Tronox Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2024

There are 9 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Tronox Holdings Second Quarter 2024 Earnings Call Conference. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Friday, August 2, 2024. I would now like to turn the conference over to Jennifer Gunther.

Operator

Please go ahead.

Speaker 1

Thank you, and welcome to our Q2 2024 conference call and webcast. Turning to Slide 2, On our call today are John Romano, Chief Executive Officer and John Srivosol, Senior Vice President, Chief Financial Officer. We will be using slides as we move through today's call. You can access the presentation on our website at investor. Tronox.com.

Speaker 1

Moving to slide 3. A friendly reminder that comments made on this call and the information provided in our presentation and on our website include certain statements that are forward looking and subject to various risks and uncertainties, including, but not limited to, the specific factors summarized in our SEC filings. This information represents our best judgment based on what we know today. However, actual results may vary based on these risks and uncertainties. The company undertakes no obligation to update or revise any forward looking statements.

Speaker 1

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.

Speaker 1

GAAP terms are provided in our earnings release and in the appendix of the accompanying presentation. Additionally, please note that all financial comparisons made during the call are on a year over year basis unless otherwise noted. It is now my pleasure to turn the call over to John Romano. John? Thanks, Jennifer, and good morning, everyone.

Speaker 2

We'll begin this morning on Slide 5 with some key messages from the quarter. We delivered the 2nd quarter performance within our previously guided ranges. TiO2 volumes improved sequentially 8% over a strong Q1 performance, and this represented a 16% increase over the prior year as volumes continue to recover from the low levels realized in 2023. This sequential growth reflects an increase in demand that is consistent with our seasonal trends. Zircon demand was relatively stable compared to the Q1, which factored in a shipment at the end of the quarter that rolled into Q3.

Speaker 2

Our pricing for both TiO2 and zircon increased sequentially, but were both partially offset by unfavorable mix. On the operation side, our total pigment plant utilization rate in the Q2 was lower than targeted, driven by short term challenges relating to ramping up our assets. As a result, we incurred higher costs in the Q2 than anticipated and delivered adjusted EBITDA of $161,000,000 at the lower end of our guided range and margins just under 20%. While this will impact the margins of pigments sold in the 3rd quarter, the operating challenges we experienced during the ramp up in the 2nd quarter are now resolved and our average pigment plant utilization rate for July was in the 80% range and we expect this to continue for the balance of the year. We'll discuss these operational dynamics and how it will impact the Q3 costs later in the call.

Speaker 2

Our free cash flow for the quarter was a source of $84,000,000 and we expect to continue to generate positive free cash flow for the second half and full year. On the sustainability front, we published our 2023 sustainability report earlier this week. Turning to Slide 6, I'll briefly review the sustainability related goals and targets. Our 2023 report details meaningful accomplishments achieved in the past year, driving continued progress toward our previously established sustainability goals. It also reinforces the unwavering commitment to our sustainability strategy and purposeful investments in our people, operations and product portfolio.

Speaker 2

In this report, we reinforced our carbon emissions reduction targets, including reducing Scope 1 and 2 carbon emissions intensity by 50% by 2,030 against the 2019 baseline and achieving carbon neutrality by 2,050 and reducing scope 3 carbon emissions by 9% by 2025 and 16% by 2,030 against the 2021 baseline. We've made significant progress on our carbon emissions reduction targets this year with 2 renewable energy contracts in South Africa that will convert on a combined basis a total of 70% of our electricity in the region from coal based to renewable sources when the second project comes online in 2027. As a result of this latest expected project adjusted our Scope 1 and 2 emissions reduction target for 2025 percent to 25% from 35%. We're focused on numerous other initiatives, including reducing waste to external landfills, partnering on top partnering with our top and meeting suppliers to help reduce emissions across the value chain and our continuous involvement and partnership with the communities in which we operate. We firmly believe in the importance of safeguarding our operational privilege both now and in the future.

Speaker 2

This is why we ensure that sustainability is seamlessly integrated to our business strategy, operations and culture and will continue to support our priority to grow the business and create lasting value for stakeholders. I'll now turn the call over to John to review some of our financials from the quarter in more detail. John?

