Tronox Holdings plc (NYSE:TROX) Q4 2023 Earnings Call Transcript

Tronox Holdings plc (NYSE:TROX) Q4 2023 Earnings Call Transcript February 16, 2024

Tronox Holdings plc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to the Tronox Holdings Q4 2023 Earnings Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Jennifer Guenther, Chief Sustainability Officer and Head of Investor Relations. Please go ahead.

Jennifer Guenther: Thank you, and welcome to our fourth quarter and full year 2023 conference call and webcast. Turning to slide 2. On our call today are John Romano and Jean-Francois Turgeon, Co-Chief Executive Officers; and John Srivisal, Senior Vice President and Chief Financial Officer. We will be using slides as we move through today’s call. You can access the presentation on our website at investor.tronox.com. Moving to slide 3. A friendly reminder that, comments made on this call and the information provided in our presentation and on our website, include certain statements that are forward-looking and subject to various risks and uncertainties, including, but not limited to, the specific factors summarized in our SEC filings.

This information represents our best judgment based on what we know today. However, actual results may vary based on these risks and certainties. 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 believe are useful to investors in evaluating the company’s performance. Reconciliations to their nearest U.S. GAAP terms are provided in our earnings release and in the appendix of the accompanying presentation. Additionally, please note that all financial comparisons made during the call are on a year-over-year basis unless otherwise noted. It is now my pleasure to turn the call over to John Romano.

John?

John Romano: Thanks, Jennifer, and good morning, everyone. We’ll begin this morning on slide 5 with some key messages from the quarter. We delivered fourth quarter top line performance in line with expectations. TiO2 sales volume declined approximately 4% in the quarter compared to the third quarter. Volumes were slightly lower than expected due to more seasonality in North America than anticipated, and we also experienced some shipment delays as a result of congestion in the Red Sea that delayed some stock transfers to cover our Botlek outage in Europe. Our TiO2 pricing was only down 1% compared to the third quarter, which was better than our previous guide. Our zircon volumes increased 82% versus the third quarter, higher than expected and communicated on our last earnings call.

However, we did experience some unfavorable product and regional mix, which negatively impacted our marginal quarter. Zircon pricing was down 9% compared to the third quarter, due to product mix and some regional pricing adjustments, primarily in Asia Pacific. Revenue was also higher from other products due to additional sales of pig iron, as well as opportunistic sales of ilmenite and a portion of our rare earths tailing deposit in South Africa, which is a key part of our funding strategy for our rare earths business. Our adjusted EBITDA for the fourth quarter came in $11 million below our guided range. This was primarily driven by a delayed restart of our steam supplier at Botlek and higher costs from unanticipated downtime stemming from running at lower rates, while the Botlek situation is now under control, and our suppliers back up and running, we saw approximately $10 million more in cost than forecasted, due to the longer downtime.

Importantly, our supplier outage did not disrupt our ability to fulfill customer demand as we were able to reposition inventory from our other global assets to meet customer demand in Europe. We expect to recover at least $15 million in insurance proceeds in 2024, as a result of the downtime at public in the second half of 2023. This amount represents the cost incurred to continue to provide uninterrupted service to our customers, while working around the supplier outage. The operating challenges we experienced in the last six months are indicative of the standard we hold ourselves to at Tronox, and we’re addressing these challenges head on in 2024. In 2023, we ran at the lowest utilization rates on record in order to manage inventories and free cash flow in light of the lower market demand.

As we look into 2024, we’re adjusting our operating rights to support the recovery currently underway. This will set Tronox up to realize a step change in our earnings power after we work through the remaining high-cost inventory on the balance sheet. Our free cash flow for the quarter came in higher than expected at $51 million despite the lower than forecasted earnings owing to our cash management initiatives. We saw a positive inflow of nearly $60 million from working capital in the quarter. I’ll let John run through more of the year end numbers from the balance sheet, but we’re very comfortable with where we are from a liquidity and debt then. Despite the lower market demand, we took action at the right time in 2023 to bolster the balance sheet and ensure we had sufficient liquidity.

