Welcome to the Tronox Holdings Q4 2022 Earnings Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. Thank you. Now, let me turn the call over to your host, Jennifer Guenther, Vice President, Investor Relations. So Jennifer, you may begin your conference.

Thank you, and welcome to our fourth quarter and full year 2022 conference call and webcast. Turning to Slide 2, on our call today are John Romano and Jean-Francois Turgeon, Co-Chief Executive Officers; and Tim Carlson, Chief Financial Officer; John Srivisal, Senior Vice President, Business Development and Finance. We will be using slides as we move through the call, and 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-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. 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. For those of you who have joined and may be a bit new to the Tronox story, we're the world's largest vertically integrated TiO2 producer with nine pigment plants, six mines, and five upgrading facilities across six continents. Our 2022 revenue totaled $3.5 billion and was fairly evenly distributed across the Americas, Europe, Middle East and Africa, and Asia-Pacific. Our 1.1 million tons of pigment capacity supports our well-balanced base of approximately 1,200 customers globally. Our vertically integrated business model supplies approximately 85% of our internal feedstock needs at full effective capacity, ensuring consistent and secure supply for our customers. In addition to TiO2, we also generated significant value as the world's second largest producer of zircon with approximately 300,000 tons of capacity. Our strategy is focused on positioning Tronox as the advantaged global TiO2 leader, producing safe, quality, low-cost sustainable tons. Now let’s turn to Slide 5, where I want to take a moment to cover the significant strides we made in 2022 in our sustainability performance. In our sustainability report released in June, we accelerated the carbon reduction targets we had published previously, increasing our 2025 goal to 35% from 15% emission reductions and we increased the 2030 goal to 50% from 35% emission reductions relative to our 2019 baseline. We remain committed to our net zero goal by 2050 as well as other sustainability-related commitments, including zero waste to externally dedicated landfills by 2050 and targeting zero workforce injuries. The revision to the targets was made possible largely due to the significant renewable energy project we announced in 2022 in South Africa. This 200 megawatt solar project with SOLA Group is expected to provide 40% of Tronox's South African electricity needs and reduce our exposure to electricity cost increases in the region. It's also expected to lower our Global Scope 1 and 2 emissions by 13%. And we're very excited about the positive impact this project will have on our organization, both locally and globally, as it is expected to be completed by the first quarter of ‘24. We also added additional disclosure on climate-related risks in accordance with TCFD and aligned our reporting to SASB standards. We are continuously working to understand the standards and expectations of our stakeholders and align our internal priorities accordingly. Finally, as we highlighted last quarter, we are continuously realizing increasing value from higher value co-product streams, including rare earth minerals. We continue to see demand for the types of rare earth elements found in our monazite reserves increasing, given their use in the green economy. We are exploring opportunities to upgrade the rare earth content of what we sell to extract more value from our mineral resources. Now let's turn to Slide 6 to review the key messages for 2022. 2022 was definitely a tale of two halves, and we're proud of the perseverance of our organization throughout 2022 as we ended the year very different from how it began. The first half of 2022 began with considerable momentum, while the second half was characterized by a significant market pullback starting in China, followed by the rest of Asia-Pacific, EMEA, and the Americas. Despite a 34% TiO2 volume decline and a 44% zircon volume decline in the fourth quarter of 2022 compared to the prior year, we were able to achieve full year 2022 adjusted EBITDA of $875 million and adjusted EBITDA margin in the mid-20s, while generating full free cash flow of $170 million after investing $428 million in capital expenditures. These results were driven by prudent management of production and our cost structure to align with the current market environment while remaining focused on our commercial pricing strategy. Our capital investment of $428 million in ongoing key capital projects included Project newTRON and our mining expansion projects that reinforce Tronox's commitment to strengthening our business model. The $170 million of free cash flow generated in the year came in well above our expectations. Despite the increase in cost pressures in the fourth quarter and the AR securitization initiative coming in lower than anticipated due to lower receivables, we successfully managed our cash position to more than offset these headwinds. In the year, we returned approximately $137 million to shareholders, including share repurchases and dividends. As we highlighted in the fourth quarter, the unanticipated events, namely the fire at our KZN site in South Africa and historic flooding in Australia, unfavorably impacted costs by $30 million in the fourth quarter. We were also negatively impacted on the cost side by lower absorption as we adjusted our production to be more closely aligned with the lower market demand. In total, we incurred over $60 million in costs from fourth quarter events and unfavorable absorption charges. We expect to see continued impacts of these events in the first quarter, namely on zircon tons available for sale and the cost of ore from the new mine. However, these impacts are expected to begin to improve within the first quarter, and therefore, we anticipate greater recoveries to EBITDA as we move into the second and third quarters. Slide 7 provides a bit more detail on the full year performance for your reference. So let's turn to Slide 8 and review the fourth quarter in more detail. Revenue of $649 million was impacted by a swift market contraction across all regions. Improvements and pricing were more than offset by operational cost increases and lower sales volumes. As I previously outlined, the fourth quarter includes approximately $60 million of idle facility and lower cost to market charges along with higher costs from Q4 events and lower fixed cost overhead absorption. Our effective tax rate for the quarter was 26%, while our normalized rate was 24%. Our GAAP diluted loss per share was $0.09 and our adjusted diluted loss per share was $0.17. Adjusted EBITDA in the quarter was $113 million, and our adjusted EBITDA margin was 17.4%, impacted by higher event-driven operational costs in the quarter. Our free cash flow in the quarter was $126 million. Now let's move to Slide 9 for a review of our commercial performance. While we did see a significant reduction in demand across all regions, our TiO2 volumes came in within our previously guided range for the quarter. Pricing across both TiO2 and zircon was in line with our expectation, driven by continued execution of our commercial pricing strategy. TiO2 volumes declined 28% sequentially, while average selling prices declined slightly by 1%, while FX impacts were less than half of a percent favorable. Zircon volumes declined 30% compared to the prior quarter, owing to lower production from the fourth quarter, and our zircon pricing remained relatively flat to the prior quarter. Revenue from other products was $80 million, a decrease of 12% compared to the prior year, largely driven by lower pig iron sales. The strengthening of the U.S. dollar in the quarter was a headwind to revenue compared to the prior year due to unfavorable translation impacts primarily from the weakening of the euro. We firmly believe we saw the trough in our TiO2 volumes in the fourth quarter, as we stated previously, and we're already beginning to see a rebound. We expect the first quarter pigment demand to increase from the fourth quarter, driven by a larger rebound in Europe than in other regions. We anticipate North America and Asia to recover a bit slower as demand continues to remain low, although still up from the fourth quarter lows. We expect the recovery in demand to continue as we enter into the coating season and anticipate progressively improving sales volumes in all regions as we move throughout the second and third quarters. We also continue to see the benefits of our margin stability initiatives and our financial results. Even with the recent significant volume reductions, we anticipate our overall TiO2 pricing in the first quarter to remain relatively flat to the fourth quarter level. This is driven by the variety of contract arrangements we have in the market with our customers that support our margin stability initiatives. As we've communicated previously and demonstrated in Q4, we do not expect pricing to move as it has in previous economic transitions, owing in large part to the commercial approach we successfully implemented over the last several years. I'll now turn the call over to JF for a review of our operational performance. JF?

