Tronox - Earnings Call - Q2 2020
July 30, 2020
Transcript
Speaker 0
Good day, and welcome to the Tronox Holdings plc Q2 twenty twenty Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Note this event is being recorded. I would now like to turn the conference over to Jennifer Gunther, Vice President of Investor Relations.
Please go ahead.
Speaker 1
Thank you, and welcome to our second quarter twenty twenty conference call and webcast. On our call today are Jeff Quinn, Chairman and Chief Executive Officer Jean Francois Tregion, 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 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 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 second quarter twenty twenty performance compared to the second quarter twenty nineteen 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's now my pleasure to turn the call over to Jeff Quinn.
Jeff?
Speaker 2
Thanks, Jennifer. Good morning, everyone, and thank you for joining us today. Tronox delivered solid financial results in the quarter despite the significant reduction in demand and the other challenges associated with the COVID-nineteen pandemic. Our results reflect a demand profile consistent with the outlook provided at the time of our first quarter earnings release, offset partially by our crystal transaction synergies, cost reduction initiatives and prudent management of working capital. I will briefly discuss some of the highlights of the quarter before turning it over to the other members of my team for a deeper dive.
Revenues in the second quarter declined 30% versus the year ago quarter and 20% sequentially compared to the first quarter. This decline in revenue was driven by lower sales volumes due to the economic impact of the COVID-nineteen pandemic in the various world regions. TiO2 sales volumes and pricing were consistent with our outlook for quarter two, while zircon volumes and pricing were slightly favorable to our expectations due to shipment timing and favorable product mix. Within the quarter TiO2 volumes reached a low point in May when the full impact of the lockdown was felt before recovering significantly in June, which was the best month of the quarter. We expect that momentum to carry forward into the third quarter.
John Romano will provide more commentary on the market in a moment. Adjusted EBITDA was $142,000,000 for the quarter And our adjusted EBITDA margin was a very strong 25% attributable to delivery of the synergies from the Cristal transaction and our continued focus on operational excellence. Jean Francois will discuss both of these contributors to our results in a few minutes. But to steal a little bit of his thunder, we achieved total synergies of $107,000,000 year to date of which $84,000,000 was reflected in EBITDA and $23,000,000 in tax and other synergies. We remain on target for achieving our anticipated synergy targets for the year.
Certainly we are in a very different economic and market situation than what we anticipated at the time the Crystal transaction was completed. But the ability to deliver the synergies from the acquisition are make is making a huge difference in our financial performance. As I have said before, the combined company is much stronger and is weathering the storm much better than either of the predecessor companies would have done on their own. Adjusted EPS of 3¢ was impacted by lower sales volumes as well as an unusually higher effective tax rate for the quarter due to the generation of losses in tax jurisdictions in which we had valuation allowances. Our CFO, Tim Carlson, will discuss this in further detail in a few minutes.
We have over $1,100,000,000 in available liquidity, which is more than sufficient to sustain our business through any situation. During the quarter, as we previously announced, we signed a definitive agreement to acquire the Tizier TTI business from Aramed for $300,000,000 This is a highly strategic acquisition which will further our vertical integration strategy by increasing our titanium feedstock production capacity, thereby enabling us to more fully meet our feedstock requirements internally and better serve our pigment customers with an even lower cost position. The facility will reduce our costs by reducing our reliance on third party feedstocks and also presents an opportunity for cost and operating synergies. In addition, ONI TTI will provide technology support for Jazan, increasing the likelihood of success there, even further enhancing our vertical integration and lowering our costs. We are continuing to work through the regulatory approval process and other customary closing conditions associated with the TTi acquisition.
Speaking of design, during the quarter, we also entered into an amendment to the technical service agreement related to that facility as we briefly addressed in our Q1 earnings call. This amendment will allow Tronox to increase technical and managerial resources devoted to the project as the project continues to advance towards startup in the 2021 and sustainable operations in late twenty twenty one. The project has experienced some delays due to travel restrictions associated with COVID nineteen, but we are working with AIMIC and AutoCheck to claw back some of that time. All in all, it was a very good quarter for Tronox. Solid operating results given a truly unprecedented situation and several significant strategic advancements.