I’m proud our team — how our team is proactively prepared for varied scenarios and Tronox is very well-positioned as we stand today, especially, considering the key capital projects we planned for 2024 which we’ll discuss a little bit later on the call. Turning to slide 6. I’ll now review a few updates on some of the key sustainability initiatives. We are nearing the conversion of 40% of our power in South Africa to power from the significant solar project we helped develop in partnership with the SOLA Group. This project is one of South Africa’s largest solar installations. We expect to receive power in the coming months, which will significantly reduce our carbon emissions globally and marked the first significant step on our journey to net zero in 2050.

Renewable power and energy efficiency projects are key to achieving our 2030 greenhouse gas emission reduction target of 50%. So we’re excited to mark such a significant milestone. We have another renewable project development in South Africa that we hope to provide more details on soon. Also underway are various initiatives to achieve our stated targets towards reducing our waste to external landfills. This includes exploring alternative uses for waste in a number of opportunities including cement, road base, bricks and water treatment chemicals. We are also continuing to evaluate opportunities to extract valuable minerals and metals from waste including rare earths scandium and vanadium. We’re excited about the progress we’ve made. Look forward to continuing to updating you on our journey.

I’ll now turn the call over to John to use some of our financials for the quarter in more detail. John?

John Srivisal: Thank you, John. Turning to slide 7. Revenue of $686 million increased 6% compared to the prior year, primarily from TiO2 and other product sales. This represented an increase of 4% relative to the prior quarter due to higher zircon and other product sales. Income from operations was $8 million in the quarter. We reported a net loss of $56 million. Our effective tax rate in the quarter was 75%. Despite generating a loss before income taxes, we paid $24 million in taxes in the quarter as the majority of our taxes are paid in South Africa where we had higher earnings than expected owing to higher Zircon sales in the sale of a portion of our rare earth tailing deposit. In the majority of our other jurisdictions, we either realized a net loss or FNOL positions.

As a result, our adjusted diluted earnings per share was a loss of $0.38. As previously discussed, our adjusted EBITDA in the quarter was $94 million and our adjusted EBITDA margin was 13.7%. Free cash flow generated in the quarter was $51 million. Now let’s move to slide 8 for a review of our commercial performance. TiO2 revenues increased 9% versus the year ago quarter driven by a 16% increase in sales volume, a 6% decrease in average selling prices and unfavorable product mix impact of 2%. We saw a favorable impact from FX of 1%. Zircon volumes decreased 26% compared to the year ago quarter and zircon pricing was lower by 11%. Revenue from other products was $110 million an increase of 38% compared to the prior year driven by higher sales of pig iron, ilmenite and rare earth tailings that John previously mentioned.

Turning to slide 9. I will now review our operating performance for the quarter. Our adjusted EBITDA of $94 million represents a 17% decline year-on-year, driven by lower average selling prices and higher operating costs due to lower production rates. This was partially offset by improved sales volume and product mix, favorable exchange rate tailwinds and lower freight costs. Sequentially, adjusted EBITDA decreased 9% driven by higher operating costs due to lower production rates and lower product pricing. This was partially offset by improvement in sales volume and product mix, exchange rate tailwinds and lower freight costs. As we mentioned previously, we brought down our operating rates in order to manage inventory and cash, which had an unfavorable impact on our costs in the fourth quarter and across the year.

Quarter-over-quarter production cost increases of $40 million included $16 million of higher costs associated with lower absorption and higher input costs. $12 million of lower cost or market and idle facility charges due to lower production rates and $9 million of higher mining costs. Turning to slide 10. I’ll now review our financial position. We ended the quarter with total debt of $2.8 billion and net debt of $2.6 billion. Our net leverage at the end of December was 4.9 times on a trailing 12-month basis. While we ended the year with higher debt than the prior year, the incremental term loan of $350 million raised in the third quarter reinforced the strength of our balance sheet and bolstered available liquidity ahead of anticipated critical, vertical integration-related capital expenditures.