Thank you, John, and good morning. Turning to Slide 10. Our adjusted EBITDA sequential decline was driven by lower sales volumes, higher costs, including freight and unfavorable pricing impact. FX rates were a favorable offset. As John outlined, the quarter was significantly impacted by a fire at our KZN facility in South Africa and historic flooding in Australia, which delayed the commissioning of our Atlas Campaspe mine. In South Africa, we are replacing the final spiral this month that suffered damage from the fire, and we will be back to 100% production level at the site by the end of this month. As a result, our first quarter will also be impacted by the lower zircon available for sales and the lower fixed cost absorption. In Australia, while the heavy rain abated late last year, the area where the mine is located is in a basin where the water continued to collect and resulted in never-before-seen flooding level in this millennium. We were able to reach an important milestone this month at Atlas Campaspe due to significant effort and negotiation by our team; the heavy mineral concentrate being produced is now successfully being trucked off the site using an alternate road, albeit at a higher cost. A good accomplishment given the significant impact of the flood on our inability to use the original roadway. We are enthusiastic about the value this mine will bring to our operation and the improvement to our bottom line. We will see from utilizing the feedstock. We will begin to see this in our second quarter results in the form of incremental zircon sales. All through, the cost benefits for the ore will be further delayed as it will take time for the ore to flow through our pigment plant. We expect to see a more significant benefit as we move into the second half of the year. In total, these events impacted our result by $30 million. As we previously communicated, we also slowed our production to align more closely with the lower market demand in the fourth quarter, resulting in lower fixed cost absorption and idle facility charges. This impacted results by an additional $30 million, resulting in a total of approximately $60 million of impact to the fourth quarter EBITDA. We expect to see continued impacts from these events in the first quarter, namely on zircon tons available for sales and on the cost of ore from the new mine. As a result of the commercial dynamic John previously outlined and the hangover effect from the fourth quarter events, we expect the first quarter 2023 adjusted EBITDA to be in the range of $120 million to $130 million and adjusted EBITDA margin to remain in the high teens. The impact to zircon production and our Australian ore cost is expected to begin to improve within the first quarter, and we therefore anticipate a greater recovery to EBITDA as we move into the second and third quarters. Turning to Slide 11. As a result of the macroeconomic backdrop, we are taking action to navigate the current landscape and position Tronox for success. We employ a robust process as a part of our forecasting review that enables us to plan for a variety of economic scenarios. Combined with our enterprise optimization model, we are able to react swiftly and optimize our portfolio. We continue to be laser-focused on cost reduction and have a number of levers to optimize performance across a variety of scenarios that we are executing on. We have already begun executing on our cost reduction playbook. We have implemented a hiring freeze. We are reducing professional fees, travel, and other discretionary costs. We are also optimizing our fixed costs and driving additional supply chain initiatives. We are prudently managing working capital. Declining demand drove increased TiO2 inventory levels in the third and fourth quarters. One benefit of this was enabling the replenishment of our safety stock, which has been below seasonal norm levels in the first half of 2022. Our target to be an 85% vertically integrated TiO2 producer is part of our long-term strategy. This led us to absorb market fluctuations while optimizing our feedstock assets, which have higher fixed costs relative to our TiO2 assets. As a result of current lower TiO2 production levels driven by customer demand, which is down in the 30% range year-on-year, we are taking action to reduce our feedstock production levels. This will result in slightly higher mining and beneficiation costs in the first and second quarters of the year. On capital expenditure, as we have highlighted previously, vertical integration investment and newTRON projects are key to support our medium and long-term profitable growth initiatives. However, we have implemented plans to significantly reduce our annual capital spend to be below $275 million in 2023 to adapt to the macroeconomic environment as it unfolds. While this will delay our ability to realize benefits from these projects, we do believe this is the appropriate decision for the business at this time and is consistent with our ability to flex our capital spend. We anticipate these actions will enable Tronox to generate positive free cash flow across a variety of scenarios, including our recession case. We will continue to balance cash generation while ensuring we have the product necessary to meet our customer needs and are effectively positioning Tronox for future success. I would now like to turn the call over to Tim Carlson for a review of our financial position. Tim?

