Tronox Holdings plc Q1 FY2021 Earnings Call

Good morning, and welcome to the Tronox Holdings First Quarter 2021 Earnings Call. Please note this event is being recorded. I would now like to turn the conference over to Jennifer Guenther, Vice President of Investor Relations. Please go ahead.

Thank you, and welcome to our first quarter 2021 conference call and webcast. On our call today are John Romano and Jean-François Turgeon, Co-Chief Executive Officers; and Tim Carlson, Chief Financial Officer. We will be using slides as we move through today's call. Those of you listening by Internet broadcast through our website should already have them. For those listening by telephone, if you haven't already done so, you can access them on our website at investors.tronox.com. Moving to Slide 2. 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 3. It's now my pleasure to turn the call over to John Romano. John?

Thanks, Jennifer, and good morning, everyone, and thank you for joining us today. I'd like to start the call with a comment on safety. Safety is ingrained in the culture at Tronox. It's our leading value and we start every meeting with safety to ensure it stays top of mind. In previous earnings calls, we've spoken about our journey to zero—zero harm to our employees, zero harm to our environment and zero harm to the communities in which we operate. And we're happy to report that we continued our positive safety trends in 2020 into the first quarter of 2021, delivering on our target to zero. Now moving on to our financial highlights for the quarter. Our first quarter performance outpaced our expectations, driven by exceptional demand across all regions and end markets, resulting in a record quarter across a number of metrics. Achieving our highest TiO2 sales volume quarter in the company's history is an incredible accomplishment and is evidence of continuation of the recovery of the TiO2 cycle. Zircon sales volumes also broke company records and beat our expectations, driven by robust global demand led by China that we were prepared to meet through production as well as inventory on hand. Revenue in the first quarter increased 14% sequentially to $891 million, driven by robust market demand and higher TiO2 prices. This represented a 23% increase year-over-year. Net income for the quarter was $26 million and diluted earnings per share was $0.12, while adjusted earnings per share was $0.43. The difference between diluted EPS and adjusted EPS is primarily due to costs associated with the Q1 debt refinancing transactions and the break fee associated with the TTI transaction. Adjusted EBITDA was $225 million, another record for Tronox. This figure came in ahead of our previously guided range due to stronger zircon sales volumes and higher TiO2 pricing than we expected at the time we issued our outlook. This also drove EBITDA margins to 25% for the quarter. We generated $77 million in free cash flow after investing $58 million in capital expenditures. Given the strong free cash flow generation, we will have repaid an additional $100 million of debt by the end of the month, on top of the $300 million we committed to repay during the first quarter. During the quarter, we restructured our balance sheet, which both lowered interest and extended maturities. After adjusting for the redemption of the $450 million, 5.75% senior notes, which were redeemed on April 1, 2021, after the quarter closed, our total debt balance was $3 billion and our trailing 12-month net leverage was 3.8x. Tim will discuss these transactions in more detail a little bit later on the call. But overall, we are very pleased with the outcome, given the improvement in our balance sheet and an anticipated increase of free cash flow from the interest savings, which will enable us to continue to progress towards our $2.5 billion gross debt target. Moving to Slide 4, I'll now review our commercial performance in more detail. As I previously highlighted, the first quarter was a very strong quarter from a commercial perspective. Revenue increased 23% versus the year-ago quarter to $891 million, driven by double-digit growth in both TiO2 and zircon volumes and low single-digit percentage increase in TiO2 average selling prices. TiO2 sales volume grew 15% quarter-over-quarter, driven by the global economic recovery and led by growth in Europe and Asia. South America and Asia Pacific led volume growth in the year-over-year comparison, while North America also grew sequentially and year-over-year, but compared to the lower growth levels given the overall resiliency of the region throughout 2020. Increases in TiO2 selling prices in all regions resulted in a 3% sequential improvement globally. This equates to a 4% increase year-over-year on a U.S. dollar basis or 1% on a local currency basis. Revenue from zircon sales increased 31% sequentially. The strong recovery in China, as evidenced by their recently released Q1 GDP data and a rise in architectural completions during the quarter, was one of the primary drivers that led to a 30% increase in sequential zircon sales volumes. Pricing for zircon in the quarter remained level. Revenue from the feedstock and other products declined 29% sequentially, primarily due to the conclusion in the fourth quarter of 2020 of the mandated chloride slag sales per the FTC consent order as a remedy for the Cristal transaction, allowing us to utilize more of our feedstock produced internally which will benefit us on the cost side, starting in the second quarter, as we outlined on our year-end earnings call. The lower chloride slag sales were partially offset by stronger pig iron volumes and pricing. Our Q1 performance would not have been possible without the dedication of our Tronox team and in particular, our global supply chain, logistics and order delivery employees, who successfully navigated numerous challenges and disruptions to meet our commitments and serve our customers. So I'd like to thank all of those employees around the world. We continue to see very strong demand as we've entered the second quarter. Given the lower-than-typical inventory levels throughout the supply chain, we anticipate TiO2 sales volumes to increase in the low to mid-single-digit range over record-breaking first quarter levels, setting us up for another very strong quarter on volume. Zircon sales volumes are expected to remain elevated above 2019 and 2020 quarterly volume levels, though off of the first quarter peak, driven by global economic recovery, which is led by the stimulus that's been recently announced in China. We remain well positioned to meet the demand, given our consignment inventory levels and our ability to source zircon from multiple locations. And finally, TiO2 and zircon prices are expected to increase as we progress with our regional price initiatives. And now I'd like to turn the call over to JF for a review of our operating performance and profitability in the quarter. JF?