Our nearest term significant maturity remains 2028 and we have no financial covenants on our term loans or bonds. Our weighted average interest rate in Q4 was 6.17%. We maintain interest rate swaps such that approximately 73% of our interest rates are fixed through 2024 and approximately 64% are fixed from 2024 through 2028 aligning with the maturity of our term loan. As a result, we do not expect to see our average interest rate increased significantly in the year. Total available liquidity as of December 31st, was $761 million including $273 million in cash and cash equivalents, an improvement from our Q3 levels and owing to positive cash generated in the quarter. Capital expenditures totaled $59 million in the quarter. Approximately 65% of this was for maintenance and safety and 35% was for strategic growth projects.

DD&A expense was $69 million for the quarter. We’ve returned $20 million to shareholders in the form of dividends in the quarter. We’ll now turn the call back over to John Romano for some comments on the year ahead and our outlook. John?

John Romano: Thanks John. We expect 2024 to see a reversal of several of the trends for the last 18 months on the market. We’ve already begun to see a pickup in demand for TiO2 that is more positive than we would see normally at this time of year. January sales were strong and we’re seeing continued strengthening in the market for February and March order books. We expect TiO2 pricing to reverse its downward trend and improve as we move through 2024. Zircon volumes are also continuing to improve from the trough levels realized in July of 2023. The magnitude of the recovery will be somewhat dependent on China as it makes up 50% of the total zircon market. However, even without that significant shift in China we’re seeing demand recover.

On the operational side as I’ve mentioned previously, we incurred significant costs in 2023 from running our assets at low utilization rates due to soft market demand. We incurred between $25 million and $35 million in fixed cost absorption headwinds in each quarter of last year. In 2024, we’re already beginning to increase our operating rates in line with demand, which will have a positive impact on our manufacturing cost. We still have high-cost inventory to move through the business, which we anticipate will carry partially into the second quarter. But by the second half of the year, we should see margins revert to our more normalized levels. We continue to deploy technology at our sites to reduce costs and improve efficiencies, which will also improve our cost position as we ramp up.

We are investing in key capital projects to sustain our vertical integration as well. From a growth perspective, R&D efforts remain focused on product and process innovation to enhance profitability. Additionally, we’re continuing to explore opportunities in the rare earth space. As rare earths are already present in the heavy mineral sands we mine in South Africa and Australia, we are continuing to explore opportunities to increase value as these — after these heavy start [ph] after minerals. We are also continuing to drive our sustainability initiatives, which not only are critical to preserving our privilege to operate but also support Tronox’s value proposition. And we’ll continue to challenge ourselves to be a leader in this regard. Moving to slide 12.

I’d like to spend some time reviewing two of our key capital projects for 2024. This year we’ll be investing $130 million in two key mining projects in South Africa to replace our existing mines, which are reaching the end of their lives. Investment in these projects, were delayed in 2023 to preserve cash given the lower market demand. These investments will maintain our more than $300 a ton advantage relative to market pricing for feedstock. Each project is expected to generate IRRs in excess of 30%. These are critical projects to maintain Tronox’s vertically integrated strategy that will continue to enhance our position as a leading TiO2 producer and the industry’s leading financial performance. Turning to slide 13. I’ll review our outlook for the quarter and the year ahead in more detail.

On the first quarter for 2024, we expect TiO2 volumes to increase 12% to 16% and zircon volumes to increase 15% to 30% both compared to the fourth quarter. We expect both TiO2 and zircon pricing to remain relatively flat in the quarter. While we expect a headwind from non-repeating sales and other products, this will be offset by some improvement on fixed costs due to our higher operating rights. As a result, we’re expecting Q1 2024 adjusted EBITDA to be $100 million to $120 million and adjusted EBITDA margins to be in the mid-teens. While we’re not providing full year EBITDA guidance, we did want to provide a view on our expectations for our 2024 cash uses. Our capital expenditures are expected to be approximately $395 million for the year.

