Yahoo Finance Tronox Holdings plc (NYSE:TROX) Q1 2024 Earnings Call Transcript
Tronox Holdings plc (NYSE:TROX) Q1 2024 Earnings Call Transcript May 2, 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' Q1 2024 Earnings Conference Call. [Operator Instructions] Also note that this call is being recorded on Thursday, May 2, 2024, and I would like to turn the conference over to Jennifer Guenther, Chief Sustainability Officer and Head of Investor Relations. Please go ahead.
Jennifer Guenther: Thank you, and welcome to our first quarter 2024 conference call and webcast. Turning to Slide 2, on our call today are John Romano, Chief Executive Officer, and John Srivisal, Senior Vice President, Chief Financial Officer. We will be using slides as we move through today's call. You can access the presentation on our website at investor.tronox.com. Moving to Slide 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 filing. 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. 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. As mentioned in our preliminary results announcement, we delivered a stronger first quarter than anticipated. This was driven by production costs through our lower production costs through our global operations, destocking having largely run its course through the supply chain, paired with the demand trajectory outpacing normal seasonal levels and our ability to respond to that demand through the strength of our global footprint. Our revenue increased 13% compared to the prior quarter or 20% on TiO2 and zircon revenue alone, excluding other product sales which saw decrease due to non-repeating sales of ilmenite and a portion of our rare earth tailings deposit in South Africa.
The 18% increase in TiO2 volumes from the fourth quarter exceeded both our guidance of 12% to 16% and the growth that would be more typical for this time of year. However, this type of rebound is indicative of what we would expect to see on the front end of a recovery. Demand improved across all region and outperformed even more so in Europe, Middle East and Africa and Latin America, where volumes declined more significantly over the past 6 quarters. Zircon continued to recover from the trough volume seen in July of 2023 driven by stronger underlying demand despite the market in China remaining relatively muted. Our volumes increased 54% versus Q4, which was well above our guidance of 15% to 30%. Pricing for TiO2 and zircon was in line with our expectations.
On the operational side, we incurred significant costs in 2023 from running our assets at lower utilization rates due to softer underlying demand. As we saw the market beginning to turn late last year, we began increasing our operating rates, which had a positive impact on our manufacturing cost. As a result, our first quarter cost improved when compared to both to the prior quarter and the prior year. This helped drive better-than-anticipated EBITDA margin of almost 17% and adjusted EBITDA for the quarter totaling $131 million, which was above our guided range. As the high cost inventory continues to move through our internal supply chain, efficiencies from investments made in the business to reduce costs will enable margins to return to levels realized prior to the downturn.
The first quarter has been a true inflection point. We believe the trends both on the demand side and in reducing our costs will continue going forward. We're well on our way to delivering a step change in our earnings power, having already worked through much of the remaining high cost inventory on the balance sheet. Our free cash flow for the quarter was a use of $105 million, but we will begin clawing back this use beginning in the second quarter and expect to generate positive free cash flow for the full year. I'll let John run through more of the first quarter numbers and the balance sheet, but we're comfortable with where we are from a liquidity and a debt position. We recently consolidated and repriced 2 tranches of our term loan, which will result in an estimated annual savings of approximately $5 million.
I'm proud of how our team has continued to work to strengthen the business. And as we stand here today, we are well-positioned to continue to capitalize on the recovery that is underway. On the sustainability front, we're happy to confirm that we officially began receiving power from the 200 megawatt solar project in South Africa. This is not only a significant development on our journey to net zero by 2050, as we will realize an additional 13% CO2 emissions reductions from this project alone for a total of 18% relative to our total 2019 baseline. But it'll also provide some cost avoidance benefit from increasing electricity costs in South Africa. We're already working on our next power purchase agreement in South Africa, this time on wind, as this is the highest cost contributor to carbon emissions, so it remains a high area of focus.
We expect to publish our 2023 sustainability report this quarter that will outline these and other key initiatives across emissions and waste reduction, water management, social initiatives and more. We firmly believe that preserving our privilege to operate is critical for our strategy today and for our future. At the end of the day, our people and our planet enable us to carry out our work and as a result we have a responsibility to do so in a manner that is both safe and sustainable. I'll now turn the call over to John to review some of our financials from the quarter in more detail. John?
