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spk02: Good day and welcome to the Toronto Holdings Q3 2020 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch confirm. To reply a question, please press star then two. I would now like to turn the conference over to Jennifer Daunter, Vice President of Investor Relations. Please go ahead.
spk00: Jennifer Daunter Thank you, and welcome to our third quarter 2020 conference call and webcast. On our call today are Jeff Quinn, Chairman and Chief Executive Officer, John Francois Turgeon, Chief Operating Officer, John Romano, Chief Commercial and Strategy Officer, Tim Carlson, Chief Financial Officer, and John Cervizal, Senior Vice President, Business Development and Finance. 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 them on our website at investor.tronox.com. Moving to slide two. A 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 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 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. Moving to slide three, it's now my pleasure to turn the call over to Jeff Quinn.
spk05: Jeff? Thanks, Jennifer. Good morning, everyone, and thank you for joining us today. I will first review the highlights of the quarter before turning it over to other members of my team for a deeper dive into the results of the quarter. I will then share an update on some of our ongoing strategic projects and our outlook for the full year. We were very pleased with our third quarter results, which continued to reflect the strength of our vertically integrated business and our ability to optimize our operations and deliver strong financial results across a variety of business conditions. Revenue in the third quarter increased 17% sequentially, driven largely by improved TIO2 sales volumes and recovery in feedstock and other revenues. The improved TiO2 market demand we began to see in July continued through the remainder of the quarter, resulting in a sequential volume growth in all geographic regions. As we will discuss, that trend also gave us some momentum as we've entered the fourth quarter, and we have seen that materialize in our October order book. TiO2 sales volumes recovered strongly in the quarter, increasing 16% sequentially, outpacing our previous expectations while pricing remained stable. Adjusted EBITDA for the quarter was $148 million, with an adjusted EBITDA margin of 22%. Utilizing our proprietary enterprise optimization model, we adjusted our operations in the quarter to accommodate the effect of the pandemic, which resulted in temporary higher production costs and a slight negative impact to margins, as we had foreshadowed on our second quarter earnings call. These temporary impacts were minimized through continued cost reduction, as well as increased acquisition synergies. Synergy capture for the year to date now totals $183 million, $134 million of which has been reflected in the EBITDA. Today, I invited John Cervasol, our Senior Vice President, Business Development and Finance, to join the call to discuss our continued outstanding achievement in synergies in more details a bit later. John is our internal guardian of our robust program to track and quantify synergy delivery. The robustness of this tracking mechanism is one of the reasons we have been successful in delivering the promise of the Crystal acquisition. To preview his comments, given our success to date in achievement of synergies and our view that we will continue to deliver even more synergies at an accelerated pace, we are raising our full year 2020 synergy target to $235 million, with $185 million of that expected to be reflected in EBITDA. We continue to deliver synergies ahead of schedule while increasing our expectation for the total synergies to come. At our investor day last year, we laid out a target of $120 million in total synergies in 2020. Our new target for this year is almost twice that much. As I have said before, we remain encouraged by the value creation through the combination of our two legacy businesses, which has led to an expectation of increased achievable synergies, both in terms of pacing and the absolute amount. Given our synergy trajectory, we will significantly exceed the increased longer-term synergy targets laid out at the beginning of this year for future years. After we complete our budget process for the year, at the year-end call in February, we will lay out new synergy, new significantly increased synergy targets for future years. John will provide more details on the breakdown of the synergies achieved year to date in 2020 to help demonstrate the areas of value creation that continue to grow. Our third quarter net income of $902 million included a non-cash deferred tax benefit of $895 million due to the reversal of a portion of our U.S. valuation allowance related to net operating loss carry forwards. This reversal of a portion of our U.S. valuation allowance is based upon an analysis of our improved profitability as well as our expectations for continued profitability in the U.S., increasing the likelihood that our U.S. subsidiaries will be able to utilize the substantial deferred tax asset on our balance sheet. This is yet again further evidence of the strength of our business model and how Tronox will deliver value to our shareholders in the future. Adjusted EPS for the quarter was five cents. From a liquidity and capital resource perspective, we are pleased with how well our business is positioned despite the pandemic. We have $1.1 billion in cash and available liquidity more than sufficient to sustain our business. As we move closer to the end of the year, we are evaluating incremental debt pay-down options, utilizing excess liquidity on the balance sheet to advance further towards our gross debt target of $2.5 billion. I will now turn the call over to John Romano, our Chief Commercial and Strategy Officer, who will comment on our commercial performance and the trends we are seeing in the global marketplace. John?