Our net cash taxes are expected to be less than $10 million as the significant capital expenditures in South Africa are deductible. Our net cash interest expense is expected to be $145 million, and we’re expecting working capital to be a tailwind, and the magnitude of that tailwind will depend on the significant — how significant the market recovery this year. Our strategy remains largely unchanged. We’re prioritizing investments in the business that are critical to furthering our strategy and driving value from our vertically integrated portfolio. Even at this investment level, we expect to generate positive free cash flow for the year. We will see — we will also be focused on bolstering our liquidity and as the market recovers we’ll look to resume debt paydown.

We will continue to evaluate strategic high-growth opportunities as they arise. Currently, we’re focusing on the rare air space and we will keep the market updated on any key developments. That will conclude our prepared remarks, and we’ll now move to Q&A portion of the call. So, I’ll hand the call back over to the operator to facilitate. Operator?

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from John McNulty with BMO Capital Markets. Please go ahead.

John McNulty : Yes. Good morning. Thanks for taking my question. So I guess the first one would just be — you’ve got a relatively positive outlook on the volume front of TiO2, as we look to the first quarter, is there any geographic deviation in terms of where you’re seeing kind of that outsized or above normal demand? Or is it relatively broad? How should we think about that?

John Romano: Yes. Thanks for the question. So look in the first quarter it’s relatively broad. We’re seeing it across all the sectors. We mentioned that we didn’t — we saw a little bit more seasonality in the fourth quarter in the North American market, and we’re starting to see the North American market pick up a bit more. So that increase in Q1 sales normally Q1 and Q4 would typically be pretty similar. So I really do believe that based on what we’re seeing in the field from our customers we’re confidently — we’re confident that the destocking has largely run its course, and we’re seeing customers restocking and moving into more normal buying patterns. I think additionally, historically, our business has kind of led in and out of economic transitions, and we really do believe we’re on the front end of a recovery, and this is having a I’d say, a more positive impact on our outlook for the entire year.

John McNulty: Got it. Okay. Fair enough. And then maybe just speaking to the fixed cost absorption this year. You highlighted in one of the slides a $25 million to $35 million per quarter hit. So I mean, we’re talking like $100 million $150 million for the year, which is pretty chunky. I guess, is there a way to think about what volume levels you need or where we — what we need to see in 2024 to completely erase that? Or like is there kind of a rule of thumb that we should be thinking about as that kind of fixed cost absorption headwind dies down?

John Romano: That’s a great question. I’ll start and John maybe you can add on to it. So historically wind the clock back four quarters, we were I think 18 months in a row consistently above 20% EBITDA margins. And we quoted something just below 14%. So running at the rates that we’ve been running at which, again, we made the point that it’s lower than what we’ve ever historically run, we believe that where we’re ramping up right now, and we’re not at full capacity. We’re ramping up the assets that as we move through the first quarter we’ll start to get to volumes. And I’d say, capacity utilization, which should get us back to, I would say, mid to normal run rates on EBITDA margin, but we also have to think about the inventory that we’ve got to work through.

So I made the reference on the call that we’ve got inventory on the balance sheet. We’re going to have to work through that. It’s probably going to work its way probably halfway through the second quarter. But when we get in the second half of the year you should start to think about those normal low to mid-20 kind of run rates on EBITDA margin. And that’s without a lot of movement on price.

John Srivisal : And John I would add to that that on the mining side of our business, remember last year we mentioned that the drop was so significant that we had to slow down our mine — and our mine and smelter are high fixed cost operations, we’re back to running those assets at full capacity in 2024.

John McNulty: Got it. Okay. No, that’s very helpful. Thanks very much for the color.

Operator: Your next question comes from David Begleiter with Deutsche Bank. Please go ahead.

David Begleiter: Thank you. Good morning. John, you mentioned the prospects for higher pricing in H2 this year. What do you think will manifest first in the region and by what end-markets and customers?