Speaker 3

Thank you, John. Turning to Slide 7. We generated revenue of $820,000,000 an increase of 3% compared to the prior year or 6% sequentially, driven primarily by higher TiO2 volumes. Income from operations was $76,000,000 in the quarter and we reported net income attributable to Tronox of $16,000,000 While our profit before tax was $55,000,000 our tax expense was $45,000,000 in the quarter. This was driven by a $16,000,000 valuation allowance in Brazil and losses in jurisdictions where we have pre existing valuation allowances.

Speaker 3

As a result, our adjusted diluted earnings per share was $0.07 As John previously mentioned, our adjusted EBITDA in the quarter was $161,000,000 dollars and our adjusted EBITDA margin was 19.6%. CapEx for the quarter was $76,000,000 and we generated free cash flow of $84,000,000 in the quarter. Now let's move to Slide 8 for a review of our commercial performance. Q2 came in relatively in line with expectations. TiO2 revenues increased 7% versus the year ago quarter as sales volumes improved 16%, partially offset by 8% decline in price and mix.

Speaker 3

On a sequential basis, TiO2 revenues increased 8% driven by improved sales volumes in all regions. Pricing increased 1% over Q1 as expected, while unfavorable mix partially offset this increase. Zircon demand remained relatively flat to Q1 as expected with a slight decrease driven by a shipment rolling into the 3rd quarter. Zircon pricing increased 1% sequentially. Now turning to Slide 9, I will now review our operating performance for the quarter.

Speaker 3

Our adjusted EBITDA of $161,000,000 represented a 4% decline year on year, driven by lower average selling prices and mix. This was partially offset by improved production costs, including lower input costs for materials such as coke, chlorine and caustic soda, higher sales volume and favorable exchange rates. Additionally, our freight costs continue to see rate decreases on a cost per ton basis. Sequentially, adjusted EBITDA improved 23%. Compared to Q1, production costs improved an incremental $20,000,000 on a net basis.

Speaker 3

This was comprised of a $26,000,000 improvement relating to favorable absorption from lower cost tons produced in the Q1 that were sold in the Q2. This was partially offset by a net $6,000,000 of period costs taken in Q2 due to the lower operating rates. Other tailwinds versus the prior quarter, as expected, were price mix and volume, while FX was a headwind. Turning to Slide 10, I'll now review our balance sheet and cash position. We ended the total the quarter with total debt of $2,800,000,000 and net debt of $2,600,000,000 Our net leverage ratio at the end of June was 5.2 times on a trailing 12 month basis.

Speaker 3

Following a second quarter sequential growth, our balance sheet remains strong with ample liquidity ahead of anticipated critical and vertically integrated integration related capital expenditures. Our weighted average interest rate in Q2 was 5.99 percent, down from 6.15% in Q1 from the repricing transaction. We maintain interest rate swaps such that approximately 73 percent of our interest rates are fixed through 2024 and approximately 64% are fixed from 2024 through 28, aligning with the maturity of the earliest tranche of our term loan. Total available liquidity as of June 30 was 680,000,000 dollars including $201,000,000 in cash and cash equivalents that are well distributed across the globe. Capital expenditures totaled $76,000,000 in the quarter.

Speaker 3

Approximately 40% of this was for maintenance and safety and 60% was for strategic growth projects, heavily weighted on the mining side of the business, which we previously disclosed. Working capital was a source of $39,000,000 driven by improved accounts payable. We returned $41,000,000 to shareholders, which included the payment for both the first and second quarter declared dividends. I will now turn the call back over to John Romano for comments on the outlook. John?

Speaker 3

Thanks, John.

Speaker 2

So the first half of twenty twenty four has already demonstrated a reversal of some of the trends from the prior 2 years, and we anticipate that recovery to continue. On a year to date basis through Q2, our TiO2 volumes were up approximately 17% and our zircon volumes increased approximately 20% compared to the prior year. Although we are not yet back to normalized volume levels on either TiO2 or zircon, the improvement this year is a demonstration that 2023 was indeed a trough year for volume demand. In addition to the recovery, we have also seen the launch of several antidumping investigations. Most notably, the EU announced a provisional duty last month on Chinese imports, while Brazil and India each have investigations underway.