spk06: Thanks, Jeff. Now moving to slide four, first I'll take you through the year-on-year comparison. Revenue of $675 million was 12% lower than $768 million for the year-ago quarter, primarily due to the impacts from the COVID-19 pandemic. TIO2 pigment sales of $543 million were 10% lower, driven primarily by a sales volume decline of 9%, reflecting weaker demand in Asia Pacific, led by India due to the impacts of COVID-19, A slight lag in Europe, while volumes in Latin America exceeded and in North America were level with Q3 2019 volumes. The year-over-year volume decline of 9% for Q3 is a significant improvement from the previous quarter, where volumes were 27% lower year-on-year. As Jeff will share with you in a few minutes when he provides our outlook, we expect this year-over-year negative variance to be eliminated in the fourth quarter. TO2 selling prices were 3% lower on a local currency basis year over year, or 1% lower when adjusted for currency. This represents very little pricing movement from this point last year, despite the challenge macroeconomic backdrop largely attributable to our margin stability initiatives. Now moving to Zircon, sales of $56 million were 18% lower than a year ago. Zircon sales volumes were 7% lower when compared to Q3 of 2019, driven by softer market conditions and the timing of shipments. Selling prices were 11% lower than a year ago quarter. As we've mentioned before, Zircon pricing declined late in the fourth quarter and early in the first quarter. So this comparison demonstrates the roll forward of that trend on a yearly year comparison. In feedstock and other products, sales of $76 million declined 22%, largely due to lower mandated CP slag sales associated with a remedy for the crystal transaction and lower pig iron sales volumes due to COVID-19. Now moving to the sequential comparison versus the second quarter of 2020, revenue of $675 million increased 17% from the prior quarter. on improved TIO2 and feedstock and other product sales due to increased market demand. TIO2 pigment sales of $543 million were 17% higher compared to $466 million. Sales volumes were 16% higher as we saw sequential volume growth in all regions led by strong volumes in North America and a significant recovery in Latin America. Selling prices were level on a U.S. dollar basis or down 1% on a local currency basis. TO2 pricing in 2020 has been relatively stable despite the challenging macroeconomic environment we have been operating in. Moving to Zircon, sales of $56 million decreased by 18% from the previous quarter. Sales volumes declined 15% as a result of shipment timing on some volumes that shifted from Q3 into Q2 as we communicated in our second quarter earnings call, as well as volumes that have shifted into what will now be a very strong fourth quarter. Zircon summing prices declined by 2%, largely driven by product mix. And finally, feedstock and other product sales of $776 million increased 73% due to improved pig iron volumes and the resumption of mandated CP slag sales as per the FTC consent order. Looking back over the quarter, September was our strongest TIO2 volume month. The trajectory moving out of the third quarter is encouraging as we see this strength continuing into October, indicative of an improving market condition, which we expect to see through the end of the year and the end of 2021. Jeff will speak to our fourth quarter volume outlook later in the call. And finally, we're expecting TIO2 pricing in Q4 to remain in line with the third quarter. As we discussed on our last earnings call, Following the precipitous drop-off in the second quarter, Chinese sulfate pricing began to increase in July and has continued to increase into the fourth quarter, supported by improving demand and an increase in Chinese and imported ilmenite pricing. I'll now turn the call over to JF for a review of our operating performance and profitability in the quarter. JF?
spk07: Thank you, John. Moving to slide five, let me first review the year-over-year comparison. Adjust EBITDA of $148 million was 20% lower than a year ago quarter. We benefit this quarter versus the year ago quarter from $34 million in synergy and favorable foreign exchange rate, primarily the South African Rand, Euro, and Brazilian Real. This was upset by lower sales volume and pricing mix, increased production costs driven by the adjustment of our operation to accommodate the effect of the pandemic, idle facility and LCM charge, and the absence of the defer margin benefit from Q3 2019. Sequentially, adjusted EBITDA of $148 million increased 4% from the $142 million, driven primarily by the improved volume John discussed earlier, a favorable comparison of production cost in South Africa due to COVID-19-related slowdown on our operation in the second quarter, and an incremental $4 million of synergy achieved in Q3 versus Q2. This improvement was achieved despite increased pigment production costs in the quarter due to the adjustment of our operation to accommodate the effect of the pandemic. An unfavorable foreign exchange rate, primarily the South African rand and the Australian dollar. Overall, our operation continues to remain stable, an achievement I'm proud of, considering the challenge presented by COVID-19. Using our operational excellence program and our integrated business planning tool, we have reduced our anticipated back-asked fixed costs by approximately $50 million to offset the impact of the COVID-19. Combined with the strength of our synergy capture, we have minimized the impact on our margin profile. While many of these cost reductions were deferral that will be incurred once we return to normal operation in the first half of 2021, the benefit from the synergy will carry forward. I would now like to turn the call over to John Cervasol to discuss the synergy in further detail. John?
