Tronox Holdings plc (TROX) on Q2 2022 Results - Earnings Call Transcript
Operator: Thank you for joining and welcome to the Tronox Holdings Q2 2022 Earnings Call. My name is Brika and I'll be your event specialist on today's call. [Operator Instructions] I now have the pleasure of handing the call over to our host, Jennifer Guenther, Vice President of Investor Relations. So Jennifer, please go ahead.
Jennifer Guenther: Thank you, and welcome to our second quarter 2022 conference call and webcast. Turning to Slide 2 on our call today are John Romano and Jean-Francois Turgeon, Co-Chief Executive Officers and Tim Carlson, Chief Financial Officer. We will 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 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 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 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. Moving to Slide 4. It's now my pleasure to turn the call over to John Romano. John?
John Romano: Thanks, Jennifer, and good morning, everyone, and thank you for joining us today. I'd like to start this morning's call by setting the stage with a quick overview of Tronox. With the world's largest vertically integrated TiO2 producer with 9 pigment plants, 6 mines, 5 upgrading facilities across 6 continents. Our 2021 revenue totaled $3.6 billion, which was fairly evenly distributed across the Americas, Europe, Middle East and Africa and Asia Pacific. Our 1.1 million tons of pigment capacity supports our well-balanced base of approximately 1,200 customers globally. Our vertically integrated business model supplies approximately 85% of our internal feedstock needs, and this ensures consistent and secure supply for our customers. In addition to TiO2, we also generate significant value as the world's second largest producer of zircon with approximately 300,000 tons of capacity. We held an Investor Day in June to review the transformation of Tronox over the last several years and where we're heading. We are very proud of the organization we created and the value we have and will continue to generate for our stakeholders. I invite you to listen to a replay of the webcast that you haven't already to learn more about our strategy, key initiatives and our mid- and long-term financial targets. Now let's turn to Slide 5 for a review of our key highlights. Tronox delivered record earnings and a strong margin performance this quarter. We achieved adjusted EBITDA of $275 million, slightly above the midpoint of our guided range, and an Adjusted EBITDA margin of 29.1%, exceeding expectations. This was the 21st quarter in a row that we achieved adjusted EBITDA margins greater than 20%, and the seventh consecutive quarter where margins were above 25%. Evidence of the strength and resilience of our business through a variety of economic scenarios. We also achieved adjusted EBITDA of $1 billion on a trailing 12-month basis, another demonstration of our earnings potential and a testament to the benefits of our vertically integrated business model. In the first half, we invested $202 million in key capital projects. This included newTRON, our project to digitally transform our global portfolio, which is expected to generate savings of $150 to $200 per ton on a run rate basis by the end of 2023. We also invested in our mining extensions in South Africa and the Atlas Campaspe mine in Eastern Australia, and JF will review these investments in more detail later in the call. We return $91 million to shareholders year-to-date, including share repurchases and dividend payments. Finally, we published our 2021 sustainability report in June, highlighting the significant accomplishments the company has achieved over the last year and the ongoing projects to advance our leadership role and sustainability in protecting the environment. Turning to Slide 6. This year, as Turgeon reviewed at Investor Day, we updated and accelerated our carbon neutrality targets enabled by our solar renewable energy project in South Africa that we announced earlier this year and numerous other initiatives we have ongoing across the company. Our initial goal of reducing greenhouse gas emissions intensity by 15% by 2025 has now been increased to 35%. And the initial goal of 35% reduction by 2030 has now been updated to 50%.We reiterated our goal of zero waste to external dedicated landfills by 2050, and we remain committed to our target of zero injuries, zero incidents and zero harm. We are also striving to improve the gender balance and diversity of our workforce, leadership and succession planning. I invite you to review our 2021 sustainability report on our website for more on these and other initiatives. Turning to Slide 7, I'll briefly review our second quarter financial highlights. Revenue of $945 million represented a 2% increase versus the prior year driven by higher TiO2 revenues. Income from operations was $190 million, an increase of 27%, primarily due to improved pricing. Net income of $375 million included a $262 million reversal of a portion of our deferred tax valuation allowance in Australia, which is further evidence of the strength of our business model and the earnings that it generates. Our effective tax rate in the quarter was negative 147% due to the valuation allowance reversal. Excluding this and the loss on debt extinguishment, our normalized second quarter effective tax rate was 22%. Our GAAP diluted earn earnings per share was $2.37, and our adjusted diluted earnings per share was $0.84, an increase of 38%. Adjusted EBITDA of $275 million represented a 16% increase and our margin increased 350 basis points to 29.1% driven by improved pricing and favorable product mix from pig iron volumes that rolled from Q2 to Q3 due to logistics and shipping delays. The shift of these volumes into Q3 will favorably - unfavorably impact our EBITDA margins in Q3 given the lower contribution margin from [indiscernible]. And finally, we returned $66 million to shareholders in the second quarter through share repurchases and dividend payments. Moving to Slide 8. While demand remained solid in the quarter, our TiO2 volumes came in slightly below our expectations due to ongoing supply chain and logistics challenges across the regions. Pricing across both TiO2 and zircon was in line with our expectations, driven by continued execution of our commercial pricing strategy. Revenue from TiO2 sales was $769 million, an increase of 4%, driven by a 19% increase in average selling prices on a local currency basis or a 15% increase on a U.S. dollar basis, partially offset by a 9% decrease in volumes. Compare to the prior quarter, TiO2 revenues were relatively in line. Volumes declined 3% sequentially, driven by lower volumes in Asia Pacific, while average selling prices increased 4% on a local currency basis or 2% on a U.S. dollar basis. Zircon revenue decreased 8% to $111 million, driven by a 38% decrease in volumes, which was partially offset by a 47% increase in average selling prices. The volume decline year-over-year is due to higher sales from inventory in 2021, as we've communicated previously. Sequentially, zircon volumes declined 5%, driven by the orders that rolled into the third quarter due to logistics challenges and shipping delays in Australia and South Africa, while average selling prices increased 8%. Revenue from other products was $65 million, relatively flat versus the prior year quarter, primarily due to higher pig iron average selling prices, offset by lower pig iron volumes. The strengthening in the U.S. dollar in the quarter was a headwind to revenue due to the unfavorable translation impacts, primarily from the weakening of the euro. As we enter the second half of the year, despite challenging macroeconomic conditions and increasing inflation, we continue to project solid financial performance through strong execution and operating agility. At this stage, we continue to see steady demand across the majority of our end markets though we expect demand in Asia Pacific and Europe to remain dynamic. Notwithstanding, we are confident that in Tronox's position and our ability to deliver for our customers given our integrated business model and our global footprint that allows us to quickly adapt to changing market conditions. Our dedicated team of employees is working to ensure we earn the right to be the supplier of choice. Our enterprise optimization model enables us to maximize our global footprint, and we're investing today to advance and sustain our competitive advantage. We're focused on executing against our strategy to deliver safe, quality, low-cost sustainable tons. Looking ahead into the third quarter, we anticipate TiO2 volumes to be relatively in line with the second quarter 2022 levels based on what we're currently seeing in the market and our order books. In the third quarter, TiO2 pricing will continue to increase globally across all contract categories, including margin stability agreements and volume contracts. As Jeff Engle outlined at Investor Day, our pricing strategy remains focused on optimizing pricing over the long term and supporting our margin stability initiatives. Zircon volumes are expected to increase sequentially, benefiting from the rolled orders from the second quarter and fourth quarter volumes are forecasted to remain in line with production levels, while pricing in the third quarter is forecast to increase sequentially. And now I'm going to turn the call over to JF for review of our operating performance and profitability in the quarter. JF?
