Tronox - Earnings Call - Q3 2020

Transcript

Speaker 0

Good day, and welcome to the Tronox Holdings Q3 twenty twenty Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Jennifer Dunter, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, and welcome to our third quarter twenty twenty conference call and webcast. On our call today are Jeff Quinn, Chairman and Chief Executive Officer Jean Francois Trojan, Chief Operating Officer John Romano, Chief Commercial and Strategy Officer Tim Carlson, Chief Financial Officer and John Servizal, Senior Vice President, Business Development and Finance. We will be using slides as we move through today's call. Those of you listening by Internet broadcast through our website should already have them. For those listening by telephone, if you haven't already done so, you can access them on our website at investor.tronox.com.

Moving to Slide two. A reminder that comments made on this call and the information provided in our presentation and on our website include certain statements that are forward looking and subject to various risks and uncertainties, including but not limited to the specific factors summarized in our SEC 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 use in the management of our business and believe are useful to investors in evaluating the company's performance. Reconciliations to their nearest U. S.

GAAP terms are provided in our earnings release and in the appendix of the accompanying presentation. Moving to Slide three, it's now my pleasure to turn the call over to Jeff Quinn. Jeff?

Speaker 2

Thanks, Jennifer. Good morning, everyone, and thank you for joining us today. I will first review the highlights of the quarter before turning it over to other members of my team for a deeper dive into the results for the quarter. I will then share an update on several of our ongoing strategic projects and our outlook for the full year. We were very pleased with our third quarter results, which continue to reflect the strength of our vertically integrated business and our ability to optimize our operations and deliver strong financial results across a variety of business conditions.

Revenue in the third quarter increased 17% sequentially, driven largely by improved TiO2 sales volumes and recovery in feedstock and other revenues. The improved TiO2 market demand we began to see in July continued through the remainder of the quarter resulting in a sequential volume growth in all geographic regions. As we will discuss, that trend also gave us some momentum as we've entered the fourth quarter, and we have seen that materialize in our October order book. TiO2 sales volumes recovered strongly in the quarter, increasing 16 sequentially outpacing our previous expectations while pricing remained stable. Adjusted EBITDA for the quarter was $148,000,000 with an adjusted EBITDA margin of 22%.

Utilizing our proprietary enterprise optimization model, we adjusted our operations in the quarter to accommodate the effect of the pandemic, which resulted in temporary higher production costs and a slight negative impact to margins as we had foreshadowed on our second quarter earnings call. These temporary impacts were minimized through continued cost reduction as well as increased acquisition synergies. Synergy capture for the year to date now totals $183,000,000 $134,000,000 of which has been reflected in EBITDA. Today, I invited John Servisaw, our Senior Vice President, Business Development and Finance to join the call to discuss our continued outstanding achievement in synergies in more details a bit later. John is our internal guardian of our robust program to track and quantify synergy delivery.

The robustness of this tracking mechanism is one of the reasons we have been successful in delivering the promise of the Crystal acquisition. To preview his comments, given our success to date and achievement of synergies and our view that we will continue to deliver even more synergies at an accelerated pace, we are raising our full year 2020 synergy target to $235,000,000 with $185,000,000 of debt expected to be reflected in EBITDA. We continue to deliver synergies ahead of schedule while increasing our expectation for the total synergies to come. At our investor day last year, we laid out a target of a $120,000,000 in total synergies in 2020. Our new target for this year is almost twice that much.

As I have said before, we remain encouraged by the value creation through the combination of our two legacy businesses, which has led to an expectation of increased achievable synergies both in terms of pacing and the absolute amount. Given our synergy trajectory, we will significantly exceed the increased longer term synergy targets laid out at the beginning of this year for future years. After we complete our budget process for the year, at the year end call in February, we will lay out new synergy new significant increased synergy targets for future years. John will provide more details on the breakdown of the synergies achieved year to date in 2020 to help demonstrate the areas of value creation that continue to grow. Our third quarter net income of $9.00 $2,000,000 included a non cash deferred tax benefit of $895,000,000 due to the reversal of a portion of our US valuation allowance related to net operating loss carry forwards.

This reversal of a portion of our US valuation allowance is based upon an analysis of our improved profitability as well as our expectations for continued profitability in The US, increasing the likelihood that our US subsidiaries will be able to utilize the substantial deferred tax asset on our balance sheet. This is yet again further evidence of the strength of our business model and how Tronox will deliver value to our shareholders in the future. Adjusted EPS for the quarter was 5¢. From a liquidity and capital resource perspective, we are pleased with how well our business is positioned despite the pandemic. We have $1,100,000,000 in cash and available liquidity more than sufficient to sustain our business.

As we move closer to the end of the year, we are evaluating incremental debt pay down options utilizing excess liquidity on the balance sheet to advance further towards our gross debt target of $2,500,000,000. I will now turn the call over to John Romano, our chief commercial and strategy officer, who will comment on our commercial performance and the trends we are seeing in the global marketplace. John? Thanks, Jeff. Now moving to Slide four.

First, I'll take you through the year on year comparison. Revenue of $675,000,000 was 12% lower than $768,000,000 for the year ago quarter, primarily due to impacts from the COVID -nineteen pandemic. TiO2 pigment sales of $543,000,000 were 10% lower, driven primarily by a sales volume decline of 9%, reflecting weaker demand in Asia Pacific led by India due to the impacts of COVID-nineteen, a slight lag in Europe, while volumes in Latin America exceeded and in North America were level with Q3 twenty nineteen volumes. The year over year volume decline of 9% for Q3 is a significant improvement from the previous quarter where volumes were 27% lower year on year. As Jeff will share with you in a few minutes when he provides our outlook, we expect this year over year negative variance to be eliminated in the fourth quarter.

TiO2 selling prices were 3% lower on a local currency basis year over year or 1% lower when adjusted for currency. This represents very little pricing movement from this point last year despite the challenged macroeconomic backdrop largely attributable to our margin stability initiatives. Now moving to zircon. Sales of $56,000,000 were 18% lower than a year ago. Zircon sales volumes were 7% lower when compared to 2019, driven by softer market conditions and the timing of shipments.

Selling prices were 11% lower than a year ago quarter. As we've mentioned before, zircon pricing declined late in the fourth quarter and early in the first quarter. So this comparison demonstrates the roll forward of that trend on a year over year comparison. In feedstock and other products, sales of $76,000,000 declined 22% largely due to lower mandated CP slag sales associated with the remedy for the Cristal transaction and lower pig iron sales volumes due to COVID-nineteen. Now moving to the sequential comparison versus the 2020.

Revenue of $675,000,000 increased 17% from the prior quarter on improved TiO2 and feedstock and other product sales due to increased market demand. TiO2 pigment sales of $543,000,000 were 17% higher compared to $466,000,000 Sales volumes were 16% higher as we saw sequential volume growth in all regions led by strong volumes in North America and a significant recovery in Latin America. Selling prices were level on a US dollar basis or down 1% on a local currency basis. TiO2 pricing in 2020 has been relatively stable despite the challenging macroeconomic environment we have been operating in. Moving to zircon, sales of $56,000,000 decreased by 18% from the previous quarter.

Sales volumes declined 15% as a result of shipment timing on some volumes that shifted from Q3 into Q2 as we communicated in our second quarter earnings call as well as volumes that have shifted into what will now be a very strong fourth quarter. Zircon selling prices declined by 2% largely driven by product mix. And finally, feedstock and other product sales of $776,000,000 increased 73% due to improved pig iron volumes and the resumption of mandated CP slag sales as per the FTC consent order. Looking back over the quarter, September was our strongest TiO2 volume month. The trajectory moving out of the third quarter is encouraging as we see this strength continuing into October indicative of an improving market condition, which we expect to see through the end of the year and into 2021.

Jeff will speak to our fourth quarter volume outlook later in the call. And finally, we're expecting TiO2 pricing in Q4 to remain in line with the third quarter. As we discussed on our last earnings call, following the precipitous drop off in the second quarter, Chinese sulfide sulfate pricing began to increase in July and has continued to increase into the fourth quarter supported by improving demand and an increase in Chinese and imported ilmenite pricing. I'll now turn the call over to JF for a review of our operating performance and profitability in the quarter. JF?

Speaker 3

Thank you, John. Moving to Slide five, let me first review the year over year comparison. Adjusted EBITDA of $148,000,000 was 20% lower than a year ago quarter. We benefit this quarter versus the year ago quarter from $34,000,000 in synergy and favorable foreign exchange rate, primarily the South African rand, euro and Brazilian real. This was offset by lower sales volume and pricing mix, increased production costs driven by the adjustment of our operation to accommodate the effect of the pandemic, idle facility and LCM charge and the absence of the deferred margin benefit from Q3 twenty nineteen.

Sequentially, adjusted EBITDA of $148,000,000 increased 4% from the $142,000,000 driven primarily by the improved volume John discussed earlier, a favorable comparison of production cost in South Africa due to COVID-nineteen related slowdown on our operation in the second quarter and an incremental $4,000,000 of synergy achieved in Q3 versus Q2. This improvement was achieved despite increased pigment production costs in the quarter due to the adjustment of our operation to accommodate the effect of the pandemic And then for and unfavorable foreign exchange rate, primarily the South African rand and the Australian dollar. Overall, our operation continued to remain stable, an achievement I'm proud of considering the challenge presented by COVID-nineteen. Using our operational excellence program and our integrated business planning tool, we have reduced our anticipated back half fixed costs by approximately $50,000,000 to offset the impact of the COVID-nineteen. Combined with the strength of our synergy capture, we had minimized the impact on our margin profile.

While many of these cost reductions were deferral that will be ensured once we return to normal operation in the 2021, the benefit from the synergy will carry forward. I would now like to turn the call over to John Servisel to discuss the synergy in further detail. John? Thank you, JF. Turning to Slide six.

As JF mentioned on the previous slide, in Q3,

Speaker 4

we achieved $34,000,000 of incremental synergies year over year reflected in EBITDA. This amounts to year to date synergies of $134,000,000 reflected in EBITDA or $183,000,000 achieved in total synergies, the balance being tax and other synergies. As Jeff mentioned earlier in the call, given our continued demonstration of the benefits of our vertically integrated business model, we have raised our full year 2020 synergy targets to $235,000,000 from the $190,000,000 target set earlier this year. The $185,000,000 of this amount is expected to be reflected in EBITDA, which is also increased from the $140,000,000 target from earlier this year. As we have mentioned on previous earnings calls, the majority of the targeted synergies are coming from true cost savings and not tied to volumes.

We continue to realize more synergies faster despite the macro backdrop with a slight shift in allocation across the anticipated synergy buckets, which I will walk through in more detail. 36% of the EBITDA synergies realized year to date comes from SG and A. While the majority of these savings were realized early on, we expect to achieve incremental SG and A synergies through 2022. 24% of the synergies comes from supply chain benefits or network optimization opportunities by leveraging the larger footprint, skills and experience of the combined company in our purchase of goods and services. This opportunity continues to increase as new initiatives are identified and better than expected performance is realized on current projects.

19% is from operations driven by best practices for the exchange of technology, intellectual property, and maintenance materials and procedures across our expanded portfolio as well as operational performance improvements at historically higher cost legacy Cristal sites such as Yanbu in Brazil. The teams at these sites continue to deliver on targets and identify new opportunities for implementation above what was initially identified. Feedstock makes up the balance of the significant EBITDA synergies, representing 18% of the year to date figure. We realized significant savings in what we call value in use or the ability to optimize the use of feedstocks internally, reducing the processing costs of our pigmented plants. The last point I wanted to make about synergies is that at Investor Day in May 2019, we had committed to achieving $120,000,000 of total synergies in 2020 and $220,000,000 by the end of the program in 2022.

We are pleased to report that we expect to nearly double the 2020 target, delivering our 2022 target over two years earlier than expected and will continue to further unlock and drive cost savings and synergies. To be clear, not only have we been able to deliver synergies at a more rapid pace, the synergy opportunity has been much more robust than we had expected. We'll now turn the call over to Tim Carlson for a review of our financial position. Tim? Thanks, John.

On Slide seven, in the

Speaker 5

top left quadrant, we've outlined our liquidity and capital resources at the end of the quarter. We have $1,100,000,000 in total available liquidity, including $722,000,000

Speaker 2

of cash and cash equivalents.

Speaker 5

Our cash is appropriately distributed amongst our global operations, and we have no trapped cash. 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, pay down debt and preserve optionality for our business. Moving to the top right quadrant, our current total debt is $3,500,000,000 and our net debt is 2,800,000,000.0 Our current trailing twelve month net leverage is 4.5 times. We've included a chart to visually outline our debt maturity schedule.

As you can see, we have no maturities on our term loans or our bonds until 2024. We also have no financial covenants on our term loans or bonds. Our capital allocation policy remains unchanged. We continue to prioritize disciplined capital spending on high return projects and deleveraging with a targeted net leverage of two to three times and a gross debt level of $2,500,000,000 Moving to the lower half of the page, capital expenditures in the third quarter were $47,000,000 and our depreciation, depletion and amortization expense was $76,000,000 Year to date capital expenditures totaled $129,000,000 We expect capital expenditures for the fourth quarter to increase to $70,000,000 due to a couple of critical capital projects that Jeff will discuss next. Our free cash flow for the quarter was $37,000,000 while our inventory balance overall remained relatively flat quarter over quarter.

Our pigment inventory volumes declined as we adjusted our operations to accommodate the effects of the pandemic. While feedstock and other inventory volumes increased as we continue to operate our mines at 100% to meet internal high grade feedstock requirements. Additionally, unfavorable FX rates contributed to approximately a $20,000,000 inventory increase. Our outstanding receivable balance remains at 95% current and we have no accounts receivable aging concerns. I'd now like to turn the call back to Jeff to provide an update on some key strategic developments and our outlook.

Jeff? Thanks, Tim.

Speaker 2

As I have emphasized many times in the recent months, with the support and counsel of our board of directors, our management team, while very focused on navigating our company through the pandemic, has not lost our focus on planning for the future and positioning for the recovery to come. I would like to take a moment to provide an update on several ongoing strategic projects that remain key to contributing to our long In May, we announced the signing of a definitive agreement to acquire the Tyzere TTI business from Aramid for $300,000,000 representing a synergy adjusted multiple of approximately 5.22019 adjusted EBITDA. This highly strategic acquisition will further our vertical integration strategy by increasing our titanium feedstock production capacity, thereby reducing our reliance on third party feedstock suppliers, which will lower our cost and in turn allow us to better serve our pigment customers. We continue to work through the customary closing process with the regulatory authorities and are making progress towards closing as anticipated.

While the pandemic has diminished internal CP side demand in the short term, we still believe that TTi will be a great asset and help us achieve our vertical integration strategy in the future. As we mentioned at the time of the announcement, the TTi acquisition will also improve the likelihood of a successful commissioning, ramp up, and eventual acquisition of the design smelter. In May, we announced an amendment to the design technical services agreement, which has allowed Tronox to increase technical and managerial resources devoted to the project. The the design project has experienced delays due to travel restrictions associated with COVID nineteen, but we are working to claw back some of that time. We remain cautiously optimistic that the ongoing design modifications will result in a successful startup and currently anticipate achieving sustainable operations to trigger for Tronox to acquire a 90% interest in the asset by mid twenty twenty two.

Design also remains an important element of advancing our vertical integration strategy. Moving to the next project. We introduced Project Neutron at our Investor Day last year. It is a global multiyear digital transformation strategy aimed to reduce operating cost to enable Tronox to maximize the benefits of our vertical integration and achieve a sustainable first quartile integrated cost position. This high return project will reduce our cost per ton by introducing proven enhanced automation technology, implementing process improvements, and deploying operational excellence across the portfolio.

Our $200,000,000 capital expenditure target for this year reflects investment associated with this project. The project ramp up in the fourth quarter will drive the increase in CapEx in in the quarter as Tim mentioned and a portion of the the increased anticipated CapEx expenditure in 2021. The timing and pacing of this project is within our control. We have the ability to manage our investment investment in in Neutron as macroeconomic environment and industry conditions merit. We are excited for the benefits this project would deliver to our shareholders.

Neutron is an essential part of our strategy. Two years ago, we laid out a five pronged strategy for success. Having a competitive cost structure across the value chain is foundational to that strategy. Having that cost position will allow us to maximize the benefit of our distinct advantages of our unique global footprint and our vertical integration. Our strategy is also founded on the premise that being the TiO2 technology leader and having the right people, the right culture, and capabilities will enable successful execution of our strategy.

Neutron directly addresses several of those components. Lastly, the Atlas capacity project is the next mine development in our pipeline of high value mine projects available to maintain our feedstock integration from existing assets. This project will replace supply from our existing Snapper Ginkgo mines, which are nearing the end of their life. This mine site located in Eastern Australia is abundant in natural rutile and high value zircon and will be a significant source of high grade ilmenite suitable for direct use, synthetic rutile production, or slag processing. The project ensures that we maintain current levels of feedstock integration in zircon supply, strengthening our strategy of vertical integration.

This high return capital project has commenced development and will contribute to capital expenditures for 2021 in line with levels indicated at investor day for the medium term, which we will manage as required depending on the global macroeconomic conditions and resulting market demand. These projects represent key investments in the future competitiveness of Tronox and the differentiation of our vertically integrated profile. While we continue to contend with the ongoing global pandemic, we remain simultaneously focused on enhancing our competitive position for the medium and long term. As part of our year end results call early next year, we will provide more details on each of these projects. Now turning to slide nine.

I'd like to share our outlook for the remainder of the year. As I mentioned earlier, the momentum we have moving out of the third quarter is indicative of the improved market conditions we expect through the end of the year. While the macroeconomic environment remains uncertain, we anticipate a favorable deviation from normal fourth quarter seasonality resulting in strong fourth quarter TiO2 sales volumes at or above third quarter twenty twenty and the 2019. Additionally, as a result of shipment timing and continued recovery in end market demand, zircon sales volumes for the fourth quarter are expected to be the strongest of the year, improving sequentially from the third quarter in the range of 25%. Our expectation of incremental synergy achievement combined with the strength of our commercial outlook and offsetting cost reductions should result in adjusted EBITDA in the fourth quarter in the range of a 155 to a $170,000,000 with an adjusted EBITDA margin improving back to first half twenty twenty levels.

Additionally, we recognize that given the tax valuation allowance reversals and charges this year, our tax expense has been a challenge for many of you to anticipate. We maintain our expectation of full year tax expense excluding valuation allowance adjustments to be 30 to $40,000,000. As John Servisaw reviewed, we continue to demonstrate our ability to exceed the initial synergy targets laid out and subsequently raised and expect that in addition to achieving the newly increased targets for 2020, we should also continue to exceed the long term synergy targets laid out earlier in the year. Moving on to our expectations for the full year, we anticipate our full year 2020 adjusted EBITDA to be in the range of $619,000,000 to $634,000,000 and the following uses of cash. Net cash interest between 160 and $165,000,000 15 to $20,000,000 of cash to be cash taxes.

Working capital would be a use of cash between 75 and $90,000,000. Capital expenditures of $200,000,000 which is at the low end of our previous range, and net pension contributions of between 15 and $20,000,000 These represent our estimates based on our current market outlook. We also remain confident in our ability to generate strong free cash flow for the year. Our capital allocation priorities remain unchanged with high return internal investments and debt pay down taking precedent. As I mentioned earlier in the call, we are evaluating accelerated debt pay down options in the fourth quarter, utilizing excess liquidity on the balance sheet to advance further towards our gross debt target of 2,500,000,000.

You may also note that on the bottom of the slide nine, we've modified our safe quality low cost tons mantra to include sustainability. During the quarter led by Melissa Zona, our chief sustainability officer, we published our 2019 GRI report for the combined Tronox and Crystal businesses. Sustainability and ESG continue to grow as an increasingly important aspect of our operations, And we felt that acknowledging this in the way we think and talk about the tons we produce is critical to keeping these aspects of our business at the forefront of everything we do. If you have not had the opportunity to review our GRI report, I encourage you to do so. A link to it can be found on our website.

I am very pleased with the results delivered in the third quarter as they are a manifestation of our ability to leverage our unique portfolio to optimize our assets and secure our position as the most adaptable resilient TiO2 industry leader and allows us to continue to deliver industry leading financial performance. The outlook provided today is based upon our current information available to us. Globally, we are seeing a a reversion of some economies to various forms of shutdown due to a resurgence of COVID nineteen. Undoubtedly, uncertainty remains. At this stage, we have not seen an impact to our end markets.

However, we have developed the ability to adapt very quickly as needed should market demand significantly change. We are cautiously optimistic that the strong sales trends we have seen through this month will continue through the end of the year and into 2021. In closing, I am extremely proud of how focused our entire Tronox team has remained throughout the prolonged pandemic, prioritizing safety and looking out for the health and well-being of one another while continuing to deliver safe, quality, low cost, sustainable tons for our customers. I would like to extend my thanks once again to my nearly 7,000 colleagues around the world. The strength in our performance speaks to the resiliency of our business and the caliber of our people, which reinforces my confidence in Tronox's positioning for the recovery to come.

That concludes our prepared remarks today. With that, I'd like to open the call for your questions. Operator?

Speaker 0

We will now begin the question and answer session. To The first question is from Frank Mitsch with Fermi Research. Please go ahead.

Speaker 6

Good morning everybody. I'm trying to get at what might be normalized when I look at your third quarter given the negative impact from the pandemic. I mean your volumes in TiO2 moved up 16%, but they were down 9% year over year. Is any way to quantify when you reined it as you reined in production with the fixed cost absorption might have been in terms of the negative impact in the quarter?

Speaker 5

Hey, Frank. It's Tim. Just to let you know, from a cost absorption standpoint, we did reduce our production to match the economics of the pandemic. In doing so, we did take about $14,000,000 of idle facility charges in the quarter. And what those are just US GAAP charges whereby you've got to expense rather than capitalize a certain cost in the inventory.

So that was about two margin points. Those idle facility charges will actually decline quite a bit, probably cut in half in Q4 as we start to ramp up production at a couple of our sites. But we will still see a little bit of unfavorable fixed over the absorption in q four. So probably a similar margin profile from q three in terms of as it's as it's flipping from idle facility cost to the over absorption. But we'll see that to continue to improve just given some of the zircon that we see flowing through in Q4.

Speaker 6

Got you. Thank you. And if I think about the very positive progress that you've made on synergies, one of them was tied to operating the Yanbu facility at higher rates. Now I do understand that we are in the midst of a pandemic, that is having an impact on production. But can you talk about how you are progressing in terms of ramping Yambu up to, to where your Hamilton rates are and and, you know, where you stand in that whole process?

Speaker 3

So, Frank, it's, JS. Look. What we have done is we have

Speaker 0

a team.

Speaker 3

And obviously, because of COVID nineteen, what we have done is that team has kind of focused on quality and cost instead of focusing on volume. And as John mentioned when he detailed the synergy, I mean, we have overachieved on other bucket of synergy, and we're confident that we will continue to overachieve even if none of those synergy are linked to volume addition.

Speaker 2

But I think, Frank, this is Jeff. But I think also we we have increasing confidence of our ability to ramp up the volumes when the market demand calls for it. So while we've not yet stepped up to those Hamilton Lock rates, we we certainly have in in improved our visibility to be able to get there.

Speaker 6

Perfect. Thank thank you so much.

Speaker 0

The next question is from Hassan Ahmed with Alembic Global. Please go ahead.

Speaker 7

Good morning, Jeff.

Speaker 8

Hey, how are you? In the comments that you made, touched on the Chinese market and you talked about how pricing had infected positively in China TiO2 wise and you also touched on how ilmenite prices were going up through the course of the quarter. So two part question. One is obviously there was a bit of a destock in China earlier. So is that destock behind us?

And then in terms of ore pricing, you talked about ilmenite, but broadly speaking, if you could just tell us where you see supply demand right now because it's kind of been all over the place, right? As we were sort of going through the course of 2019, it seemed that high grade ore in particular was pretty tight and pricing was sort of primed to go up. And then the pandemic happened and it seemed that pricing was weakening and now it just seems that pricing is going up again. Like I said, one on the destock in China and two just the ore pricing side.

Speaker 2

Hey, Anton. It's John Romano. So on the destocking in China, I would agree with you. We have seen, you know, inventories come down. That's one of the reasons why we're starting to see not only an uptick in demand, but from the destocking, a price improvement that really started back in July, and it's continuing into the fourth quarter.

On the ilmenite pricing, that's not only on Chinese ilmenite pricing. There would be imported ilmenite into China as well. And we've seen, you know, in the range of, I'd say, from q two, twenty five to 30% increase in ilmenite pricing. And that ultimately is reflected, as, you know, you know, into Chinese TiO2 pricing. Then ultimately, that'll have an impact on pricing in general.

With regards to high grade feedstock, we haven't seen a significant move there. The pandemic obviously has had some impacts on production. So I'd say at this particular stage, although we're not in the market to sell other than what we're doing as mandated by the FTC with the transaction with Crystal when we closed that, We've seen stable, I'd say, high grade feedstock pricing, but the likelihood that it should start to move up as we get into early twenty twenty one.

Speaker 8

Understood. Very clear. Thank you. And as a follow-up, Q4 zircon volumes obviously expected to be quite strong and obviously the guidance overall for the company is quite strong as well. Just trying to get a sense of that 25% sequential zircon volume increment you guys are talking about, in terms of sort of incremental EBITDA contribution for Q4, what would that translate to?

Speaker 2

So from the stand I'll give you a little color on the volume, and then Tim can provide whatever color we would on EBITDA. But if you think about our volume in 02/2019, and it kinda gives some impact on the resilience of the market I even in the midst of a pandemic. At 2020 volumes are going to be about the same. The timing of the shipments had an impact on it, but we have seen a pickup. In the fourth quarter into Jeff the point that Jeff made earlier of, you know, in the range of 25% over and above where we were in the third quarter, we're seeing goods good demand, again, and that trend moving into 2021 as well.

Tim? Hassan,

Speaker 5

just from a a margin standpoint, as you know, we don't comment specifically on margin structure of our product other than to say, just given the co product nature of Zircon, it does provide good margins for us.

Speaker 8

Very helpful. Thank you so much, guys.

Speaker 0

The next question is from John McNulty with BMO. Please go ahead.

Speaker 6

Yeah. Thanks for taking my question. I I guess the first one would just be around the the incremental synergies that you came up with the the $45,000,000 or so for this year. I know you're going to give more detail, it sounds like, at the end of the year. But can you give us some color as to if these are just accelerated synergies that were coming from the out year or if these are just new opportunities that you've developed?

And also, looks like, if I understand it right, the 3Q run rate and the 4Q run rate in terms of synergies are about the same. Why wouldn't that be inching higher as we look to 4Q?

Speaker 4

Hi, John. This is John Servisall. As Jeff mentioned and I mentioned in my comments, we do expect, you know, synergies to continue to outperform throughout the year. That's why we raised our guidance. We believe that, you know, in Q3, there were some, one time synergy benefits.

But, as we go to Q4, we expect to report at or above where we believe the the full year number is gonna come out at.

Speaker 2

So, John, and just to to be clear, I mean, think as John said in his earlier comments, the increased synergy amount is is both in the quantity, the overall quantity, and the pacing. So it it it is some new things that we've been able to realize synergies from and also delivering some of the things that we anticipated quicker. Now there's been there's been some things that we've not been able to fully fully capture because of some of the effects of the pandemic and whatnot. And that's why some of the allocations, the percentages have moved around a little bit. But overall, I think we know the story there is more sooner and faster.

Speaker 1

And John, just adding one more thing. It's Jennifer. So your question regarding the fourth quarter being aligned with the third quarter, know, as we've said, we didn't really tie a lot of our synergies to volume. So while we're expecting a pretty strong recovery on the volume front in the fourth quarter, We're still managing our operations to align with the demand we've seen this year. So I think that's more attributable to why you're seeing kind of a level amount in the fourth quarter.

Speaker 6

Got it. Fair enough. No, that all makes sense. And then I guess on stronger TiO2 demand, can you give us some color as to what you're hearing from your customers? Is this a function of them trying to catch up for maybe being caught off guard a little bit in terms of stronger demand in 3Q, where they're kind of trying to get their own inventories back in shape?

Or is this more a function that, look, 4Q total end product demand is just that much higher? I guess how should we be thinking about that? Or how are you thinking about that? And what does it mean in terms of kind of how you think the customer base ends the year in terms of overall inventories?

Speaker 2

Yes. So from the standpoint of where we are on, you know, our our view on customer inventories, in the second quarter, I do believe, although our numbers were down significantly, our customers were running through and consuming a lot of the inventory they had on hand. So there is an element of inventory rebuilding that was going on, but I do also believe that this true demand development. When we went through our scenario analysis, looking at the outcomes that might happen as the pandemic kind of eased, this is pretty much one of the more optimistic views that we had. And our volumes have recovered.

And as we look into the fourth quarter, actually, October is the second strongest month that we had this year, only, I guess, less than the number we had in March. So we continue to see strong volumes, and that's why we're not going to see the seasonal impact that we would normally see in the fourth quarter because the recovery is outpacing, what would normally be seasonal downturn in the fourth quarter. Great. Thanks very much for the color.

Speaker 0

The next question is from Duffy Fischer with Barclays. Please go ahead.

Speaker 9

Yes. Good morning, guys. First question is just around the Saudi smelter. As it stood before, it was supposed to start ramping in q one. And I thought the commentary was we would know pretty quickly after it starts to ramp whether the fixes worked or not.

So in the new timeline, when does it actually ramp up and when will we know if the is are generally working? And has the amount of money that is gonna cost us going up with this delay?

Speaker 3

To Duffy, it's JF. Look versus what we have said previously, there's only about the one to two month delay that he's had because of the COVID nineteen situation and having difficulty to have some of the key people on-site to realize some of the modification. So we're now envisaged to start in the middle of next year, the plant. When Jeff referred that it's in 2022, he referred that Tronox will acquire the smelter. And that would be probably a year after startup that we would do that because as you know, the smelter has to deliver a certain level of success for us to take the ownership.

But as of today, the construction is at about 70% complete on those modifications. We're making good progress. Look, we had on-site, know, AMEC has a crew of almost more than 300 people, you know, that are working on making that construction and making it ready for the start up that we see in q two twenty one. And then Duffy, in regards to your question as to whether or not our our cost will go up with any delay, we

Speaker 5

are capped at a 125,000,000. We have 113,000,000 at the end of q three. We've made the additional $12,000,000 contribution in in q four already. So there'll be no additional cash outflow related to Jazan going forward. We're capped at 01/25.

Speaker 2

Yeah. And and, Duffy, I I think your your premise that when when when we begin to ramp up, we'll know shortly after. I I think I think that's that's accurate. I mean, as we as we begin to ramp up, certainly, we'll be we'll get a lot of a good read on on whether it's gonna be successful. Then obviously, if you ramp up and start to push it, you get a better feel of how long it might take to ramp up to sustainable operation level.

But yeah, you're right. Mid next year, we should get a really good read on whether the design modifications have have done the trick.

Speaker 9

Great. Thanks. And then this year, the the net exports out of China have gone up pretty significantly. So two questions here. One, that incremental additional tons, geographically, where do you see or where have you seen most of that end up?

And then the second one is, do you think that's a new structural level of Chinese net exports, meaning they added more supply maybe than we thought? Or was that just a result of weak demand in China? And so there's a chance that Chinese net exports actually decrease next year.

Speaker 2

Yeah. I and I'll ask I'll answer the last question first, and I I think, demand in China has been, I'd suppressed a bit, and so that does drive the exports up. And when you think about the the change in the volumes, in September, it's down a little bit from August about 3%. But now on average, it's still at this particular point in time, trailing twelve months is about 1,170,000 tons. So I do think that there's no question that Chinese have added some capacity.

There's also been some capacity that's been pulled out as well. So it's a bit hard to say that 1,170,000 tons is a new trend, but I definitely believe that some of the demand pickup in China will now start to absorb that volume. As far as where the volumes have gone, we've obviously, we have a facility in Brazil, so we compete head to head with the Chinese there on a regular basis. There's been some volume input in input, in Turkey, in Europe specifically, I would say, and then in India, we've seen a little bit of an uptick as well. But and then we talked about earlier, we have seen a significant move in pricing.

We have great visibility into that because we have an asset in China now. And our pricing on sulfate material has moved up and will continue to move up as we enter the fourth quarter. I mean, we end the fourth quarter into 2021.

Speaker 9

Terrific. Thank you, guys.

Speaker 0

Next question is from Vincent Andrews with Morgan Stanley. Please go ahead.

Speaker 7

Hi. This is Steve Haynes on for Vincent. I wanted to ask a question on margins.

Speaker 6

I mean, you know, given that in 2019, we kind of had big big destock. 2020, we've had, you know, obviously pandemic, and you guys have taken out a ton of synergies. It sounds like there's some temporary kind of cost deferral that's also gonna come back next year. So I mean, how should we be thinking about EBITDA margin directionally And and any kind of, you know, kind of directional guidance would be would be helpful there.

Speaker 2

Yeah. Yeah. Steven, this is Jeff. I I think, you know, as we said, I think EBITDA margins in the fourth quarter will recover to sort of what we had in the first half. We'll recover to that mid twenty range.

And I think longer term, we certainly believe that we can sustain EBITDA margins in that range with maybe a little upward movement as we as volume recovers. So I think that's a good long term outlook for for sort of our our EBITDA margin profile.

Speaker 6

Okay. Thank you.

Speaker 0

The next question is from Josh Spector with UBS. Please go ahead.

Speaker 10

Yes. Hi. Thanks for taking my question. I was just wondering if you could maybe share what you would think would be an upside volume scenario in fourth quarter. And I understand, you know, seasonally, it's it's maybe a little bit tough to predict.

But if October strength continues, what would you expect to see for the fourth quarter as a whole?

Speaker 2

Yeah. Look, we're not gonna give a a specific number, but we do expect the fourth quarter numbers based on where we are today to be at or above where we were in q three as well as where we were in 2019. You know, we've we've seen a significant increase in, demand for coatings and plastics. And the one market where we hadn't seen much of a recovery was in the laminated paper business. And, in September, we started to see that volume recover as well.

Again, October sales are strong. We will have some seasonality, but because we're recovering, that seasonality has been muted by the recovery. And it's I guess what I would say confidently at this particular stage is that Q4 will be at or above Q3 levels. But, Josh, the other thing that's still happening is the order book is still coming together a little bit different than it historically has. And, you know, like, even even, you know, yet this month, we we will continue to place orders, you know, very, very late into the month as, you know, as recently as even, you know, this week for shipment this month.

So that's a little unusual, but it just shows that, buying patterns have changed a bit because of the pandemic.

Speaker 10

Thanks. And and maybe if I could try one more time is I

Speaker 8

mean, would you be willing

Speaker 10

to share how much October volumes were up year over year?

Speaker 2

No. Josh. I mean, we we we we don't do we don't, you know, track and and report month to month, year over year volumes. But, again, as John said, we're we're very confident that, fourth quarter volumes will be at or above third quarter volumes and at or above twenty nineteen levels.

Speaker 1

Our typical seasonality in this, you know, for the fourth quarter from the third quarter is, you know, approximately in the high single digits or so down sequentially. So, you know, we're talking, when we say a favorable deviation, you know, to be flat or above is pretty big move away from what we typically see trend wise.

Speaker 10

Yep. Understood. Fair enough. And if I could ask just so on the synergy front, I mean, you're you're obviously doing a lot better than you guys expected. You know, I guess, when I look at SG and A specifically for this quarter relative to last year, it's kind of flattish.

I'm I'm not sure maybe what I'm missing in that year over year comp or, you know, some of those synergies or maybe offsetting some expected inflation. How how would you characterize that?

Speaker 5

Josh, we had some incremental employee benefit costs in q three of this year, and we had a little bit of a credit employee benefit cost in q three of last year.

Speaker 2

And plus and your your your your comment about the inflation is right. Some of our synergies have have offset inflation in some of the cost items.

Speaker 10

Okay. What would the normalized SG and A for three q have been without that extensive comp, accrual?

Speaker 5

I'd say about 3 to 4,000,000 less.

Speaker 10

Okay. Alright. Thank you.

Speaker 0

The next question is from Travis Edwards with Goldman Sachs. Please go ahead.

Speaker 9

Hey. Good morning. I've got sort of a

Speaker 6

two part question here on the vertical integration side. Just with Suzanne coming on in 2022, you've got TTI progressing. I just wanted to confirm that those two assets will fully get you to your vertical integration targets, both sort of in the level and in the time frame that you'd like. And then second part would be, I guess, more generally, just what does the availability of mineral sands feedstock assets look like in the market right now, just in the event that you or competitors wanted to be more active on that front?

Speaker 3

So Trevor, maybe I can answer the first part of your question. Look, today, we're about 70 to 75 vertically integrated. And with TTI, we will move to 90 to 95. That that assume, obviously, that we would get 100% of the TTI production. But look, it's likely that TTI would have some contract that we will need to respect.

And obviously, when we start Jazan, the intention is to ramp up Jazan with the need of the increase in our pigment production. So that that's really the the planning that we have, to achieve our vertical integration. Yeah. And, Travis, you

Speaker 2

know, if if we if we end up in a situation where, you know, design comes on and we are structurally long and high grade feedstock, you know, it's not our intention to to enter the commercial market, you know, and be a merchant seller of high grade feedstock. But what we will look for opportunities to put that asset to work, you know, to create value for our shareholders. So we'll we'll be very proactive in that regard. And and then regarding your overall question about mineral sands assets, I mean, you know, that that that that activity continues right? There are always a number of projects that are out there looking for investment, looking for sponsors to help make successful.

I think for for any anybody who wants to become more aggressive in that area, there are projects available that are in need of investment, in need of, know, probably fresh money.

Speaker 6

Got it. That's helpful color on both ends and maybe just as an extension to your comments, Jeff. Just wondering, you talked about considering debt pay down before the end of the year. I guess, one, are you I guess, our base case would be you're looking to pay down, you know, people bank debt. Just is that generally how you're thinking about things?

And then two, you know, anything like M and A or anything else that we should be aware of that might sort of not disrupt the delay in your plans to pay down debt? Thanks.

Speaker 5

Hey, Travis. It's Tim. Just as regards to your first half of the question, in terms of the debt pay down, we're looking at all options. Right now, the most likely option, just given the facts and circumstances, is the pay down on the term debt.

Speaker 2

Yeah. And Travis, in terms of other capital allocation priorities, As we said in our prepared comments, the the projects we have going on, the strategic projects, new Neutron Atlas capacity are are real priorities and and along the pay down of debt. We don't see we don't expect other than closing of the TTI acquisition that's already been planned. We don't foresee M and A, you know, being something that that would interfere with those, those priorities.

Speaker 3

Awesome. Appreciate the time.

Speaker 0

The next question is from Rod Speeds with Bank of America. Please go ahead.

Speaker 7

Good morning. What is your normalized liquidity target? And and how much excess liquidity do you have at September recognizing there's 300,000,000 for Tazir? And I'll ask that first.

Speaker 5

Yeah. The targeted liquidity, know, depends if you would have asked me a year ago. It's a little bit different just given the pandemic. I'm probably on the higher end of a target liquidity now in terms of, you $3,400,000,000 of cash and then the 300 or $400,000,000 of ADLs and lines that we have not used. Excluding the TTI, we have over $800,000,000 of liquidity, which is, you know, far and above what we need is which is the reason that we're looking at, targeting to to pay down some debt.

Speaker 7

So I just wanna make sure I understand. It's 3 to 400 of of normalized liquidity of cash plus term loan of avail excuse me. Of availability or of each? Maybe you made it sound like it was each. But

Speaker 5

Yes. So combined, it's probably more 500,000,000 right now. Yeah. Combined, about 500,000,000 right now where we are given the the the pandemic. Without the pandemic, it's it's probably 200,000,000 lower than that.

Just given the strength of our business model, proven that we can generate free cash, you know, despite the environment we're in.

Speaker 7

Got it. And do you have initial 2021 CapEx given the Australian project? And and what what would that project be that's gonna replace the Snapper and Ginkgo mines? How much would that cost? Because it sounds like greenfield would require infrastructure, etcetera.

Thank you.

Speaker 1

So on on the capital expenditures, you know, we're currently estimating I should say this, at Investor Day, we communicated that we have some elevated levels of CapEx due to these high investment, high return projects. We communicated, I think, in the mid-three 100,000,000 range. I think we could be lower than that. We're still going through our 2021 planning process. So as a part of our Q4 results, like Jeff said, we'll disclose our current forecast.

But Atlas capacity and Neutron are the projects largely driving that increase, like Jeff outlined on the call. And Atlas capacity is the name of those mining development sites that we are building out that will replace Snapper Ginkgo. It's similarly located, so there's some shared benefits there, but there's still development capital required for those sites. But also, like Jeff said, depending on the market condition, should the need be there to pull capital, we can certainly manage that. So we anticipate currently those targets, but that can be adjusted if needed, much like we did this year with our capital plans given the market demand environment.

Speaker 7

Thank you very much.

Speaker 0

This concludes our question and answer session. I would like to turn the conference back over to Jeffrey Quinn, Chairman and CEO for any closing remarks.

Speaker 2

Thank you, operator. Again, thank you for your time today, and thanks for all your questions. No. It certainly has been memorable year for us here at Tronox. No.

Despite a lot of uncertainty, the year is playing out much as we, you know, anticipate at one point with a very strong first quarter, you know, a tough second quarter due to the pandemic, and then recovery in the third quarter and and closer or sort of back towards normality in the fourth quarter. No. We are we are not out of this yet, obviously, but we are encouraged. But we look forward to speaking with many of you in the weeks to come at some of the conferences that we're doing, and to address all of you in February for our year end call to discuss, you know, the, the closeout of the year, which we believe will be very strong in our path forward in 2021. As I said at the time, we'll update you on a couple of the key projects and provide an updated view on on overall longer term synergies.

So thanks very much. We we appreciate your time. Everyone have a great day. Thank you.

Speaker 0

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Goodbye.