Tronox Holdings plc Q1 FY2022 Earnings Call

Hello, everyone and welcome to Tronox Holdings First Quarter 2022 Earnings Call. My name is Juan and I will be coordinating your call today. At this time, all participants are in listen-only mode. I would now like to turn the call over to Jennifer Guenther, Vice President of Investor Relations. Please go ahead, Jennifer.

Thank you, and welcome to our first quarter 2022 conference call and webcast. Turning to slide 2. 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 the presentation on our website at investor.tronox.com. 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. During the conference call we will refer to certain non-US 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 US 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. Moving to slide 4. It is 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'll start this morning by setting the stage with a quick overview of Tronox. We're the world's largest vertically integrated TiO2 producer with nine pigment plants, six mines and five upgrading facilities across six continents. Our 2021 revenue totaled $3.6 billion, which was fairly evenly distributed across the Americas, Europe, the Middle East and Africa and Asia Pacific. Our 1.1 million tons of pigment capacity supports our well-balanced space of approximately 1,200 customers globally. Our vertically integrated business model supplies approximately 85% of our internal feedstock needs and this ensures consistent and secure supply for our customers. In addition to TiO2, we also generate significant value as the world's second largest producer of zircon with approximately 297,000 tons of capacity. We are proud of the organization we've created following the transformative Cristal acquisition three years ago and the value we have and will continue to generate for our stakeholders. But before turning to the first quarter highlights, I want to address the crisis in Ukraine. Our financial exposure is minimal with less than 1% of our total revenue from Russia and Ukraine combined in 2021. More importantly, our hearts go out to those impacted by the conflict and we offer our support to those who are affected. Now let's turn to slide 5 to review our first quarter results. Tronox delivered solid first quarter results and continued to serve our customers against a backdrop of increasing costs, higher commodity prices, logistics constraints, and extended downtime at our Stallingborough UK pigment facility, which has since been resolved. It is a testament to the dedication of our employees that we've continued to deliver results in line with our expectations while overcoming these ongoing challenges, so we thank the Tronox team for their commitment. Despite the challenging operating environment we delivered adjusted EBITDA of $240 million within our guided range. In the quarter, we invested $103 million in key capital projects. This included newTRON, our project to digitally transform our global portfolio, which is expected to generate savings of $150 to $200 per ton on a run-rate basis by the end of 2023. We also invested in our mining extensions in South Africa and the Atlas Campaspe mine in Eastern Australia and JF will review these investments in more detail later in the call. We generated $86 million in free cash flow from our strengthened and differentiated business model. On April 4th, we closed the refinancing transaction, enabling the achievement of our previously stated $2.5 billion gross debt target ahead of our 2023 goal while also reducing cash interest payments, extending maturities and increasing pre-payable debt. We repurchased 1.4 million shares of our stock in the quarter totaling $25 million and have $275 million remaining under the Board approved share repurchase program through February of 2024. Finally, we announced a significant renewable energy project in South Africa, which we will now review on slide 6. In March we announced that we entered into a long-term power purchase agreement with South African independent power producer SOLA Group to provide 200 megawatts of solar power to our mines and smelters in South Africa. This project is expected to provide approximately 40% of Tronox's South African electricity needs and lower our worldwide Scope 1 and 2 emissions by approximately 13%. We anticipate the project should be fully implemented by the fourth quarter of 2023. This project is only one example of numerous initiatives and investments we are pursuing to meet our publicly announced goal to align with the global warming scenario below two degrees Celsius and achieve net-zero greenhouse gas emissions by 2050. More information about our sustainability initiatives will be available in our 2021 sustainability report expected to be published by midyear, which we will expand on further at our Investor Day on June 16th. Turning to slide 7. I will briefly review our first quarter financial highlights in more detail. Revenue of $965 million represented an 8% increase versus the prior year, driven by higher TiO2 and pig iron revenue. Income from operations includes the one-time settlement fee totaling $85 million, representing the break fee and related negotiated interest. Our effective tax rate in the quarter was 53%, due to the settlement and tax rate changes in foreign tax jurisdictions. Without these items, our normalized Q1 effective tax rate would have been 25.5%. Our GAAP diluted earnings per share was $0.10 and our adjusted diluted earnings per share was $0.60, an increase of 40% year-over-year. Adjusted EBITDA of $240 million represented a 7% increase. Our margin decreased 40 basis points to 24.9%, impacted by unfavorable product mix related to zircon, logistics constraints, higher commodity costs and the extended downtime in Stallingborough. Free cash flow of $86 million increased 12%. Now moving to slide 8, I will review our commercial performance in more detail. Our first quarter results were in line with our expectation with our team continuing to manage strong customer demand while navigating a number of macro challenges including continued input cost inflation and supply chain disruptions. Total revenue increased versus the prior year driven by TiO2 and pig iron sales, partially offset by lower zircon revenue and currency headwinds. Revenue from TiO2 sales was $773 million, an increase of 11%, driven by a 20% increase in average selling prices on a local currency basis or an 18% increase on a US dollar basis, partially offset by a 6% decrease in volumes. Sequentially, TiO2 volumes increased 9% at the high end of our previously communicated range, driven by higher volumes across all regions, while average selling prices increased 6% on both a local currency and the US dollar basis. Although we continue to monitor the macro situation, TiO2 demand remains solid. TiO2 supply/demand balance remains tight due to continued strong demand while inventories remain low and delivery times continue to be extended by shipping delays and supply chain disruptions. Zircon revenue decreased 12% to $108 million, driven by a 38% decrease in volumes, partially offset by a 43% increase in average selling prices. Sequentially, zircon volumes declined 20%, while average selling prices increased 14%. The volume decline on both a year-over-year and a sequential basis are due to higher sales volumes from inventory in the previous quarters as we communicated previously. Revenue from other products was $84 million, representing a 17% increase, primarily due to higher pig iron volumes and higher average selling prices. Our dedicated team of employees is working to ensure we earn the right to be the supplier of choice for our customers. We have substantially increased the number of long-term volume contracts with our global customer base, securing our volumes well beyond 2022. Our demand outlook for the year remains solid, as TiO2 market tightness persists, while inventories remain below seasonally normal levels and similarly positive trends continue in the zircon and pig iron markets. While we experienced unexpected challenges this quarter, Tronox remains well positioned to continue to overcome these adverse conditions. With our enterprise optimization model, we are able to maximize our global footprint and we are investing to sustain our competitive advantage. We are focused on executing against our strategy to deliver safe quality low-cost sustainable tons for our customers. Our expectation for TiO2 market demand growth in line with GDP in 2022 remains unchanged. This will be supported by the need to replenish inventory throughout our customer supply chain channels. Distribution remains extremely challenged headed into the second quarter. Considering this as well as low inventory levels, we anticipate TiO2 volumes to be in line with the first quarter of 2022 levels. We expect TiO2 pricing to continue to increase, reflecting strong market demand and commodity price increases. Zircon sales volumes are expected to increase slightly sequentially, benefiting from some orders that rolled over from the first quarter, but we remain more in line with production levels for the remainder of the year. Zircon pricing improvement in the second quarter is expected to more than offset the volume headwind on an EBITDA basis and we expect this trend to continue for the full year. I will now turn the call over to JF for a review of our operating performance and profitability in the quarter. JF?