Thank you, John. Moving to Slide 5. As John mentioned, adjusted EBITDA of $225 million was another record for Tronox. The anticipated first quarter cost headwinds outlined during our fourth quarter earnings call, including the impact of unfavorable foreign exchange rates on our operations as well as the higher cost of pigment inventory sold in the quarter were offset by favorable price and volume, leading to adjusted EBITDA well above our previously forecasted range. Digging a bit further into the comparison, adjusted EBITDA increased 29% year-over-year, driven by improved TiO2, zircon and pig iron volume and TiO2 and pig iron selling price as well as improved production costs, partially offset by unfavorable foreign exchange. Production costs were favorable year-over-year due to the improved operating rate at our Australian mines and less overburn costs. Sequentially, adjusted EBITDA improved 10% and was primarily driven by improved TiO2 and zircon volume partially offset by headwinds from FX and increased pigment cost as projected on our fourth quarter earnings call, the latter of which will roll off after this quarter. We saw greater sequential improvement than anticipated due to TiO2 volume coming in at the high end of the range. This resulted in lower cost per ton produced in January being sold in March as our global inventory level has dropped below seasonal norm. In addition to the typical cost inflation we see every year in our global network, we began to see increased raw material and logistics costs during the first quarter and expect to see continued cost pressure for the rest of the year. As one example, electricity costs in South Africa have increased 15% in 2021. Excluding impact from FX, we will more than offset the increase with continued savings and benefit from our synergy program and the near-term savings from newTRON throughout the year. The volume and price tailwind John mentioned previously are also going to help offset increases. Taking into consideration the anticipated impact from FX, the cost inflation, a $10 million impact in the second quarter from a planned maintenance shutdown of our synthetic rutile production facility and an extended downtime at Botlek due to a longer-than-planned chlorine supplier shutdown, we are anticipating a Q2 2021 adjusted EBITDA of between $225 million to $240 million, despite the plant maintenance at our synthetic rutile plant that only occurs every 4 to 5 years. We believe our recent quarterly results demonstrate the strength of our vertically integrated business model and the strong free cash flow that it can generate. Taking into consideration the pricing momentum in the market and the expected incremental synergy and cost saving from newTRON, even after accounting for headwinds from exchange rate and cost inflation—based on our current assumptions—the $1 billion adjusted EBITDA target set at Investor Day is shown to be very achievable in the short to mid-term. On that last point, I want to expand on Project newTRON to remind investors about why we are pursuing the project, what the project encompasses and how we will achieve newTRON's vision. Turning to Slide 6. As a reminder, newTRON is our multiyear digital transformation strategy project that will standardize process and technology globally. newTRON will enhance the benefit of our vertical integration and further reduce our integrated cost per ton. The cost savings will come from four key areas: first, the project will optimize our global supply chain using state-of-the-art procurement tools, business process and capabilities to better leverage our global footprint. Second, it will improve the operation and maintenance of our assets by reducing our spend through enhanced predictive maintenance schedules. Third, it will provide enhanced automation through linking our integrated business planning process throughout our organization more seamlessly, enabling the alleviation of bottlenecks at our plants. And finally, it will provide benefit across a variety of business functions through automation and standardization, reducing costs. We are very excited about the opportunity newTRON will unlock for our portfolio, including the expected cost reduction of $150 to $200 per ton by the end of 2023. We look forward to continuing to update you on our progress. I will now turn the call over to Tim Carlson. Tim?