spk09: Thank you, J.F. Turning to slide six, As J.F. mentioned on the previous slide, in Q3, we achieved $34 million of incremental synergies year-over-year reflected in EBITDA. This amounts to year-to-date synergies of $134 million reflected in EBITDA, or $183 million achieved in total synergies, the balance being tax and other synergies. As Jeff mentioned earlier in the call, given our continued demonstration of the benefits of our vertically integrated business model, we have raised our full year 2020 synergy targets to $235 million from the $190 million target set earlier this year. The $185 million of this amount is expected to be reflected in EBITDA, which is also increased from the $140 million target from earlier this year. As we have mentioned on previous earnings calls, the majority of the targeted synergies are coming from true cost savings and not tied to volumes. We continue to realize more synergies faster despite the macro backdrop with a slight shift in allocation across the anticipated synergy buckets, which I will walk through in more detail. 36% of the EBITDA synergies realized year to date comes from SG&A. While the majority of these savings were realized early on, we expect to achieve incremental SG&A synergies through 2022. Twenty-four percent of the synergies comes from supply chain benefits or network optimization opportunities by leveraging the larger footprint, skills, and experience of the combined company in our purchase of goods and services. This opportunity continues to increase as new initiatives are identified and better-than-expected performance is realized on current projects. Nineteen percent is from operations driven by best practices for the exchange of technology, intellectual property, and maintenance materials and procedures across our expanded portfolio, as well as operational performance improvements at historically higher-cost legacy crystal sites such as Yanbu in Brazil. The teams at these sites continue to deliver on targets and identify new opportunities for implementation above what was initially identified. Feedstock makes up the balance of the significant EBITDA synergies, representing 18% of the year-to-date figure. We realize significant savings in what we call value in use, or the ability to optimize the use of feedstocks internally, reducing the processing costs of our pigmented plants. The last point I wanted to make about synergies is that at Investor Day in May 2019, we had committed to achieving $920 million of total synergies in 2020 and $220 million by the end of the program in 2022. We are pleased to report that we expect nearly double the 2020 target, delivering our 2022 target over two years earlier than expected and will continue to further unlock and drive cost savings and synergies. To be clear, not only have we been able to deliver synergies at a more rapid pace, the synergy opportunity has been much more robust than we had expected. We'll now turn the call over to Tim Carlson for a review of our financial position. Tim? Thanks, John. On slide seven in the top left quadrant, we've outlined our liquidity and capital resources at the end of the quarter. We have $1.1 billion in total available liquidity, including $722 million of cash and cash equivalents. Our cash is appropriately distributed amongst our global operations, and we have no trapped cash. The $722 million of cash and cash equivalents excludes $27 million of restricted cash, of which $18 million is in escrow related to the TTI acquisitions. Our current liquidity is sufficient to fund the TTI acquisition, pay down debt, and preserve optionality for our business. Moving to the top right quadrant, our current total debt is $3.5 billion, and our net debt is $2.8 billion. Our current trailing 12-month net leverage is 4.5 times. We've included a chart to visually outline our debt maturity schedule. As you can see, we have no maturities on our term loans or our bonds until 2024. We also have no financial covenants on our term loans or bonds. Our capital allocation policy remains unchanged. We continue to prioritize disciplined capital spending on high return projects and deleveraging with a targeted net leverage of two to three times and a gross debt level of $2.5 billion. Moving to the lower half of the page, capital expenditures in the third quarter were $47 million. and our depreciation, depletion, and amortization expense was $76 million. Year-to-date capital expenditures total $129 million. We expect capital expenditures for the fourth quarter to increase to $70 million due to a couple of critical capital projects that Jeff will discuss next. Our free cash flow for the quarter was $37 million. While our inventory balance overall remained relatively flat quarter over quarter, Our pigment inventory volumes declined as we adjusted our operations to accommodate the effects of the pandemic, while feedstock and other inventory volumes increased as we continued to operate our mines at 100% to meet internal high-grade feedstock requirements. Additionally, unfavorable FX rates contributed to approximately a $20 million inventory increase. Our outstanding receivable balance remains at 95% current, and we have no accounts receivable aging concerns. I'd now like to turn the call back to Jeff to provide an update on some key strategic developments in our outlook.
spk05: Jeff? Thanks, Tim. As I have emphasized many times in the recent months, with the support and counsel of our board of directors, our management team, while very focused on navigating our company through the pandemic, has not lost our focus on planning for the future and positioning for the recovery to come. I would like to take a moment to provide an update on several ongoing strategic projects that remain key to contributing to our long-term strategic goals. in may we announced the signing of a definitive agreement to acquire the tizier tti business from aramid for 300 million dollars representing a synergy adjusted multiple of approximately 5.2 2019 adjusted evida this highly strategic acquisition will further our vertical integration strategy by increasing our titanium feedstock production capacity thereby reducing our reliance on third-party feedstock suppliers, which will lower our costs and in turn allow us to better serve our pigment customers. We continue to work through the customary closing process with the regulatory authorities and are making progress towards closing as anticipated. While the pandemic has diminished internal CP side demand in the short term, we still believe that TTI will be a great asset and help us achieve our vertical integration strategy in the future. As we mentioned at the time of the announcement, the TTI acquisition will also improve the likelihood of a successful commissioning, ramp-up, and eventual acquisition of the Jezon smelter. In May, we announced an amendment to the Design Technical Services Agreement, which has allowed Tronox to increase technical and managerial resources devoted to the project. The design project has experienced delays due to travel restrictions associated with COVID-19, but we are working to claw back some of that time. We remain cautiously optimistic that the ongoing design modifications will result in a successful startup and currently anticipate achieving sustainable operations the trigger for tronox to acquire a 90 interest in the asset by mid 2022. design also remains an important element of advancing our vertical integration strategy moving to the next project we introduced project neutron at our investor day last year it is a global multi-year digital transformation strategy aim to reduce operating costs to enable Tronox to maximize the benefits of our vertical integration and achieve a sustainable first quartile integrated cost position. This higher return project will reduce our costs per ton by introducing proven enhanced automation technology, implementing process improvements, and deploying operational excellence across the portfolio. Our $200 million capital expenditure target for this year reflects investment associated with this project. The project ramp up in the fourth quarter will drive the increase in CapEx in the quarter, as Tim mentioned, and a portion of the increased anticipated CapEx expenditure in 2021. The timing and pacing of this project is within our control. We have the ability to manage our investment in Neutron as macroeconomic environment and industry conditions merit. We are excited for the benefits this project will deliver to our shareholders. Neutron is an essential part of our strategy. Two years ago, we laid out a five-pronged strategy for success. Having a competitive cost structure across the value chain is foundational to that strategy. Having that cost position will allow us to maximize the benefit of our distinct advantages of our unique global footprint and our vertical integration. Our strategy is also founded on the premise that being the TL2 technology leader and having the right people, the right culture and capabilities will enable successful execution of our strategy. Neutron directly addresses several of those components. Lastly, the Atlas Compacity Project is the next mine development in our pipeline of high-value mine projects available to maintain our feedstock integration from existing assets. This project will replace supply from our existing snapper ginkgo mines, which are nearing the end of their life. This mine site, located in eastern Australia, is abundant in natural rutile and high-value zircon and will be a significant source of high-grade ilmenite suitable for direct use, synthetic rutile production, or slag processing. The project ensures that we maintain current levels of feedstock integration in zircon supply, strengthening our strategy of vertical integration. This high return capital project has commenced development and will contribute to capital expenditures for 2021 in line with levels indicated at investor day for the medium term, which we will manage as required depending on the global macroeconomic conditions and resulting market demand. These projects represent key investments in the future competitiveness of Tronauts and the differentiation of our vertically integrated profile. While we continue to contend with the ongoing global pandemic, we remain simultaneously focused on enhancing our competitive position for the medium and long term. As part of our year-end results call early next year, we will provide more details on each of these projects. Now turning to slide nine, I'd like to share our outlook for the remainder of the year. As I mentioned earlier, the momentum we have moving out of the third quarter is indicative of the improved market conditions we expect through the end of the year. While the macroeconomic environment remains uncertain, we anticipate a favorable deviation from normal fourth quarter seasonality, resulting in strong fourth quarter TIO2 sales volumes at or above third quarter 2020 and the fourth quarter of 2019. Additionally, as a result of shipment timing and continued recovery in market demand, Zircon sales volumes for the fourth quarter are expected to be the strongest of the year, improving sequentially from the third quarter in the range of 25%. Our expectation of incremental synergy achievement combined with the strength of our commercial outlook and offsetting cost reductions should result in adjusted EBITDA in the fourth quarter in the range of $155 to $170 million, with an adjusted EBITDA margin improving back to first half 2020 levels. Additionally, we recognize that given the tax value-washing allowance reversals and charges this year, our tax expense has been a challenge for many of you to anticipate we maintain our expectation of full year tax expense excluding valuation allowance adjustments to be 30 to 40 million dollars As John Serversall reviewed, we continue to demonstrate our ability to exceed the initial synergy targets laid out and subsequently raise and expect that in addition to achieving the newly increased targets for 2020, we should also continue to exceed the long-term synergy targets laid out earlier in the year. Moving on to our expectations for the full year, We anticipate our full year 2020 adjusted EBITDA to be in the range of $619 to $634 million and the following uses of cash. Net cash interest between $160 and $165 million. $15 to $20 million of cash taxes. Working capital would be a use of cash between $75 and $90 million. capital expenditures of $200 million, which is at the low end of our previous range, and net pension contributions of between $15 and $20 million. These represent our estimates based on our current market outlook. We also remain confident in our ability to generate strong free cash flow for the year. Our capital allocation priorities remain unchanged, with high return internal investments and debt pay down taking precedent. As I mentioned earlier in the call, we are evaluating accelerated debt paid down options in the fourth quarter, utilizing excess liquidity on the balance sheet to advance further towards our gross debt target of $2.5 billion. You may also note that on the bottom of this slide, 9, we've modified our safe, quality, low-cost tons mantra to include sustainability. During the quarter, led by Melissa Zona, our chief sustainability officer, we published our 2019 GRI report for the combined Tronauts and Crystal businesses. Sustainability and ESG continue to grow as an increasingly important aspect of our operations, and we felt that acknowledging this in the way we think and talk about the tons we produce is critical to keeping these aspects of our business at the forefront of everything we do. If you have not had the opportunity to review our GRI report, I encourage you to do so. A link to it can be found on our website. I am very pleased with the results delivered in the third quarter as they are a manifestation of our ability to leverage our unique portfolio to optimize our assets and secure our position as the most adaptable, resilient TO2 industry leader and allows us to continue to deliver industry-leading financial performance. The outlook provided today is based upon our current information available to us. Globally, we are seeing a reversion of some economies to various forms of shutdown due to a resurgence of COVID-19. Undoubtedly, uncertainty remains. At this stage, we have not seen an impact to our end markets. However, we have developed the ability to adapt very quickly as needed should market demand significantly change. We are cautiously optimistic that the strong sales trends we have seen through this month will continue through the end of the year and into 2021. In closing, I am extremely proud of how focused our entire Tronux team has remained throughout the prolonged pandemic, prioritizing safety and looking out for the health and well-being of one another while continuing to deliver safe, quality, low-cost, sustainable tons for our customers. I would like to extend my thanks once again to my nearly 7,000 colleagues around the world. The strength in our performance speaks to the resiliency of our business and the caliber of our people, which reinforces my confidence in Tronox's position for the recovery to come. That concludes our prepared remarks today. With that, I'd like to open the call for your questions. Operator?
spk02: We will now begin the question-and-answer session. To ask a question, you may pass 1,001 on a touch-tone phone. To withdraw your question, please pass 1,002. This question is from Frank Mitch with Fermi Research. Please go ahead.
spk09: Hey, good morning, everybody. I'm trying to get at what might be normalized when I look at your third quarter, you know, given the negative impact from the pandemic. I mean, your volumes in TI2 moved up 16%, but they were down 9%. year over year. Is there any way to quantify, you know, when you reigned it, you know, as you reigned in production with a fixed cost absorption might have might have been in terms of the negative impact in the quarter? Hey, Frank, it's Tim. Just to let you know, from a cost absorption standpoint, we did reduce our production to match the economics of the pandemic. In doing so, we did take about $14 million of idle facility charges in the quarter. And what those are just U.S. GAAP charges whereby you've got to expense rather than capitalize certain costs in the inventory. So that was about two margin points. Those idle facility charges will actually decline quite a bit, probably cut in half in Q4 as we start to ramp up production at a couple of our sites. but we will still see a little bit of unfavorable fixed overdrive absorption in Q4. So probably a similar margin profile from Q3 in terms of as it's flipping from idle facility costs to overdrive absorption. But we'll see that to continue to improve just given some of the Zircon that we see flowing through in Q4. Got you. Thank you. If I think about the very positive progress that you've made on synergies, one of them was tied to operating the Yambu facility at higher rates. Now, I do understand that we are in the midst of a pandemic, so that is having an impact on production. But can you talk about how you are progressing in terms of ramping Yambu up to where your Hamilton rates are and where you stand in that whole process?
spk07: So Frank, it's JS. Look, what we have done is we have a team and obviously because of COVID-19, what we have done is that team has kind of focused on quality and cost instead of focusing on volume. And as John mentioned when he detailed the synergy, I mean, we have overachieved on other buckets of synergy, and we're confident that we will continue to overachieve even if none of those synergies are linked to volume additions.
spk05: But I think, Frank, this is Jeff, but I think also we have increasing confidence of our ability to ramp up the volumes when the market demand calls for it. So while we've not yet stepped up to those Hamilton lock rates, we certainly have improved our visibility to be able to get there.
spk09: Terrific. Thank you so much.
spk02: The next question is from Hasan Ahmed with Olympic Global. You go ahead.
spk10: morning Jeff you know hey how are you you know in the comments that you made you you touched on the Chinese market and you talked about how you know, pricing had infected positively in China, TIO2-wise, and you also touched on how ilmenite prices were going up through the course of the quarter. So two-part question. One is, you know, obviously there was a bit of a destock in China, you know, earlier. So is that destock behind us? And then in terms of ore pricing, you talked about ilmenite. But, you know, broadly speaking, if you could just tell us where you see supply demand right now, because it's kind of been all over the place, right? You know, as we were sort of going through the course of 2019, it seemed that You know, high-grade ore in particular was pretty tight, and pricing was sort of trying to go up. And then the pandemic happened, and it seemed that pricing was weakening. And now it just seems that pricing is going up again. So, you know, like I said, one, on the destock in China, and two, just the ore pricing side.
spk06: Hey, it's John Romano. So on the destocking in China, I would agree with you. We have seen inventories come down. That's one of the reasons why we're starting to see not only an uptick in demand, but from the destocking, a price improvement that really started back in July, and it's continuing into the fourth quarter. On the Illmanite pricing, That's not only on Chinese ilmenite pricing. There would be imported ilmenite into China as well. And we've seen in the range of, I'd say, from Q2, 25 to 30 percent increase in ilmenite pricing. And that ultimately is reflected, as you know, into Chinese TO2 pricing. And then ultimately that will have an impact on pricing in general. With regards to high-grade feedstock, we haven't seen a significant move there. The pandemic obviously has had some impacts on production. So I'd say at this particular stage, although we're not in the market to sell, other than what we're doing as mandated by the FTC with the transaction with Crystal when we closed that, we've seen stable, I'd say high-grade feedstock pricing, but the likelihood that it should start to move up as we get into early 2021.
spk10: Understood. Very clear. Thank you. And as a follow-up, you know, Q4 Zircon volumes obviously expected to be quite strong. And, you know, obviously the guidance overall for the company is quite strong as well. Just trying to get a sense of, you know, that 25% sequential Zircon volume increment you guys are talking about in terms of sort of incremental EBITDA contribution for Q4, what would that translate to?
spk06: I'll give you a little color on the volume and then Tim can provide whatever color we would on EBITDA. But if you think about our volume in 2019, and it kind of gives some impact on the resilience of the market, even in the midst of a pandemic, 2020 volumes are going to be about the same. The timing of the shipments had an impact on it, but we have seen a pickup in the fourth quarter. And to Jeff, the point that Jeff made earlier of, you know, in the range of 25% over and above where we were in the third quarter, we're seeing good demand again, and that trend moving into 2021 as well. Tim?
spk09: Hassan, just from a margin standpoint, as you know, we don't comment specifically on margin structures of our product other than to say, just given the co-product nature of Zircon, it does provide good margins for us. Very helpful. Thank you so much, Jeff.
spk02: The next question is from John McNulty with BMO. Please go ahead.
spk09: Yeah, thanks for taking my question. I guess the first one would just be around the incremental synergies that you came up with, the incremental $45 million or so for this year. I know you're going to give more detail, it sounds like, at the end of the year. But can you give us some color as to if these are just accelerated synergies that were coming from the out year, or if these are just new opportunities that you've developed? And also, it looks like, if I understand it right, the 3Q run rate and the 4Q run rate in terms of synergies are about the same. Why wouldn't that be inching higher as we look to 4Q? Hi, John. This is John Cervasol. uh as uh jeff mentioned and i mentioned my comments we do uh expect uh you know synergies to uh continue to outperform throughout the year that's why we raised our guidance um we believe that you know In Q3, there were some one-time synergy benefits, but as we go to Q4, we expect to report at or above where we believe the full year number is going to come out at.
spk05: And just to be clear, I mean, I think as John said in his earlier comments, the increased synergy amount is both in the quantity, the overall quantity and the pacing. So it is some new things that we've been able to roll out synergies from and also delivering some of the things that we anticipated quicker. There's been some things that we've not been able to fully capture because of some of the effects of the pandemic and whatnot. And that's why some of the allocation of the percentages have moved around a little bit. But overall, I think the story there is more sooner and faster.
spk00: And John, just adding one more thing. It's Jennifer. So your question regarding the fourth quarter being aligned with the third quarter, as we've said, we didn't really tie a lot of our synergies to volume. So while we're expecting a pretty strong recovery on the volume front in the fourth quarter, we're still managing our operations to align with the demand we've seen this year. So I think that's more attributable to why you're seeing kind of a level amount in the fourth quarter.
spk09: Got it. Fair enough. Now that all makes sense. And then I guess on the stronger TIO2 demand, can you give us some colors to what you're hearing from your customers? Is this a function of them trying to catch up for maybe being caught off guard a little bit in terms of the stronger demand and tweak you where they're kind of trying to get their own inventories back in shape? Or is this more a function that look 4Q and total end product demand is just that much higher. I guess, how should we be thinking about that? Or how are you thinking about that? And what does it mean in terms of kind of how you think the customer base ends the year in terms of overall inventories?
spk06: Yeah, so from the standpoint of where we are on our view on customer inventories, in the second quarter, I do believe, although our numbers were down significantly, our customers were running through and consuming a lot of the inventory they had on hand. So there is an element of inventory rebuilding that was going on, but I do also believe that this is true demand development. When we went through our scenario analysis, looking at the outcomes that might happen as the pandemic kind of eased, this is pretty much one of the more optimistic views that we had, and our volumes have recovered. And as we look into the fourth quarter, you know, Actually, October is the second strongest month that we had this year, only, I guess, less than the number we had in March. So we continue to see strong volumes, and that's why we're not going to see the seasonal impact that we would normally see in the fourth quarter because the recovery is outpacing what would normally be seasonal downturn in the fourth quarter.
spk09: Great. Thanks very much for the call, Eric.
spk02: The next question is from Jeffrey Fisher with Barclays. Please go ahead.
spk08: Yes, good morning, guys. First question is just around the Saudi smelter. As it stood before, it was supposed to start ramping in Q1, and I thought the commentary was we would know pretty quickly after it starts to ramp whether the fixes worked or not. So in the new timeline, when does it actually ramp up and when will we know if the fixes are generally working? And has the amount of money that it's going to cost us gone up with this delay?
spk07: To Duffy, it's JF. Look, versus what we have said previously, there's only about a one to two month delay that has had it because of the COVID-19 situation and having difficulty to have some of the key people on site to realize some of the modification. So we're now envisaged to start in the middle of next year the plant. When Jeff referred that it's in 2022, he referred that Tranox will acquire the smelter. And that would be probably a year after startup. uh that we would do that because as you know the smelter has to deliver a certain level of success for us to uh to take the ownership but as of today the construction is at about 70 percent complete on those modifications we're making good progress Look, we have on site, you know, Haymec has a crew of almost more than 300 people, you know, that are working on making that construction and making it ready for the startup that we see in Q2 21.
spk09: And then Duffy, in regards to your question as to whether or not our cost will go up with any delay, we are capped at $125 million. We have $113 million at the end of Q3. We've made the additional $12 million contribution in Q4 already. So there will be no additional cash outflow related to Jizan going forward. We're capped at $125 million.
spk05: yeah and and definitely I think your your premise that when when we begin to ramp up we'll know shortly after I think I think that's that's accurate I mean as we as we begin to ramp up certainly we'll be we'll get a lot of good read on on whether it's going to be successful and then obviously as you wrap up and start to push it you you get get a better feel of how long it might take to to ramp up to sustainable operation level but yeah you're You're right. Mid-next year, we should get a really good read on whether the design modifications have done the trick. Great. Thanks.
spk08: And then this year, the net exports out of China have gone up pretty significantly. So two questions there. One, that incremental additional tons, geographically, where do you see or where have you seen most of that end up? And then the second one is, do you think that's a new structural level of Chinese net exports, meaning they added more supply maybe than we thought? Or was that just a result of weak demand in China? And so there's a chance that Chinese net exports actually decrease next year.
spk06: Yeah, and I'll answer the last question first. And I think demand in China has been, I'd say, suppressed a bit. And so that does drive the exports up. And when you think about the change in the volumes in September, it's down a little bit from August, about 3%. But on average, it's still at this particular point in time, trailing 12 months is about 1.17 million tons. So I do think that there's no question that Chinese have added some capacity. There's also been some capacity that's been pulled out as well. So it's a bit hard to say if that 1.17 million tons is a new trend, but I definitely believe that some of the demand pickup in China will now start to absorb that volume. As far as where the volumes have gone, We have a facility in Brazil, so we compete head-to-head with the Chinese there on a regular basis. There's been some volume input in Turkey, in Europe specifically, I would say. And then in India, we've seen a little bit of an uptick as well. But as we talked about earlier, we have seen a significant move in pricing. We have great visibility into that because we have an asset in China now, and our pricing on sulfate material has moved up and will continue to move up as we enter the fourth quarter. I mean, we end the fourth quarter into 2021. Terrific. Thank you, guys.
spk02: Next question is from Vincent Andrews with Morgan Siding. Please go ahead.
spk09: Hi, this is Steve Haines on for Vincent. I wanted to ask a question on margins.
spk03: Given that in 2019 we kind of had a big D-stop, 2020 we've had obviously a pandemic, and you guys have taken out a ton of synergies.
spk09: It sounds like there's some temporary kind of cost deferral that's also going to come back next year. So, I mean, how should we be thinking about either down margins directionally and any kind of, you know, kind of – directional guidance would be helpful there.
spk05: Yeah, Steven, this is Jeff. I think, you know, as you said, I think EBITDA margins in the fourth quarter will recover to sort of what we had in the first half. So we'll recover to that mid-20 range. And I think longer term, we certainly believe that we can sustain EBITDA margins in that range with maybe a little upward movement as volume recovers. So I think that's a good long-term outlook for sort of our EBITDA margin profile.
spk01: Okay, thank you.
spk02: The next question is from Josh Spector with UBS. Please go ahead.
spk03: Yeah, hi. Thanks for taking my question. I was just wondering if you could maybe share what you would think would be an upside volume scenario in fourth quarter. And I understand, you know, seasonally it's maybe a little bit tough to predict, but if October strength continues, what would you expect to see for the fourth quarter as a whole?
spk06: We're not going to give a specific number, but we do expect the fourth quarter numbers based on where we are today to be at or above where we were in Q3, as well as where we were in Q4 of 2019. You know, we've seen a significant increase in demand for coatings and plastics, and the one market where we hadn't seen much of a recovery was in the laminated paper business. And in September, we started to see that volume recover as well. Again, October sales are strong. We will have some seasonality, but because we're recovering, that seasonality has been muted by the recovery. And I guess what I would say confidently at this particular stage is that Q4 will be at or above Q3 levels.
spk05: The other thing that's still happening is the order book is still coming together a little bit different than it historically has. And even yet this month, we will continue to place orders very, very late into the month, as recently as even this week for shipment this month. So that's a little unusual, but it just shows that buying patterns have changed a bit because of the pandemic.
spk03: And maybe if I could try one more time is, I mean, would you be willing to share how much October volumes were up year over year?
spk05: No, Josh, I mean, we don't track and report month to month year over year volumes. But again, as John said, we're very confident that fourth quarter volumes will be at or above third quarter volumes and at or above 2019 levels.
spk00: Our typical seasonality in this, you know, for the fourth quarter from the third quarter is, you know, approximately in the high single digits or so down sequentially. So, you know, we're talking when we say a favorable deviation, you know, to be flat or above is a pretty big move away from what we typically see trend-wise.
spk03: Yep, understood. Fair enough. And if I could ask just on the synergy front, I mean, you're obviously doing a lot better than you guys expected. I guess when I look at SG&A specifically for this quarter relative to last year, it's kind of flattish. I'm not sure maybe what I'm missing in that year-over-year comp or some of those synergies are maybe offsetting some expected inflation. How would you characterize that?
spk09: Josh, we had some incremental employee benefit costs in Q3 of this year, and we had a little bit of a credit and employee benefit costs in Q3 of last year.
spk05: And plus, your comment about the inflation is right. Some of the synergies have offset inflation in some of the cost items.
spk03: Okay. What would the normalized SG&A for 3Q have been without that extent of comp accrual? I'd say about $3 million to $4 million less. Okay. All right. Thank you.
spk02: The next question is from Travis Edwards with Goldman Sachs. So please, go ahead.
spk08: Hey, good morning. I've got sort of a two-part question here on the vertical integration side. Just with Shazam coming on in 2022, you've got TTI progressing.