Thank you, John and good morning everyone. Moving to slide 9. Our adjusted EBITDA growth of 7% to $240 million was driven by higher pricing across all products and favorable exchange rates, partially offset by higher costs to serve our customers including increased commodity costs, lower volume and unfavorable product mix, primarily due to zircon. Freight rates remain elevated, while demurrage expense in South Africa drove most of the incremental costs due to port congestion. We incurred higher mining costs, including raw material and natural gas, driving higher costs per ton. Favorable exchange rate impacts on cost of goods sold more than offset unfavorable exchange rate impact to revenue, resulting in a net positive impact overall. As a reference, our TiO2 manufacturing Q1 cost per ton has increased nearly 20% compared to the prior year with the largest increase from natural gas, sulfuric acid, chlorine, coke and electricity. However, we are confident we can continue to improve margins due to the continued solid market demand, favorable feedstock position and our ability to implement pricing across all product lines. Turning to slide 10. I will review how executing against our strategy will enable us to continue differentiating our business and meet our financial targets. We remain committed to executing our strategy to become an advantage vertically integrated global TiO2 leader. Foundational to our strategy is to produce low-cost high-quality pigment for our customers and sustaining our integrated global footprint to ensure security of supply for our customers and optimize our global footprint. Our mining and upgrading facilities continue to run at high operating rates at a time when feedstocks are critical. This combined with our integrated planning capability will allow us to increase production and produce up to 40,000 tons of additional TiO2 this year versus 2021. Our effort and capital expenditure will continue to be dedicated to pursuing our strategic objective through projects like newTRON and our mining projects. Our strategy drives our ability to leverage our unique portfolio to optimize our assets and secure our position as the most adaptable resilient TiO2 industry leader allowing us to continue to deliver industry-leading financial performance. Turning to slide 11. I will now review our key capital project that will unlock future value creation from our assets. If we look at our major strategic capital projects, they can be divided into two categories: the first being growth and cost-saving capital; and the second as vertical integration related capital. newTRON falls under the first bucket. newTRON is our strategic multi-year global digital transformation project. The second bucket relates to sustaining our vertical integration. Our business model is our source of differentiation and investing in our mines is critical in sustaining that advantage. Atlas-Campaspe represents the next phase of our mining plant in Australia and the Namakwa and Fairbreeze extension represent the next phase in South Africa. Atlas-Campaspe, as a reminder, is expected to come online in the second half of 2022 to replace the Snapper/Ginkgo mine as they reach end of life. These elements are abundant in natural rutile high-value zircon and high-grade ilmenite suitable for synthetic rutile slag processing or direct pigment production. The investment in Atlas-Campaspe will also put in place the infrastructure for this new mining area where we have other important future mining resources in our portfolio. The Namakwa and Fairbreeze extension will ensure sustained production beginning in 2024 and 2025 respectively and extended mine life in South Africa beyond 2035. In total, we anticipate investing $150 million to $175 million in 2022 across our mining projects, which will sustain Tronox's 85% internalization of feedstock supporting over $300 per ton saving relative to average high-grade feedstock market price. Turning to slide 12. I would like to review the various elements of newTRON and remind investors of why this project is so transformational for Tronox. newTRON will transform our business, enabling us to remain among the lowest cost TiO2 producers and enhance service to our customers. We will achieve this through an optimized global supply chain, efficient maintenance spending, enhanced automation and throughput, and standardized processes. The new vendor management system put in place allows improved handling of catalog purchase orders and invoices, enabling the optimization of our procurement activity globally and resulting in $20 million in savings in 2021. As an example of enhanced automation, we continue to see significant stabilization in our chlorinator at Hamilton as a result of a program being trialed today. This has increased the uptime of the plant and has also led to reduced coke consumption. We are very excited about these initial results and what this means for Tronox's future and for our shareholders. Efficient maintenance means our plants' employees have improved capabilities to plan and schedule maintenance before equipment failures to optimize production schedules and downtime. Standardization across our functions will lead to improved visibility and a streamlined order to delivery process enabling better data visibility and decision-making. It also facilitates the transfer of best practices from one site to another. The anticipated $150 to $200 per ton savings by the end of 2023 will come from all four of these areas, which clearly identify benefits, which we look forward to reviewing in further detail at our Investor Day. Finally, I'd like to provide a brief update on our slagging operation in Jazan. The first slag was stacked at the end of November. The ramp-up is progressing according to plan. We are continuing to utilize the slag produced at Jazan at our Yanbu facility. At a time when tight feedstock conditions are impacting the TiO2 industry a fully operational Jazan would make Tronox more competitive by strengthening our vertical integration strategy. We expect the site to continue to ramp up from here forward ensuring a safe and sustainable operation. We will keep the market updated on the progress of the site. I will now turn the call over to Tim Carlson to cover our balance sheet and outlook. Tim?