Thanks, JF. I want to first review the benefits of the refinancing transactions we completed in the first quarter. As a result of the great work by our treasury, controllership and legal teams, we extended our debt portfolio's weighted average maturity by approximately three years. Our term loan now matures in 2028 and our newly issued senior notes are due in 2029, which replaced the senior notes previously due in 2025 and 2026. We also reduced our interest cost in 2021 by approximately $20 million. Given the timing of the transactions, we'll see a reduction of approximately $30 million in 2022. We expect an even further reduction in 2022 with continued deleveraging, all of which will directly benefit free cash flow. Our total debt after the redemption of the 5.75% senior notes on April 1 was $3 billion and our trailing 12-month net leverage was 3.8x. Given our strong free cash flow in the quarter, we'll have repaid an additional $100 million of debt by the end of this month, on top of the $300 million we committed to repay during the first quarter. This will reduce our total debt to $2.9 billion at the end of this month. We preserved sufficient prepayable debt and remain committed to using incremental free cash flow to reduce our gross debt balance to achieve our target of $2.5 billion. Given current market conditions and the strength of our vertically integrated business model, we believe we can achieve our goal of net leverage of 2 to 3x and gross debt levels of $2.5 billion, well in advance of our previously stated target of 2023. On Slide 8, on the left-hand side, we've outlined our liquidity and capital resources after the redemption of our $455 million senior notes. As of April 1, we had $740 million in total available liquidity, including $302 million of cash and cash equivalents, which is appropriately distributed across our global operations. Our current liquidity is more than sufficient to operate the business. Moving to the right-hand side of the page. Capital expenditures in the first quarter were $58 million. First quarter CapEx is usually the lowest of the year so we expect an increase in Q2, Q3 and Q4, reflecting the pacing of expenditures related to newTRON and our Atlas-Campaspe capital projects as well as other maintenance spend to reach our anticipated level of $350 million for the year. Depreciation, depletion and amortization expense was $84 million in the quarter and we expect DD&A to be approximately $300 million to $320 million for the year. Our free cash flow for the quarter was $77 million due to our strong cash earnings despite approximately a $25 million working capital headwind, given a significant increase in our accounts receivable in March as March was our strongest sales month of the quarter. Turning to Slide 9. I'd like to share an outlook for the remainder of the year. As John mentioned, market demand remains very strong. We expect the second quarter volumes to increase in the low to mid-single-digit percentage range over a record-breaking Q1 level, setting us up for another strong volume quarter. Zircon sales volumes are expected to remain elevated above 2019 and 2020 quarterly volume levels, though they are expected to come off slightly from the Q1 peak. Both TiO2 and zircon prices are expected to increase as we make progress with our regional pricing initiatives. We expect our Q2 2021 adjusted EBITDA to be in the range of $225 million to $240 million. As JF stated, the business has done a great job of managing our costs, but we'll see headwinds from planned maintenance at our synthetic rutile production facility, increasing costs and continued headwinds from FX, particularly the South African rand and the Australian dollar, a continuation of the trends from the first quarter. The rand is trading sub-14.5 versus 18 a year ago and recall that one move in the ZAR is equivalent to approximately $7 million to $8 million on a quarterly basis. The Australian dollar is trading today around $0.78 versus $0.66 a year ago. Recall that a $0.01 move in the Australian dollar is equivalent to approximately $1 million to $2 million on a quarterly basis, take into account our current hedge, which will benefit us through the second quarter of 2022; beginning in the third quarter of 2022, that will increase to $2 million to $3 million a quarter. Moving to our expectations for the full year in terms of uses of cash. Due to the refinancing transactions, we've reduced our anticipated net cash interest by $20 million to $140 million to $150 million. We expect $30 million to $40 million of cash taxes, narrowing to the high end, given increased earnings expectations for the year, capital expenditures of $350 million, which include expenditures related to newTRON and Atlas-Campaspe, and net pension contributions of less than $10 million. We continue to actively manage working capital and are currently expecting it to be a modest source for the year. Net-net, we expect strong free cash flow generation that will be used to continue to delever over the remainder of the year. This represents our estimates based upon the current market outlook. We also remain confident in our ability to generate strong free cash flow for the year; high-return internal investments and debt paydown remain our highest capital priorities. As I mentioned, based upon our current outlook, we anticipate achieving our $2.5 billion gross debt target well ahead of our 2023 goal. We also want to remind investors of our significant tax attributes with approximately $5.6 billion in total NOLs and $4.5 billion of that in the U.S. We do not expect any material impacts from any currently contemplated changes in the U.S. tax code. Our total deferred tax assets are in excess of $1 billion. I'll now turn the call back over to JF for closing remarks before opening the call up for questions.