Speaker 2

We believe these efforts will be a benefit in the medium and long term, and we will continue to monitor the short term impacts from these announcements. On the operational side, this year, we've been ramping our assets to meet the increased customer demand over 2023. As we were ramping up, we experienced some operational challenges across our sites, which caused Q2 operating rates to come in lower than what we had targeted, and this led to higher costs in Q2 and higher anticipated costs in Q3. Due to the breadth of our geographic footprint, we were able to continue to meet customer demand as we resolved these issues. We previously indicated that lower utilization rates impacted our business by $25,000,000 to $35,000,000 per quarter, and our start up challenges in Q2 resulted in a similar To put that into context, we incurred roughly half of the impact in the second quarter and expect the remaining half to impact the 3rd quarter, which is included in our outlook.

Speaker 2

These short term challenges have now been resolved, and our average utilization rates for July were in the 80% range. We expect to continue running at this rate through the second half of the year, which will result in lower cost and a step up in our earnings momentum in Q4. As we ramp up, we're continuing to see the benefits of technology we've deployed at our sites to reduce costs and improve efficiencies. As we mentioned in the last two quarters, we're investing $395,000,000 in capital expenditures, primarily in the mining side of the business in South Africa to sustain vertical integration. As a reminder, in 2024, we expect to invest a total of approximately $130,000,000 in our 2 South African mining projects, the Fairbreeze expansion and the Makwaisto FS.

Speaker 2

These investments will ensure we maintain our $300 to $400 per metric ton advantage for feedstock sourced internally. From a growth perspective, our R and D efforts remain focused on product and process innovations to enhance our profitability, and we're continuing to explore opportunities in the rare earth space. Moving to Slide 12, I'll now review our outlook. While the macro backdrop to the second half of twenty twenty four is expected to be less robust than previously anticipated, Tronox has realized and expects to continue to realize considerable growth compared to 2023. For the Q3, we expect TiO2 volumes to decline in line with seasonal norms by approximately 2% to 4% compared to the Q2.

Speaker 2

This represents an increase in the high teens range compared to the Q3 of 2020 3. Regarding zircon, we anticipate stable volumes in the Q3, which would represent an increase of approximately 160% compared to the trough levels we realized in the Q3 of last year. We anticipate TiO2 prices to increase marginally compared Q2, and we expect TiO2 zircon pricing to remain relatively stable. On our cost, the higher cost pigment tons manufactured in the second quarter will impact our profitability as these tons are sold in the Q3, and this has been factored into the range. Additionally, based on current exchange rates, we expect FX to be a slight headwind in Q3.

Speaker 2

As a result of these factors and assumptions, we expect Q3 adjusted EBITDA to be between 145,000,000 dollars and $165,000,000 and our adjusted EBITDA margin to be in the high teens. As previously referenced, our average utilization rates are now running at 80% range and we expect that to continue through the second half of the year. This would result in an improvement in pigment manufacturing costs and a step up in earnings momentum sequentially in Q4. On cash, our expectations for 2024 remain unchanged and are as follows. Our capital expenditures are expected to be approximately $395,000,000 for the year.

Speaker 2

Our net cash taxes are expected to be less than 10,000,000 dollars as the significant capital expenditures in South Africa are deductible. Our net cash interest is expected to be $140,000,000 and we're expecting working capital to be a tailwind. The magnitude of the cash inflow will depend on the market trends in the second half. Turning to Slide 13, I'd like to briefly remind investors of our capital allocation priorities before turning over to questions. Our capital allocation strategy has not changed.

Speaker 2

We continue to prioritize investments in the business that are essential for advancing our strategy and maximizing value for a vertically integrated business. We also remain focused on strengthening our liquidity and resuming debt pay down as the market recovers and our dividend remains a priority. And finally, we'll continue to assess strategic high growth opportunities as they emerge, including the rare earth space, which is an active focus for us at the moment. We'll provide more updates on this as developments happen with these projects. That will conclude the prepared remarks, and we'll now move to the Q and A portion of the call.

Speaker 2

So I will hand the call back over to the operator to facilitate that. Operator?

Operator

Thank you. You. Your first question comes from the line of John McNulty from BMO Capital Markets. Please go ahead.

Speaker 4

Yes, good morning. Thanks for taking my questions. So I guess the first question is just on the cost impact of the ramp up issue. So I think you kind of implied it's about the same as the low utilization rate issues you had over the past few quarters, so $20,000,000 to $25,000,000 So when you say it's split between 2Q and 3Q, is that essentially $10,000,000 to $15,000,000 each quarter or are you going to see a $20,000,000 to $25,000,000 hit in each of those quarters? And I guess more importantly, now that you're at utilization rates where you should be kind of in the 80% plus range, do you should we be still seeing risk of ramp up issues as demand and utilization rates climb or have you kind of reached a tipping point where you've gotten you're running hard enough now where you realistically won't see material impacts or risks around ramping up further?