Thank you, JF. On slide 13, we provide an overview of our financial position, liquidity, and capital resources. We ended the first quarter with net leverage of 2.4 times within our previously stated targeted range of two to three times. While we ended the quarter with $2.6 billion in debt, the refinancing transaction announced in the first quarter and completed early in the second quarter enabled us to obtain our previously communicated $2.5 billion total debt target as announced in early April and extended maturities while lowering interest costs. Total available liquidity as of March 31 was $758 million including $292 million in cash and cash equivalents, which is well distributed across our global operations. Capital expenditures totaled $103 million in the first quarter with the increase driven by the key projects JF outlined. Depreciation, depletion and amortization expense was $68 million. Our free cash flow totaled $86 million due to our strong cash earnings. We returned $25 million to shareholders in the first quarter in the form of share buybacks. We repurchased approximately 1.4 million shares. There is $275 million remaining through February 2024 under the share repurchase program authorized by the Board in November 2021. We increased our dividend to $0.50 per share beginning with the first quarter dividend which was paid out at the beginning of the second quarter. Turning to slide 14. I'd now like to share our outlook. As John mentioned, we anticipate demand trends to remain solid for both TiO2 and zircon. Amidst the backdrop of continued supply chain disruptions, inflationary pressures including elevated commodity prices and ongoing geopolitical instability in Ukraine. We do not expect inflationary cost pressures to significantly abate. However, the planned increase in production through the end of the year will enable improved fixed cost absorption and help lower our cost per ton. We expect second quarter adjusted EBITDA to be $265 million to $280 million. These expectations are driven by sequential increases in pricing, zircon volumes and production rates and partially offset by headwinds from commodity cost inflation and logistic constraints. For the full year 2022, our outlook for adjusted EBITDA and adjusted diluted EPS remains unchanged. We have updated our cash use assumptions as follows: we increased working capital expenditures by $25 million to a use of $100 million to $150 million of cash as well as begin to rebuild inventories to more normalized levels and Jazan continues to produce slag. We lowered net cash interest expense to $110 million to $120 million reflecting more favorable interest rates from the refinancing transaction. We increased cash taxes to $50 million to $60 million to reflect updated assumptions and we increased capital expenditures to $400 million to $425 million to reflect higher vertical integration investments primarily for Atlas Campaspe. Based upon these updated cash assumptions as well as the one-time settlement costs, we have updated our free cash flow outlook for the year to be a minimum of $265 million. These represent our best estimates based upon our current market outlook. We continue to see significant runway ahead and expect to see earnings expansion driven by growing the top line, reducing our cost per ton through high-return capital projects, remaining focused on disciplined expense management, and leveraging our tax attributes. Turning to slide 15, I'll briefly review capital allocation. We expect to continue to prioritize capital expenditures with the projects we have reviewed driving significant value for Tronox for today and in the near future. With the remaining free cash flow, we anticipate servicing the dividend, continuing to reduce debt levels and opportunistically repurchasing shares. Our forecasted 2022 capital expenditures break down as follows: maintenance and safety capital of $125 million, investments in sustaining our vertical integration of $150 million to $175 million, growth in cost reduction projects of $100 million and other small strategic projects of $25 million. We estimate our annual returns on total capital expenditures inclusive of maintenance and safety capital to be between 25% and 30%. I'll now turn the call back over to JF for closing remarks.