Thank you, JF. Turning to Slide 12. We ended the year with total debt of $2.5 billion. Our net leverage at the end of the year was 2.8 times. Our balance sheet remains strong with no near-term significant maturities until 2028 and no financial covenants on our term loans or bonds. Total available liquidity, as of December 31, was $608 million, including $164 million in cash and cash equivalents, which is well distributed across our global operations. Capital expenditures totaled $428 million in 2022; approximately $125 million was for maintenance and safety capital, $75 million was for project newTRON, and $200 million was for operational vertical integration projects, including Atlas Campaspe. Depreciation, depletion, and amortization expense was $269 million for the year, and our free cash flow totaled $170 million, due to our strong cash earnings. We returned $137 million to shareholders in 2022 in the form of dividends and share repurchases. As this is my last earnings call before my retirement from Tronox on April 1, I would just like to say thank you for your support over the last six years. I'm extremely proud to have played a role in Tronox's transformation to where it is today, well-positioned to navigate the current environment and deliver meaningful value in the future, and I look forward to remaining a shareholder for many more years. I'll now turn the call over to John Srivisal, who will discuss the first quarter outlook. I have worked very closely with John over the past several years as a business partner on the executive team and I'm confident that the leadership, financial skills, and strategic vision he brings to the role will continue to position Tronox for success. John?

Thank you, Tim, for those kind words. Hello, everyone. I'm excited to be here this morning. I've been looking forward to meeting many of you over the coming months. Turning to Slide 13. At Tronox, we employ a robust bottoms-up analysis of our markets, operations, and the risks and opportunities in developing our forecast. While the pace and timing of the recovery remains to be seen, we are confident that we have seen the trough on TiO2 volumes. However, as John and JF outlined, we expect to continue to see the impact of zircon volumes and operating costs in the first quarter from fourth quarter events. Based on this and our current bottoms-up analysis, we expect adjusted EBITDA to be in the range of $120 million to $130 million for the first quarter. This assumes that TiO2 volumes will increase sequentially in the low to mid-teens range. As John indicated, this also assumes relatively flat TiO2 pricing given the reset in some of our margin stability contracts. With respect to zircon, we do expect volumes to decline sequentially by about 5,000 tons, owing to lower production at KZN in Australia for the reasons discussed earlier. Furthermore, due to these two events, we have incorporated into our first quarter range approximately $25 million in higher production costs. The range also assumes a headwind from FX, primarily driven by the Australian dollar and South African rand. Now stepping back from the quarter, as you would recall, we introduced a recession case at our Investor Day in June 2022. While we stand firm behind the analysis supporting that range, there are three important factors to consider in the time since then. First, we modeled the market correction starting 12 months to 18 months from our Investor Day. Instead, we saw the start of a downturn within 60 days of Investor Day. We therefore hadn't fully realized the newTRON benefits we had originally assumed we would achieve by the end of 2023. Instead, we have now delayed aspects of the project to reduce capital, which also delays the realization of savings previously anticipated. Second, the historical flooding in Australia has significantly delayed the benefits from the Atlas Campaspe mining project. And third, TiO2 volumes declined 15% year-over-year in 2022, while the recession case assumes a 10% decline. While we anticipate TiO2 volumes to sequentially increase from the Q4 trough, we expect 2023 full year volumes to be flat to slightly up from 2022. Importantly, however, pricing dynamics have played out exactly as we anticipated. As we have emphasized over the last several years, the stability programs our commercial team has put in place have successfully reduced the volatility in the market. Moving to our expectations for 2023 cash uses, we expect working capital to be approximately $150 million used, which is higher than where we'd like it to be. We are working to reduce these expected outflows through further optimization efforts. We expect net cash interest expense to be approximately $130 million, cash taxes of approximately $35 million, and capital expenditures of less than $275 million. JF shared earlier the actions we are currently taking as a business. We will continue to assess and execute against the levers we can pull depending on the economic scenarios to ensure sufficient liquidity and continued alignment of our production and costs to the economic backdrop. We remain focused on delivering on our commitments. That concludes our prepared remarks. With that, I'd like to turn the call over for questions.