Jean-François Turgeon: Thank you, John. And good morning, everyone. Moving to Slide 9. Our adjusted EBITDA growth of 16% to $275 million was driven by higher pricing across all products and favorable exchange rate. This was partially offset by higher cost to serve our customer, including increased commodity costs in addition to lower volume. We also benefit from product mix, as John mentioned, as lower sales of pig iron in the second quarter had a favorable impact to margin. Trade rate remained elevated, largely due to incremental costs in South Africa. While commodity costs continue to increase, improved production drove cost improvement on a sequential basis. The weakening Australian dollar and South African Rand had a favorable impact on production costs and more than offset unfavorable FX translation impact to revenue. This result in a net positive FX impact on EBITDA versus the prior year. Cost has been a significant headwind in the year, no different to other player in our space. Our major material costs have increased 56% from the first half of 2022 compared to the first half of 2021, with the largest increase from natural gas, sulfuric acid, chlorine, coke and electricity. Our flexible business model has allowed us to leverage our enterprise optimization model to rapidly adjust to market change. This result in our record adjusted EBITDA performance this quarter and is driving our expectation for another record next quarter. Consistent with our long-term goal, we are confident, we can continue to generate margin in the high 20s in the second half of the year due to the continue market demand, our vertically integrated model and forecasted pricing increase. Turning to Slide 10. As we reviewed at Investor Day, there are two key initiatives we are undertaking across Tronox to support our long-term strategy, newTRON and investing in our mining asset. The implementation of newTRON will yield top to bottom saving across the entire enterprise. We have already recognized value from this initiative in 2021 with approximately $20 million in procurement savings, and we expect total savings to grow significantly over time with annual run rate savings between $150 to $200 per ton by the end of 2023. On the mining side, we are investing now to secure long-term supply of feedstock. We anticipate investing $150 million to $175 million in 2022 across our mining projects, which will sustain Tronox 85% internalization of feedstock, supporting $300 to $400 per ton saving relative to average, high-grade feedstock market price. Turning to Slide 11. Atlas Campaspe represent the next phase of our mining plant in Australia and the Namakwa and Fairbreeze extension represents the next phase in South Africa. These are the key mining investment over the next three year that will secure our vertically integration level for the next 10-plus year and our first investment in new mine since the Fairbreeze mine investment in 2014 and 2015. Atlas Campaspe, as a reminder, is currently being brought online to replace the Snapper Ginkgo mine as they reach end of life and the mining area or rehabilitate with best-in-class sustainability practice to reintroduce indigenous plan. These elements are abundant in natural rutile, high-value zircon and high-grade ilmenite suitable for synthetic rutile, slag processing or direct pigment production. The investment in Atlas Campaspe will also put in place the infrastructure for this new mining area, where we have other important mining resource in our portfolio that would replace Atlas Campaspe in about 10 years, as you can see on this page. The Namakwa and Fairbreeze extension will ensure sustained production beginning in 2024 and 2025, respectively, and extend the mine life in South Africa beyond 2035. We are strategically managing our portfolio of mining tenement to align with our vertical integration requirement, which will provide additional revenue opportunity and significant long-term cost savings. These projects are expected to deliver IRR in excess of 50% and payback in less than five years. We are making investments today in order to be positioned to capture future growth. We expect to invest a total of approximately $400 million on this mining project for the rest of 2022 until the end of 2024, when we expect to complete significant mining investment for the next 10 years. However, we have the ability to be nimble with our spending and can pause or ramp up project as market demand dictated. Turning to Slide 12. NewTRON transform our business, enabling us to remain among the lowest-cost TiO2 producer and enhance service to our customer. The project is already prefunded based on previously realized savings and cash benefit. As you heard from John Srivisal at Investor Day, we are tracking to anticipate savings in a very detailed model. That roll-up saving into four main categories an optimized global supply chain, efficient maintenance spend, enhanced automation and throughput and standardized