Thank you, Tim. Turning to Slide 16. This page outlines our key focus areas for 2022 which remain unchanged from our end of year earnings call. As we wrap up today's prepared remarks, I want to take a moment to acknowledge the outstanding position Tronox is in due to the commitment by our organization throughout the last several years. This would not be possible without our 6,500 global employees. So thank you to everyone for your ongoing effort. With our portfolio of assets and market position, we are confident in our ability to capitalize on our momentum, execute against our objectives, and deliver on our commitment to our stakeholders. Turning to Slide 17. We are planning to hold our second Investor Day on June 16 and look forward to presenting more detail on our long-term strategy, key operational and financial aspects of the business, ESG-related practices and more. We continue to navigate the current macroeconomic challenges while transforming our company which will ensure our future remains bright. Conclude our prepared remarks. With that, I'd like to turn the call over for questions. So Juan?

Thank you. And the first question comes from Josh Spector from UBS. Please go ahead, Josh, your line is open.

Yeah. Hi. Thanks for taking my question. I guess just first on your TiO2 volume outlook the flattish quarter-over-quarter. Can you comment on what's the biggest limiting factor there? And to your comments about increasing production this year, do you expect to buck normal seasonal trends later this year and increased sales volumes, or is that a little bit more at risk and more of a 2023 benefit?