Thank you. The first question we have from the phone lines comes from Duffy Fischer of Goldman Sachs. Your line is now open, Duffy. Please go ahead.

Yes. Good morning. First question, just on the last comments about the differential from your trough case. Can you quantify roughly what those three buckets would do to your trough case?

Sure, Duffy. And good to talk to you again. So if you take those three buckets separately, we first focused on newTRON savings. And as we presented at Investor Day, we expected about $150 to $200 per ton of savings. And as we shared as well, about a third of that related to volumes. So given this market environment, we don't expect to see those savings come through until the market picks up later in 2024. Additionally, a portion of that related to cost savings, which required full integration of our ERP across the globe. So a portion of that amount related to those we won't see for a while. Turning to the Atlas, as we mentioned before, we expect about we had initially assumed and related to you that about $50 million of benefit we'd see from the Atlas. However, as you can expect, just given the downturn in the market and the delay in the mine opening up, we do see some additional costs coming through. So with that and the activities that we're doing to try to bring that ore to accommodate for the floods, we'll see additional costs hitting. So that's roughly about $25 million. And then finally, as I mentioned, recession case assume 10% volume declines and we're seeing more than that.

Okay.

And there is an element. It's cost and it's the volume on that zircon that we're not getting early in the year as well.

Okay. And then just kind of a balance sheet question, volumes were down big last year, but yet your inventory was up over $200 million and now you're guiding working capital being up another $150 million this coming year as you're calling volumes kind of flattish. So what is that? Why do we need so much more working capital than we did a year ago?

Duffy, we're still building inventory. We have brought down production at our sites, but not as much as the volume on TiO2 have come down. Additionally, we are building feedstock. So that's a big portion of the build in the inventory level.

Duffy, you would realize that I mean we're 85% vertically integrated. And in Q4, we saw a drop in that and TiO2 demand in the order of 30%, and we're expecting the same drop in Q1 versus a year ago quarter. So we have to slow down our mine and smelter and those are high fixed operations. So we don't want to slow them down too much. So that's why we're still building inventory at the moment. Look, obviously, that would position us very well for the second half if we see the market picking up.

Hey, Duffy. It's Tim. The other component of working capital, and probably the more significant component, is receivables. Q4 of 2022, obviously, was a trough for the levels we've never seen before. We see the uptick in Q1. We see the uptick continuing through Q4, so just inventory levels in Q4 year-on-year with slightly improved DSOs will cause an increase as well.

Great. Thank you, guys.

Thank you. Our next question comes from the line of Josh Spector of UBS. Please go ahead when you are ready, Josh.

Hi, guys. This is James Cannon on for Josh. I was just going to ask about your 1Q outlook. It seems a little bit more optimistic that upward to mid-teens versus a competitor that was a little less optimistic. I was wondering if you could just comment on what gives you confidence in that recovery and whether you've seen that pickup so far in the quarter or you're expecting further improvement to come?

Yeah, James. So look, I mean, we can tell you what we're seeing in the market. And what we're seeing in the market, as we mentioned in the prior quarter, we thought the fourth quarter was going to be a trough. And in fact, it was; our volumes are picking up in all regions. We made reference on the call that Europe is picking up a little bit or actually quicker than the rest of the world, but we're seeing an increase in North America. We're seeing an increase in Asia. There's a lot of optimism going around in India right now. India is a bigger portion I think a lot of our investors think China is a big part of our business. India is a bigger part of our business than China is at this particular stage, and there's significant growth going on there. So when we think about where we are today compared to where we were in the fourth quarter, pigment volumes are picking up, that's why we're confident that those margins that we referenced are going to continue. We also referenced where we were on the pricing. We referenced that pricing was going to be relatively flat. We have a lot of agreements that have adjusted on the margin stability side that have allowed us to offset and actually probably overcome some of the decreases. So net-net when we think of relatively flat, that could be flat to slightly up depending on what happened. So we're confident in what we're seeing in the first quarter, and that first quarter build is going to build into the second quarter because we expect to see volumes to continue to increase.

And James, I would add to that, that obviously in Q4 with the drop of 30% of volume and with what we expect for Q1, as John said, is an improvement, but still far from what was our normal volume, and this drop is way more than what our customers are experiencing. So it was not sustainable to see the type of drop that we had in Q4.

Thank you. We now have David Begleiter of Deutsche Bank. Please go ahead when you're ready.

Thank you. Good morning. Just on zircon, how does the market react to the loss of your volumes, and what does that mean for pricing do you think for the full year?

Our volume and pricing for the fourth quarter remained flat compared to the previous quarter, and we expect stable pricing as we enter the first quarter. Although there has been a slight decrease in demand due to the downturn in China, it did not affect us significantly because we were already low on inventory, and the delay with Atlas Campaspe continued to reduce our stock. We are confident that as we approach the first and second quarters, pricing will remain relatively flat. If we had received the production from Atlas, we could have added about 5,000 to 10,000 more tons in the first quarter and potentially sold them at the same price.