process. Our optimized supply chain enabled by a new vendor management system that improved handling of catalog, purchase order and invoice is expected to drive the majority of our savings at just under 40%. Efficient maintenance, which will reduce downtime at our plant is expected to drive 18% of the forecasted saving. Enhance automation, which include technology implementations such as advanced process control at our site, that Russ Austin review at Investor Day, is anticipated to drive 14% of saving. And finally, standardization across function, including the automation and optimization of our integrated business planning model, which will enable better data visibility and decision-making is forecasted to drive the remaining 29% of saving. We expect approximately two-third of the total savings to be driven by cost reduction and one-third from volume contribution. NewTRON remains on track and is delivering in line with expectations. A testament to the dedication by the newTRON team and the entire Tronox organization. Finally, I'd like to provide a brief update on slagging operation in Jazan. The first slag was at the end of November 2021, and the ramp-up is progressing according to plan. We are continuing to utilize the slag produced at Jazan at our Yanbu facility. At a time where tight feedstock conditions are impacting the TiO2 industry, a fully operational Jazan would make Tronox more competitive by strengthening our vertical integration strategy. We expect the site to continue to ramp up from here forward, ensuring a safe and sustainable operation, and we'll keep the market update on the progress of the slide. I will now turn the call over to Tim Carlson to cover our balance sheet and outlook. Tim?
Timothy Carlson: Thank you, JF. On Slide 13, we provide an overview of our financial position, liquidity and capital resources. We ended the second quarter with $2.5 billion of debt, and our balance sheet is very healthy. We have no significant maturities until 2028, no financial covenants on our term loans or bonds and fixed rate interest on approximately 70% of our total debt. Total available liquidity as of June 30 was $508 million, including $112 million in cash and cash equivalents, which is well distributed across our global operations. While this level of cash is below our generally targeted range of $150 million to $200 million, we're comfortable with current and forecast liquidity given the strength of our vertically integrated business model. So we opportunistically bought back $25 million of shares in Q2 and paid down a piece of our revolver draw from the 158Venator settlement. Capital expenditures totaled $99 million in the second quarter, with the increase year-on-year, driven by the key capital projects JF reviewed. Depreciation, depletion and amortization expense was $67 million. Our free cash flow for the quarter was a use of $67 million due primarily to the $85 million settlement paid in Q2. We anticipate second half free cash flow to significantly outpace first half free cash flow in order to achieve our full year cash flow target. We returned $66 million to shareowners in the second quarter, $25 million in the form of share buybacks with the repurchase of approximately 1.5 million shares and $41 million in the form of dividends as we paid out the dividends declared in the first and second quarter. Year-to-date, we've returned $91 million to shareowners, inclusive of the $25 million of share repurchases in the first quarter. Turning to Slide 14. As John mentioned, while there have been recent shifts in the broader macroeconomic backdrop, our business remains sound. We continue to monitor developments given current economic conditions. We actively monitor developments through a monthly bottoms-up view of market trends, and our process involves a robust discussion to thoroughly evaluate all identified risks and opportunities to our forecast. The demand we are seeing in our end markets and the status of our order book today are both consistent with our projections for the rest of the year. We anticipate third quarter TiO2 volumes to remain relatively in line with second quarter volumes, reflecting the latest outlook across all markets, including the current demand trends we are seeing in Asia Pacific and Europe. We do not expect inflationary cost pressures to significantly abate. However, the planned increase in production through the end of the year will enable improved fixed cost absorption and helped lower our cost per ton. We expect another record adjusted EBITDA quarter in Q3 with a range of $275 million to $295 million. These expectations are a result of our commercial price initiatives, improved zircon volumes due to rolled orders, improved production rates as a result of the investments in our assets and cost savings from newTRON, partially offset by headwinds from commodity cost inflation. As John and JF previously mentioned, we do anticipate slightly lower margin sequentially as a