I am pleased with our delivery of these results given the challenges the men and women of Tronox overcame in the quarter. As an organization, we have remained relentlessly focused on the health and safety of our employees, managing our ongoing operations, protecting, preserving, and strengthening our business, and laying the foundation for the future. Efforts of my colleagues to proactively implement effective access protocols and other safeguards at all of our worldwide locations have minimized the spread of the virus at our facilities and preserved our ability to operate. As a result, we have continued to meet our customers' needs despite the environment. This focus will not waver as the economic climate improves in the back half of the year.
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 markets. John?
Speaker 3
Thanks, Jeff. Moving to Slide four, first I'll take you through a year on year comparison, which Jennifer said focuses on the pro form a numbers for the year ago quarter for comparison purposes. Revenue of $578,000,000 was 30% lower than $827,000,000 for the year ago quarter due to the impacts of COVID-nineteen pandemic. TiO2 pigment sales of $466,000,000 were 29% lower, driven primarily by the sales volume decline of 27%, reflecting weaker demand across all regions following the onset of the global COVID nineteen pandemic. While the pandemic has had a significant impact on the sales volumes, pricing has remained relatively stable.
TiO two selling prices were 2% lower on a local currency basis or 3% lower when adjusted for currency. Pricing in 2020 has been relatively stable with some larger movements in sulfate pricing, though declines in sulfate pricing appear to be improving in Q3. Moving to zircon, sales of $68,000,000 were 24% lower than a year ago. Zircon sales volumes were 12% lower when compared to 2019, driven by softer market conditions globally. And selling prices were 13% lower than a year ago.
As you may recall from our first quarter discussion, zircon pricing declined late in the fourth quarter and early into the first quarter, so this comparison demonstrates the roll forward of the trend on a year over year comparison. Product mix actually had a favorable impact on pricing this quarter, so the decline was less significant than the Q1 year over year comparison. And in feedstock and other products, sales of $44,000,000 declined 46% largely due to the lack of mandated CP slag sales associated with the remedy for the Crystal transaction and lower pig iron sales due to the global economic slowdown. Moving to the sequential comparison versus 2020, revenue of $578,000,000 declined 20% from the prior quarter on lower TiO2 and feedstock and other product sales due to lower demand attributable to COVID-nineteen and partially offset by higher zircon revenues. TiO2 pigment sales of $466,000,000 were 20% lower compared to $580,000,000 Sales volumes were 19% lower and selling prices were level on both a local currency and a U.
S. Dollar basis, both in line with the expectations that we discussed on our first quarter call. Sales volumes in June recovered significantly off a low in May, leading June to be our best month of the quarter. Moving to zircon, sales of $68,000,000 increased by 5% from the previous quarter, slightly above our outlook. Sales volumes were up 2% as a result of shipment timing representing some volumes that were expected in Q3 that shifted into Q2.
And selling prices also increased by 2% due to favorable product mix. And finally, feedstock and other product sales of $44,000,000 declined 43 due to no mandated CP slag sales in the quarter, as I mentioned previously, lower pig iron sales due to COVID nineteen, and an opportunistic spot sale of excess ilmenite in q one that did not repeat in q two. Now turning to the next slide, I'd like to speak to the demand trends we saw in q two by region and how we're seeing those transition into q three. In North America, social restrictions began lifting halfway through the second quarter. We've continued to see strength in DIY market with construction and professional paint markets seeing improving conditions later in the quarter, which we believe will continue into the third quarter.
While The U. S. Is experiencing a resurgence of cases in some regions which could influence the recovery, we have not seen any significant impact on demand in Q3 and believe the recovery will continue into the quarter. Similarly in Europe, social restrictions began lifting midway through the quarter on a country by country basis. Our customers' operations started to reopen in May and as a result, we began to see a greater demand pull in June.
We are continuing to see improving demand into Q3 and believe the recovery in Europe will continue, factoring in the seasonal slowdown that we normally see due to the holiday period. South And Central America were the most impacted during the quarter and remained challenged. Volumes there are beginning to recover, but the region remains behind the curve relative to other regions. India, like South And Central America, also saw a significant surge in cases in Q2 but began reopening in early June. Despite an increasing number of cases in the country, we have not seen a signaling of another complete lockdown and have not seen a pullback in orders for Q3 up to this point.
China demand continues to recover, but given an excess of TiO2 inventory in the region, we have not yet seen a full recovery. We have, however, started to see a tightening of inventory levels and signals of increasing demand. The rest of Asia Pacific remains mixed and varies significantly by country, and we will continue to diligently monitor the recovery into Q3. For the third quarter, we anticipate TiO2 demand will continue to improve relative to the second quarter. And with zircon, we expect the market to remain relatively level with the last several quarters.
Zircon volumes are expected to remain largely in line with first quarter volumes or down slightly relative to Q2 due to the shipment I referenced earlier that sailed in Q2 as opposed to Q3. We anticipate lower demand in Southern Europe and India will continue to offset improving demand in China through the end of the quarter. I will now turn the call over to JF for a review of our operating performance and profitability in the quarter. JF?
Speaker 4
Thank you, John. Moving to Slide six, let's first review the year on year adjusted EBITDA comparison. Adjusted EBITDA of $142,000,000 was 29% lower than pro form a adjusted EBITDA of the year ago quarter. As John mentioned, demand decline across the business were driven by the global economic condition. We benefit this quarter versus the year ago quarter from 40,000,000 in synergy, favorable exchange rate, primarily the South African rand and improve Australian mining costs.
This was offset by the absence of the deferred margin benefit from Q2 twenty nineteen, higher net costs and costs associated with the shutdown of the South African mining operation and slowdown of the South African smelting operation during the twenty one day countrywide lockdown period, combined with the remaining cost impact of the Quezadan shutdown for the relining discussed on the fourth quarter call. Sequentially, adjusted EBITDA of $142,000,000 decreased 18% from $174,000,000 driven primarily by decreased TiO2 and feedstock and other product sales volume as well as increased net cost and the impact of the twenty one days countrywide lockdown period on our South African operation. This was partly offset by incremental synergy of $9,000,000 achieved in Q2 versus Q1 and favorable foreign exchange rate. Turning to Slide seven, we achieved $46,000,000 of synergy reflected in EBITDA in Q2, amounting to year to date synergy of $84,000,000 in EBITDA or $107,000,000 in total, with the balance in tax and other synergy. We remain on track to achieve our target for the year of $190,000,000 in total synergy, of which $140,000,000 will be reflected in EBITDA.
As a reminder, the majority of the targeted synergy are coming from true cost saving and not anticipated volume. So we therefore feel confident in our ability to achieve this figure despite the macro backdrop. Overall, our operation has been stable and uneventful in the quarter, which is always a positive in the operating world. This is particularly a great accomplishment considering the environment in which we are operating. I owe many thanks to my team and our employee for making this a reality.
Thank you. Our focus continues to be on satisfying our customers' needs, providing the same high level of service our customer have grown to expect from Tronox, while executing on our cost reduction opportunity. Using our operational excellence program and our integrated business planning tool, we have identified and are implementing a cost reduction program to mitigate the impact of increased fixed cost absorption on our cost per ton. I will now turn the call over to Tim Carlson for a review of our financial position. Tim?
Speaker 5
Thanks, JF. On Slide eight, we've outlined our liquidity and capital resources at the end of the quarter. We have over $1,100,000,000 in total available liquidity, including $722,000,000 of cash and cash equivalents. Our cash is appropriately distributed amongst our global operations, and we have no trapped cash in any jurisdiction. The $722,000,000 of cash and cash equivalents excludes $27,000,000 of restricted cash, of which $18,000,000 is in escrow related to the TTi acquisition.
Our current liquidity is sufficient to fund the TTi acquisition and preserve optionality for our business. Turning to the next slide. On Slide nine, we highlight the strength of our balance sheet. 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 4.2 times on a pro form a basis. We have no maturities on our term loans or 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 $2,500,000,000 Capital expenditures in the second quarter were $44,000,000 and our depreciation, depletion and amortization expense was $72,000,000 Capital expenditures totaled $82,000,000 in the first half of the year. We anticipate capital expenditures for the back half of the year to increase to $118 to $128,000,000 due to critical capital projects in Q3 and Q4, including our Neutron business transformation initiative and the development of our Atlas Kompaspi mine to prepare for a seamless transition succeeding the Snapper Ginkgo mine, which is expected to phase out next year. Our free cash flow for the quarter was $56,000,000 driven by working capital improvements.
Our accounts receivable balance in mid July was 97% current, so I don't see any impact on our aging that causes this concern. Turning on to the next slide, I'll discuss our outlook. As John mentioned, we anticipate third quarter TiO2 volumes continue to improve versus Q2 twenty twenty, and we anticipate the zircon market to remain relatively stable as compared to the last several quarters. As JF mentioned, we are managing our operations, utilizing our integrated business planning capabilities to ensure we continue to satisfy customer needs while prudently managing working capital. We'll continue this focus through the rest of the year, which as a result will increase the amount of fixed costs absorbed in the inventory, resulting in a slight reduction in margins until a higher cost inventory works its way through the system.
If it were not for the cost saving initiatives JF mentioned, the impact would be greater. I would also like to comment on our income tax expense. This quarter, our effective tax rate was 167% influenced by income and losses in jurisdictions with full valuation allowances, a $2,000,000 valuation allowance charge we took in Saudi Arabia, and our jurisdictional mix of income at tax rates different than The UK statutory rate. We anticipate our full year income tax expense to be 30,000,000 to $40,000,000 As JF said, we also maintain our previous synergy target of $190,000,000 of which $140,000,000 will be in EBITDA. Moving on to our expectations for full year twenty twenty uses of cash.
We anticipate net cash interest expense of 165,000,000 to $170,000,000 cash taxes of 20,000,000 to 25,000,000 reduced slightly from our previous expectation of 20,000,000 to $30,000,000 working capital of $75,000,000 to $90,000,000 increased from our previous expectation of 40,000,000 to $50,000,000 capital expenditures of 200,000,000 to $210,000,000 which were reduced from $225,000,000 and cash for pension contributions remains unchanged at 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, and we remain confident in our ability to generate strong free cash flow for the year. With that, I'd like to turn the call back to Jeff to provide closing remarks before turning the call over to Q and A. Jeff?
Speaker 2
Thank you, Tim. Tim just walked you through our latest news on the demand profile for the quarter and cash outlays for the year based upon the current macroeconomic situation. While globally there appears to be more optimism about the recovery, uncertainty remains. This outlook is based on current information available to us. We remain diligent in monitoring the status of our markets and have developed the ability to adapt very quickly.
The cost reduction initiatives we have implemented have shown results. And we have identified other actions that could be taken if there is a further decline in the economic environment. I continue to believe in our differentiated global network of assets and our vertical integrated business model. Our business model will continue to define us as the most adaptable, resilient TiO2 industry leader and allow us to continue to deliver industry leading financial performance. The TTi acquisition as the next step in furthering our vertical integration strategy will enable us to continue to lower our costs and provide improved service to our customer base.
I would like to thank my colleagues around the world for continuing to tackle any new challenge that is presented. I am proud of their commitment to delivering safe, quality, low cost, sustainable tons for our customers. I especially want to thank our senior leadership team around the world. During this time, they have provided strong, positive leadership consistent with our Tronox values. Leadership does matter, and in a time like this, even more so.
I am very grateful to have the privilege of working with this team every day. We remain focused on providing the same high level of service our customers have grown to expect from Tronox, while ensuring the safety of our employees who make this possible and being a good steward of our shareholders' capital. This concludes our prepared remarks for this morning. With that, I'd like to turn the call back to the operator, Grant, for your questions. Thank you.
Speaker 0
We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Our first question comes from Frank Mitsch
Please go ahead.
Speaker 2
Hi. Good morning, Frank.
Speaker 6
Hey, guys. It's actually Aziza on for Frank. My first question was, we've been seeing Chinese producers announcing price increases. Just to get a sense of how you're seeing that playing out and any regional impacts associated with it? Thank you.
Speaker 2
John, do you want to address that?
Speaker 3
Yes. Yes. Sure, Jeff. So we have been seeing we believe as we exited the second quarter, pricing in China has bottomed out, and we are in the midst of implementing some pricing in the upward direction. As I mentioned in our prepared comments, we do expect to see pricing on the sulfate side start to move up.
Speaker 6
Okay. And I I know you guys mentioned, you know, synergies are still on track irrespective of volume trends. Is there a level where you guys think you might have been, you know, ex coronavirus, and might we see a step up, you know, when and if we return to normal?
Speaker 2
I think as I think, you know, the the synergies in general, most of those, synergies were not related to volumes at all. I think as volumes do improve in the back half of the year, we get through this pandemic a bit, there's some slight change in sort of the buckets that the synergies will be realized in, but I would not expect to see a significant increase in that number. We remain on target with what we've said before with perhaps little a upside, there as we progress through the rest of the year.
Speaker 6
Got it. Thank you so much.
Speaker 2
Thank you.
Speaker 0
Our next question will come from Duffy Fischer with Barclays. Please go ahead.
Speaker 7
Yes. Good morning. First question, just some of your customers on the paint side and the plastic side have come out with their numbers already. In aggregate, it looks like they're down kind of high teens versus your TiO2 volume down high twenties. So do you think your volume was off more than industry?
And can you kinda triangulate where you think industry volumes in the second quarter were versus real consumption at the customer level?
Speaker 2
John, you want to address that?
Speaker 3
Yes. I can't really speak to the industry at whole, but I don't believe we've lost any share. When we think about our quarter over quarter comparison being down 19% on volume, A lot of that had to do with customers pulling back on purchases, so we do believe that there was an inventory drawdown on that as well, so they weren't buying as much. Early in the quarter, I think early in the second quarter, we anticipated that could be a little bit higher than that. I think our guidance was high teens to low twenties on the downside from q two.
So I think, you know, based on what we know right now, I I believe we're in line with, with what was happening in the market based on the COVID nineteen pandemic.
Speaker 7
Okay. And then, second question, just on the doubling of the cash needed for working capital. With volumes being down, usually working capital throws off more cash than you would expect. So what's the dynamics happening there? Why that needs to consume so much more cash than we thought originally?
Speaker 2
Kent, do you want to address that?
Speaker 5
Hey, Duffy. Thanks for the question. It was more of an increase in inventory in Q2 as a result of the significant decline in demand. As we adjust our operations to meet customer demand. We're managing working capital a little bit more prudently in Q3 and Q4, but it was just a little bit bigger build in Q2 than we anticipated.
Speaker 0
Great. Thanks, Vas. Our next question will come from Hassan Ahmed with Alembic Global. Please go ahead.
Speaker 8
Good morning, Jeff. Hey, Hassan. Over the last couple of quarters, we started seeing some sort of pricing momentum develop on the ore side of things, particularly the high grade ore. Did you guys see that continuing through Q2? And what's the outlook Q3 and beyond?
And how do you see the industry reacting to that?
Speaker 2
Yes. Thanks, Hassan. JF, you want to address that in terms of what we're seeing on the ore side?
Speaker 4
Yes. I'd say a sign that the ore price has been quite stable. I think that there was a momentum in price moving up as we enter the first quarter and that momentum hasn't stopped because as you know, those contracts are long term and they take time to react. And so I'd say that some of the high grade feedstock like rutile that was in very high shortage, we have seen price still moving up. But I think that this will pause because of COVID-nineteen and the fact that, look, everybody has to react to lower demand.
So we will have a more balanced high grade feedstock going forward.
Speaker 8
Understood, understood. Very helpful. And as a follow-up, again, over the last few quarters, we had seen certain market share sort of shifts within the pigment side of things, particularly on the plastics additive side and market wise. I mean, those mostly behind us? Did you guys mostly in the industry see relatively stable market shift?
Speaker 3
Yes, Saan. I think, from our viewpoint, we've maintained, market shares. Not to say that, if there's been a certain situation out there where we saw pricing moving in a direction that wasn't consistent with the value we believe we need to get from our product that we haven't adjusted. But our strategies remain the same to focus on getting at least fair value for the products we produce and aligning ourselves with strategic customers that are growing faster than the market. So I'd say we're consistent on that line.
Speaker 8
Perfect. Very helpful. Thank you so much.
Speaker 0
Our next question will come from Jim Sheehan with SunTrust. Please go ahead.
Speaker 9
You. Good morning. Good Jim. Yeah. Could you talk about your TiO2 volumes, your what the year over year decline rate was in June and what you're seeing so far in July.
Talked about improvement there. Just curious about what your year over year change is in July relative to June.
Speaker 3
We're not gonna break down the quarter by month, but what I can tell you is similar to what we had in the prepared comments. You know, April was down, obviously. May was the worst quarter we had worst month we had in the quarter, and June rebounds rebounded significantly. And when we look at July, July is, you know, in the same kind of range as we saw in, June. So when we think about moving into the quarter, that's why we're pretty confident at this point point in time, assuming that there's no significant change, which we haven't seen in COVID-nineteen resurgence or lockdowns in economies, that our volumes in Q3 will be north of where they were in Q2.
Speaker 9
Thank you. And when we
Speaker 8
look at the
Speaker 9
TiO2 go ahead. Had that On TiO2, the industry in China, can you talk about the high cost producers there and what pressures they might be under? Do you expect any high cost capacity in China to be shutting down anytime soon?
Speaker 3
Look, I think at this particular stage, there's always a risk of, Chinese producers, closing down. Clearly, pricing, coming out of China had dropped. We talked about that. Those were not sustainable levels in my opinion or in our opinion as a company. And, you know, it's always possible that those plants could close down.
And, actually, you've got some third party or analysts in the market that are actually expecting that to happen. So the issue is as pricing moves up, you typically can start sulfate plants up again. But from the standpoint of where the pricing was and factoring in environmental liabilities and restrictions that are changing in China, it's definitely a possibility that as those close this time, they could close permanently, but it's yet to be seen. I don't know if you have anything else to add on that, Jeff.
Speaker 2
No, John. I think that's exactly right. There is pressure, you couple that economic pressure with the continuing environmental regulation and enforcement and the fact that sulfate is sort of falling out of favor a bit, I think there is certainly the likelihood that some of the marginal producers will be under extreme pressure.
Speaker 3
When you think about where pricing is today and compare that to where ilmenite pricing is, Chinese ilmenite price is still in the, you know, $1.70 to $200 range, which is significantly higher than it was the last time pricing dropped down to this level. So the pressure there is more significant. And, I mean, we have a bit more visibility into that at this time around because we have a plant in China.
Speaker 9
Thank you very much.
Speaker 0
Our next question will come from Roger Spitz with Bank of America. Please go ahead.
Speaker 10
Thanks and good morning. Given the additional design smelter services agreement advisory activity that you'll be doing, should we take away that there are more issues regarding starting up the smelter than you were previously aware of?
Speaker 2
No. I I don't think there are more issues, Roger. I I think I think what it is is that, you know, the arrangement that was put in place at the time of the Crystal acquisition, you know, soon to set up circumstances back there, you know, several you know, no significant time ago. And as as the project has developed, there's just more opportunities that were identified where the the resources and experience and expertise of Tronox could make a make a real difference. And so I I think, you know, by by being more involved, not only do we bring our technical services, we bring our project management skills and whatnot.
So it it's it's just a, you know, an enhancement of that and increasing the likelihood of success, but not not really any any new issues. I mean, it's it's it's not a certainty. Right? Jazan was always identified as being something where there was no there was risk. And so we think this is just a very prudent manner and no manner of increasing the overall likelihood of success.