John Srivisal: Thank you, John. Turning to Slide 6. We generated revenue of $774 million, an increase of 9% compared to the prior year or 13% sequentially, driven by higher revenue from both TiO2 and zircon. Income from operations was $41 million in the quarter and we reported a net loss of $9 million. While our profit before tax was $2 million, our tax expense was $11 million in the quarter. This was due to the fact that we generated higher-than-expected earnings in jurisdictions where we pay taxes, driven mainly by higher zircon sales. As a result, our adjusted diluted earnings per share was a loss of $0.05. As John previously mentioned, our adjusted EBITDA in the quarter was $131 million, and our adjusted EBITDA margin was approximately 17%.
Free cash flow was a use of $105 million, of which $76 million was from capital expenditures. Now let's move to Slide 7 for a view of our commercial performance. As John mentioned, the recovery outpaced our expectations and drove TiO2 and zircon volume growth versus prior quarter and prior year. Pricing was largely in line with our expectations and consistent with our margin stability program. TiO2 revenues increased 8% versus a year ago quarter and 17% versus the prior quarter as sales volumes improved 18% in both comparisons. The volume increase was driven by both organic demand and restocking, which we saw across all regions with a higher recovery rate in Europe, Middle East, Africa, and Latin America where volumes declined more notably in the past 6 quarters.
As expected, TiO pricing including mix saw 1% decrease quarter-over-quarter. Zircon volumes increased 54% sequentially. We've continued to see recovery from the trough levels of July 2023 with stronger underlying demand in Q1. Zircon pricing was level with the prior quarter. Revenue from other products decreased 26% compared to the prior quarter, driven by an opportunistic sale of ilmenite and a portion of our rare earth tailings deposit in South Africa in the fourth quarter that, as we had communicated last quarter, would not repeat. Turning the Slide 8, I will now review our operating performance for the quarter. Our adjusted EBITDA of $131 million represented 10% decline year-on-year, driven by lower average selling prices and mix and higher SG&A.
This is partially offset by improved sales volumes, exchange rate tailwinds and favorable reductions in input cost from materials such as chlorine, coke, caustic soda. Additionally, we saw favorable fixed cost absorption and freight costs as compared to Q1 2023. Sequentially, adjusted EBITDA improved 39%. As we mentioned last quarter, we expected to see improvements in costs as we increased our operating rates beginning late last year and continuing into this year. Compared to Q4, production costs improved $57 million. This was comprised of $32 million relating to favorable absorption and lower cost of market charges from the higher production, $15 million from the Q4 Botlek idle facility charge due to the supplier outage that did not repeat in Q1 and $10 million for lower mining costs primarily from Atlas.
By the end of the year we expect to recover approximately $15 million from insurance claims relating to the downtime at Botlek due to the supplier outage. The TiO2 and zircon volume benefit to EBITDA was partially offset by the non-repeating opportunistic sale of ilmenite and a portion of our rare earth tailings deposit in Q4. Other headwinds versus the prior quarter as expected were price mix, FX, freight costs from the Red Sea impact and higher SG&A. Turning to Slide 9, I will now review our balance sheet and cash position. We ended the quarter with total debt of $2.8 billion and net debt of $2.7 billion. Our net leverage at the end of March was 5.2x on a trailing 12-month basis. Our balance sheet remains strong with ample liquidity ahead of anticipated critical vertically integrated -- integration-related capital expenditures.
As John mentioned, we successfully completed a repricing transaction on 2 of our existing term loan tranches, which will result in approximately $5 million of annualized interest expense savings. We also extended the maturity of one of these tranches to 2029. Our nearest term significant maturity remains 2028 and we have no financial covenants on our term loans or bonds. Our weighted average interest rate in Q1 was 6.5%. We maintained interest rate swaps such that approximately 73% of our interest rates are fixed through 2024 and approximately 64% are fixed from 2024 through 2028, aligning with the maturity of our earliest tranche of our term loan. Total available liquidity as of March 31st was $629 million, including $152 million in cash and cash equivalents that are well distributed across the globe.