Speaker 2

Yes. Thanks for the question, John. So look, on the first one, I would say that's split evenly, dollars 15,000,000 in the second quarter and about $15,000,000 in the third quarter from a cost perspective. And we also mentioned that there was some FX impact that could impact the business and that was a headwind. So that could be somewhere in the $5,000,000 range.

Speaker 2

As far as where we are in the ramp up, there wasn't really any one issue that you can point to on that ramp up issue. We've got 9 plants and even throughout our operations on the mining side of the business, we had some issues ramping up the assets. And we are at that 80% range. We ran the entire month of July at that improved rate. Moving into August, we're seeing the same kinds of things.

Speaker 2

So when we think about that 80%, that's on average over those assets. And through the rest of the year, we're going to have planned outages, so those numbers will fluctuate. But on average, yes, we're expecting to be at 80%. We feel like the issues that we had during that ramp up process have run their course. And that's why we said we felt pretty comfortable about where we are on that run rate and that run rate being consistent to the balance of the year.

Speaker 2

And that's where when we talk a little bit about the Q4 and typically you'll see some seasonality in there. We'll talk about that, I'm sure, later with regards to what demand would be, because we're not going to really provide a lot of forward look on the Q4 as far as the market. But the reason we made those comments is because we do feel comfortable that that step up in earnings momentum is going to come from lower cost tons produced that will be sold throughout the balance of the year predominantly in the Q4. John, any comments? Nothing else.

Speaker 4

Got it. Okay. No, that's helpful. And then maybe just as a follow-up. So you list on the outlook page, working capital is going to be a source cash.

Speaker 4

I guess, can you help to frame that a little bit? It does seem like you should have a decent amount of inventory release. I guess, can you help us to think about how big that working capital cash source could be as we look to the back half of the year and for a full year 2024?

Speaker 3

Yes, I think we've mentioned that in John's comments that working capital we expect to be a slight tailwind for the full year. And frankly, it just will depend on the market recovery and how Q3, we obviously have guided on volumes slightly down there, but also Q4 depends on where that ends up at which will determine the scope and size of the working capital benefit. But, as we did mention, we are ramping up our facilities. So, we are building a bit of inventory throughout the rest of the year. But, obviously, if that converts to cash flow much to the free cash flow and be able to use that to pay down to build cash and have our net leverage go down.

Speaker 3

But from an AR perspective, we are seeing increased sales in Q1 and Q2 that drove higher AR in the quarter, good use of working capital that will ultimately convert to cash. We are seeing second half of the year based on what I mentioned on the commercial side that we would recover some of that in the second half of the year. And secondly and finally, sorry, AP was the use of cash in Q1. What we mentioned is that would claw back throughout the rest of the year. We saw that in Q2 and expect to see a bit more in the second half

Speaker 2

of the year. Maybe just a little bit more color on that. In the Q1, we saw a big bump and our sales was 18% was 8% in the second quarter. And we started ramping up and we didn't hit the targets we were looking at from a production perspective. So in the Q2, we actually drew inventory down.

Speaker 2

So there is a need, John made reference to building some inventory. We've got some plants that actually need to build some of that inventory to make sure we can continue to meet the demand as it's forecasted.

Speaker 4

Got it. Okay. No, that makes sense. Thanks for the color.

Operator

Your next question comes from the line of Frank Mitsch from Fermium Research. Please go ahead.

Speaker 2

Good morning, folks. John, if

Speaker 4

I could just follow-up and get a clarification of what exactly you are referring to when you talk about a step up in earnings momentum in the Q4. You've used that phrase a couple of times. What exactly are you referring to? Are you referring that Q4, your expectation is that it might be more than Q3?

Speaker 2

Well, what I'm referring to is that we're going to have lower costs and those lower costs will reflect higher margins in the Q4 as we sell those tons. So we're selling higher cost tons in the Q3 because we had lower production rates, which we talked about. Plants are now running at rate and the lower cost inventory that we will be selling in the Q4 will generate better margins. So when we made the comments in, I think the release, we made some reference about the second half being stronger than the first half. But there's lots of things again, as a practice, we don't provide any color on the beyond 90 days.