Very good. And just on newTRON, all the actual savings in ‘22, what do you think they'll be in ‘23 and even ‘24 now?

So on newTRON, David, remember, we talked about an improvement of about $50 million for 2022, and we will maintain that obviously in 2023, and we're probably going to slightly increase it by, I'd say, another $20 million through automation of some of our plant and continuous development of our advanced process control and our maintenance practice because all of those elements the investments were done in '22 and the benefit will start to show in '23. As John mentioned, we have paused the ERP deployment worldwide, so that will slow down a bit the benefits related to that part of the project. And obviously, all the additional ton at newTRON worth giving us, it will be available when the market picks up. So that's in a nutshell where we are.

Very good. Thank you.

Thank you, David. We now have Frank Mitsch, Fermium Research. Your line is now open.

Thank you, and best wishes on your retirement, Tim. It was a pleasure working with you for sure. John, in response to one of the questions that was asked earlier, you talked about lost revenues and profits from zircon. And so kind of begs the question, you had a $60 million negative impact from the flood and the fire in 4Q. On your slide, you mentioned a $25 million impact in 1Q, but it sounds like the impact might be higher than that. Can you kind of step us through as to what the impacts might be here in 1Q and what lingers into 2Q?

Certainly, Frank. To start, Atlas is currently operational. The heavy mineral concentrate we extract from Atlas needs to be transported to Broken Hill, but the road there is still flooded. As JF mentioned earlier, we’ve found an alternate route to ship HMC from Atlas to Broken Hill since the main road hasn't been repaired. We are getting materials to Broken Hill and expect to see more benefits from this asset as we enter the second quarter. The major issue in the first and fourth quarters was that Broken Hill wasn’t fully operational, resulting in fixed costs. Additionally, our Ginkgo mine was supposed to stop, but we continue its operation to produce ilmenite for pigment production through Broken Hill. The flood caused various compounding effects that are impacting us as we head into Q1. Looking forward, we anticipate that costs from the fourth quarter will improve in the latter half of the year as road repairs allow for full production capacity, enabling us to use the main road for shipping again.

Yeah. And Frank, we will obviously close the mine that is the high-cost mine as soon as we could reach full production from that road, and that's the big unknown for us this year because we don't know when that road will open. We're obviously working with the county and with the local authority to try to even help them reopen that road and do what's necessary. But that's why it was hard for us to predict what would happen for the whole year.

Understood. So the way that we think about it is not just the $25 million in the production costs, but the lost zircon tons, so you're probably talking another material loss profitability in 1Q? Is that not how we should think about that? And then some of that spills into 2Q as well?

Yeah. It's about $15 million on zircon, $10 million on Atlas, and $15 million on South Africa, which is not going to repeat because as JF mentioned, South Africa is coming back online at the end of this month and that's from the fire.

Thank you. We now have John McNulty with BMO Capital Markets. Please go ahead when you're ready.

Yeah. Thanks for taking my question. So I guess can you speak to energy costs? 2022 obviously, Europe had a huge spike, rest of the world was kind of mixed. You guys were somewhat immune to that because of the hedges now energy plunged back down. I guess can you kind of help us to think about how energy will impact you in ‘23 versus ‘22 overall? How should we be thinking about that?

Hey, John. It's Tim. From an overall energy standpoint, it will be somewhat neutral for us, ‘23 versus ‘22, a little bit of incremental cost that we've built into our plan as a result of some concerns that we have in Europe, but nowhere near the level of increases that we saw in ‘21 or in ‘22, sub-$10 million.

Got it. Okay. To clarify, I understand I'm a bit confused by some earlier questions. Regarding the mining issues faced in the fourth quarter, it appears there was about a $60 million impact on costs. In the first quarter, this is expected to be around a $25 million impact. Additionally, there may be some concerns regarding zircon and your ability to manage zircon sales. Could you elaborate on whether zircon sales and volumes will increase, decrease, or remain stable compared to the fourth quarter?

So John, to take the different pieces of that, as it relates to our Q1 run rate, there's about $10 million of incremental Atlas cost that we normally would not have had. There's about 15,000 tons of zircon sales in the quarter that we would have had if in fact Atlas had been online and if in fact we did not have the KZN fire. In addition to that, as JF mentioned as part of his prepared remarks, volumes are down 30% year-on-year in the fourth quarter. And we see that again in Q1 just given the guide that we gave you on volumes. And when you're down 30%, our benefits of vertical integration, we struggle a bit because we target 85%, but when you're down 30%, we've got to slow our mines down a little bit, which we are doing as part of Q1, and that's an additional $15 million of unfavorable over absorption. So it's really those three pieces in Q1 that are impacting our Q1 guide.

I mean just from the zircon question though, I mean, so the first quarter of ‘23 is going to be about 5-ish down from where we were in the fourth quarter and then it starts to move up. But when we talk about the road, this alternate road from Atlas to Broken Hill. It's not the road that had the capability to take the volume that we would have been using on that primary road. So we've got approval to use that road on a smaller volume of material going from Atlas to Broken Hill to switch to convert that into MAGs and non-MAGs. And ultimately, we won't have full capacity until we get probably more in the mid-year when that primary road is back up and running. So that's the limiting effect. And then when you get into the third quarter, you start to see zircon numbers move back up to what those normal levels would be.