Thank you, Josh. In the first quarter, our volumes were at the top end of a range, up about 9%. Going into the first quarter, our inventories were below seasonal norms. Our team did an excellent job getting our orders out. Looking ahead to Q2, our inventory remains below seasonal norms. We mentioned the Stall outage that impacted our inventory, which reflects our efforts to keep pace with demand. Our order patterns are significantly above our flat number. If we can address some logistics issues, there's a chance we could exceed that. Currently, it appears flat, not due to demand but our capacity to meet that demand this quarter. Regarding your question about volumes, we indicated we will produce 40,000 tons of additional volume, primarily in the latter part of this quarter and continuing into Q3 and Q4. We also discussed working capital; we need to build some inventory to fulfill customer demand. We are confident that the volume increase in the second half of the year will help us meet customer demand and uphold our service levels.

Thanks. That's helpful. And just on the coproduct side, I mean a lot of discussion about zircon and obviously that's very important for you guys. But curious, if you could comment on pig iron. Prices moved up in the quarter. I'm not really sure what you're seeing, demand-wise there if there's still kind of a frenzy on that side. And really trying to think about, is that an incremental benefit sequentially about the flow-through of higher pricing there, or is that not really baked into your outlook at this point?

So Josh, it's JF here. Look pig iron as you know is always linked to iron ore. The conflict in Russia and Ukraine at the moment has limited the production of pig iron coming out of those two countries. We have seen the price of pig iron move up significantly. We haven't assumed that that would remain the case. Obviously, we don't know what will happen with the conflict. So we've been cautious in our assumption for what will happen with price. But we're not influencing the price of pig iron. We're selling everything we produce and we benefit from the bigger market in relation to that.

Yeah. We're kind of the tail on that dog. Prices have moved. When we think about the second quarter, most of those contracts are already locked in. There is that higher pricing is factored into Q2 but to JF's point in the back half of the year that's probably upside if the conflict continues.

Thank you. Our next question comes from the line of John McNulty from BMO Capital Markets. Please, John, your line is now open.

Yes. Thanks for taking my question. So, I guess, the first one would just be on Europe. Obviously, the energy outlook has gotten noticeably more difficult. I guess, can you help us to understand just given you've got a reasonable amount of exposure in Europe. How you balance the energy side versus the pricing and what looks to be still solid demand? Can you get through what you need to in terms of pricing do you think just given the fragile economic backdrop there? And so how should we think about the European assets?

John, it's Tim. Thanks for the question. As it relates to energy in Europe, our largest exposure is in Stallingborough given natural gas in the Netherlands where, as part of an industrial park, we've got forward contracts in place for the year. In Thann, it's much smaller in France and a very similar approach. We are hedged and have forwards in place for Q2 to about 67% of our exposure. Our forecast is pretty much where the current market prices are today just given the recent uptick over the last week. We're currently forecasting at that level. So not a lot of exposure as it relates to our current forecast for the rest of the year. Just given where we are with pricing right now price more than offsets some of the cost increases not just the pressures from natural gas, but also the pressures that we're seeing in sulfur in Europe, I'm sorry, in China in sulfuric acid and in Brazil in coking and anthracite across the board.

Got it. That's helpful. You mentioned earlier that the cost of production has increased by about 20%. Considering the price and newTRON, do you anticipate that the price increases will sufficiently cover that 20% rise in production costs, allowing all the savings from newTRON to contribute directly to profits? Is that the correct way to view this, or will some of the newTRON savings be offset over the next year or two due to the overall higher production costs? How should we understand this?

John, as it relates to 2022 that 20% increase in cost structure that cost is primarily focused in process chemicals and energy utilities. Process chemicals energy and utilities are actually up 60% year-on-year. As I mentioned, we are able to cover those costs from a price perspective and we do anticipate that the newTRON benefits will help us drop to the bottom line, which is one of the reasons that we remain confident in our full year range.

And that's why John we expect our margin to continue to improve.

Got it. Okay. No that's helpful. Maybe if I can squeeze one last one in. I noticed the CapEx number inched a little bit higher. Is that a function of just general inflationary trends, or is that where you're pulling a bit of future CapEx forward into this year?

John, it's the former. It's all inflation.

Thank you. Our next question comes from the line of Frank Mitsch from Fermium Research. Please, Frank, your line is now open.

Thank you. Thank you so much. I was just curious what did you size the Stallingborough impact in 1Q? Was there any spillover into 2Q?

Yeah, Frank thanks for the question. The Stall issue, the unplanned extended outage cost us about $10 million in the first quarter. We're back up and running and obviously that will be a benefit quarter-on-quarter.

In Q2, there is a slight flow-through effect due to the reduced inventory.