Speaker 2

So 1 quarter out, we don't provide so we're not providing guidance on the Q4. But there's lots of things that are going to drive Q4. I mean, you've got the economy, the election, jobs reports just came out, which are an impact. There's inflation. You've also got dumping.

Speaker 2

Pricing may have an impact on that if there's opportunities to do that. So just think about normal seasonal fluctuations in the Q4 and defining normal seasonal fluctuations in the Q4, it's kind of difficult because I'd say over the last 10 years, there's been lots of anomalies in the Q4. But if you kind of pull all of those out, and I looked at this last night going back to 2,007, call it, in a normal season if you can define normal seasonal adjustments in the Q4, down 5% to 10%. Sometimes we've seen it up significantly, sometimes it's down significantly. So pull 5% to 10%, those I wanted the assumptions that even with the volume being down, we're expecting to get earnings potential over and above what we would have in the Q3 because the tons that we're going to be selling are being a lower cost.

Speaker 3

Yes, I think it's Frank, I mean, I think you asked a similar question last quarter. And I think the way you ask it was appropriate because all things being equal, if we did run if we continue to run-in July, for the rest of the year, you will see that add back of $15,000,000 to your earnings. Obviously, as John mentioned, there's lots of things that go into our results, obviously, both on the cost side as well as the commercial side that can impact that. But we are confident that that running higher rates will have a step change in our cost position. When you did see it in our Q2 bridge, Q1 over Q2, there is a bump up in that operating cost bar there.

Speaker 2

And I guess at this stage, it's just it's really hard to determine what our volumes are going to look like because of all these factors that are just a bit early for us to be projecting what that number is going to look like in the Q4. So that's where that color came from.

Speaker 4

Okay. Very helpful, John, on the response. And if

Speaker 5

I could

Speaker 4

just ask about anti dumping, given the favorable news out of the EU. Are you seeing any customer are you hearing of any customer behavior changes in the EU? What is your expectation as to how that may play out in terms of pricing and volumes for the Western producers, including yourselves into that region? And then just lastly on that, any sort of timeframe as to when we might be hearing something regarding Brazil and India?

Speaker 2

Okay. Yes. So, Frank, the EU provisional duties were put in place in July. And there's still a lot of time to go through between now July, but you can now and the end of the year before provisionals could turn into permanent duties. But you've seen already a lot of movement, right?

Speaker 2

EU exports from China in the last 2 months have dropped significantly. You saw a big pickup in exports into India, a pretty big pickup into Brazil. And there is some, I'd say, movement going on. Inside China, for instance, which is not a big market for us, we've seen the Chinese pushing hard to try to pick up more market share and that's why there's some noise around pricing, although we saw a bit of a lift in the Q2 and we talked about a lift in the Q3, a marginal one. There's still a lot of movement regionally due to that activity that's going on, on the assumption that duties in the EU would go into place.

Speaker 2

So we are seeing some activity. I would say, right now, there's still a fair amount of volume that needs to get kind of absorbed. There's a lot of Chinese material sitting over there. But I think on the mid to long term, we would see that as a uplift to the business if they're put in place effectively, because ultimately the volume and the price implications that are attached to that should lead to better margins for us. And then as far as India and Brazil go, those investigations are under way.

Speaker 2

It's our expectations that we should see some sort of indication on what's happening in those two countries sometime maybe late Q3 for Brazil and probably Q4 for India. We don't have a tremendous amount of visibility. Those investigations are still, I'd say, more in their infancy as far as the evaluation of what's going to happen there. But those are 2 big markets too. If you just think about Brazil's 180,000 market and there's roughly 100,000 tons of Chinese exports going into Brazil.

Speaker 2

India is approximately 450,000 tons and trailing 12 month exports into India from China are 278,000 tons. And those tons can only go so many places. APAC in general, if you exclude China, it's already 75% to 80% across that region saturated with Chinese material. So I think if those actions go into place, that should be a lift for the business.

Speaker 4

Got you. Thank you so much.

Speaker 3

Thank you.

Operator

Your next question is from the line of David Begleiter from Deutsche Bank. Please go ahead.

Speaker 4

Thank you. Good morning. John, on zircon, can you size the shipment that was pushed into Q3? And on volumes here, what do you need to see to see volumes improve? Just Chinese demand or could other factors help drive volume improvement?