John, if you look at Q4 to Q1 specifically, as I mentioned earlier on the call, we're going to be down 5,000 tons quarter-over-quarter from zircon.

Thank you. We now have Jeff Zekauskas of JPMorgan. Please go ahead when you are ready, Jeff.

Thanks very much. Your titanium dioxide volumes were down 34%. Can you talk about the regional differences? If you group it into Europe, America, and Asia, what were the relative changes? And then if you can overlay demand from coatings and paper and plastic additives. How did those demand changes work?

Yeah. So in the fourth quarter, Europe was down more significantly than Asia-Pacific. Asia-Pacific was down, I guess I'd say, second to the Europe, Middle East, and Africa market. And then North America had not moved down as much, but it was still down. So when we think about how that breaks down into the segments, I wouldn't say there was a significant push in either direction. Maybe there was a bit more of a pullback on the paper laminate side in Europe than there was on the coating side. But we saw a destocking effect going on in the fourth quarter that was pretty consistent around all market segments. It wasn't heavily weighted in the coatings. Now, obviously, as we look into Q1, I mentioned that Q1 is stronger than Q4 in North America, although, it's growing at a slower pace, that is heavily weighted on coatings. So as we get into the coating season, we're anticipating that we're going to start to see those volumes pick back up, and that's why we referenced in the second quarter, we'll see volumes picking up significantly in every region.

Can you just frame a little bit of a degree of volume contraction in North America, that order of magnitude was it 10% or 20% or 25% or 5%? And are you picking up market share in Europe in the current quarter?

Yeah. So in Europe, we're seeing a significant increase in volume from the fourth quarter. To the point that JF made previously, we're not where we were previously, but we are seeing a significant increase. And market share gains, it's hard to say, I mean, clearly, there's still some production offline. There are other competitors out there that are having more difficulty than we are. So there could be some market share gain, but it's not being driven by price. It's maybe driven by some of the customer agreements that we have that are more long-term.

And I'd say, Jeff, that our sustainable approach being vertically integrated and the way we operate our mine, pigment plant, and our positive impact on the environment and our reputation with our customers is certainly helping us maintain and I'd say gain share. And that's obviously a story that we use to our advantage, specifically against Chinese competition.

And in the fourth quarter, what were North American volumes like in TiO2?

North American volumes, I'd say, we're down probably about 5% to 10% more than what we would normally see in the fourth quarter downturn. And as we move into the first quarter, they're moving up, but probably not as much as we would have seen previously. And that's again, North America was kind of the last one to slow down, and we saw Europe and Asia picking up a bit more. And as we look into the forecast, because we're halfway through the quarter, we're already getting an indication from customers, and so the second quarter is looking to improve in all regions.

Okay. Thank you so much.

Thank you. We now have Hassan Ahmed from Alembic Global. Please go ahead when you're ready.

Good morning, John and JF. I'm still a little confused about the trough earnings power of the company. I mean, from your sort of commentary, it seems you're backing away from the $800 million to $1 billion sort of guidance you had given earlier. But my confusion kind of stems from, if I take a look at let's say, the Q1 guidance of $120 million to $130 million in EBITDA you guys have given. On an annualized basis, that's $480 million to $520 million, right? If I take a look at your Q4 number, $113 million, and factoring the $60 million of one-offs and annualized that, that’s $700 million, and obviously the $800 million to $1 billion that you guys had talked about. So where are we now in terms of that sort of cross earnings potential?

Thank you for your question. When we examine our guidance, which is between $120 million and $130 million, let’s take the midpoint of $125 million, while the consensus is around $152 million. We need to bridge that gap of $25 million, and we estimate that approximately $20 million of this gap is linked to Australia, and $5 million to South Africa. Of the $20 million related to Australia, we believe about $10 million would come from EBITDA associated with zircon sales, and the other $10 million is due to extra costs from the mine. This is how we would connect to the consensus. Moving into the second and third quarters, as we’ve mentioned before, it's important not to simply multiply our guidance by four, as that number would be significantly lower. John touched on how to bridge towards our target. Specifically regarding Atlas, we projected $50 million but there are some additional costs, so we anticipate around $75 million from Atlas for the year. We aren't currently realizing the value we had previously discussed regarding a $50 million positive impact. Looking at the second half of the year, if you take the anticipated figures for the third quarter and multiply them by four, you'd find yourself in our recession scenario. JF, if you wish to add anything, feel free, but I hope this provides some additional clarity.

No, I think that was the right way. I hope Hassan, you understand that Atlas was obviously when we did our recession case at Investor Day, we assume that Atlas Campaspe will be in full operation, and it's not. At the moment, there's absolutely no value from Atlas in Q1. In fact, there are costs associated with Atlas at the moment because we continue to run a mine that we should have shut down. So we have more costs and less value. So that's explained why Q4 and Q1 are below our normal recession run. And we hope that look as the year progresses, we can go even above that. We don't know what the market will do, but we'll be in a very good position to react to the market. We'll have the feedstock and the pigment to meet our customer demand.