result of significantly higher pig iron volumes in the third quarter at lower contribution margin relative to TiO2 and zircon. But we continue to expect to realize adjusted EBITDA margins in the high 20s. For the full year 2022, our outlook remains unchanged from Investor Day. We are very confident with our adjusted EBITDA range of $1.075 billion to $1.125 billion and our adjusted EPS range of $3.15 to $3.59 per share. As a reminder, our cash use assumptions are as follows; we expect working capital to be a use of $100 million to $150 million, driven by our expectation of rebuilding inventories in the second half to more normalized levels and purchases of Jazan slag. Net cash interest expense of $110 million to $120 million; cash taxes of $50 million to $60 million and capital expenditures of $400 million to $425 million. Based upon these cash assumptions, we expect our free cash flow for the year to be a minimum of $300 million. Adjusted to add back onetime uses of cash, our free cash flow for the year would be $460 million. These continue to represent our best estimates based upon our current market outlook. As a reminder, and as we reviewed at Investor Day, we have ample levers to ensure sufficient liquidity under any conceivable scenario. Our capital expenditures are flexible, and we can manage the balance sheet to generate cash. Turning to Slide 15. We expect to continue to focus our capital allocation across three key areas: growth, returns and the balance sheet. Growth will be supported by capital expenditures with the projects we've reviewed expected to drive significant value for Tronox, both today and in the near future. The return on these projects exceed our return threshold of 25% and will allow Tronox to grow with our customers. After capital expenditures, returning value to shareowners through dividends and share repurchases will be our near-term priority. Dividend increases will be evaluated annually. We expect to continue share repurchases under the remaining $250 million program through February 2024 as cash generation permits. We also announced our net debt-to-EBITDA target of 1x to 1.5x at Investor Day that we anticipate achieving by the end of 2025. While we anticipate share repurchases and debt repayment to be fairly evenly split over the next 3.5 years, we do not anticipate an equal allocation on a quarterly or even an annual basis. I will now turn the call back over to JF for closing remarks.
Jean-François Turgeon: Thank you, Tim. Turning to Slide 16. This page outline our key focus area for 2022. We remain committed to strong execution, operational excellence and returning capital to shareholders. As we wrap up today's prepared remark, I want to take a moment to reiterate our confidence in the fundamental of our business, owing to the action we have taken over the last several years to create a stronger and more resilient enterprise. This would not be possible without our dedicated global employee. So thank you to everyone for your continued effort. We are committed to executing against our strategy and delivering value to our stakeholders. That concludes our prepared remarks. With that, I'd like to turn the call over for questions. Brika.
Operator: [Operator Instructions] We have our first question on the phone line today from David Begleiter of Deutsche Bank. Please go ahead. You may proceed with your question.
Operator: We now have the next question from Josh Spector of UBS. You may proceed.
Operator: The next question comes from John McNulty of BMO Capital Markets. Your line is open, John.
Operator: We now have the next question from Frank Mitsch of Fermium Research. Please go ahead.
Operator: The next question comes from Hassan Ahmed from Alembic Global Advisors. Please go ahead when you're ready.
Operator: We now have Michael Leithead of Barclays. Your line is open, Michael.
Operator: We'll move on to our next question, which comes from Matthew DeYoe of Bank of America. Your line is open.
Operator: We now have Jeffrey Zekauskas of JPMorgan.
Operator: We now have Duncan Andrew from Morgan Stanley. Please go ahead when you're ready.
Operator: We have a final question from the line from Ed Brucker of Barclays. Your line is open.
Operator: As we have no more questions, I'd like to hand it back to John Romano for some closing remarks.
John Romano: Well, we'd like to thank you for joining us for the call today. In summary, we're focused on the levers within our control, executing against our strategy, focusing on our operational excellence and delivering on our key capital projects to enhance our vertically integrated portfolio. We believe we're well positioned to continue to delivering on our commitments. We're confident in our forecast, and we look forward to reporting results to you and speaking with you throughout the quarter. So thank you for joining us today.
Operator: Thank you all. That does conclude today's call. Thank you again for joining. You may now disconnect your lines.