Jean Francois, you want to comment on sort of your perspective as leading our efforts there?
Speaker 4
Yes. And I think Jeff mentioned the project management skills. It is clear that Tronox with our global footprint and our experience, we had good people that we could dedicated to help Jazan and put some more discipline in how to make the modifications that are being made at the moment and increase the likelihood of success. And that's really what that enhanced technical agreement is all about. So we're more involved in also getting ready for when AutoTech will have modified the smelter with the operation readiness.
And so training, preparation of the operator, preparation of how we're going to ramp up and operate will be more involved than last time around. So all of that hopefully will help the probability of success to increase. There's a risk on our side hasn't changed. I mean, what we have explained to you, our financial commitment hasn't changed. And we're not putting more risk on our side.
On the contrary, I think that the possible gain are higher for Tronox.
Speaker 10
That's great. Secondly, can you compare the Tazir ilmenite to the cost position and quality of your South African and Australian ilmenite operations? And any thoughts regarding the comparison to the relatively nearby Cronos' Norwegian ilmenite mines?
Speaker 11
Thank you.
Speaker 2
I'll comment and JF maybe you can follow-up. But I think you know, all in all, we with our integrated business planning, you know, capabilities, we'll we'll be able to to use the TTI Omanite. I mean, the TTI, you know, output at our plants in Europe where we can get the most effect for that and and and improve our overall cost of feedstocks through the through the entire portfolio. JF, you wanna comment on the on the relative competitiveness
Speaker 0
of the the various sources?
Speaker 4
Sure. And and and look, one one element that I want to emphasize, Roger, is TTI for us is the best way to increase the chance of Jazan to be successful because the TTI smelter in Norway use a technology that is the most similar to the Jazan technology. And that's obviously a big driver of us strategically acquiring that asset. So we could increase the HUD of Jazan of being successful. So that's the first element.
Another big element is the Norwegian smelter use hydro power as the source of energy and it's a clean power. So that make it one of the most green titanium smelter in the world. And we see that as a big advantage with a stability on the highest cost, which is power. So we see that as an advantage in our portfolio. And look, we identify synergy that are real, like the synergy that we have identified with the crystal pigment plant, there will be gain in technology exchange between South Africa and Norway.
And this is only us having the capability to extract those synergy versus what ERAMET was able to do. So all in all, look, there's plus or minus from a cost point of view, but a very good asset with comparative cost structure to what we have in South Africa.
Speaker 2
Yeah. I I think, Jeff, that's that's the current you know, this is a world class asset. You know, we've been, the the majority customer from the from this at this facility for for a number of years. And, the ability to internalize this production and to eliminate sort of the double marginalization will reduce our cost and lower our cost position and make us an even more competitive producer of TiO two pigment.
Speaker 10
Great. Thank you very much.
Speaker 0
Again, if you'd like to ask a question, it is star then one. Our next question will come from John McNulty with BMO Capital Markets. Please go ahead.
Speaker 12
Hey. Good morning. This is Colton Bina on for John. So so I guess, my first question is kind of a follow-up to the pricing question that was asked earlier. So a number of, North American coatings producers pointed to the possibility for chloride TiO two prices to be up modestly in the coming quarters.
Is that something that from where you guys sit is starting to look like more of a possibility?
Speaker 2
John, you want to address that?
Speaker 3
Yes, sure. I mean, what I mentioned in our prepared comments, again, about pricing moving into the third quarter. We didn't give too much specificity on that. But with regards to what we're seeing right now, pricing in The Americas has remained stable or at least in The U. S.
And we have seen a bit of variability, but nothing out of the range of what we would have seen over the course of the last six quarters. So obviously, I would say yes, there's a possibility in the coming quarters that we could see price improvement. Moving into the third quarter, when we think about where we are today, we're not going provide a lot of guidance, but not going to be significantly out of line with where we were on pricing for the last six quarters with regards to movement. With regards to China, I think we all are aware, at least we mentioned it on the call, that there has been some volatility there. Pricing in China in the second quarter, at least as far as Chinese TiO2 and sulfate products, moved down more significantly in the back half of the quarter.
Entering the third quarter, our average on that sulfate price is a bit lower. And again, we're starting to see that price move up as we move into Q3.
Speaker 12
Okay. Okay. Thanks. That's helpful. And just one more question.
I mean, guys you guys mentioned the sequential pickup in zircon mix. I was just wondering, any of that pickup, is that customers in China switching back to the kind of premium quality zircon? And are you starting to see some real possibly longer term improvement in the Chinese zircon markets?
Speaker 3
Yes. So that mix variance, when you think about the pandemic in China, there was a fair amount of, concentrate that was shipped into China in the first quarter and into the early part of the second quarter. And some of those Chinese concentrate producers who upgrade that material didn't have product available. So they gave us an opportunity to actually fill that void with some of our higher grade products. So I wouldn't say at this particular stage that that may be long term sustainable.
But moving into Q3 we're seeing a similar pattern, maybe not as significant as it was in Q2.
Speaker 12
Okay, that's great. Thank you. Thanks for taking my questions.
Speaker 3
Thank you.
Speaker 0
Our final question will come from Travis Edwards from Goldman Sachs. Please go ahead.
Speaker 11
Good morning. This is Birdie Ray on for Travis. Just a few quick questions. Could you remind us what your target is around vertical integration? Now with the TTI acquisition announced and the guidance you provided on, Jovan, will those two projects be sufficient to get to your optimal vertical integration levels?
Speaker 2
Yeah. No. Currently, we're we're sort of in the, you know, 75% range and, you know, depending upon, you know, exact pigment demand of that, that might might increase a little bit, you know, as we go through the year with less, you know, third party feedstock purchases. But as we bring TTI into the portfolio, that will increase and certainly will increase towards full vertical integration. And then when design comes you know, we'll we'll be able to reach actually full vertical integration.
But, of course, the you know, design will come on in a in a sort of a staged manner. Plus, I think it's important to say that that design will can you know, when design comes on, we'll have the ability to grow and still remain at a very high vertical integration level. There may always be some third party feedstocks in the mix just for the mix profile, But with TTI and ZaZon, we will effectively be fully vertically integrated.
Speaker 11
Great. Thank you very much for that color. And secondly, as a follow-up, as we saw one of the major TiO2 producers give up material amounts of share last year, And as we think about a path to recovery, how should we expect a pickup in man to be distributed among pigment producers?
Speaker 2
John, you wanna address that?
Speaker 3
Yeah. I'm sorry. I heard that was a bit broken. Could you repeat the question one more time, please?
Speaker 10
Sure.
Speaker 11
Sorry about that. So as we saw one of the major TiO2 producers give up material amounts of share last year, and as we think about the past recovery, how should we expect the pickup in demand to be distributed among pigment producers?
Speaker 3
So it's our intent moving into the quarter to try to maintain our share, as I mentioned earlier. I can't give you clear guidance on what our competitors are doing. That was obvious that one of our competitors had lost some share due to a different program they had in place. Our project, our plan is to be consistent, with how we've been growing our business over time. So aligning ourselves with customers that are growing faster than the market so that we can continue to develop and gain, share as the market grows.
Does that answer the question?
Speaker 10
Yes. Thank you very much.
Speaker 0
This will conclude our question and answer session. I would now like to turn the conference back over to Jeffrey Quinn, Chairman and CEO, for any closing remarks.
Speaker 2
Thanks, Grant. I just want to conclude by thanking all of you for your time this morning and your continued interest in Tronox. You know, certainly, it's an unprecedented time. We we look forward to being able to reengage with many of you in person in in the months to come. We look forward to to speaking with you here in a few months to update you on the third quarter, as economies around the world start get you know, start to get back to business.
I think and and some, you know, the state of Tronox is very strong, solid operating performance, prudently managing working capital and cash, managing our capital expenditures, but not turning a blind eye to the future. We think it's very important to continue to position the company from a position of strength to fully participate in the recovery that will come, And we look forward in future quarters talking with you guys about that. So thank you very much. Everyone have a great day.
Speaker 0
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.