Q2 2019 Earnings Call
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Excuse me starting to zero characters tone telephone as a reminder, this call will be recorded I will now much introduce your host for today's conference Senior Vice President of Investor Relations Brennen Arndt.
Please go ahead.
Thank you, Chris and welcome everyone to our second quarter 2019 conference call.
Our call today are Jeff Quinn, Chairman and Chief Executive Officer, John First Watchers Young Chief operating Officer, John Romano, Chief commercial and strategy Officer, and Tim Carlson Chief Financial Officer.
We'll be using slides as we move through today's call. Those of you listening by Internet broadcast through our website should already have them for those listening by telephone if you haven't already done. So you can access them on our website.
Tronox Dot com.
Moving to slide two.
A reminder, that our comments made on this call as well as the information provided in our presentation on our web site, including 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, including those under the heading entitled risk factors in our annual report on Form 10-K slash shape for the year ended December 31st 2018.
This information represents our best judgment based on today's information. However, actual results may vary based on these risks and uncertainties. The company undertakes no obligation to update or revise any forward looking statements.
During the conference call, we will refer to certain non U.S. GAAP financial terms that we use in the management of our business and we believe are useful to investors evaluating the company's performance.
These include EBITDA adjusted EBITDA, adjusted EBITDA margin adjusted earnings per diluted share and free cash flow.
Reconciliations to the nearest U.S. GAAP terms are provided in our earnings release and in the appendix of the slide deck.
But the company's guidance with respect to full year 2019, adjusted EBITDA adjusted earnings per diluted share and free cash flow, we're not able to broad without unreasonable effort. The most directly comparable GAAP financial measure or reconciliations for such GAAP financial measure because certain items that impact such measure or on certain out of our control.
Poor cannot be reasonably predicted.
As you saw in our earnings release, we provided our results on both a reported basis and a pro forma basis to assist in our discussion of the second quarter performance compared to the second quarter 2018, and the first quarter 2019, our primary focus today will be on the pro forma comparisons to enhance your understanding of the underlying trends our business performance in our markets in the appendices of our earnings release and the slide deck, our pro forma statements of operations and pro forma adjusted EBITDA statement for the second quarter's 2019 and 28.
Moving to slide three it's now my pleasure to turn the call over to Jeff Quinn Jeff.
Thanks, Brian and good morning, everyone and thank you for joining us today.
I am pleased to report that we delivered strong performance in our initial quarter. Following the closing of the game changing Crystal acquisition on April 10th.
As we laid out for you at our Investor Day in late May we were well prepared for the closing of the acquisition.
Because of our significant planning and preparation and aligned and energized global team came out of the starting block strong on day, one and has generated substantial momentum across our organization.
Our global team feels a real sense of ownership regarding the commitments that have been made to our shareholders and that's already begun delivering on those commitments.
On a pro forma basis second quarter revenue of $827 million increased 15% in the first quarter of 2019 with T. Ao two sales volumes up 17% and zircon sales volumes up 8%.
Selling prices for T. Ao two were level on a local currency basis, and zircons selling prices were down 1% due to customer and product mix.
In a moment genre Mano, our chief commercial and strategy Officer will talk about the successes team had been working with our pigment customers on our be spoke when when margin stability initiatives.
Harmonizing contract terms across the customer base that has more than doubled in size and capturing the benefits of the broadest category leading product portfolio in the industry.
Pro forma adjusted EBITDA of $200 million in the second quarter increased 42% in the first quarter of 2019.
This substantial increase was driven in part by the sales volume growth across our product lines, but even more so in our operations by the capture of $12 million at synergies in the second quarter and $28 million up margin benefits from our shift to fully integrated operations.
As we discussed on last quarter's call and at Investor Day, We took a number of actions in the quarters preceding closing in preparation for moving from a long short feedstock position.
As we reported these actions diminished margin in the quarters prior to the closing.
However, we are now deriving significant benefits from those actions.
John first of all three Sean our Chief operating officer. During his comments, we'll discuss the success. His team has had been bringing to the bottom line the significant benefits from our combination.
We are very pleased with the progress every day, we are finding new value creation opportunities in the new tronox.
Regarding our outlook for the full year 2019.
Clearly global macroeconomic conditions remain uncertain.
However, as we anticipated T Ao two pigment markets in Europe , and Asia has stabilized as inventory Destocking has run its course.
North American Mark market conditions remain resilient.
We have however, we've seen some softness in the Circon market.