John Romano: Yeah. So we typically don’t give a lot of regional view on that, but I would expect — what is in the first quarter as pricing was going to be relatively flat both on zircon and on TiO2. And we did largely see rollovers moving into the first quarter of 2024. I would suspect that as we start to migrate out of the first quarter, we’ll start to look at pricing opportunities across all regions. And there’s a lot of activity. We’ve got a lot of questions about the antidumping. Everything that we’re talking about right now has nothing to do with antidumping, right? Antidumping if it actually happens. And it gets input and provisional duties come in, that could be something additive to this. But what we’re talking about right now is just generally what we’re seeing in the market — we would see — these are all the signs and indicators that would indicate pricing would start to move up.

It’s not in the first quarter, but we’re hopeful we’ll start to see some sort of movement as we move into Q2.

David Begleiter: And John, on the antidumping, are you seeing any change in bad behavior yet, because of this investigation? And how — what’s the timeline from your perspective for the EC to act here?

John Romano: Yeah. So maybe on the timeline, the formal investigation from the Commission what happened was the coalition — this was a coalition that was formed back in November of 2023, when the dumping suit was filed. We would expect the formal investigation to conclude in the second quarter. And under the process, the final recommendation won’t happen until the fourth quarter. However, there could be a possibility that provisional duties could get put in place sometime as early as the second quarter but that’s yet to be seen. As far as, are we seeing any real significant buying change I’d say we’re seeing a little bit but nothing significant. There’s some I’d say export activity that’s going on that’s in line with what we would have expected, as a dumping suit was filed in EU.

David Begleiter: Thank you.

Operator: Your next question comes from Josh Spector with UBS. Please go ahead.

James Cannon: Yeah. Hey guys, this is James Cannon on for Josh. Thanks for taking my question. Just if we go back to kind of the comments you gave on the project of the mining projects you’re doing in South Africa? Can you just give a little color as to the rationale behind moving forward with them now as opposed to once we’ve gotten back to kind of a more steady state? I mean it seems like with the mining rates having come down last year there would be additional capacity to kind of lift rates elsewhere in the system and maybe not require that CapEx at this stage?

John Romano: Yeah. Look, so last year we delayed those projects — both projects in South Africa. One was a little bit further along than the other one. So we have to run our business on the long-term. And the mining projects actually do require a longer view than clay earnings. So we feel that it was an appropriate delay, what we did last year. We spent sometime bolstering our liquidity last year for that specific purpose, to make sure that we had the ability to invest in these assets, because at the end of the day, as I mentioned on the call these are actually replacing mines that are coming to the end of their lives. So if we want to maintain our zircon volumes in the Ilmenite to feed our smelters, these are long-term projects.

And we’ve got a five-year plan for our TiO2 business but like a 20-year plan to manage our mining. So we feel that what we’re doing at this particular stage is not only appropriate it’s needed to make sure we can maintain our long-term business.

James Cannon: Okay. Thanks. And then just on timing with those – can you give some commentary on when you anticipate those to start producing and whether or not there will be any drag on OpEx or absorption as those do start up?

John Romano: So is – in both of those mines, there will be basically a transition from the end of the mind of the previous one to a transition to the new one. So there shouldn’t be a lot of lag or lead time moving in, it’s all timing as we move out of one body of ore we’ll be moving into another one. So there shouldn’t be a lot of transition. Obviously, as we’re bringing up some of the mining equipment, there could be a little bit of transition but we don’t expect that to be a drag.

Jean-Francois Turgeon: I think as we start new mines obviously, there’s the whole resource there and we do optimize to bring out the higher value or earlier on, so we would expect and when those lines come online and see some positive benefit.

James Cannon: Okay. Great. Thanks.

Operator: Our next question comes from Duffy Fischer with Goldman Sachs. Please go ahead.

Duffy Fischer: Hey, good morning, guys. If you could – your CapEx assumption for this year is $395 million. Your operating cash flow last year was $184 million. So to be free cash flow positive this year that means you need to grow your operating cash flow a little over $200 million this year. Can you just walk through how you see those buckets coming through? How much of that would be an improvement in EBITDA? How much of that would be things like improvement in working capital. Anything else on the cash flow statement kind of before the operating activities that would get us at $200 million plus?