John, Tim and I are very pleased with the results we delivered in the first quarter. This is an exciting time for Tronox. We remain confident that with our portfolio of assets and market position, we are prepared to continue capitalizing on the momentum and delivering on our commitment to our shareholders. We have continued to operate with the future in mind and are digitally progressing on our previously identified key capital projects to reduce costs and ensure we sustain our advantaged position. Much like John started with a comment on safety, I'd like to conclude with a comment on sustainability. You often hear us talk about vertical integration as an advantage, one being the opportunity for positive impact across the full spectrum of our operation. We see the elements of sustainability as having been embedded in our company for years. We look forward to sharing more detail with you in our upcoming sustainability report that will be published midyear and through our regular dialogue. That concludes our prepared remarks. And with that, I'd like to open the call for questions. Operator, Jason?

Our first question comes from John McNulty from BMO Capital Markets.

Congratulations on some really solid results. So when I think about the Q2 guide, you're calling for sequential volume growth that looks to be in the low to mid-single digits, admittedly off of a really high base. I guess, when you think about any potential gating factors in the event that the demand environment is stronger. What would those gating factors be? Again, if there are any that maybe hold you back?

Thanks, John. Look, from the standpoint of—to your point, we had a very strong first quarter, quite frankly. From a seasonality perspective, Q4 and Q1 are normally quarters where we would be building inventory, and we drew inventory down in Q4 and significantly drew that down in Q1 as well. So growth of—again, we had a record volume in Q1. So growth of low to mid-single digits is what we see as achievable from the standpoint of where we are today. To the extent volumes grow over and above that, obviously, we'll do what we can to make sure we fill those requirements. There's a fair amount. I'm sure we'll get to talk a little bit about China. But from the standpoint of a lot of the demand that we have been seeing has been coming from China. It's been coming from a lack of exports into the rest of the world. So when we think about how we're making commitments to fill that volume, we're looking at trying to tie the additional volumes to longer-term agreements. So I hope that answers your question; to the extent there is a stronger pull on demand, we do what we can to make sure we can meet that.

Got it. Okay. No, that definitely answers the question. And then just as a follow-up, you spoke to inventory levels. It sounds like not only your own, but the industry is at kind of below normal levels. Have you seen much in the way of restocking it? Or is it really kind of hand to mouth at this point and the restock is still on the come?

Yes. Look, from the standpoint of restocking, we do believe that inventory levels throughout the supply chain have been reduced. Clearly, customers are trying to rebuild those supply chains, but based on order patterns at this particular stage—and quite frankly, to your point, I can't speak to the industry, but our inventory levels are well below seasonal norms—I just don't think that there's a tremendous opportunity for those inventory builds to be actually completed based on current supply constraints.

Got it. And maybe if I can just sneak one last one in. I know you had indicated on the last call that you were going to have some high-cost TiO2 inventory kind of working through your system. I guess, with regard to zircon, did it have any knock-on effects for that too? Did you have higher cost inventory? I know it's kind of more of a derivative product, but was there any knock-on effect in zircon profitability as we think about how some of the higher cost or fixed cost absorption, heavy kind of inventories work through the system?

John, it's JF. Look, on the zircon side, the fluctuation is very small. The reason being, as you know, we're vertically integrated, but we're slightly short so that allows us to always run our mine at full capacity and maximize the fixed cost absorption by doing that. That's obviously made our zircon cost more even than what happened with the TiO2 when we had slowed down the plant in Q3 2020.

