort of ballpark number that you gave was that you know around 600000 tonnes of volume would be in play and you know if I heard you correctly on this call.
Speaker Change: Saudi Arabia side of things add another 50000 tons right. So I'm, just trying to understand as and when let's let's assume for a second that all of these measures do go into effect and if 650000 tons is the correct number is in place I mean, how should we think about.
Speaker Change: You know how much of that you could you guys had thrown Alex could actually capture.
Speaker Change: It's a great question and your math is right only and that I said, the Saudi Americas, Saudi Arabia markets 50000, China has about 20000 of it. So you know 620 call. It 600 dose that's the right number 100000 tons ish in Brazil, 250000 tons ish in India and about 200.
Speaker Change: 3000 tons in the EU, so 600000 tonnes.
Speaker Change: If all of those duties go into place and again I didn't make reference to it but if you don't know the Brazilian duties weren't insignificant they range from $600 or $650 per ton of finished pigment. It's not a percentage basis. It's a dollar amount up to 17 $170 per ton.
They are significant duties and again those are in place now as Provisionals.
Speaker Change: And there'll be a provisional for six months before they make a determination on what the final duty is so.
Speaker Change: With those let's just use the Americas as an example.
Speaker Change: Trump 301 tariffs are in place, there's a 6% duty on T. O. Two that was always there 25% added on top of that you've got a 900 to a 1 million ton market in the U S. China's imports 24000 tons a year into it.
That's the kind of impact you should see.
Speaker Change: Very helpful. John Thank you so much.
Speaker Change: Ladies and gentlemen, as a reminder, shake your question. Please press star one.
Speaker Change: One.
Speaker Change: Your next question comes from Mike <unk> with Barclays. Your line is now open.
Speaker Change: Great. Thank you and good morning, guys.
Speaker Change: Just one question on inventory.
Speaker Change: It seems like over the past few years, you've added about say $400 million of cash that's trapped in inventory I guess, what is the game plan or the timeframe to get that back to a normal level Unrelatedly I assume part of that dynamic is the ore inventory right because of the temporary mismatch in your mine activity in downstream.
Speaker Change: <unk> utilization so is there any thoughts or selling some of that work position to help harvest cash shorter term.
Speaker Change: And Mike Thanks for that question.
Speaker Change: <unk>, we have built up significant inventory over the past several years as we've mentioned previously we do have a different profile than most of the others because of the or that in the vertical integration that we have and.
Speaker Change: You saw that and frankly in Q2. So we did end up building inventory there, but it was romney raw materials relating to our feedstock assets.
Speaker Change: And then in Q3, we did end up.
Speaker Change: Using and that feedstock, but we did build the finished goods inventory. There. So we are also seeing.
Speaker Change: Even though volumes are going up in our cost per ton is going down. So we are building inventory but.
And much better cost there. So as you look over when we might be able to extract more value in cash from inventory. So frankly, it will depend on the market environment, but we do expect if you look at back a couple of years to build we would expect to get back a significant portion of that and maybe just a little bit more color on the inventory.
Speaker Change: From our side I mean, occasionally we do sell ilmenite.
Speaker Change: Sold $6 million worth of ilmenite in that other category. This quarter. We also sold some heavy mineral concentrates. So a lot of those are done more on a spot.
Spot basis based on availability and but we have sound like we are formulating a strategy to go out and be a big seller of ore in the market. That's what the vertical integration is for again, we have a $300 three to $400 advantage due to having that vertical integration through our own ore supply in the high grade feedstock.
Speaker Change: So it's not something that we're planning to go out and develop our changes of strategy, where we're going to be a supplier to the market we've already we actually.
Speaker Change: Or a supplier we have been through that process before we made the acquisition of Crystal.
And that's one of the reasons the Cristal acquisition was accretive for us.
Speaker Change: Okay fair enough. Thank you guys.
Speaker Change: Yeah.
Speaker Change: Your next question comes from Roger Spitz with Bank of America. Your line is now open.
Roger Spitz: Thanks, very much and good morning.
You said earlier.
Roger Spitz: To Jackups that your 2020 for tier two volumes you expect to be at about 11 or 12% versus 2023.
Global industry.
Speaker Change #101: Only flat to slightly up I heard that correctly. So two questions here what is it you're doing or are you just in the right place and the right markets to take that market.
Speaker Change #101: <unk> market share and secondly, sort of who do you think is seeding that market share is it to Chinese producers.
Speaker Change #101: It's a good question I'll go back to the.
Speaker Change #101: I don't have complete visibility on what the global demand for Tio too is you know that's what we use a lot of our consultants for so I say up to flat to slightly up but I will say for US you know our strategy is to align ourselves with the customers that are growing faster than the market. We do that in every region and I think we've done a reason.
Speaker Change #101: Good job with our commercial team up aligning ourselves with customers that are growing faster than the market and by doing that naturally you can gain share without using price because you've attach yourself to the right people the right customers. So I think our commercial team has done a very good job of looking at who are those right customers who are the ones that are growing at the right rates and Thats why.
I believe the majority of our volume and again, we say that range of 11% to 12% and you get to the higher range of 135, it could be a little bit different than that but again. We're also seeing some of the seasonal adjustment in the fourth quarter, which we were not expecting so I.
Speaker Change #101: I don't have clear visibility on what the total number is going to be for the globe will have that as we get into the first quarter next year have a better view on it but our growth this year as well.
Speaker Change #101: The right customers in the right regions the ones that are growing and it's our alignment with those customers.
Speaker Change #102: Got it thank you very much.
Speaker Change #102: Okay.
Speaker Change #103: Ladies and gentlemen, this concludes your conference call for today, we thank you for participating.
Speaker Change #104: Please disconnect your lines.
Speaker Change #104: Okay.
Speaker Change #104: