Tronox - Earnings Call - Q1 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and welcome to the Tronox Holdings plc First Quarter Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jennifer Zunther.

Please go ahead.

Speaker 1

Thank you, and welcome to our first quarter twenty twenty conference call and webcast. On our call today are Jeff Quinn, Chairman and Chief Executive Officer Jean Francois Trogon, Chief Operating Officer John Romano, Chief Commercial and Strategy Officer 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 done so already, you can access them on our website at 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 filings. 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 will 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. As you saw in our earnings release, we provided our results on both a reported basis and a pro form a basis to assist in our discussion of first quarter twenty twenty performance compared to the 2019 performance. Our primary focus on this call will be on the comparison of pro form a results to enhance your understanding of the underlying trends in our business performance and our markets. In the appendix of our earnings release and the accompanying presentation are a statement of operations and adjusted EPS and adjusted EBITDA reconciliations, including on a pro form a basis for the 2019. Moving to Slide three, it is now my pleasure to turn the call over to Jeff Quinn.

Jeff?

Speaker 2

Thank you, Jennifer, and good morning to everyone, and thank you for joining us today. I hope everyone remains healthy and safe. At this point, our strong first quarter earnings may be a bit of old news with the issuance of our guidance late in the quarter and our prerelease in mid April. But turning to Slide three, I do want to walk you through the highlights of the quarter before reviewing our response to the ongoing COVID-nineteen pandemic and our current perspective on the markets. Our first quarter revenue was consistent with our preliminary results, while adjusted EBITDA and adjusted EPS actually came in better than our preliminary results.

Revenue of $722,000,000 was up 4% sequentially, driven largely by increased TiO2 demand, which John Romano will cover later in our remarks. Adjusted EBITDA of $174,000,000 increased 12% sequentially and 23% year over year. And our adjusted EBITDA margin was strong at 24% largely due to synergies and our focus on operational excellence. Adjusted EPS of $0.29 a share was well above our previously anticipated range of $0.20 to $0.26 a share primarily driven by purchase accounting adjustments and an estimate of tax expense which proved to be conservative. Last month, we passed the one year anniversary of the closing of the Crystal deal and it has been everything we hoped and believed it would be.

During the quarter, we continued to deliver ahead of target synergies, achieving total synergies of 45,000,000 with $38,000,000 of that amount reflected in EBITDA and $7,000,000 reflected in tax and other synergies. Jean Francois will cover the synergies in more detail later in the presentation, but we remain on target for achieving our anticipated synergy targets for the year despite the economic impact of the global pandemic. Our strong operating performance in the quarter was driven not only by delivering synergies but also by increased TiO2 volumes coupled with the continued optimization of our global vertically integrated footprint and the prudent management of our cost structure. Our financial position is strong as Tim will discuss later. We recently completed the offering of our $500,000,000 6.5% senior unsecured notes due in 2025 which provides us with enhanced optionality in these uncertain times.

We anticipate using the proceeds for general corporate purposes including the potential repayment of existing indebtedness, capital expenditures, strategic investments, working capital and other business opportunities. We already used a portion of the proceeds to repay the $200,000,000 drawn on our ABL and revolving credit facilities at the March. During these uncertain times, we are deriving great benefit from our continued focus on execution, operational excellence, synergy capture from the Crystal transaction, and enhancing our vertical integration strategy. The execution of this strategy has created and will continue to optimize an enterprise with greater stability in financial performance and cash generation even under the current environment. In this time of great uncertainty, one thing that is for certain is that the company created by the merger with Crystal is far more resilient with substantially more flexibility and strength than either one of the legacy companies would have been on their own.

I'd now like to turn to slide four to discuss our COVID-nineteen response. Our focus has been on the prioritization of three things. First and foremost, the safety, health, and well-being of our employees and their families. Secondly, preserving our ability to operate safely and run our business. And finally, our role as an essential enterprise.

With our plant in China impacted early on, we were well prepared as the pandemic spread across the globe and were able to rapidly respond to the dynamic conditions. All sites around the world are currently operating. We've implemented increased safety protocols and facility access protocols at the sites limiting non essential visitors and effectively eliminating business travel. We've also established additional cleaning, PPE, and disinfection protocols at all locations. Our operations have been designated as essential given the applications of TiO2, zircon, and other co products and the continued manufacturing of critical products such as food and medical packaging, medical equipment, pharmaceuticals and personal protective gear.

We continue to work diligently to ensure business continuity in order to meet our customers' needs. Thanks to the efforts of my colleagues around the world, we've managed to limit the spread of the virus at our facilities. I am extremely grateful for the swift action and dedication of my nearly 7,000 global colleagues. We have shown continued determination and resilience throughout the pandemic, adapting to significant change virtually overnight, allowing our operations to quickly meet the new challenges in which we find ourselves on almost a daily basis. The efforts and results have been extraordinary.

I have never been more proud of our organization. I would now like to turn the call over to John Romano, our Chief Commercial Officer who will report on our commercial performance and the trends we are seeing in the global markets including an update on the near term view for the remainder of the second quarter. John?

Speaker 3

Thanks Jeff. Moving to slide five, First, I'll take you through the year on year comparison, which Jennifer said focuses on pro form a numbers for the year ago quarter for comparison purposes. Revenue of $722,000,000 was in line with sales of $720,000,000 for the year ago quarter. TiO2 pigment sales of $580,000,000 were 2% higher. TiO2 sales volumes increased 6% while selling prices were 3% lower on a local currency basis and lower by only 1% when adjusted for currency.

The sales volume increase reflected continued strength in North America and strong demand in Europe prior to the onset of COVID-nineteen, partially offset by slight demand reductions in South America and Asia Pacific. The reason for the lower year on year TiO2 average selling price, as we stated previously is primarily a prior year issue due to the Cristal commercial approach in 2018 and 2019. This is the final quarter in which we will see this effect as price harmonization was achieved in Q2 shortly after we closed the acquisition. You will see in the sequential comparison, our global average selling price once again have remained stable as they did in each sequential comparison in 2019. Moving to zircon, sales of $65,000,000 were 21% lower than a year ago.

Zircon sales volumes were 7% lower when compared to 2019, driven largely by softer market conditions primarily in China early in the quarter and Southern Europe later in the quarter. Selling prices were 16% lower due to the roll forward of the trend from the fourth quarter carrying into the early part of the first quarter before stabilizing. Our sales of standard grade zircon products versus premium grade continue to run at a higher rate in Q1, which had a negative impact on our average selling price. And in feedstock and other products, sales of $77,000,000 increased 13% largely due to higher titanium tetrachloride sales out of Yambu and the addition of the mandated CP slag sales associated with the remedy for the Cristal transaction. Moving to the sequential comparison versus the 2019, revenue of $722,000,000 was up 4% from the prior quarter on higher TiO2 sales, partially offset by lower zircon volumes and impacts from revenue exchange rates primarily at the euro.

TiO2 pigment sales of $580,000,000 were 7% compared to $544,000,000 Sales volumes were 7% higher and selling prices were level on a local currency basis and a U. S. Dollar basis. Moving to zircon, sales of $65,000,000 decreased 8% from the previous quarter. Sales volumes were level with volumes from the previous quarter while selling prices declined 8%, which was influenced by an increase in standard grade versus premium grade zircon.

And finally, feedstock and other product sales of $77,000,000 were relatively in line with 2019. While this completes the review of the previous quarter's results for commercial perspective, we know that the focus is going to be on what we're currently seeing and anticipate for the second quarter. We've released two updates to the market since the onset of the global pandemic in an effort to continue to communicate early and transparently what we're seeing as conditions changed based on information available to us at the time and our read through on our end markets. We continue to monitor the changing market conditions which indeed evolve every day. As we've stated previously and as you've seen in our results, we benefit from our balanced geographic sales, our vertical integration and our favorable end market exposure.

Approximately three fourths of our TiO2 sales volumes are sold into paints and coatings and a majority of those sales are in architectural markets. The resilience in the DIY market coupled with our minimal automotive and aerospace exposure has benefited us to this point. We've also benefited from the 20% or so of our volumes that are typically sold into plastic applications. And those end markets have been strong driven by food, medical and other packaging applications. Our sales are essentially balanced across the major regions of the world, which has meant we've seen changing geographic demand profile since the onset of COVID-nineteen.

China was the first region to see a slowdown in February whereas since March we've seen improving demand in that region. North America has proven to be the most resilient. The region has not been immune to the impacts of the pandemic but has seen the least impact relative to our expectations. Europe has remained mixed with Southern Europe seeing the most severe impacts while other regions less so. Brazil and India are currently facing challenging conditions and are the two areas where we recently have seen the most demand reduction relative to our expectations.

From the onset of the global pandemic, we developed economic scenarios to evaluate the potential impact on demand, which included a mild case, a medium case and a more extreme case. On a daily basis, we're evaluating and adjusting our perspectives as to what is the most likely case by region, which then rolls into a global forecast and our integrated business planning model that also takes into consideration potential operational and supply chain constraints. The mild impact case assumed approximate 10% decline in TiO2 volume sequentially while the worst case scenario assumed as much as 30 sequential decline. Based upon the evolving status of social restrictions, the uncertain plans for reopening economies around the world and our most recent conversations with and public statements from our customers, our current expectation is for second quarter TiO2 volumes to decline in the high teens to low 20s percent range versus the 2020. This reflects a change from our previous outlook and is largely due to recent reductions in demand outlook by our customers due to slower than anticipated reopening of certain geographies such as Italy, Spain and France and extended shutdowns in countries such as India and Brazil and the recent reduction of feeder vessel availability out of Australia into the Asia Pacific region.

We do not anticipate any significant movement in our global TiO2 selling price in the quarter given our commercial approach and our margin stability initiatives. Zircon volumes are expected to remain largely in line with the first quarter volumes as we continue to see improving demand in China offset by lower demand in Southern Europe and India. Selling prices are anticipated to remain relatively stable from the first quarter. These estimates remain subject to change due to a number of factors but represent our best views at this time. While the macroeconomic conditions remain uncertain, we firmly believe that with our global network of assets and our vertically integrated business model, we will remain well positioned to respond to the changing market conditions as they develop.

And with that, I thank you and I'll now turn the call over to JF for a review of our operating performance and profitability in the quarter. JF?

Speaker 4

Thanks, John, and good morning, everyone. Moving to Slide six, let's first review the year on year adjusted EBITDA comparison. Adjusted EBITDA of 174,000,000 was 23% higher than pro form a adjusted EBITDA of the year ago quarter. As John discussed, increased TiO2 demand, largely offset by lower zircon volume and selling price, were the primary commercial driver. We benefit this quarter versus the year ago quarter from favorable foreign exchange rate, primarily the South African rand and the Australian dollar.

The absence of the deferred margin built, which occurred in Q1 twenty nineteen and $38,000,000 of synergy, all of which were partly offset by higher production costs and lower ore grade in our Australian mines, which has result in increased manufacturing cost per ton. I will further discuss our strong synergy achievements on the next slide in a moment. Looking at the sequential comparison, adjusted EBITDA of $174,000,000 increased 12% from $156,000,000 driven primarily by increased TiO2 sales volume and incremental synergy of $9,000,000 achieved in Q1 versus Q4 twenty nineteen. Favorable foreign exchange rate, again, primarily the South African rand and the Australian dollar, given their significant move in the quarter also contribute to the gain. This factor were slightly offset by lower zircon pricing as expected.

Turning to Slide seven, as I mentioned on the previous slide, we achieved $38,000,000 of synergies reflected in EBITDA. We also achieved $7,000,000 from tax and other synergy not reflected in EBITDA for a total of $45,000,000 in synergy achieved in the first quarter. The increased target for 2020 set during our fourth quarter earnings call was $190,000,000 in total synergies and we remain on track to achieve this target. My team has done a good job finding additional value creating opportunities in the new Tronox and delivering on the targeted synergies each quarter. As we've mentioned before, a majority of the targeted synergy are coming from true cost saving, including opportunities to reduce spending across our supply chain, the sharing of best practice across our various sites and what we call value in use or the opportunity to use our feedstock across our nine pigment plants to generate real cost saving.

So our synergies are not significantly tied to the anticipated volume. We therefore remain confident in our ability to achieve the previously communicated target, despite the faster demand condition due to the pandemic. However, as I said before, the synergy are only one part of our operational excellence program. We have identified other cost reduction opportunity of up to $100,000,000 which can be implemented based on how the situation developed. Additionally, our global team continued to deliver on our target of producing safe, quality, low cost tons for our customer.

We remain committed to improving our safety performance on our Journey to Zero initiative, which is our goal of achieving an injury free workplace, the highest priority of our operation. In fact, recently, the new Tronox achieved the best safety performance record in the history of both legacy company. As Jeff mentioned, all our operations are running due to the effort of our employee and their commitment to our organization, customer and community. Even in South Africa, our smelter continued to run throughout the twenty one days lockdown. Our vertical integration gave us the flexibility to reorganize the use of feedstock in our global portfolio to deliver the best value in use, which demonstrate the strength of our business model.

I want to take a moment to state how extremely proud I am of our employees and their ability to seamlessly adapt our operation to the demand of our customer and manage through the ongoing COVID-nineteen pandemic. As an example, we made the decision to slow down the Yanbu plant in April to adjust production to be in line with our customer demand. But the increased costs due to unabsorbed fixed costs will be partly offset by reduced maintenance costs and lower energy usage. This is only one example of the benefit of our asset base. Thank you to my team and everyone at Tronox for your continued commitment.

Before concluding, I'd like to provide the latest update on the Jazan smelter, which remain a key step in furthering our vertical integrated strategy. As Jazan continue to advance toward its next milestone, Tronox has increased the amount of technical and managerial resource that it will devoted to the project through an amendment to the existing technical service agreement. Under the amend agreement, we will provide comprehensive consulting and advisory service to act as the project manager through the next four phase of the Jazan smelter project. Those phase being construction and mechanical completion of the agreed modification to the furnace, coal commissioning, hot commissioning and ramping up to sustainable operation. Based on our latest expectation, which accommodate the delay due to COVID-nineteen, we anticipate the startup of Jazan to take place in the 2021.

We will complete our funding obligation of $36,000,000 which will occur in three tranches of $12,000,000 over the next three quarters. As a reminder, the earliest date Tronox would acquire the asset would be when the Jez Van smelter achieved sustainable operation as defined in our option agreement, which we anticipate would be no sooner than mid twenty twenty one, but more likely in early twenty twenty two. I look forward to reporting on our synergy and operational excellence progress on the next quarter call. I will now turn the call over to Tim Carlson for a review of our financial position. Tim?

Speaker 5

Thanks, JF. Slide eight, we've outlined our liquidity and capital resources as of 03/31/2020. On a pro form a basis, we include the $500,000,000 in net proceeds from the senior secured note offering that we closed last week as well as the repayment of the $200,000,000 draw on our ABL and credit facility at the March, using proceeds from the recent offering. We have over $1,000,000,000 in total available liquidity, including $720,000,000 of cash and cash equivalents. We have no trapped cash, and our cash is appropriately distributed across our global operations.

Our cash and liquidity balances remain relatively unchanged as of today, and we remain very comfortable with our current liquidity, which provides enhanced optionality for our business. Turning to

Speaker 2

the next

Speaker 5

slide. On Slide nine, we highlight the strength of our balance sheet. Our recent senior secured note offering, which we successfully upsized to $500,000,000 provides additional flexibility at an interest rate only slightly above our weighted average cost of debt, while leaving ample additional secured debt capacity, Including the offering and the repayment of the amounts drawn on our ABL and credit facilities, our current total debt is $3,500,000,000 and our net debt is $2,800,000,000 Our current trailing twelve month net leverage is 3.9x on a pro form a basis. We have no near term maturity on our term loans or bonds until 2024. You may also have no financial covenants on our term loan bonds.

We only have one springing financial covenant on our ABL facility, which we do not expect to trigger under any scenario, especially since there are no current funds drawn against the facility. 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 $2,500,000,000 We've announced a $07 quarterly dividend per share and remain committed to remaining our dividend. Capital expenditures in the first quarter were $38,000,000 and our depreciation, depletion and amortization expense was $71,000,000 Our free cash flow for the quarter was a cash use of $66,000,000 driven by a very strong month of revenue in March and a reduction in payables given the timing and mix of core capital expenditure payments. We are monitoring our accounts receivable balances weekly, currently do not see any impact on our aging that causes us concern.

We've identified only $16,000,000 of receivables where payments are delayed because of bank closures in India, Malaysia, Vietnam and Tunisia. We anticipate making up the $66,000,000 free cash flow burn in Q1 during Q2 despite lower sales volumes through the continued management of accounts receivable, accounts payable and inventory. Turning to the next slide, I'll discuss our outlook. As John mentioned, we anticipate second quarter TiO2 volumes to decline in the high teens to low 20s percent range versus first quarter twenty twenty. Zircon volumes are anticipated to remain largely in line with Q1 twenty twenty.

As JF mentioned, we remain committed to our previously issued synergy targets, including $190,000,000 targeted this year in total synergies and $140,000,000 of that to be reflected in EBITDA. Before moving to anticipated cash uses for the year, I wanted to provide an update on our foreign exchange exposures given the significant movement in rates that we've seen this year. In the third quarter of last year, we took out positions to hedge approximately 50% of our twenty twenty cash flows in South Africa and Australia, hedged at sixteen point one and zero point six eight respectively. Given the positions taken over the next three quarters, we'll only see 50% of the benefit of the FX sensitivities previously communicated. In other words, a one movement in the czar will result in approximately $4,000,000 quarterly impact to EBITDA.

And a $0.01 movement in the Australian dollar results in approximately a $1,000,000 quarterly impact on EBITDA. Moving on, while global macroeconomic conditions remain uncertain, we remain confident in our ability to manage our cash flow. For the full year 2020, we expect our uses of cash to be net interest expense of 165,000,000 to 170,000,000 cash taxes of 20,000,000 to $30,000,000 working capital of 40,000,000 to $50,000,000 reduced from $75,000,000 to $100,000,000 and capital expenditures of $225,000,000 reduced from $275,000,000 And lastly, pension expense, the 15,000,000 to $20,000,000 These represent our estimates based upon our current market outlook. We have ample levers to maintain flexibility and manage cash generation, including the cost reduction measures JF mentioned and the additional management of our working capital and capital expenditures should we see the need. We remain confident in our ability to generate free cash flow across all economic scenarios we are evaluating.

With that, I'd like to turn the call back to Jeff to add additional color to our outlook and provide a few closing remarks before we turn the call over to Q and A.

Speaker 2

Jeff? Thanks, Tim. The numbers that Tim just walked you through represent our current outlook incorporating global macroeconomic uncertainty with our current understanding of our end market demand and customer outlook. We continue to diligently monitor the situations, though it is a bit like trying to track a hurricane and precisely predicting where it will make landfall. We have a range of economic scenarios we continue to evaluate much like the potential path for a hurricane.

But the ultimate path of the storm is determined by a number of factors, including how long it hovers and and how it builds and strengthens. In this case, while we are using a bottoms up analysis, deep dives on trends in our end markets, and conversations with our customers to inform our latest views, The outcome will ultimately depend on a variety of factors including how long the lockdown remains in place and impacts on the supply chain to name only a couple of examples which continue to change every day. That being said and to reiterate what we've stated before, we believe we are differentiated in our market through our global network of assets and vertically integrated business model which positions us to respond quickly and as needed to changing market conditions as they develop. We remain committed to what we said at the beginning of the year. We believe we will deliver industry leading financial performance.

We are prudently managing the present situation but we are not turning a blind eye to the future. We continue to focus on our vertical integration strategy in a multitude of ways to better serve our customer base, all while remaining committed to safety and sustainable development. While the current environment presents an unanticipated and unprecedented challenge, I have confidence in my colleagues around the world and know that we will persevere, only surviving the present, but thriving in the future. That concludes our prepared remarks. And with that, we'll turn it to open it up for Q and A.

And I do apologize. I believe that we have some echo and feedback on the line. So hopefully you can bear with us and apologize for the distraction. Operator, can you open it up for questions, please?

Speaker 0

Your first question comes from the line of John McNulty with BMO Capital Markets.

Speaker 6

Thanks for taking my question. The first one would be on the $100,000,000 of, I guess, recession related cost saves that JF had spoken to, are you targeting all of those at this point? Or are those options for if things get worse? And if it's the latter, how much should we be thinking you're actually targeting right now?

Speaker 2

Those are potential cost savings that we would execute upon as we read the economic situation and as it develops. There are a number of things in addition to things we're already currently doing. So I would view those as additional above and beyond cost reduction items that we've already taken.

Speaker 6

Got it. And then the second question would be, with all the supply disruptions that we saw in the first quarter around COVID in China, there seemed to have been a little bit of a scramble from some customers in the industry. Is that changing their appetite for partnering with someone like Tronox with significant number of assets geographically? And I guess, how should we think about how that may have picked up throughout the quarter in terms of desire for longer term contracts?

Speaker 2

Yes. I think certainly, we believe that our global asset base is a differentiator in a number of scenarios, both in times of lesser demand or global supply disruptions or even times of strong demand, the ability to deliver from multiple sources. John Romano, you want to maybe comment on that as well?

Speaker 3

Yes. No. Thanks, Jeff. I would agree with the comments that you just made. And you know, it depends on the region that we're supplying.

But the ones that typically have had significant imports from China, I would say that we are getting some feedback in that area. It's a bit early to have locked down any contracts. But, there's no question that when something like this happens, it does have a little bit of an impact with regards to, reliance on that channel for raw materials.

Speaker 6

Great. Thanks a lot.

Speaker 0

Next question comes from the line of Frank Mitsch with Fermium Research.

Speaker 2

Frank, are you there?

Speaker 5

We're

Speaker 2

having auto operator, could you go to the next question, please? We're having trouble hearing mister Mitch Mitch.

Speaker 0

One moment.

Speaker 2

Operator, could you please go to the next question?

Speaker 0

Yes. One moment. One moment for the next question.

Speaker 2

Operator, we're not getting any any feedback. Maybe is there is there alternative line that we can go to?

Speaker 0

One moment. Ladies and gentlemen, if you have previously pressed 1, please press 1 again on your telephone keypad now now. Once again, if you have previously pressed 11, please press 1 again on your telephone keypad now now.

Speaker 2

We apologize for the technical difficulty. It's our phone, conference provider that's having, major issues on their end. So we do apologize. And they continue to try to correct the situation.

Speaker 1

If those of you who were in the queue to ask a question could please send your question to myself, Jennifer Gunther, please do so, and I will roll through the

Speaker 0

questions while they work through this.

Speaker 1

Jeff, I have another question. Go ahead, operator.

Speaker 0

We have a question from the line of Frank Mitsch with Fermium Research. Frank, your line is open.

Speaker 7

Good morning. Can you hear me now?

Speaker 2

Yes, Frank, thank you.

Speaker 7

All right. I was going to say you guys sound well and I'm glad you do. Thought it was really interesting looking progression for the TiO2 industry among the four major western players. Three are showing steady improvement in the year over year price over the past several quarters, but one has been blowing out in the other direction. So I was wondering if you could comment on the competitive landscape in terms of price on TiO2?

And are you and what can you tell us with respect to what you're seeing in April and May on that front?

Speaker 2

John, would you like to take that?

Speaker 3

Yes. Hey Frank, is John Romano. So as we communicated on the last call, we were working through price initiatives as we were the first quarter actually was recovering as we anticipated it. And as COVID-nineteen started to, I guess, impact the second quarter more significantly, the progress we were having on raising pricing slowed a bit. But when I mentioned that we didn't expect any significant move in pricing Q2, It was largely due to the fact that we have seen some improvement.

It's not to the extent that we would have forecast previously due to some of the movement in COVID-nineteen volumes. And, we're also seeing a bit of competitive activity in China where we are seeing a little bit of price reduction there. So on average globally prices have been stable for us. They've been stable for basically the last five quarters. So, you know, we're projecting stability moving through the balance of Q2.

So I don't know if that answers your question completely. We can't speak too much to what our competitors are doing. We believe we're maintaining our share globally. There's a variety of initiatives that we have in place now to make sure we're shoring up volume in a very difficult situation that's COVID-nineteen related. But we're doing that in line with our customer approach and our margin stability initiatives.

Speaker 7

Very helpful, John. And perhaps if you can offer a comment or respect to what obviously you guys are more vertically integrated, but what are you seeing in terms of feedstock ore pricing as we progress here in the second quarter? And what the outlook is for the balance of the year on the feedstock ore side of things?

Speaker 3

Yes. Maybe, JF, do you want to respond to that one?

Speaker 4

Look, as you know, we started Q1 with a very tight high grade feedstock market. Being vertically integrated, obviously, gave us the advantage of having flexibility to feed our plant with the different options that we have. As I mentioned in my comment, even during the twenty one day lockdown in South Africa, we were able to operate our smelter and it had no significant impact on us. Look, with the supply demand situation going forward, I expect that the feedstock market will remain balanced, but that's as far as we see at the moment. What I can say is we are in a good position ourselves to meet all our needs.

Speaker 7

Very helpful. Thank you so much.

Speaker 2

Frank, as you know, we are not a participant. We know the commercial feedstock market, we don't sell feedstock into the market. We buy a bit, but we run our feedstock assets and serve our pigment plants, which has provided, we think, a source of flexibility and advantage in situations like the current 01/2001.

Speaker 7

Got it. Thanks.

Speaker 2

Operator, next question, please.

Speaker 1

Jeff, I don't hear the operator, so let me move to some questions that I have via email. Roger Fitz from Bank of America has a question. What do you see Q2 twenty twenty working capital inflow or outflow? Also as a follow-up, what is driving the working capital outflow of 40,000,000 to $50,000,000 in this environment?

Speaker 2

Tim, would you like to take that please?

Speaker 5

Yes, I'd be happy to. Our significant working capital burn in Q1, as I mentioned, was primarily a result of a very strong revenue month in March. We've seen significant collections in the month of April. So we actually see some positive impact from working capital in Q2 despite the lower volumes. We also continue to manage payables and inventory levels appropriately.

We do see somewhat of a burn for the remainder of the year, probably more of a conservative assumption. And we can further manage that down should the market continue to deteriorate.

Speaker 2

Thanks, Ken.

Speaker 1

Jen. Another question from him was on the design flagger. The $12,000,000 per quarter payment, that's above the outflow shown on the outlook on Slide 10?

Speaker 3

Tim, do you want to address that as well?

Speaker 5

Yes. The $36,000,000 of the $12,000,000 a quarter for the next three quarters is in addition to what we have summarized in Slide 10, correct.

Speaker 1

And how much debt do you now expect will you assume on the balance sheet when you acquire

Speaker 5

The amount of debt as it relates to Jazan Gizan? Is unchanged, a total of $325,000,003 $40,000,000 But that's only assuming that we assume ownership. And as Jeff mentioned, that would be mid to late twenty twenty one.

Speaker 1

And in terms of the EBITDA we expect from the furnace, does that remain in line with what we communicated at Investor Day, which was around 50,000,000 to $80,000,000 per furnace?

Speaker 5

Correct.

Speaker 1

Josh Spector from UBS. In your EBITDA bridge comments, you talk about a negative impact of lower ore grades at your Australian operations. Can you just expand on that in terms of what's going on there? And is that an ongoing headwind that we should consider?

Speaker 4

All you hear me now?

Speaker 5

Yes. So our

Speaker 4

mine in South Africa, especially the Legacy Cristal mine, we are toward the end of the life of some of those assets. And as expected, the grade is going slightly down. But we have plant and it is built in our working capital to expand or replace those mine with other assets that are obviously better. So you'll see a couple of year where we'll maintain what we have delivered now and then you'll see a benefit from a new area of the mine where we'll be. So like any mine, you have period where the grade is higher and period where the grade is lower.

So we're going to run for the next two to three years similar to what we have had in Q1.

Speaker 1

Thank you, JF. In past cycles, how quickly has zircon demanded demand shifted back towards the more premium product grade? John, you want to take that?

Speaker 3

Yes. So the shift from, I'd say, lower grades or standard grades to premium grades has been driven by a variety of factors. And I would say, you know, we had the capability to adjust our production to meet that demand. You know, in prior cycles, it depends on how quickly it recovers, but I would say anywhere from two to three quarters. A lot of that will depend on the inventory and the supply demand situation.

As we noted in our remarks, the volume in Q1 was basically flat with Q2. A significant amount of our sales do go into China, and that's the majority of where the markets are, at least as far as consumption of zircon. At the beginning of the quarter, we were a bit softer in China, and at the back end, it strengthened. So over the last three quarters, our sales have been relatively stable into the region. And previously, we were expecting demand to start to recover in the second half of the year.

That will be determined now largely on what COVID-nineteen and how that impacts the second half. We're not at this particular stage prepared to really comment on second half.

Speaker 1

Okay. And another one from Josh. In terms of the free cash flow bridge, what are you expecting in 2020 in terms of restructuring cash spend?

Speaker 2

Tim?

Speaker 5

Very minimal, no different than we've talked about in the last quarter. There are a few actions that will be taken, but low single digit millions.

Speaker 1

Okay. And final one from him. In terms of synergy targets, other companies have reported challenges in achieving the pace of planned synergies given travel restrictions and other limitations in the near term. What are you doing to keep those timelines on track?

Speaker 2

Yes. As JF said in his remarks, we believe that even with the current situation, we still are on track. Many of those synergies were actions that had already been taken just the flow through impact of those actions. So we are fortunate that this has occurred a year into this. If this had occurred in the early stages of our integration and our synergy capture, we may have had a more difficult problem.

But we're very confident of our ability to continue to deliver the synergies at the targeted rates.

Speaker 1

Okay, great. I've received questions, from SunTrust. So, in an environment where TiO2 volumes are falling sharply, what factors can you point to that would support pricing stability in 2Q? And do you have any visibility on if you will be able to hold prices stable beyond this quarter?

Speaker 3

With regards to Q2, Jeff, I'll take that one. What we're seeing at this particular stage is we've already negotiated price for the quarter. So a lot of what we're seeing in Q2 is already based on negotiated agreements. Clearly, with where the market is right now and as volumes have reduced, price isn't really what's going to drive recovery at this particular stage. So based on what we're seeing in the market right now, and as I mentioned, with the exception of some movement in price in China, we continue to see stable pricing moving into Q2.

And we're not really prepared to provide any guidance beyond what we've provided as far as the second half of the year.

Speaker 1

Okay. And maybe a follow-up. Can you walk through the major regions and give us an idea of approximately where your operating rates have been during Q2?

Speaker 2

JF, you want to maybe address the operating rate question first. And then John, maybe you could comment on the market perspective by region.

Speaker 4

Yes, sure. Look, it's clear that with the combination of legacy Cristal and legacy Tronox together, we have more capacity than the demand of our customer. I mean, we always said that we did that deal so we could grow with our customer and we would grow with what I call the hidden factory. So to give you a feel, we were running at about 85% in Q1. I mean, if we were to run all our assets at nameplate capacity, we would produce way more than the demand of our customer.

And it's always been our strategy to adjust our operating rate to meet our customer demand.

Speaker 3

As far as where we're seeing some adjustments from the market, as I mentioned in the prepared comments, certain geographies such as Italy and Spain and France, the downturn there has been extended. When you think about when those three regions specifically locked down, it was back in mid March. Italy and Spain and France are opening between, you know, starting this week up until May 11. And the pull through from the customer base is a bit slower than what we would have projected. We get into Asia, speaking specifically to India, that's been a significant change with regards to our expectations.

The lockdown there has been, I would say, much more significant, not only from the standpoint of being able to get, product to customers from a transportation perspective, but the extended, downtime in that area as well. And again, in The US, that is the one region that I would say is not immune to the pandemic, but it has been more in line with the expectations that we had outlined previously.

Speaker 1

Thanks. For those of

Speaker 0

you still on the phone,

Speaker 1

we appreciate you hanging on. We're gonna go a couple minutes over to accommodate some of the technology issues we've had. So I'm going to continue with another question here that I have. But follow-up with me if you need to hop off, I'm happy to take additional questions later today or tomorrow. On your CapEx reduction, what projects are you delaying or canceling?

What do you estimate that your current maintenance level of CapEx is should you decide to look at additional cuts?

Speaker 2

Yes. The projects that the reduction really comes from a slight delay in a couple of the really long term projects that we have, mine development projects, some technology related projects. Our maintenance and sort of ES and H type capital is about 100,000,000 to $125,000,000 Obviously, being first quarter already passed, we wouldn't be able to get down to that level. But certainly, with the 02/25 level, there is some potential room if we needed to readjust once again as we get, later in the year. But the delay of those long term projects will not have a significant impact on achieving our synergies, our cost structure.

They are truly longer term projects for which we would reap the benefit for a number of years to come.

Speaker 1

Okay. Great. I have a question from, Morgan Stanley from Stephen Hayes. You give us an understanding of where customer inventories were entering the second quarter?

Speaker 2

Yes. John, you want to address that? Because certainly, the inventory levels were in a good place at the beginning of the quarter. Do you want to address that kind of compared to historic context?

Speaker 3

Yes. Thanks, Jeff. So look, the destocking we've been talking about for the last two to three quarters, again by the end of the year it happened. And our customers' inventories and our inventories I think as an industry, well at least Tronox's were at or below what we would deem to be seasonal norms. And, as the first quarter kicked in, we started to see demand pull forward.

Our sales in the first quarter were higher than our expectations. So from our perspective to plan, we actually were lower in inventory than we planned, as far as our budgeting process because the first quarter was stronger than we expected. And we do believe, that our customers' inventory probably towards the March, may have picked up a bit. But again, we don't feel, through the quarter that there was any significant build on inventory for some of the reasons that we outlined earlier.

Speaker 1

Thanks. Another question from him. Some companies have talked about social distancing measures preventing them from getting into factories, working with consultants, etcetera. Does COVID or social distancing measures change the makeup of the synergy bucket?

Speaker 2

No, they really don't. Again, we're fortunate in that many of the actions that would derive the synergies have already occurred. Things like best sharing of practices and the value and use of feedstocks and all of that continue. We've had to change how we interact, obviously. We've had to change how we interact you know, amongst our colleagues within the company and outside providers.

But but the the really nice important thing about, you know, the transfer of best practices and a lot of that, that's internal within the company. It's not like we're bringing in hoards of outside consultants to necessarily help us there. That's our internal expertise, being able to take those things and really, you know, really move forward with it. So we feel good about that, and we've adapted, and we'll continue to move forward.

Speaker 1

Thanks. And I think I'm managing an email inbox here. So I think a final question that I have is from Hassan at Alembic. He said he'd love to hear about industry feedstock availability, keeping in mind some mine disruptions in South Africa and how to think about the 700,000,000 to $800,000,000 earlier guide in light of the mild, medium and extreme scenarios we have run?

Speaker 2

Yes. I think I'll address the latter part first, and then I'll maybe ask Jean Francois to address the feedstock availability. Obviously, the guidance that we gave at the beginning of the year is was in a different under different circumstances and different place. We no longer believe that that is relevant to looking at sort of full year performance. We do believe though that we'll continue to play the cards that are dealt very well.

And as I've said in my prepared remarks, we believe that we will have industry leading financial performance as we go through the year under any circumstances. We're going to try to be very open and transparent and communicate early and often as to what we're seeing in the markets. But at this point, there is not tremendous visibility into the back half of the year. So with that, and Jennifer, thank you for moderating the Q and A. I want to just say thank you for to all of my colleagues around the world for their continued dedication to delivering safe, quality, low cost tons for our customers during this period of great uncertainty.

We remain focused on execution, operating excellence, delivering the synergies and enhancing our vertical integration strategy, which has created and will continue to create a company that has greater stability in financial performance and cash generation. I want to thank everyone joining us on the phone today. We look forward to continuing to dialogue with you about the changing landscape, including probably the very lofty change in conference call provider. And we really apologize for the technical difficulties. But as Jennifer said, if you have questions that you didn't get to ask because of the snafu on the technology, please reach out to Jennifer today, tomorrow, and and we'll we'll make sure we try to provide the best answers to your questions that we can.

Thanks very much and have a great day.

Speaker 0

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.