And when you think about the volumes that we delivered in the first quarter, the production that we had in Q3 of 2020—we did slow down a bit. We started to build that capacity back up in Q4 and Q1. But to JF's point, we never slowed the mining process down, and that's really what allowed us to meet a lot of the increased demand through additional production from the zircon side and inventory.

The next question comes from Frank Mitsch from Fermium Research.

A nice start to the year. I was certainly struck by the comment about European strength. Is that really predominantly driven by the pullback in Chinese exports? Or are you actually seeing some underlying demand take place there? And any comments you can offer about regional pricing would be helpful as well.

Frank, it's JF. Look, I'd say that the stimulus that all the governments around the world have put in place has created a very strong demand worldwide and China is experiencing a huge growth at the moment. So more of the local TiO2 stays in China. But look, that growth has been experienced everywhere. I guess it's—we call it a different economy. I mean, people are obviously not traveling, and they're not entertaining the same way that they used to be because of COVID, but that has created demand for basic products like ours and that's what we see.

And from the standpoint of pricing, Frank, we don't typically provide guidance on regional pricing. But as we noted in the call, we're progressing towards regional price initiatives and expect additional price improvement in both zircon and TiO2 in the second quarter. And on top of the stimulus, though, we are seeing a demand pull in Europe. It's not just stimulus generated; it's what we believe to be true demand, and we clearly see it through our order book. And there's an element of some of the Chinese volume that may not be exported over there, but we're also picking up some share by locking that in with longer-term agreements.

Got you, very helpful. And then if I could just follow-up on Saudi Arabia. Any update that you can provide in terms of Jizan? And any update you can provide in terms of production out of Yanbu?

So let's start with Jizan. There's not a lot of change since our last earnings call. Metso Outotec is still working at modifying the smelter. And look, I talked to you about some of the delay created by COVID-19 and the difficulty to have some people going to Saudi Arabia. The Suez Canal, believe it or not, also had an impact on some key components that were being shipped to Jizan. So I'd say that we're probably four weeks behind where we thought we would be in the last three months. So we lost basically another four weeks because of COVID and logistics-related issues. So that's basically where we are on Jizan. And Yanbu—we have cranked up Yanbu given what we see from a demand point of view for TiO2. So we have restarted all of our lines in Yanbu. We mentioned to you, we have six lines in Yanbu, and in 2020 because of the low demand, we were only running two. So we now are back to six lines operating. And this is what will allow us to create some of the synergy that we talked about by producing more TiO2 out of Yanbu running harder. It is also challenging with COVID-19 to have some of our expats travel to KSA at the moment. But with vaccination, the border should reopen in June and that would facilitate the transfer of know-how that we want to encourage to really ramp up Yanbu to its best capacity. I hope that answered your question, Frank.

The next question comes from Josh Spector from UBS.

Just on zircon volumes, given the strength in the past couple of quarters and you're talking about somewhat modest decline, I think, sequentially into Q2, where do you think volumes could be for full year 2021? Or maybe another way to ask is, what's your capability to supply in 2021 based on the capacity that you guys have?

Thanks, Josh. From the standpoint of inventory, we did finish the third quarter last year with a bit more inventory. The fourth quarter, quite frankly, was a good quarter, and we drew additional inventory down in Q1. So as we stated on the call, our inventories at this particular stage, we feel confident that we can deliver similar volumes in the second quarter. A lot of what's being driven by this additional demand is actually coming from some additional pull in China. And a lot of that actually has to do with some additional ceramic production that's being driven toward higher-quality large-format tiles; there's a lot of Chinese producers that have actually installed new capacity for that. So that's driving demand. We're also getting some additional volume through a bit of a channel change from the standpoint of where historically you would have seen buildings being built for apartment complexes that weren't finished. There's now a change or migration to finished buildings where you've got contractors that are actually spending a tremendous amount of volume or buying a lot of volume upfront. So you're getting a shift in the way zircon is actually purchased for ceramic tile applications.

Maybe I'll add that on the production side, with our production capability and with the inventory that we have on hand, we feel very comfortable to meet the customer demand for zircon. So it's going to be really more the logistics of distributing that material.

Okay. I appreciate that. And just if I could try another time on TiO2 pricing. So not looking for your forward commentary, but within Q1, can you talk about the difference in pricing that you might have achieved by each major region?