The impact on revenues, no impact on cost.

Got you, got you. And speaking of costs and you just detailed what process chemistries have been inflating. Just curious regarding chlorine, you mentioned chlorine is one of the ones that has been inflating for you. Can you talk about the availability and your ability to source chlorine? And what your outlook is there? Obviously, there's a lot going on in that business.

Yeah, Frank, our chlorine footprint is a bit different globally, depending upon the plant but we don't have any problem getting chlorine at this particular stage. So a couple of quarters ago we were having some issues, but at this stage availability of chlorine is not something that keeps us up at night.

Thank you. Our next question comes from the line of David Begleiter from Deutsche Bank. Please David, your line is now open.

Thank you. Good morning. Just on TiO2 pricing, what's embedded in your guidance for both Q2 and the full year?

We don't provide clear guidance as far as percentage increases. But what we can say is we would expect to see pricing continue to move up in Q2. We've already locked those numbers in. In the second half of the year considering the environment we're operating in with low inventories and demand where it is we would expect to continue to see pricing moving up in the second half as well.

Got it, very good. And just on Chinese exports of TiO2 what are you seeing right now? And what's your expectation for the back half of the year given current lockdowns over there?

Exports increased slightly from Q4, which was already a strong quarter. However, China is experiencing a slowdown in growth along with recent lockdowns. There's significant congestion at the Shanghai port, leading us to adjust our shipping operations. We have visibility into the market due to our plant in China and have shifted many of our shipments to the Ningbo and Xiamen ports, allowing us to continue moving materials. Given the current demand levels, the slight increase in exports was expected.

Yes, David, I would like to add to John's comment that the raw material supply for our TiO2 plant in China has remained stable at a high level. However, some commodities, such as sulfur, have actually seen a significant increase. In the past three months, while we previously noted that sulfur prices were at record highs, prices in China have surged by an additional 33%. This is unprecedented. To put this in perspective, producing one ton of TiO2 pigment requires about 1.2 to 1.3 tons of sulfur, which is used to make sulfuric acid. This is why we don’t anticipate any disruptions in exports from China.

Thank you. Our next question comes from the line of Hassan Ahmed from Alembic Global. Please Hassan, your line is now open.

Good morning John and JF. I wanted to revisit your comment about the cost inflation cost per ton sort of being up 20% year-on-year. I mean you guys being as integrated as you are I'd imagine that inflationary number is far higher for your competitors. Just wanted to get a sense of what you're seeing in terms of just the global cost curve. Despite all of these price hikes that we are seeing in TiO2 just broadly, is there a sliver in the marketplace which is not making money right now?

I think Hassan, thanks for your question. Yes, there is a sliver even at the prices that we're operating at now of operators that may not be making money. To your point, all those costs that impacted us by 20%, I wouldn't say are maybe significantly different from our competition, but our ability to vertically integrate and use our material internally with about a $300 per ton at a minimum advantage over and above our competitors actually helps us continue to be more competitive as we noted earlier.

Yeah. You would remember Hassan that we used to say that our ore advantage was $200 to $300 per ton. Well, what we see now it's above $300, as John mentioned. In some cases, it goes even up to $400. With what's happening with the tight ore market, that advantage should continue to increase.

Very helpful. As a follow-up on zircon, I just wanted to get a sense of what you guys are seeing in terms of supply/demand over there. Obviously a bunch of moving parts there as well, China construction being one of them, but more importantly, would love to hear what you guys are seeing in terms of the white clay side of things because obviously as I understand it Ukraine was a big, big producer of white clay, and it seems none of that product is in the market anymore.

Thank you, Hassan. I'll start with the last point. From the perspective of clay, we had a significant amount of inventory already available at many of our tile manufacturing customers. Initially, there were concerns that the clay supply from Ukraine would be affected. Fortunately, there was enough inventory, and it has become easier to source clay from other regions into Europe. In general, our estimate for the market consumption in 2021 was around 1.2 million tons. In 2022, it remains approximately the same at about 1.1 million to 1.2 million tons. Sales were notably higher in 2021 due to the need to meet demand. We estimate that the industry currently has about 160,000 tons less inventory available to meet this steady demand, which represents roughly 13% of that demand. In summary, inventory levels are lower, and supply chains are quite strained. I recently visited Europe and met with several zircon users, including tile manufacturers, and the inventory levels were noticeably low. I am very optimistic about the zircon market as we progress through the end of this year and into 2023.

Very helpful. Thank you so much.

Thank you. Our next question comes from the line of Michael Leithead from Barclays. Please, Mike, your line is now open.

Great. Thanks. Good morning, guys. First, I just wanted to ask on Jazan. I think last quarter you said you expected a site to achieve sustainable ops in the second half of this year, but I'm not sure I heard that phrase in this quarter. So is that still the plan, or is that moved at all?

Mike, it's JF. It's still the plan and Jazan has been performing according to plan. So it's still expected for the second half of 2022.

That's great to hear. And then maybe just second, a little bit broader. You're trading your stock at a quite cheap valuation on absolute or relative terms. Obviously, I think you believe you have a pretty strong medium-term outlook with the growth projects and the like. But for whatever reason, it seems like the market isn't really giving you credit for that right now. So just curious, how you guys are thinking about improving that valuation or maybe unlocking more value for shareholders here.

So maybe, Mike, I could start and let my colleague add. We're planning an Investor Day in June. It's going to be June 16. All our investors and people who want to know more about Tronox are welcome. We'll go into more detail into our strategy, our plan. We're investing a lot in our business at the moment to make it better, to lower our costs, to increase our supply to our customers, to be a strong supplier. I believe that this is what is in our control. If we continue to act and do that, people will realize that we create value and we're a solid place to invest. That's our plan and strategy.

If you think about where we are today and to answer the question around why we're undervalued. I still think there's a lot of people out there that fear things are going to move back to where they were historically maybe two or three cycles ago. We spent a lot of time working on our margin stability initiatives. This is the 20th quarter that we've been north of 20% EBITDA margins. I don't think that is something that implies an extremely volatile business profile, moving to JF's point, higher on margins back into the second half of this year. We have to continue to communicate how we've changed and transformed the business and we're confident that we can do that.

The last item that I will touch on a bit at Investor Day is really the strength of our vertically integrated business model and the flexibility that we have from our global operations as it relates to a downside scenario. There are just a number of different levers that we can pull to preserve cash and generate even reasonable EBITDA in a downturn.

Great. Thanks so much.

Thank you. Our next question comes from the line of Matthew DeYoe from Bank of America. Please, Matthew, your line is now open.

Good morning, everyone. Considering the recent shift in foreign exchange rates, particularly the strength of the dollar, how should we view this as it relates to your guidance, especially in light of the EBITDA sensitivities we've discussed before?

Matt, it will definitely be a bit of a tailwind for our guidance. We haven't changed our full year guidance, the range. The rand has fluctuated and the Aussie dollar has fluctuated quite a bit the last couple of months. Where it is currently is actually incremental upside to where we think we might come out. But what happens with FX could change tomorrow. We're in a very positive place right now, as it relates to our business model and FX could be a headwind or a tailwind depending on what happens in the marketplace.

That would be one of the elements when we think about the rand that could have a positive impact on the range, depending upon where that lands.

Thank you. It seems that the Namakwa and Fairbreeze expansion will follow with increased capacity. Should we anticipate that capital expenditures will remain high for a while? Are the spending levels from 2022 consistent with what we can expect in 2023 and 2024, or will they decrease as newTRON winds down? How do you foresee this evolving over the next few years?

Look, Matthew, we have flexibility with our capital. We have started those projects now specifically to make sure that we can adjust the capital depending on what we will see in the market. For this year Atlas-Campaspe we're just finishing the construction. It's a big year and that mine will be in operation. So no more CapEx in 2023 for Atlas. We have started Namakwa and Fairbreeze early because we want to spread that CapEx over the year. Because we see the markets for zircon and for rutile being so strong, that those projects have huge returns on capital invest. They’re good projects to accelerate. Because those mines are already in production and it's not like in the case of Ginkgo and Snapper where we had to move the operation into a different area, we had to move the mine like 100 kilometers away from where we used to mine. In the case of Fairbreeze and Namakwa, those extensions are adding capacity to existing mines, and you could always pause those and reaccelerate depending on the market conditions. That's why we said really our base capital as a company is the $100 million to $125 million which is what I call the maintenance capital. All the excess that we're spending this year is really creating value for our shareholders.

All right. Thank you.