Speaker 2

Yes. Thanks for the question. Look, that was a couple of 1,000 tons. It was not a large volume. That's why we said we were largely flat.

Speaker 2

And normally you'd see when we historically we've talked about rollovers that might have been bulk shipments. These were container shipments and it wasn't significant. And to your point, we still haven't seen China recovering on the zircon side of the business to the extent that that's why we're talking about flat volumes. It's pretty much where it was in the Q2. And from a market perspective, zircon consumption globally is about 50% in China, which is because it's heavily influenced by the ceramic market.

Speaker 2

Our position in China is not as significant as it was before. But in order to get the full potential of the zircon back, we're going to need China to recover and it's just a bit early for us to determine when that's going to be.

Speaker 4

Very good. And just on CapEx, given the elevated thing this year, how should we think about CapEx in 2025 and even 2026? Thank you.

Speaker 3

Yes. Dollars 24,000,000 obviously is a pretty sizable amount of $395,000,000 obviously from the mining investments in South Africa. We will see some of that spend in 'twenty 6 or sorry 'twenty 5 as well as those are multi year type of capital projects, but we will see it come down from that level. So, we expect to be less than where we were than where we'll be in 2024, probably in

Speaker 2

the mid-three hundred level. Thank you. And 'twenty six should start to trail down from there. Thank you.

Operator

Next question is from the line of Josh Spector from UBS. Please go ahead.

Speaker 6

Yes. Hi, good morning. This is James Cannon on for Josh. I just wanted to poke on the guidance. So if you call out the $15,000,000 impact from the ramp up outage, your guide is only down $6,000,000 You're also talking about volumes being slightly down.

Speaker 6

What is the offset that bridges $15,000,000 to 6

Speaker 3

We did mention, it's $15,000,000 from the fixed cost leverage, but another $5,000,000 of hurt on FX, assuming that rates stay where they are today? I think on the upside, you do we have said that pricing is expected to increase slightly throughout the quarter as well.

Speaker 2

Did that answer your question? Yes. Thanks. And then just

Speaker 6

on the CapEx guide, I think you lifted that from $350,000,000 to $395,000,000 Was that all related with the outage or was there anything else? I think if I looked at the 2nd quarter cash flow, you didn't really have any step up in CapEx there?

Speaker 3

Yes. No, dollars 395,000,000 has been our guide for several quarters now.

Speaker 2

That had nothing to do with any ramp up issues.

Operator

Your next question comes from the line of Mike Leithead from Barclays. Please go ahead.

Speaker 6

Great. Thanks. Good morning, guys. Just one for me. I wanted to follow back up actually on, I think with Melty's working capital question earlier.

Speaker 6

I think you said you need to rebuild some inventory in the second half. I guess when I look at your income statement, dollar inventory is still at all time highs and your days inventory is quite high. So maybe it's a product mix difference, but can you just help triangulate that for me?

Speaker 2

So I'll make a quick comment on what I was referring on inventories and that was finished goods inventories on the pigment side and then I'll let John talk about our overall inventory. John?

Speaker 3

Yes. So, obviously, pigment inventories have we expect to increase just from the ramp up, and it will depend on what happens the rest of the year from a commercial's perspective. Similarly on zircon, we are building zircon inventory throughout the year. We are at much lower levels than even in this higher environment in Q1 and Q2, much lower than what our production levels are. And then from a feedstock perspective, we do continue to run our mines relatively flat out.

Speaker 3

So you did see a bit of a jump in Q2, which aligns with our pigment assets being down a bit. So we weren't consuming that feedstock through

Speaker 2

the cycle. There's also an element of cost attached to that inventory, so it's not just tons. Remember, we still have this fixed cost, high fixed cost inventory that we talked about working our way through in the second half of the year. We had the impact that we talked about earlier that we were ramping up and we didn't get the benefit of that. So it's not only the tons, it's the actual cost of that inventory that's sitting on the balance sheet that we'll continue to work through as we migrate to the year and into next.

Speaker 2

Okay. Thank you.

Operator

Your next question is from the line of John Robert from Mizuho. Please go ahead.

Speaker 5

Yes. Thank you. John, I just wanted to follow-up back on the earlier tariff discussion there. Are you suggesting that China is going to turn down its production because of the European tariffs and not be able to find new export markets for their volume?