So with regards to pricing, in Asia Pacific, we saw a big push, obviously, in China. That was the first place that we saw significant increases in pricing, which actually started in the fourth quarter. And then with regards to the balance of the world, I'd say those were evenly distributed with the exception of South America, where we saw some significant increases. As far as forward-looking on pricing, I can't provide a lot of detail on that.

The next question comes from Duffy Fischer from Barclays.

First question is just on pigment. So if you look at your sales volumes in the first half and kind of that run rate, how do those sales volumes line up with your ability to produce pigment? And this year, what would you estimate your maximum effective pigment production to be on a tonnage basis?

So look, from the standpoint of normal seasonality, you would build inventory in Q1 and Q4 and you draw it down in Q2 and Q3. As I mentioned earlier, we drew inventory down in Q4. We drew it down in Q1, and we would expect to be somewhat closer to our production levels in the second quarter, but there'll probably be a bit of a draw there as well. So we will be able to continue to meet the demand through production, but there is an element of continued inventory drawdown if we look at our forecast through the balance of the year.

And Duffy, maybe you know that those plants are not like a switch that you turn on and off. We certainly slowed down last year in Q3 and Q4 and were not running our assets at full capacity. We obviously turned them up toward the end of the year. I mentioned Yanbu—that's the biggest swing plant that we turned on—but I'd say all of our plants are in a good place and we expect to produce more in the second half of 2021 than we did in the first half of 2021. And with the newTRON and with the synergy target, we will continue to debottleneck those assets, and we feel very confident that we can meet the demand of our customers. Look, the reality is the demand cannot increase 15% quarter-to-quarter; that's not how we plan the medium to long term.

Fair enough. And then just maybe a philosophical question on price. Your reported price in Q1 is lower than when you closed the deal, if you just follow the sequential pricing trends that you've given us each quarter. But yet if you look at almost every posted spot price globally, Q1 would be much higher than what pricing was in 2019. Obviously, you've got some long-term contracts. But philosophically, how should your realized price track kind of global spot prices that we would get over multiple years? How does that smooth in, in general?

Duff, global spot prices are a bit different than our average selling prices. As we said in the last call, we lost globally about $300-ish of pricing over the last three years, and that was predominantly in 2018 and 2019; 2020 was relatively flat. We would expect to get that back quicker. The 3% increase that we got in the first quarter and the guidance that we provided with additional pricing opportunities moving into the second quarter give us confidence that we're making good progress. And as a recovering economy, we expect to continue well into the year and into 2022.

The next question comes from Vincent Andrews from Morgan Stanley.

Maybe you could just talk a little bit about in TiO2, the sort of end market demand you're seeing, whether it's from coatings or packaging or even the paper markets, where are you seeing particular strength? Is there anything surprising you? Did you have any impact from—in the U.S.—from all the outages on the Gulf Coast from the plastics or packaging customers, so maybe we could start there.

So from the perspective of how the market's developed over time, I would say coatings in North America remained relatively strong even through 2020. It depends upon the region. Obviously, we had a lot of downturn due to COVID. But I would say coatings was doing very well, and now we're seeing every market—whether that's paper, laminate, plastic, industrial coatings—all those markets are doing very well. And from the standpoint of our ability to forecast where that growth is coming from, it's coming from all the regions. Specific to your question about what happened in the Gulf, we did have some customers that had some issues associated with the outages from that very cold weather event that largely affected the Houston area. And again, that gives us some confidence that what we're seeing in the second quarter is some actual pent-up demand. So it kind of goes back to the question where people building inventory. There wasn't a lot of inventory to be built in that situation because some of our customers weren't running at capacity.

And if I can just ask on the working capital. If I heard you correctly, you expect working capital to actually be a source of cash for the full year. And I guess I'm just trying to bridge that with the idea that the volume you sell is going to be up, the price is presumably going to be up. The cost of production are presumably going to be up. So maybe the other thing I heard through the course of this was that you're probably expecting to not have built much inventory yourself through the course of the year, potentially have lower inventory. So is that the key driver of why working capital is a source? Or is it just particular things you're doing as part of your cash management plan? How do we bridge to working capital being a source of cash despite higher prices and higher costs and higher sales volume?

Vincent, it's Tim. Thanks for the question. You had all the components with the exception of payables. We have a current initiative with our supply chain team to extend terms on most of our suppliers. So we'll see an improvement in payables year-on-year by the end of the year. And as you mentioned, inventory will be a source as well. And given the timing of receivables, given that November and December typically aren't large sales months relative to other months, we should see a little bit of a pickup at the end of the year in terms of cash collections to help that metric.