Thank you. Our next question comes from the line of Vincent Andrews from Morgan Stanley. Vincent, your line is now open.

Hi, guys. This is Will Tang on for Vincent. Thanks for taking my question. I guess just a follow-up on a previous question related to 2022 CapEx. I mean which cost buckets like labor, equipment, etc., are you guys seeing kind of the greatest cost inflation at Atlas? And then to what extent is the cost kind of locked in for the rest of the year? Can you guys also kind of touch on what's driving that $25 million in heightened working capital needs for the year? Is it mainly related to kind of higher inventories from that 40,000 ton increase in production?

Hi, Will. Thanks for the question. As it relates to capital, the inflationary pressures are primarily third-party contract costs related to wrapping up our Atlas Campaspe project. That project comes online early in the third quarter. We don't anticipate significantly more inflationary costs above that. As it relates to working capital, we've taken a hard look at our inventory balances globally to make sure we've got surety of supply for our customers. There's a bit of a tick-up on inventory as well as just given increased revenues from improved pricing and volumes it's causing receivables to go up. That’s a little bit of an increase. As we mentioned earlier, the Jazan facility continues to produce slag. So we'll have a bit of slag inventory as well in that balance. But at the higher end of the range we'll be at the higher end of the working capital range. If things don't work out as we think, we'll manage working capital to the lower end of that range.

With regards to the 40,000 tons of TiO2 that we talked about producing, there will be an element of building some inventory. We've repeatedly talked about we're well below seasonal norms. But I would not suggest all of that's going to go inventory because we have orders that we need to meet.

Got it. And then I guess just if I could ask one question. I'm wondering, how the cost profile of electricity from that renewable energy project in South Africa compares to what you guys are realizing currently? Should we expect raw material difference, or is the motivation behind methane mainly driven by intentions to reduce your emissions profile?

Yes. Most of that benefit is going to come in 2024 because that project will be online by the end of 2023 in full force. I would say there is some advantage attached to that but not a significant amount of advantage from a cost perspective at this particular stage. We'll continue to monitor that. The only other item I was going to add to that Will is one of the issues we've had in South Africa is just the increasing cost structures related to Eskom and electricity with this project that we have with SOLA to be a relatively fixed cost structure going forward. We won't see those significant increases going forward like we do currently. Sorry about that Juan.

I think the next question comes from the line of Ed Brucker from Barclays. Please Ed, your line is now open.

Thanks for taking the question. So my first one just on guidance for the full year and I guess inflation expectations. Are you baking in that inflation is going to be flat to where it is right now for the rest of the year, or is there going to be some upside or downside leeway in there?

Ed, it's Tim. As it relates to inflationary cost structures, we're expecting continued inflation through the rest of the year, both from a logistics standpoint and also from a process chems and an energy standpoint. In fact, there's probably another $100 million of inflation that we've got in our guidance for the rest of the year. But we're relatively confident and very comfortable that we'll continue to offset that with the pricing that we have.

Got it. My next one you surpassed the debt reduction goal pretty quickly and was pretty impressive as well. But you noted that you still plan on paying down more debt. I just wanted to see if you'd be able to quantify how much more you want to pay down. And then the thought process around that to continue to reduce debt especially relative to maybe increasing share repurchases or even M&A to further vertically integrate?

Yes. So, Ed from a cash standpoint, we're very comfortable around $200 million of cash on our balance sheet just given the strength of our vertical integration and our portfolio. So excess cash that we have in any given quarter, over and above the high returning capital we've talked about, we're going to use targeting 50% continued debt reduction and to opportunistically buy back shares under the program that we have authorization from the Board.

And that $2.5 billion of gross debt was an interim target. As we get a little bit closer to Investor Day, we'll talk about announcing what that next target would be for debt reduction.

We currently have no further questions. I will now turn it over to John Romano for any final remarks.

Thank you. We'd like to thank you all for joining the call today. In summary, we remain focused on the levers within our control executing against our strategy, operational excellence and delivering on our key capital projects, as JF mentioned earlier to enhance our vertically integrated portfolio. Market demand remains solid and Tronox remains well positioned to continue to deliver on our commitments to all of our stakeholders and we'll continue to generate value for our customers and our shareholders. Thank you very much and have a great day. That concludes our call.

This concludes today's conference call. Thank you so much for joining. You may now disconnect your lines.