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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