Okay. Congratulations.

Next question comes from Hassan Ahmed from Alembic Global.

It seems to me that when I listen to certain industry consultants there was a price hike on the table for January, another one for April, another one for July. Beyond that, the backdrop seems to suggest that the ore side of things is tight. One of the largest ore producers talked about their production volumes being significantly lower through the course of Q1. So my question to you is with these price hikes that have been announced, what is realization of these price hikes looking like? And particularly now with ore availability being quite tight, what are you thinking in terms of further price hikes? You guys are in a unique situation being as integrated as you are relative to other producers in the market.

Thanks, Hassan. I'm not going to comment on all the announced price increases—everybody has a different cadence and way of doing that. We do that through direct communications with customers. That being said, where we were on price implementation—we noted in the prepared comments that pricing actually increased a bit more than what we had anticipated when we gave the outlook back in February. That was clearly due to higher implementation rates on increases that we were working on regionally than we had originally anticipated. With regards to feedstock cost, again, we're vertically integrated. About 15% of what we need to make our pigment is sourced outside of Tronox. So we're not nearly as impacted as others might be due to ore inflation, but we do see that as an element. Our pricing strategy is largely driven more toward supply and demand. So as long as supply and demand continues to move in the right direction, which we anticipate it will, we'll see pricing initiatives continue regionally. We also have to remember that there are margin stability agreements that we have in place, so there will be some dampening effect as we get further into the year. But right now, again, the 3% increase that we had globally in the first quarter and our indication that we'll see additional pricing into the second quarter give us confidence that we're making good progress.

Got it. Got it. And now in terms of volumes, obviously, strong volumes in Q1. You guys came in at the higher end of your guided range, and you're guiding to volume strength in Q2, fairly strong as well. It seems there are a couple of puts and takes. In Q4, one of the themes that was being talked about was how the Chinese producers were, I guess, lagging behind or not being able to meet their commitments. It seemed that there were some market share gains in Europe, in particular, where the western producers were benefiting from the production or supply curtailments on the Chinese side of things. And then thereafter, obviously, you have a large producer out there talking about regaining market share through the course of this year as well. So could you talk about your volume guidance a little bit? Are you seeing any continuing shifts in trade flows, market share changes? Any color around that would be helpful.

So I'll go back to the comment that I made earlier around demand. We do see demand growing, and JF started with stimulus and now we're seeing pull—something over and above just stimulus; it's demand growth in every region that we're supplying. Clearly, if you go back to 2018 and 2019, there was a lot of additional exports coming out of China on a regular basis when China wasn't very strong. As the market rebounded in China, a lot of what was being exported is being consumed internally. Prices in China moved much quicker. We talked about our pricing in the China region actually starting to move back in the fourth quarter significantly. So those exports from a Chinese perspective are better suited to stay in-country because the prices are higher and the cost of logistics are very expensive right now to export material out. So have we gained some share in Q1 due to some of that? We actually gained some share, I would believe, in Q4 and Q1 on some of the share we may have lost historically against the Chinese. What we're doing now with customers is trying to make sure that we lock in those agreements for longer periods of time so that we're not just a relief valve for some of this more tactical movement on the regional shifts.

The next question comes from Jeff Zekauskas from JPMorgan.

I've got two questions. First, with your goal to reduce cost by $150 to $200 a ton, how much progress have you made already? If a big part of that is ramping up Yanbu, does that mean you have to lower production somewhere else to get the benefit? How do you realize this $150 to $200 a ton? How long will it take you? Where are you now? Second, why are TiO2 prices so slow to move? Many commodities are up enormously; TiO2 is basically flat year-over-year and up a couple of percent sequentially. What is it about the industry that doesn't allow it to capture more price? Is it Chinese exports into the rest of the world? Is it everybody operating at too low utilization rate? Why is everything going in slow motion?

Jeff, when we talk about the $150 to $200 additional cost reduction, this is linked with Project newTRON and Project newTRON is just starting for us. So I think we were clear that we will see the benefit before the end of the project, but we haven't seen any of those cost reductions yet. We should start to see some in Q4 this year, and then it will continue to progress in 2022, achieving the full benefit in 2023 toward the end of 2023 through the deployment of newTRON. We obviously had cost reduction based on our synergy work in 2019 and 2020 and those synergies are real; they improved our cost position. The synergies we're talking about for 2021 are linked to volume. We're not slowing down our operating plants; we're just selling more to our customers, and that's where those benefits also come from. I hope that clarifies the difference, Jeff.