And maybe just one more follow-on. Again, it's a repeat of what John said earlier. When we came out with that recession case, we were not anticipating that 60 days later, we'd start to see that recession case hit. So we're starting from a lower point now, exacerbated by what JF just said. So still believe in that recession case, it's just going to take a little bit of time to recover due to the points that we just noted.

Understood. And just sort of carrying forward with that sort of, call it, recession case and how you guys are modeling it and thinking about it in the like, as it pertains to free cash flow generation, right? I mean, obviously, despite all of the sort of headwinds and the like, I mean, $126 million in free cash flow generation in Q4, which is around $0.80 a share, annualized $3.20, and your share price is $15 and change, right? So I'm just trying to sort of reconcile how you guys are thinking about the free cash flow generation ability of the company and how you parlay that with share buybacks because if my numbers are right, I mean, you guys just bought back 2.5 million shares in Q4.

We didn't buy any shares back in the fourth quarter. So I'm not sure how you backed into that.

Yeah. The weighted average shares are obviously coming down because we did buy $50 million of shares back in Q1 and Q2, but that's a weighted average calculation by quarter.

And how are we thinking about buying back shares on a go-forward basis, particularly with the strong free cash you guys have?

So we'll continue, Hassan, to evaluate based on what we expect from the market. At the moment, as John mentioned, we are seeing some working capital that is playing against us specifically, well, in Q4 it was the case and in Q1 it will still be the case. And that's playing against us because the drop in demand has been so strong that even if we're slowing down our pigment plant in our mine, we're not slowing as fast as the demand. In the second half of the year, though, we will see a reverse of that, and that should help, and we're obviously trying to improve that working capital use for the use of 2023. And our plan is obviously with the free cash flow to maintain dividend and to evaluate on an opportunistic basis if we should pay down debt or if we should buy back shares. As you know, we have still $250 million approved by the board to buy back shares, and John and I are still committed to that approach of using the free cash flow.

Thank you, Hassan.

Great. Thank you, guys.

Thank you. We now have Matthew DeYoe of Bank of America. Please go ahead when you're ready, Matthew.

Good morning, everyone. I want to touch on the energy cost situation in Europe. With some of the idled capacity starting to come back online among some of your competitors, are you concerned that this resurgence might lead to excess capacity that is not actually needed in the market? I'm worried about the potential effects on price deflation in Europe if we see a significant increase in that capacity.

There has been a significant slowdown in capacity during the fourth quarter and even in the third quarter due to high energy costs. Whether that capacity will decrease over time remains uncertain, but we did anticipate that as energy costs began to lower, we would see that capacity come back online. In short, it hasn't been an issue in the past, and we don't expect it to become one. We expect demand to start increasing again. In Europe, we are noticing a strong recovery, although not as robust as before. We anticipate that some of the volume coming online will be balanced by exports from China to Europe. There was a notable increase in fourth-quarter exports from China to Europe, and with the Chinese economy recovering, we expect some of that product to remain in China. Regarding pricing, we have seen prices rise in China and for exports from China. Specifically, we observed a $150 increase in our pricing in China, and we expect this trend to continue. Tim, do you want to add anything?

The other comment I'd like to make that Matthew as it relates to energy. Energy was about 12% of our cost of product in 2022. We see that coming down to 11%. So a little bit of moderation, but not a lot. It ranges from 4% to 20% depending on our facility, the highest costs are obviously in the UK. When we do the modeling of our UK facility, yes, we do have some benefits, but they're not significant relative to the significant increases we saw in '21 and '22. Some of the modeling that we've done in terms of competitive cost per ton, energy prices that have to fall significantly, we believe for there to be any potential market pressure on us.

All right. That's helpful. And then, I guess if I were to think about just overall cost inflation for 2023, that number was astronomical last year. But I think the old rhetoric was normal years, $40 million, so where are we? Is it $80 million? Obviously, you've got $25 million coming in from Atlas again. But what do you think the bogey is for this year?

Look, Matthew, obviously, what we'll see is more kind of flat to 2022. For 2023, we would obviously have liked to see it going down but that's not what we're experiencing at the moment. You're absolutely right. I mean, there was a huge jump from ‘21 to ‘22. And remember, I mean, if you go all the way to 2020, I mean, we saw more than $400 million of increase in those two years. But what we're expecting for ‘23 is more of a flat position to what we had as a cause in '22.

And we would expect, first, second quarter, not seeing as much move on raws, but we'll start to see that move more likely in the third and the fourth quarters. So I think that flat number includes some additional fixed cost absorption and cost attached to what's happening in Australia. So on average flat, but in some other areas, it's down, and that additional costs that we talked about is, what's kind of getting us to that flattish number for ‘23.

Thank you for that.

Thank you. We now have John Roberts of Credit Suisse. Please go ahead with you are ready.

Thank you, and best wishes, Tim. You mentioned China is picking up. There's some debate about whether the China recovery will be primarily a services recovery and not materials. Could you give us a sense post Lunar New Year where the orders are versus a year ago?