But many of the key drivers to our profitability are within our control, including delivering the synergies optimizing our global vertically integrated operations, capturing the benefits of our global footprint controlling our overhead costs and wisely allocating our capital.
Considering all these factors we remain confident in our ability to deliver the results we committed to in May.
We are maintaining our outlook on the financial measures within the previous issued range for the full year 2019 on a reported basis.
For revenue and adjusted EBITDA, we are narrowing our outlook to the lower half of their previous provided a range of 2.83 to 2.98 billion and $635 million to $740 million respectively.
For adjusted diluted earnings per share, we are guiding toward the top end of the previous range of 43 cents per share and for free cash flow, we are maintaining the range of $130 million to $160 million for the year.
The early months of 2019 were marked by significant strategic accomplishments for Tronox.
In may we articulated our goals and the strategy based upon our five pillars and unique advantages that we would use to achieve those goals. We believe now more than ever that our strategy is the right approach and we are on the path to substantial value creation.
We as a unified global organization also made commitments to our shareholders in may.
As we said at Investor Day. It is now all about execution, we get that and we embrace that challenge and best of all we are already executing well and we'll continue to do so.
I'd now like to turn the call over to John Romano, Our Chief commercial and strategy Officer, John France, Walters on our Chief operating officer.
John will report on the commercial performance and the trends we're seeing in the global markets. John Francoise will report on our operating performance and on the strong start we've made integrating two great companies and delivering synergies John .
Thanks, Jeff.
Moving to slide four as Brendan said, our discussion today will focus on the pro forma numbers to provide a clear understanding of the commercial performance of the new Tronox and the trends in our business.
I'll briefly review the second quarter revenue performance versus the year ago quarter, then focus my remark on my remarks on the sequential comparison to give you a sense of the direction were taking the business.
Year on year revenue of 827 million was 8% lower than $903 million in the second quarter of 2018, or 7% lower excluding revenue of $15 million a year ago quarter from the electrolytic business sold in September of 2008.
Revenue was down for two primary reasons. The two we've spoken about on recent calls and presentations crystals commercial approach in 2018, and lower year on year zircon sales and production volumes as legacy Crystal Minings operations in Australia.
And to go to sales of 657 million were 7% lower sales volumes increased 3%, reflecting the completion of the Destocking in Europe , and Asia and continued resilience in the North American market.
Selling prices were 6% lower on local currency basis, and 8% lower on a us dollar basis as the translation of the Euro was a 16 million dollar headwind on revenue.
Regarding the year on year Keogh to selling price decline as I discussed at our Investor day in May since closing the acquisition on April the 10th we fully implemented our single unified commercial approach to serving our combined global customer base.
We were pleased to find minimal customer overlap across the regions and our average pricing across regions was quite similar.
Price harmonization program across the merged customer base went very well and is now completed so the 6% year on year decline in pricing on a local currency basis is essentially a prior year issue as we discussed with you at Investor day and in the previous call.
In zircon sales of $89 million were 18% lower as 12% higher selling prices were more than offset by 27% lower sales and production volumes at legacy Crystal mining operations in Australia.
The mineral concentrate or at the Gingko mine in Australia went down in October of last year.
The concentrator is our floating barge and one of the pontoons ruptured.
The lower production volumes from Gingko resulted in lower sales volumes, we discuss the concentrate or in detail at our Investor day in may and at that time committed to restarting the concentrate or in early August I'd like to congratulate John France won his team led in Australia by managing director Russ Austin as the consumer has the concentrated with safely. We started this week right on schedule.
Moving to feedstock and other products sales of 81 million compared to $77 million in the year ago quarter higher CP slag sales volumes drove the increase which were partially offset by lower ilmenite sales as you know we no longer actively sell ilmenite in the market given our expanded internal requirements now moving to slide five for the sequential comparison versus the first quarter of this year again on a pro forma basis revenue of 827 million was 15% higher than the 720 million in the prior quarter higher pigment and zircon sales volumes were were the primary driver of the increase.
And T. I went to pigment sales of 657 million increased 15% sales volumes increased 17%, reflecting the normal seasonal uptick the completion of Destocking in Europe , and Asia and continued resilient North American market conditions.
Selling prices were level to the first quarter on a local currency basis, and 1% lower on a us dollar basis.
As I mentioned earlier, we benefited from minimal customer overlap across regions and lower price harmonization risk. We continually we continue to work successfully with our customers on unique when when margin stability initiatives that provide the predictability of price and the stability of supply that our customers are looking for and at the same time the margin stability that will allow us to consistently reinvest in our business throughout the cycle.
We're having success with these initiatives in both coatings and plastic markets.
Moving to zircon sales of 89 million increased 7% sales volumes increased 8% positively impacted by the timing of shipments while selling prices were 1% lower due solely to mix.
As we look forward into the second half of the year, we are seeing some softening in the demand for zircon due to the uncertain outlook in China affected by the trade more environmental regulations and generally slower growth.
We've seen an increase in sales of lower grades are calm products, which has put some pressure on price for premium grades or con.
As a result, we expect our zircon sales volumes in the second half to be similar to the sales volumes in the first half.
This sales level is included in our full year outlook that Jeff discussed.
Our mid to long term outlook on zircon is still positive based on supply demand fundamentals.
Feedstock and other products sales of $81 million increased from $68 million in prior quarter.
Hi, Pete higher CP slag volumes more than offset lower ilmenite sales as our ilmenite production now serves our expanded internal requirements.
And with that I. Thank you and I'll now turn the call over to JF for a review of our operating performance and profitability in the quarter JF.
Thanks, John and good morning, everyone.
Moving to slide six.
I'm very pleased to speak with you today and to report that our integration work is going very well across our global operation.
The world's largest vertically integrated to production network with nine pigment plant and eight mineral sands facility on six continents.
As John did.
Briefly covered the year on year comparison, then move to the sequential comparison.
The sequential comparison will give you a good sense of what we have accomplished since we took the key.
Two crystal on April 10.
And where were heading on our journey.
To improve our safety lower our costs increase our product quality and generating cash using our advantage global footprint and integrated position.
Second quarter 2019 pro forma adjusted EBITDA of 200 million dollar.
Was 22% lower than the $257 million in the year ago quarter.
The primary driver to the lower year on year result, our Ddos, we discussed at our Investor day in May.
They are.
The lower year on year due to selling price due to legacy Crystal commercial approach in 2018 that John Culver.
Lower zircon sales and production volume in Crystal mining operation in Australia due to the operational downtime that limited sales volume.
The associated higher production costs at Crystal mining, Australia also impacted the comparison.
As John said that given coal mine concentrator has restarted.
I also want to tanks my team and our employee in Australia led by managing director Russ Austin.
Job very well done.
In fact, the picture on slide six shows the edge as lost last weekend as you can see the dredge is floating and was a restart earlier this week.
Hi, your crystal external feedstock costs that largely rolled off by the end of the year also impacted results in the quarter.
A major contributor to adjusted EBITDA in the quarter was the 28 million dollar margin benefit from more shift to fully integrated operation.
As Jeff said, we move from a long position in feedstock to a short position upon closing.
The actions we took.
Our operation in the three to four quarter in advance of moving from a long to short position at closing.
Are now bearing fruit.
They were the same action that diminish or margin in those quarter, including the first quarter of this year that we discussed with you on the last call.
We increased high grade feedstock production and put the lower unit costs product into inventory.
This lower cost inventory, if now benefiting pigment margin as the pigment made from that feedstock is sold.
Favorable foreign exchange, primarily the South African Rand and the Aussie dollar benefit adjusted EBITDA by $30 million.
And we're off to a good start to delivering our targeted synergy with 12 million to realize in the second quarter.
11 million reflected in adjusted EBITDA, and 1 million of interest saving not in the adjusted EBITDA Bridge.
Let's move to slide seven for a brief summary of the synergy deliver in the quarter.
Here are hard to synergy targets, we share with you on Investor day.
The synergy in each year represent the saving we expect to achieve in that calendar year.
Or 2019 target as you can see is $45 million.
We realized 12 million in the second quarter.
Compared to our range for the second quarter of $5 million to $10 million.
The $12 million saving were generated in a number of area.
F G and H reduction true organizational efficiency initiatives.
And the lower indirect spending such as a reduction in overhead expense and professional service fees.
Feedstock saving by optimizing or value in you.
This is a great example of how having control over our own feedstock is so valuable to us strategically over the long term.
We can optimize our use of different feedstock grade to minimize waste and maximize value creation.
Supply chain savings also contribute in the quarter.
Its reduction in direct material purchasing and service contract as well as consolidation of contract and elimination of redundant service.
In addition.
Reduce interest rate contribute 1 million that are not reflected in the adjusted EBITDA Bridge.
Let's move to the sequential adjusted EBITDA Bridge.
To give you a sense of the movement, we're generating in our operation.
Moving to slide eight.
Adjust EBITDA of $200 million increased 42% from the $141 million in the first quarter 29 team.
Hi, Eric you too.
The recon.
Feedstock and co products sales volume combine.
Contribute $34 million to the inquiry.
Favorable foreign exchange on cost of 7 million again, primarily the South African Rand.
28 million dollar of the increase came from the margin benefit from our shift to fully integrated operation.
And synergy saving raised EBITDA by an additional $11 million.
As you can see we are executing our plan and generating significant momentum.
Yes, global macroeconomic condition are uncertain. However, as Jeff said many of the key drivers to increase our profitability are in our control delivering the synergy and optimizing our global operating footprint.
We are fully intend to meet our commitment to lower our costs.
Improve our product quality and generated cash using our advanced age and integrated position.
With that I. Thank you I look forward to continuing to report on our progress and I'll turn the call over to Tim Carlson for a review of our financial position Tim.
Thanks, Jeff moving to slide nine and starting with our balance sheet.
On June Thirtyth 2019 debt was $3.2 billion in debt net of cash and cash equivalents was $2.8 billion.
Our liquidity was $798 million comprised of cash and cash equivalents.
Of 300, and 397 million and $401 million available under revolving credit agreements.
And our net leverage on a trailing 12 month basis was 3.7 times.
We continue to expect our net leverage to be under three times in 2020.
Regarding the legacy Crystal reporting concern we identified following closing in April .
It has been resolved the pro forma adjusted EBITDA that crystal generated in the first quarter was $61 million that concern regarding noncurrent liabilities had offsetting adjustments to other balance sheet accounts and other comprehensive income.
I think the concern regarding work working capital was within accounting guidelines.
Our capital allocation policy is unchanged with a priority given to de leveraging and disciplined capital spending on high return organic projects.
As we said share repurchase will be done solely on an opportunistic basis.
Our capital spending in the second quarter was $56 million well below our depreciation depletion and amortization expense of 84 million.
As you know we did undertake significant share repurchases since closing the acquisition.
We returned approximately $263 million to shareholders in the second quarter by repurchasing approximately 19 million shares and making our regular dividend payment.
On may 9th of this year, we repurchased 14 million Tronox shares from example for an aggregate purchase price of approximately 200 million or $14.32 per share.
The share price was based upon a 5% discount to the 10 day volume weighted average share price as of the day that exerial exercise their sales notice to us.
On June Threerd, our board authorized the repurchase of up to a $100 million of Tronox shares during the second quarter 2019, we repurchased 5 million shares under the repurchase program at an average price of $11.26 per share.
And at a cost of approximately $56 million.
We continue to purchase in the third quarter as of August six we have repurchased 7.5 million shares under the authorization.
At an average price of $11.59 per share and net cost of approximately $86 million.
As a result, we've returned 294 million to shareowners.
From the start of our second quarter August six by the repurchase of approximately 21.5 million shares and with our regular dividend payment.
Regarding our forecast for the second half 2019.
As Jeff stated, we're maintaining our outlook for full year 2019 on a reported basis within the previously provided ranges and narrowing guidance to.
The lower half of Prelease provided ranges for revenue of $2.83 billion to 2.98 billion and adjusted EBITDA of 635 million to 740 million respectively.
The high end the previously provided range for adjusted diluted EPS of a negative 17 cents to 43 cents.
And within the previously provided range for free cash flow of $130 million to $160 million.
With that I. Thank you and I will turn the call back over to Jeff for closing comments, Jeff. Thanks, Tim as you can see we are executing well and have generated significant momentum.
Despite a lot of noise in the general economic landscape is a good time for us at Tronox and were bullish about the future. Both the long term future in the near term, we are well positioned relative to others in our space to deliver significant profitability and cash flow across varying macroeconomic conditions.
Many of the key drivers to increase our profitability are within our control such as delivering the synergies from the acquisition optimizing our global operating footprint.
Taking advantage of our vertical integration, managing our overhead and wisely allocating our capital.
We are indeed, moving forward together as one new Tronox, we have a clear vision of what success looks like and clarity as to how we're going to get there.
As we've said our mission is to be the T. Ao two equity offering of choice displaying greater stability and financial performance and cash generation across cycles by utilizing our vertical integration and margins stabilizing commercial approach. We believe that the second quarter has been a very clear first step toward achieving that goal with that I. Thank you and now we'd like to open it up for your questions Chris.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press the Star then one key touchstone telephone.
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To prevent any background noise suppression on them. What's your question has been steady.
And our first question comes from the line of Duffy Fischer with Barclays. Your line is now.
Yes, good morning.
First question is just around the guidance. So you did about 341 in the first half low end of the guidance is.
I'll call. It 640, so youve got about 300 in the back half that'd be 150, a quarter and you're coming off a quarter, where you just did 200 million of EBITDA, so that step down at 25% on a quarterly run rate seems pretty large given the synergies running through can you just walk through what drives that step down.
Duffy.
The the number that you quoted for the first half was what im sorry.
341 is your pro forma right, the 200 and not the second quarter and the 141 in the first quarter.
Yes.
And the the right.
The guidance that we've reported is out on a reported basis.
So the.
61 million that you've included in the first half is not in our full year number because its a reported basis number not a pro forma number.
Okay, well, okay. So its still then it would be about a $30 million step down.
Quarter over quarter is out so again I guess, just if you could walk through kind of if we start with the second quarter, we've got more synergies coming in quarterly, but there does definitely seem to be a step down in run rate profitability, how much of that is or corneum and how our zircons and how much is.
T. out too.
So the two components support we will see some additional synergies as we go through the back half of the year.
As we go through the back half of the year, we'll also see the the T. Rowe to seasonality with Q4 revenues coming down from Q3, and then the recon market.
We built in into our forecast a little bit of softness, but it is relatively flat.
If you look at the guidance that we provided the full year guidance of the 635 of the 740.
With us some guidance to the lower half of that.
It really.
Equates to.
Okay relatively level.
EBITDA performance Q2 to Q3, and then a slight $20 million to $30 million step down in Q4.
Just given the nature of our business.
Okay.
And then second one just on raw materials now again, it doesn't affect you directly as much anymore. Since your integrated obviously it'll affect your competitors. How do you see kind of low end and high end or prices moving over the next year.
Well, maybe Duffy again answered this one its JF.
We see a very tight market tend to high grade feedstock side of the business. So for everything that you can call flag or natural rutile synthetic roof tile and it's a very tight supply demand market.
Add in the ilmenite market, we see a balance.
Supply demand situation and with that a more a more genius price for those products.
The price for ilmenite hasn't moved much sense of the numbers, we kind of reported on Investor day. So it's been relatively stable.
Great. Thank you guys.
Thank you and our next question comes from the line of John Mcnulty with BMO capital. Your line is now.
Yeah. Good morning, Thanks for taking my question.
So I guess the first one on the on the synergies that you realize I mean, clearly at least a little bit ahead of schedule, which is great. I guess can you give us an update as to how you're thinking about the year end run rate and if that's going to also continue to stay ahead of schedule or do you kind of settle in more toward your original plan.
Okay I see that it's good to be ahead, and obviously, we're working hard to try to remain ahead, but the guidance that we gave you in may at our Investor day are still.
I mean, our our best guess of where we are so we for guest we forecast to be at 45 million deliver at the end of 2019, and obviously the run rate will be higher. So we can the heat hit the 120 for the full year of 2020.
But look what as Jeff mentioned in his comment everyday we found new projects and new initiatives that we did and taught.
Were there and that help you know.
Making sure that we will maintain this said.
Slightly ahead of where we want to be on the synergy guidance John one of them. Obviously one of the ways. We realize we can create significant value is pulling forward that synergy capture and that's that's a focus that we have each and every day and and as we progress through the year, we'll continue to update on that and certainly as we get towards the end of the year will provide even a more detailed reconciliation of all the various buckets in terms of.
Got it Okay, and then just as a follow up.
I guess you you had a lot of optimism around interest in your in your kind of margin stabilization program.
Post the post the close of the transaction I guess can you give us an update as to where you stand there and how much in terms of in terms of incremental interest you've been seeing since the close.
Yes. So this is John Romano.
As we mentioned briefly on the call we are getting traction on these margin stability initiatives.
I'd say more so than we reported on Investor day.
Again, it's something that's going to take time.
It's not going to happen overnight, but we are getting traction in both plastics and coatings markets.
And that's not just in the Americas. So it's.
In other regions of the world as well and so and when we think about how we're going about that we're actually targeting strategic accounts, where our intent is to grow there and to the extent.
We have an offering on our margin stability that is more attractive than our competitors. We are actually picking up business on long term contracts. So that's kind of the summary on that.
Great. Thanks, very much for the update.
Thanks, John .
Thank you and our next question comes from the line of Frank Mitsch with Feraheme.
Research your line is now.
Thank you so much and congratulations on the gingko restart I know that that was a.
Source of some consternation in the investment community. So good to have that out of the way.
We're seeing that.
Out of China, some price increases announced on T. O. Two I think it's $50 a ton across the board.
Where do you stand on price increases and just in general.
What is your expectations on tier two prices in the back half of this year.
Hey, Frank It's John Romano So.
Yes, we as recently as this weekend there has been some movement with regards to people talking about price increases in China.
That's on the back of what we saw in the last couple of months with some downward movement on pricing. It's one of the things as a new company. We now have a much better visibility into the China market, because we have an asset over there so.
I think some of what's driving the price increase announcements.
More recently is that you know China's golden year, which is their seventyth anniversary. The first anniversary of the founding of the People's Republic of China starts in October .
That's the first full week of October and there is a lot of prep going on in front of that preparations.
Slated to start as early September so as you start creeping into the end of the year what are the environmental regulations tighten up anyway.
There are planned outages that are going to take place and I think thats, putting some pressure.
Lower inventories and ultimately drive to try to get additional pricing as far as the balance of our market.
We have been working to increase prices.
I'm not going to give a whole lot of color on exactly how we've done on that but what I can say is that in the third quarter. We did have some success.
On pricing in Asia, and Europe , and we're continuing to focus on.
Improving pricing as we move forward that being said just like pricing hasn't been moving down significantly over the last four quarters, we don't expect significant price movement up in the.
On pricing either.
And that's in line with our margin stability initiatives.
So John .
So I should take that to mean that prices in Threeq Q.
Are going to be flat to possibly up slightly sequentially from twoq.
That's a good assessment.
All right terrific and then.
You characterize some of the softness on the zircon market.
Owing to some of the.
Macroeconomic softness in China, I guess, what were sort of China is is your circon sales.
Well demand for China, It's about Ford zircons about half on ceramics, So that's a big part of that and.
No it's not only in China, that's the biggest area, where we're seeing kind of a slowdown but.
It's in Europe , as well, so as Jeff said and I think I referenced our sales moving into the second half is going to be.
Around the same kind of profile, we had in the first half may be slightly higher where we would have previously forecasted a little bit stronger volume in that second half the second quarter was also.
Normally I am making comments about.
Shipment timing have a negative having a negative impact on our quarterly volume in Q2, it actually had a positive impact on our volume based off a roll off from the previous quarter. So.
We still are very optimistic about circon moving forward in the mid to long term, but in the short term I think China is driving a lot of.
Trepidation in some of our customers minds around what might happen.
Fair enough. So the way I should think about it is volumes maybe on the weak side, but pricing still still stable on this work on site.
We don't see a lot of movement on pricing and I would say volume is relatively stable alright terrific. Thanks, so much.
Thats right.
Thank you and our next question comes from the line of Hassan Ahmed with Alembic Global Your line is now open.
Morning, guys.
Really.
Really.
Good volume growth sequentially on the pigment side up, 17%, but sort of more or less.
Nomination Yodle that growth, so I'm, just trying to figure out.
This sequential uptick you guys saw in Tiotwo volumes was that by not only a result off like you guys sort of alluded to in the release.
The destocking phase being behind US I mean was that was that we added the bulk of that volume growth came from or was there some element of market share gains baked in that as well.
Yes. They have thanks for that look there were a variety of reasons for that uptick first as I mentioned the seasonal uptick in demand that always occurs in Q2 compared to Q1, although that was a bit muted this year due to the slower start to the coding season.
There was also the pickup in demand that we saw in Q2, reflecting the completion of the Destocking in Europe , and Asia and as a combined company that was a bit more significant due to our larger footprint in Europe .
And then the impact of the legacy Crystal market adjustments to regain share that started in the second half of 2018, which had an impact on our volume moving into the first half of the year and lastly, as I mentioned, just a minute ago, our margin stability initiatives.
Again, we're targeting customers, where these unique initiatives in some instances our value proposition is more attractive than our competition and we are securing contracts for larger volume, but not on the back of price.
Understood understood now on the on the feedstock side again sequentially pro forma revenue was up 19%.
It seems to me that the bulk of that sort of uptick gain from high grade ore pricing improvements because obviously you guys talked about.
You know the sort of volume increment on the CP slag side being offset by volume declines in the ilmenite side and obviously you pointed out why those volumes declined at midnight you know obviously using it for into I know sort of purposes and the like.
So and it also seems that you sounded quite positive about a continuation of pricing increments.
On the high grade ore side, so it's sort of a two part question. One is you know.
Do you continue to see even in this sort of.
Erratic macro environment supply demand tightness in high grade ore through 19 into 20 and the second part of that is dead.
Obviously, you guys must have between yourself and legacy Crystal some legacy contracts in place.
Have most of those legacy contracts expired I mean, if you could just give me a sense of.
You know what percentage of business is being done sort of act marketplace.
Yes, so as far as legacy contracts, we only have one contract on high grade feedstock.
And that is.
With the company that acquired Ashtabula Thats by contract in the agreement we had with them. So.
That volume is actually lower than what we have sold historically timing of shipments had something to do with the uptick but.
We ultimately we will be consuming a long term all the feedstock internally so.
We the contracts that we have right now I Wouldnt say, our old legacy that relatively new but theres only.
One of them.
Understood and just about you know.
Pricing prospects just for high grade or 19 to 20.
Even in this sort of uncertain macro.
Now looking at this particular stage, we would continue to see.
Upward movement on pricing for high grade feedstock.
And we're in the market also for high grade feedstock and we're continuing to see.
Pressure on the upside the tightness in the market as Jeff said earlier.
Very helpful guys. Thank you so much.
Thank you and our next question comes from the line of Jefferies Koski with JP Morgan.
JP Morgan your line is now.
Thanks very much.
What we're operating rates at Yanbu, a month ago and what are they now and can you talk about.
Hi changes that are going on at that facility.
So so Jeff it's J.F. here and look to yanbu at the moment.
That is the asset where we want to increase the quality. So our focus has not been on volume, but our focus has been on quality to really change the perception of our customer off what can be produced in yanbu and remember at Investor Day, I made that comment that we did the last 20 year, we have improved significantly Hamilton product and in the MBU is a copy of Hamilton.
And then we have very easy add change that we have put in place too.
Significantly lift the quality out of Yanbu, well, we will obviously adjust the volume based on the demand and based on and John plus the ability of selling more material.
And that's that's always been our strategy to adjust our production to the market demand and I think I'd like to make the comment because I heard that comment from from some of our competitor I believe that we probably have the best.
Capability to increase production as needed with no capital requirement and because what we have done in our legacy Tronox plan by what I call a delivering the hidden factory well. That's why we did that deal to be able to delivery delivered the hidden factory out of the legacy Crystal assets, but we'll do that as as the market's requests this new tonnage, Jeff you'll remember at Investor Day, we talked a lot about.
The company unified commercial approach be such a critical part of our strategy going forward and we talked about how we would feather into the market as the market demanded that incremental production that we have from from legacy Crystal operations and that's exactly what we're doing and because it is a commercial driven strategy that quality need in the market and the market been receptive to a higher quality product coming out of Yanbu has been a very early focus of ours and we've made progress in that regard.
So maybe just to re ask that how long do you think it will take you too.
Get yanbu quality up to standard if you can forecast that we have that done by the end of the year or it's too hard to know.
Well, it's a range of change and I can tell you that there is some action that we have took that already have increased some of the product out of yanbu dairies grade debt or legacy Tronox grade that we want to start producing in the boom that we expect to produce in 2020.
So it I'd say that it's hard to win serve with the various fixed number of month, but I can tell you that there is already product that is better than it was out of yanbu after three months.
And then I'd see within the next year, we will continue to had new grade and new product. Yeah, you know and chapters, there's no there's no silver bullet there yet, but as we as we knew it's the culmination of dozens of projects and initiatives that will improve the quality and liberate the incremental volume over time, and and we are systematically and thoughtfully pursuing those and the team there that we've put in place with the.
Some some of the help and expertise from.
Our global no global operations, and and the energized team the yanbu.
We feel really good about the path there and the progress we've made.
Okay I'm just.
Financial question.
What's your share count after you factor in all of repurchases that you've made.
Thus far.
And I realized there is a difference between the average share count of the actual share count, but if you made no more share repurchases what would your share count be.
You know either in the third quarter or the fourth quarter.
But a 142 million Jeff.
142.
And how much.
Are there further share repurchases that you expect to make to the end of the year.
On the $100 million that the board authorized.
Back in June that authorization was within the 10% limitation permitted under section 382 of the code.
So we can go above that without.
Jeopardize will read into that obviously resets again next year.
So as of now there is no anticipated repurchases beyond what Weve already announced.
Okay. Good all right. Thank you so much.
Thanks, Jeff.
Thank you and our next question comes from the line of Jim Sheehan with Suntrust. Your line is now.
Thank you good morning.
So Joe to prices have stabilized at a higher level and this cycle than in previous trough.
Do you credit your margin stability discipline for that and how sustainable might that pricing stability D. Do you have any concern that competitors will reverse their stability strategies and disrupt the market in order to regain market share.
It looks so I do and I think we mentioned this previously I do think that the initiatives on margin stability you have had an impact.
On this last mini cycle because bottom.
Typically you'll get pricing.
That won't drop quarter to quarter far in excess of 1% in a down cycle and over the last several quarters we've had.
1% ish price decline and in this particular quarter pricing stabilize so I do believe that margin stability initiatives have had a positive impact and I also believe that as we move forward.
I can.
Predict or understand exactly what my competitors are going to do but I do believe that there is enough and enough momentum with margin stability out there that as we move forward.
It's our expectation.
That this will continue and that's going to drive positive results for Tronox.
Great and could you give us some more color on the crystal reporting issue. So is it true that inventory was not actually overstated and therefore, we should not expect a true up.
The inventory balances within the accounting guidelines the EBITDA that we talked about as being reported on Investor Day was 63 million.
The pro forma.
Adjusted EBITDA was 61 million. So the concerns that we had on working capital ended up all being within the accounting guidance.
Thank you.
Thanks, Jim.
Thank you and our next question comes from the line of Vincent Andrews with Morgan Stanley . Your line is now.
Hi, This is actually Steve hands on for Vincent.
Maybe just at the industry level on the demand side, what kind of kind of underlying volume assumptions are baked in Q.
The back half guidance for 2019, and then kind of going into 2020.
And maybe any changes to that outlook given the macro uncertainty you guys setting. Thanks.
Yes, so as we look into the back half of the year.
Our forecast has the second half looking very similar to the first half there might be a little upside.
And moving into 2020, as our position hasn't really changed much it's in.
You know three Percentish range.
19 to 20.
On growth.
Thank you. Thank you.
Thank you.
Thank you and our next question comes from the line of Roger Spitz with Bank of America.
Thank you and good morning.
Can you provide crystals Q3, 18 pro forma pro forma without Ashley.
Adjusted EBITDA and that of Q4, we have the.
To age 18 numbers, but wanted to see if we can get a quarterly breakdown of the sales and pro forma EBITDA.
Hey, Roger I don't have that handy my apologies, but we'll make sure. We we can get that out at some point.
Thank you.
So.
Our EBITDA guidance.
A bit to the lower half of the range.
The free cash flow.
Same.
Can you just comment on that and perhaps update us on the other items that you provide on the Investor day.
For the cash flow items between EBITDA and free cash flow capex cash interest et cetera, whatever might it change.
It would be happy to Roger the.
The the favorability on the free cash flow line is slightly lower capital expenditures slightly lower cash taxes.
Little bit of improvement in the working capital.
As you look at.
The full year as it relates to.
Our free cash as reported our capital is probably going to be in the 230 to 50.
Million dollar range.
Cash taxes in the <unk>.
$25 million to $40 million range.
And then working capital, we expect a little bit of continued improvement as.
As we drive some of our working capital initiatives with the combined company.
Thank you and lastly.
What is the timing of the additional 14.7 million shares as well as the 7 million.
South African shares.
You might at some point.
Joe Choir.
Resources.
Yes, so zarro has the the obviously the right to sell those shares when whenever they should his desire to sell those shares.
Based upon.
The discussions we had them had with them with the last.
Marketing request.
I anticipate that they would sell around the 14 and $15 range.
I don't think there a seller at the current the current prices.
If.
The stock does recover I would anticipate that we would get a marketing notice.
And that gives us 660 days to prepare.
As it relates to the 7.2 million share flippin.
Zero has the right as well to not accept our offer to flip those shares in and given.
The indications that.
They are looking at a 14 to $15 stock price, even if we requested to flip that and they want an accepted to so I would expect no activity until we see a recovery in the market.
Thank you very much.
Thank you and I'm not sure I'm not showing any further questions. At this time I will now turn the call back to Jeff Cohen for any closing remarks.
Thank you Chris.
In summary, we're off to a good start for the new Tronox. We are well positioned we are bullish about the future we're focused and locked in on execution.
We know and that's that's achieving results that are reflected in our in our.
Results for the second quarter.
We look forward to continuing to dialogue with you as we move forward about.
The value, we're creating the capture of synergies and building the world's greatest T. Rowe too.
Organization.
We look forward to cementing our position as the T Ao two equity of choice and Dialoguing with you about that as we move forward. So have a good day. Thank you for your time. This morning, and thank you for your continued interest in our company.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program. You may now disconnect everyone have a great day.