Jeff, on the price question—it's all about perspective. Over the last three years, prices remained relatively stable considering the market that we were in. We didn't lose a lot of price. If you think about where pricing went in the last down cycle, it was significantly below current levels. Margin stabilization had significantly benefited us over the last three years; it allowed us to continue to reinvest in the business throughout the cycle. Moving into the first quarter, I think our price increase was a good price increase from the standpoint of where we were. We've got good momentum going into the back half of the year. Finally, one thing about this particular product is there is no single index for TiO2, so comparisons to other commodity indices aren't always directly analogous. Our objective is long, stable growth, and our pricing strategy with customers is intended to benefit our investors long term.

The next question comes from Roger Spitz from Bank of America.

Regarding 2021 free cash flow guidance. Besides the items you spoke about, are there other cash items we should think about, for instance, cash restructuring, et cetera?

Roger, it's Tim. There really aren't. Given the nature of our vertically integrated business model and the fact that we've got the Cristal integration completely behind us, there aren't any other significant uses of cash that I did not speak to.

Great. And the zircon volumes, if I remember correctly, they can be lumpy due to ship departure timing. Did this occur at all given your substantial volume movements this quarter?

From the standpoint of what happened in the quarter, we definitely saw some lumpiness and we had a range in that EBITDA that we gave you for the first quarter and some of that had to do specifically with logistics and the risk of not getting volumes out in the quarter. Our logistics, OTD and supply chain group did a great job and we actually delivered a lot more on those shipments than we historically have. We've also repositioned some of our volume. In the downturn, not a lot of what we make on the zircon side was sold in South Africa and Australia. We had inventory positioned to meet additional demand. So part of what we did in COVID was reposition a lot of the inventory so that when the market rebounded, we would be well positioned to meet it. So that has helped a little bit with that historical lumpiness.

I think that's right. But I think what you're suggesting is by repositioning and basically keeping the zircon inventory closer to the company, you may have, going forward, reduced the historical lumpiness of volumes that we've seen. Is that—am I reading that correctly?

You are reading that correctly. Keeping the zircon volume closer to the customer helps us alleviate that lumpiness and it also helps with planning the shipments a bit better; it's a planned shipment for a customer and it's a revenue move as opposed to an inventory move where it can be invoiced directly inside the quarter.

The next question comes from Travis Edwards from Goldman Sachs.

I believe in your prepared remarks you mentioned raw material and logistics cost inflation citing electricity costs going up in South Africa. I was just curious if you can elaborate on maybe those two factors as far as what you're seeing either in South Africa or more globally at the entire business—what are you seeing in logistics and raw material cost inflation?

Travis, we certainly see on the logistics front that being a vertically integrated producer helps because we know what we will have to move internally and we contracted a lot of that cost. But every spot shipment we have to do outside of those normal routes, we've seen huge increases in price. There's high demand for vessels and for moving goods around the world, and we're not immune to that reality. One thing we decided to do is that the price of ilmenite in China continued to go up in Q1 and we had excess ilmenite in our South African operations. So we sent some of our own ilmenite to feed our pigment plant in China, which was a huge cost advantage compared to buying expensive Chinese ilmenite, but there was a high logistics cost to do it because that's a route we had not established earlier. Regarding electricity in South Africa, Eskom is the government entity that produces electricity and it's very difficult to predict how price will move. There's been a large increase, and combined with exchange rate moves, that creates a double impact. Last year the rand was around 18 to the dollar; it's around 14.5 now. So you had electricity increases but the rand was going down. The exchange rate is the most challenging cost we're facing at the moment. That's why we have done a lot of work with Project newTRON and with the synergy initiatives to mitigate the impact of those costs and continue to deliver a good margin on our product. We're confident those cost reductions are real and will help fight that inflation pressure.

Yes, that was great color.

There are no more questions in the queue. This concludes our question-and-answer session. I'd like to turn the conference back over to John Romano, Co-Chief Executive Officer, for any closing remarks.

Thank you. I want to thank everyone on the call for your questions and your interest in Tronox. This is the end of the call. So have a great day.

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