It's a valid point regarding the Lunar New Year. In January, our volumes in China were about 50% lower compared to the previous fourth quarter. However, as we move into February and March, we're beginning to see an increase of around 40% to 50% from January levels. This indicates a recovery is underway. There's some discussion on whether this growth pertains to the service industry, but our perspective, based on current market trends, is that demand in China is on the rise. Pricing in China is also starting to increase, and we anticipate continued price hikes into the third quarter. We have a facility there, although it's small, which gives us insight into the situation. While it's uncertain how much of this is linked to the service industry, we are noticing a rise in demand that is reflected in our forecasts and will assist us in returning to more typical levels as we progress through the second and third quarters.

And then on your rare earth initiative, the world's been worried about China's dominance for decades. Was there something in the past that kept you from exploring that opportunity? I think John, what I would say is, the fact that the world is worried about China creates the opportunity at the moment for us. Because there's interest from governments because our mines are situated in Australia and in South Africa, and that material could be upgraded without having to go to China, that's where the interest is coming at the moment. And look, we obviously are stockpiling that material for a few years now, so we have accumulated material and we have a nice reserve of this. Look, we're selling it. And as John mentioned, we're getting some revenue out of it, and this is moving at a fast pace. But the value would really be if we concentrate that tailing into monazite and if we concentrate that monazite into rare earth. And we're doing some work and we are doing some lab tests and upgrading and we're developing, if you want, a plan to create real value for our investor out of that. And we think that it's a nice fit with our existing business.

And we've been selling tailings for years. I guess the reality is, the Chinese had been very capable of controlling investment into the rare earths by manipulating the price. And to JF's point, there's a lot of interest now that's out there, which is allowing us to actually get more value. Those monazite streams for 2024 are going to be more or those rare earth streams are going to be more worth like $40 million to $50 million for us. So it's a significant uptick, and we see that there's upside. It's a natural extension of what we currently do with our mines. So we're going to continue to evaluate what that opportunity will be. And I will say that there's obviously some interest in some of the governments as JF mentioned on trying to get us to help maybe speed that up a bit.

Yeah. And John, I hope it's clear that we're still selling tailings at the moment. We're not concentrating anything yet, but that's the plan. And that's where you really start to adding value when you move from tailing to monazite and when you move from monazite to rare earth.

Thank you. We now have the next question from the line of Vincent Andrews of Morgan Stanley. Your line is now open. You may proceed.

Hey, guys. This is Will Tang on for Vincent. Thanks for taking my question here. Just a quick one for me. I know you guys talked about your expectations for raw materials, kind of outside of TiO2 feedstock briefly. But I'm wondering if you could go into more detail around that and I guess more specifically around your chlorine costs?

Yeah. Look, so I'll touch on chlorine costs at least in North America because that's someone that seems to be spotlighted. Chlorine costs are clearly something that we spend a lot of time on. I'll just say generically that we haven't seen a pullback on chlorine at this particular stage. We don't expect a significant uptick from the prior year. And we continue to look at opportunities to try to maximize the benefit that we could get from the chlorine usage that we have with regards to how we use it and how we consume that. In the rest of the world, chlorine, it’s an impact, but North America is the one that has the biggest take impact with regards to inflation that we've seen in the last two years.

That's spot on, John. Significant increases in 2022 to the tune of $40 million, and just a couple of single-digit million is what we're expecting in ‘23 for the year.

Thank you. Our final question from the phone line comes from Roger Spitz with Bank of America. Please go ahead when you are ready, Roger.

In March 2022, you established a $75 million accounts receivable securitization facility and it appears you sold those $75 million in receivables, removing them from your balance sheet. These seem to be U.S. receivables. In the previous quarter's calls, you mentioned entering a $125 million accounts receivable securitization, which involved Australian receivables. Therefore, my question is about the distinction between these two facilities. It seems you've likely sold the $125 million by December 31. So by the end of the year, you have $75 million of sold and derecognized U.S. receivables, along with $125 million of sold and derecognized Australian receivables. Is my understanding correct?

Close, Roger, just to let you know that the facilities themselves, they are lengths, but they are two separate facilities. The facility in the U.S. is $75 million; the facility in Australia is $125 million, so a total of $200 million, but we only had $147 million available as of the end of the year. Because of the significant drop-off in sales due to destocking. We do expect to recover a significant chunk of that as sales continue to recover in Q2, Q3, and Q4, and those facilities should be utilized before the end of 2023.

Got it. So just to make sure I understood, $147 million of combined facilities was sold at the end of the year and derecognized from the balance sheet as of December 30?

Correct, with the total availability of $200 million as revenues recover.

Thank you very much.

Thank you, Roger.

Brica, thank you, and thank you everyone for joining the call today. As we enter into 2023, we will maintain a relentless focus on sustainability and safety, continue to align production with customer demand, and prudently reduce costs accordingly, manage our key capital projects without losing sight of the long-term benefit to Tronox including reducing our cost per ton, and generate free cash flow across any economic scenario. That concludes the call, and thank you everyone for listening. Have a great day.

Thank you all for joining. That does conclude today's call. Please have a lovely day, and you may now disconnect your line.