Capital expenditures totaled $76 million in the quarter. Roughly 44% of this was for maintenance and safety and 56% was for strategic growth projects. Working capital was a use of $127 million in the quarter. The massive majority of this, which related to higher revenue driving an increase in accounts receivable. For inventory, we would normally expect to see an increase in the first quarter in preparation for the spring coating season. While we did plan for the upturn by running at the higher production rates, the increased demand across our business resulted in inventorying being a source of cash for the quarter. Accounts payable was a decrease, which is typical of our Q1 profile. We declared a dividend of $0.50 per share on an annualized basis in the first quarter that was paid to shareholders in the second quarter.
I will now turn the call back over to John Romano for some comments on the year ahead and our outlook. John?
John Romano: Thanks, John. So with the first quarter behind us, we can confidently reaffirm what we stated in the last quarter. 2024 has already demonstrated a reversal of several trends from the last 18 months and we anticipate the recovery to continue. On the market, we've already begun to see an uptick in TiO2 demand that is indicative of what we would see on the front end of a recovery. On pricing, we expect TiO2 pricing to reverse its downward trend and improve as we move through the remainder of 2024. Regarding zircon, volumes continue to improve from the trough levels realized in July of 2023, and there was a significant improvement in the first quarter. Further recovery will be somewhat reliant on China given its significant share of the overall zircon market.
Nevertheless, demand has rebounded even in the absence of a major shift in China. On the operational side, we incurred significant cost in 2023 in the range of $25 million to $35 million per quarter from running our assets at lower utilization rates due to soft market demand. At the end of 2023, we began increasing our operating rates in line with the demand improvements we were beginning to see in the market, which has and will continue to have a positive impact on our manufacturing costs. Although we still have some high-cost inventory to move to the business, with sales outpacing our previous guidance, our EBITDA margins will now be in the range of 20% this quarter. We will continue to deploy technology at our sites to reduce costs and improve efficiencies, which will also benefit our cost position as we ramp up.
And we're investing in key capital projects to sustain our vertical integration. From a growth perspective, our R&D efforts remain focused on product and process innovations to enhance profitability. Additionally, we're continuing to explore opportunities in the rare earth space. Moving to Slide 11. I'll now review 2 key capital projects in more detail. As a reminder, this year we're investing approximately $130 million in 2 key mining projects in South Africa to replace our existing mines reaching end of life. These projects are critical to continuing our vertical integration strategy and are important to pursue now to ensure a smooth transition to replace existing mines reaching end of life. These investments will maintain our more than $300 per ton advantage relative to market pricing for feedstock, and our very high return projects with internal rates of return in excess of 30%.
Turning to Slide 12. I'll review our outlook for the quarter and year ahead in more detail. For Q2, we expect TiO2 volumes to increase between 7% and 10% and zircon volumes to remain relatively flat, both compared to the first quarter. And we expect TiO2 pricing to increase slightly versus the first quarter. As a result, we're expecting Q2 2024 adjusted EBITDA to be $160 million to $180 million and adjusted EBITDA margins to be in the range of 20%. Our expectations for 2024 cash uses are as follows. Our capital expenditures are expected to be approximately $395 million. Our net cash taxes are expected to be less than $10 million as the significant capital expenditures in South Africa are deductible. Our net cash interest expense is expected to be $140 million, and we're expecting working capital to be a tailwind.
The magnitude of the cash flow will depend on how significant the market recovery is as we move through the year. Our capital allocation strategy remains largely unchanged. We are prioritizing investments in the business that are critical to furthering our strategy and driving value from our vertically integrated portfolio. And even at this investment level, we expect to generate positive free cash flow for the full year. 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 prioritize our dividend. And finally, we will continue to evaluate strategic high-growth opportunities as they arise. Currently, we're focusing on the rare earth space. And we will keep the market updated on any key developments as they arise.
That concludes our prepared comments. We'll now move to the Q&A portion of our call, so I'll hand the call back over to the operator to facilitate. Operator?
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