John Srivisal: Yes. Duffy, thanks for that question. And we aren’t guiding for the full year. So from an earnings perspective, we are optimistic obviously, expect an improvement year-over-year and ultimately our free cash flow, the scope and size of that positiveness, we expect will depend on market dynamics there. But from a working capital perspective that’s the earnings and working capital are the biggest drivers. Obviously, we guided on interest negative $145 million taxes less than $10 million. And as you mentioned CapEx of $395 million, so we do expect both free cash flow and working capital to be positive. From a working capital perspective, we do see – obviously, sales are going up, the AR is going to be hurt but that obviously is a good working capital use there.

And we do see inventory – we are building some inventory and that play with inventory and AR will all depend on top line sales growth. We do expect payables as well to be a source of cash as we are actively managing that throughout the year. So that’s kind of where we are on free cash flow.

John Romano: And just generically from the operating side again, we talked a couple of times about running at – I think we’ve even thrown numbers up, 70% capacity utilization for over a year. And as we started to ramp up those assets as early as December of last year and into the first quarter, obviously a little teething as you start to move up from those lower rates. So it wasn’t super smooth to get to where we are today. But now those assets are running – so when you think about that $25 million to $35 million a quarter that we talked about as a negative due to fixed cost absorption, we’ll start to see similar results. And some of these unplanned outages that we have will be added on to that. So there’ll be a significant portion of that.

So when we think about the growth, it’s obviously price is an opportunity, but running our assets at rates that are at a more normalized level which are in line with what we’ve historically seen on EBITDA margins as I mentioned before, is going to be a big driver in our profitability.

Duffy Fischer: Okay. Thank you. And then there have been several reports out of South Africa with two of their larger unions in the mining industry kind of fighting and there’s I guess, been some kidnapping and stuff like that. Do you have both of those union your operation? Or are you kind of a single union? And then again, so are you seeing any issues with your operations or any of the other TiO2 operations in South Africa?

John Romano: Duffy, I mean, I can tell you we only have one union in our case and we’re lucky to be in an area where there is no revality and no issue between the union. Look, we have always stated that our approach in South Africa is to work with our community, our worker or not remote worker, they’re local, they are member of the community where our mine and smelter are located and that makes a huge difference with the dynamic. Often and all those issues that we heard about South Africa are related to where workers are like remote in Austal and we don’t have that issue at our mine.

Duffy Fischer: Great. Thank you, guys.

Operator: Your next question comes from Jeff Zekauskas with JPMorgan. Please go ahead.

Jeff Zekauskas: Thanks very much. I think your TiO2 volume for the past two years is down about 15% each year. How do you think the industry shrank over 2022 and 2023. How did you do compared to the overall industry?

John Romano: Yes. Thanks, Jeff. Look you’re right. If you look at our — over the last two years, I think our volumes were down roughly 27%. So 15% a year is pretty much accurate. And China obviously grew. I know you take an interest in paying a lot of attention to the exports coming out of China. China has taken a significant growth, specifically in Asia Pacific. India has become a significant importer of Chinese material, a lot of Asia Pacific so not just in China. So I do think that over time, I think we’ve probably lost a little bit of share to the Chinese and we’ve done that based on where we feel like it was not competitive. That being said, I think others probably were heard a bit more than the Chinese were our — I think our chloride capacity has provided us an opportunity to avoid some of that.

That being said, we feel like we can compete directly with the Chinese, there’s lots going on. We’ve already talked about with some of the efforts that are trying to manage that in the European market. But I would suspect that the market is still growing. China took a disproportional share of that growth over the last couple of years.

Jeff Zekauskas: Okay. Thank you for that. And can you just give us sort of a status report on Project Neutron that is — how much more is still to be spent? What have the savings been? And what could the savings be? Where does all of that step?