spk09: I just wanted to confirm that those two assets will fully get you to your vertical integration targets, both sort of in the level and in the timeframe that you'd like. And then second part would be, I guess more generally, just what does the availability of mineral sands, feedstock assets look like in the market right now, just in the event that you or competitors wanted to be more active on that front?
spk07: So Trevor, maybe I can answer the first part of your question. But today, we're about 70 to 75 vertically integrated. And with TTI, we will move to 90 to 95. That assumes, obviously, that we would get 100% of the TTI production. But look, it's likely that TTI would have some contract that we will need to respect. And obviously when we start JASAN, the intention is to ramp up JASAN with the need of the increase in our pigment production. So that's really the planning that we have to achieve our vertical integration.
spk05: yeah and travis you know if we if we end up in a situation where you know design comes on and we are structurally long and high-grade feedstock you know it's not our intention to enter the commercial market you know and be a merchant seller of high-grade feedstock but what we will look for opportunities to put that asset to work you know to create value for our shareholders so we'll be very proactive in that regard and then regarding your overall question about mineral sands assets i mean There are always a number of projects that are out there looking for investment, looking for sponsors to help make successful. So I think for anybody who wants to become more aggressive in that area, there are projects available that are in need of investment, in need of probably fresh money.
spk09: The top of color on both ends, and maybe this is an extension to your comments, Jeff. Just wondering, you talked about considering debt pay down before the end of the year. I guess one, are you, I guess our base case would be you're looking to pay down, you know, prepaid bank debt. Just is that generally how you're thinking about things? And then two, you know, anything like M&A or anything else that we should be aware of that might sort of not disrupt but delay your plans to pay down debt? Thanks. Hey Travis, it's Tim. Just as regards to your first half of the question in terms of the debt pay down, we're looking at all options, but right now the most likely option, just given the facts and circumstances, is the pay down on the term debt.
spk05: Yeah, and Travis, in terms of other capital allocation priorities, as we said in our prepared comments, the projects we have going on, the strategic projects, Neutron, Atlas Compacity, are real priorities and willing to pay down their debt. We don't expect, other than the closing of the TTI acquisition that's already been planned, we don't foresee M&A being something that would interfere with those priorities.
spk08: Awesome. Appreciate the time.
spk02: The next question is from Rod Speed with Bank of America. Please go ahead.
spk04: Good morning. What is your normalized liquidity target and how much excess liquidity do you have at September, recognizing there's $300 million to zero?
spk09: and uh um i'll ask that first yeah the targeted liquidity um you know depends if you'd have asked me a year ago it's a little bit different just given the pandemic um i'm probably on the higher end of target liquidity now in terms of you know three four hundred million dollars of cash and then the three to four hundred million dollars of of ABLs and lines that we have not used. Including the TTI, we have over $800 million of liquidity, which is, you know, far and above what we need, which is the reason that we're looking at targeting to pay down some debt.
spk04: So I just want to make sure I understand. It's $300 to $400 of normalized liquidity of cash plus term loan, excuse me, of availability or of each? You made it sound like it was each, but...
spk09: So combined, it's probably more than $500 million right now. Combined, about $500 million right now where we are given the pandemic. Without the pandemic, it's probably $200 million lower than that. Just given the strength of our business model, proven that we can generate free cash, you know, despite the environment we're in.
spk04: And do you have an initial 2021 CapEx given the Australian market? project and what would that project be that's going to replace the snapper and ginkgo mines how much would that cost because it sounds like greenfield would require infrastructure etc thank you
spk00: So on the capital expenditures, you know, we're currently estimating – I should say this. At Investor Day, we communicated that we have some elevated levels of CapEx due to these high investment, high return projects. We communicated, I think, you know, in the mid-300 range, I think we could – be lower than that. We're still going through our 2021 planning process. So as a part of our Q4 results, like Jeff said, we'll disclose our current forecast. But Atlas Compacity and Neutron are the projects largely driving that increase, like Jeff outlined on the call. And Atlas Compacity is the name of those mining development sites that we are building out that will replace Snapper Ginkgo. um it's similarly located um so there's some shared benefits there but there's still development capital required for those sites so um but also like jeff said depending on the market conditions should the need be there to pull capital uh you know we can certainly manage that so um we anticipate currently those those targets but that can be adjusted if needed, much like we did this year with our capital plans, given the market demand environment.
spk04: Thank you very much.
spk02: This concludes our question and answer session. I would like to turn the conference back over to Jeffrey Quinn, Chairman and CEO, for any closing remarks.
spk05: Thank you, operator. Again, thank you for your time today and thanks for all your questions. No, it certainly has been a memorable year for us here at Tronox. Despite a lot of uncertainty, the year is playing out much as we anticipated at one point with a very strong first quarter, a tough second quarter due to the pandemic, and then recovery in the third quarter, and closer back towards normalcy in the fourth quarter. We are not out of this yet, obviously, but we are encouraged. We look forward to speaking with many of you in the weeks to come at some of the conferences that we're doing and to addressing all of you in February for our year-end call to discuss the closeout of the year, which we believe will be very strong in our path forward in 2021. As I said at the time, we'll update you on a couple of the key projects and provide an updated view on overall longer-term synergies. So thanks very much. We appreciate your time, and everyone have a great day. Thank you.
spk02: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
spk01: Goodbye.
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