Speaker 2

Well, I won't presuppose what China is going to do because I've been kind of pondering what they've been doing for the last 3 years and haven't been right yet. That being said, they're already starting to slow production down. We have a plant over there. We're pretty aware of what's happening in China. So there will be an impact.

Speaker 2

I mean, if you think about it from a cost perspective, they're moving volumes into other regions of the world on the assumption those EU duties are going to go into place and they're doing that with price. At the same time, you haven't seen any improvement in cost. We've stated many times that at much higher prices, the majority of those Chinese companies or producers are losing money. Ilmenite pricing has not gone down. It's actually starting to trend up.

Speaker 2

Sulfur pricing, which is another significant input cost for them, has not it's starting to trend in the upper direction. So I think the short answer, John, is that one would have to assume that some sort of consolidation or closures would happen there if there is not a home for what I mean if you just do the math real quick, it's call it 250,000 tons in India, 250,000 tons in the EU and 100,000 tons in Brazil. If all of those were to go into place, there's not another 600,000 tons of demand to fill it.

Speaker 5

Okay. And then I'm not sure what's going on with Venator and Cronos these days, but are there any other competitive dynamics going on in Europe besides the Chinese competition?

Speaker 2

We typically don't comment on our competitors. I mean, the only thing that's public out there is that Venator sold their interest in the Louisiana pigment plants over to Cronos. That was not a surprise to us. They were the natural buyer since that was their joint venture partner And we don't see that as a negative.

Speaker 4

Okay. Thank you.

Operator

Your next question is from the line of Vincent Andrews from Morgan Stanley. Please go ahead.

Speaker 7

Hi. This is Turner Henricks on for Vincent. I was hoping that you could speak to TiO2 inventory levels. Specifically, where do you see them in Europe right now? Could be could be a tailwind or a headwind in the near term?

Speaker 7

Thank you.

Speaker 2

Yes. I think last quarter and thanks for the call, Tom Turner. The we stated last quarter that there were 3 things that were driving the lift in demand. It was destocking, customers getting back to normal buying patterns and then there was an element of demand. So we think destocking has in fact run its course.

Speaker 2

And I'm talking about now customers inventory, not suppliers inventory, and I won't talk about industry inventory, I'll talk about ours. Our inventories have trended down in the first half of the year. We sold more in the Q1 than we produced. We sold more in the Q2 than we produced. So I made reference that there is some areas where we actually need to build inventory, but where we feel we are right now based on 2nd or the 3rd quarter projection on demand and where we feel we will be in the 4th quarter, we think that our production is in line with making sure we have the inventory that we need to be able to fill our customers' requirements, considering all the other dynamics that are going on in the industry.

Speaker 2

So I won't comment on other competitive our other competitors though. But does that answer your question?

Speaker 7

Yes, absolutely. Appreciate the color. Do you mind providing a little or a few thoughts on your medium to long term capital allocation priorities, just what they'll be following the pay down of debt and mining project investments that you all are doing right now?

Speaker 2

Yes. So I mean, again, we stated in the prepared comments that our capital allocation policy hasn't changed. We're going to continue to invest in strategic projects to maintain our vertical integration. When the market starts to return, we will start to focus on paying down debt so we can maintain our liquidity and look at our long term debt portfolio, which we have talked about getting down close to $2,000,000,000 would be the long term target. And then ultimately and consistently, we've talked about maintaining the dividend.

Speaker 2

So not a lot of change on our capital allocation projects. And obviously, then there are other things that we've talked about the rare earth business. We don't have a lot more to comment on that, but that's still something that's continuing to evolve. We're taking a paced approach at that. There's lots of movements going on in that industry as well.

Speaker 2

We don't want to take a step into that area until we're confident that our plan is going to be something that's viable and long term generating good returns for the business long term.

Speaker 7

Great. Thanks. Looking forward to hearing more about it in the future.

Speaker 2

Thank you.

Operator

Your next question is from the line of Hassan Ahmed from Alembic Global. Please go ahead.

Speaker 8

Good morning, John. A bit of a confusing quarter. From a demand perspective, I'm just trying to get a better sense. I mean, you obviously talked about your operating rates not being where you wanted them to be, hence coming in at the lower end of the guidance range. I'm just trying to get a better feel of underlying demand, right?

Speaker 8

I mean, on one side of it, some of your raw material providers, Olin in particular, talked about how the TiO2 industry didn't sort of ramp up the way they had expected it to. So they disappointed a bit over there. Some of the coatings guys are also talking about demand not being great. I mean, can you just sort of give us a better sense of what demand looks like, be it regionally, be it from an end market perspective. And I mean, the added complexity obviously is inventory levels, anti dumping stuff.

Speaker 8

There are all these different moving parts. So I mean, if you could just give us a sense of where underlying demand is regionally and market wise, could you actually hit high levels of demand even without sort of global economy is recovering with this antidumping sort of stuff that seems to be expanding across regions and the like?

Speaker 2

Yes. Thanks, Hassane. It's a great question because

Speaker 3

when you

Speaker 2

think about it, there is no shortage of variables out there that are kind of factoring in the answer to that question. But I'll start with your comment on chlorine, right? And that particular supplier that you referenced would be a supplier in the North American market. North America was a big part of that 8%, right? We talked about 8% growth in TiO2 usage, our sales Q1 to Q2.

Speaker 2

We saw an increase in demand and sales in the Americas. We saw an increase in supply globally. But in the U. S, I would say, our that particular asset is running well above 80%. So I'm not exactly sure how that correlates to that supplier, but our chlorine consumption has not pulled back.

Speaker 2

Generically, when you just think about the 2% to 4% I talked about in 3rd quarter demand growth, Last quarter, we kind of gave some general ideas that the Q3 could be up, it could be down and a lot of that was going to be driven by demand. So again, the three things that we said were factoring into this recovery were destocking had run its course, customers were getting back to normal buying patterns and demand was that other factor. So we didn't see demand pick up as much as we would have maybe initially thought it could have in the Q3. So 2% to 4% is absolutely in line with what we would see as far as seasonal demand trends. Europe right now, for instance, August is typically a pretty weak month because people are on holiday.

Speaker 2

We're not seeing that. August seems to be pretty strong. So what's going to happen in September? The order book looks reasonably good for September, but it's still a bit early for that one. Asia Pacific, India for us is it's an interesting comment because we've had even some internal questions with those exports that went into India, what's happening to our demand there?

Speaker 2

Our demand is still good in India. We have a very significant position in India, supported by the free trade agreement out of Australia, which provides us, I think, some runway to manage through any kind of maybe pre positioning of Chinese material, even though there's more exports going into that region. So it's a bit mixed globally, but when we think about the rest of the year and demand and why we're continuing to ramp up, it is in fact to make sure we can hit the demand that we're forecasting. And if I made the comment before, we're not back to where we were, 80 percent capacity utilization is not a recovery by any means. So we still got some upside.

Speaker 2

It's a big recovery from a trough of 23, but we still got some runway to move up.

Speaker 3

Yes, Hassan, over the past 2 years, if you recall, we're down almost 30% from a volume perspective. So year to date, we have seen a significant recovery, but still only up 17% versus that roughly 30%. So much more room to grow.

Speaker 8

No, that makes complete sense. And maybe I can sort of try to make you guys put some numbers around that using some of the stuff that you guys have already talked about, in particular that $25,000,000 to 35,000,000 dollars quarterly hit that you guys talked about from sort of underutilized assets, if that's the right phrase. So let's assume for a second that you guys continue operating at rates that you hit in July, that 80% figure that you guys talked about. Would that be enough to recover those $25,000,000 to 35,000,000 dollars worth of headwinds, I guess, at that sort of run rate?

Speaker 2

Yes.

Speaker 8

Fair enough. Okay. Thank you so much.

Speaker 2

Thank you.

Operator

There are no further questions at this time. I'll hand the call over to John Romano for closing remarks. Sir, please go ahead.

Speaker 2

Thank you, operator. Our team is highly focused on ensuring we deliver our commitments to our stakeholders and our vertically integrated business model serves as a differentiator for Tronox by providing security of supply from a global footprint that we can leverage to our customers' advantage and co products that contribute significant value to our portfolio. Our results wouldn't be possible without the ongoing efforts of our Tronox team though. And I'd like to take this opportunity to thank the Tronox team for their dedication to operating safely and their steadfast commitment to fulfilling our customers' needs. I thank you for your support and your interest in Tronox and that would be the end of the call.

Speaker 2

Have a nice day.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you very much for your participation. You may now disconnect.

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Earnings Conference Call
Tronox Q2 2024
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