Good morning, ladies and gentlemen, and welcome to the Tronox Holdings' Second Quarter 2023 Earnings Call and webcast. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. I would now like to turn the conference over to Jennifer Guenther, Chief Sustainability Officer and Head of Investor Relations and Financial Planning. Please go ahead.

Thank you and welcome to our second quarter 2023 conference call and webcast. Turning to slide 2, on our call today are John Romano and Jean-Francois Turgeon, co-Chief Executive Officers and John Srivisal, Senior Vice President and Chief Financial Officer. We will be using slides as we move through today's call. You can access the presentation on our website at investor.tronox.com. 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. For those joining today who may be a bit newer to Tronox, we're the world's largest vertically-integrated TiO2 producer with sales in 2022 at $3.5 billion that were fairly evenly distributed across the Americas, Europe, Middle East and Africa, and Asia-Pacific. Our strategy is focusing on positioning Tronox as the advantageous global TiO2 leader to the production of safe, quality, low-cost sustainable tons. More information on Tronox is available on the website. We've added a new video to the homepage that does a great job of outlining the value that we bring to our customers through our vertically integrated sustainable mining and upgrading solutions. Now, let's turn to slide 5 for a review of a few key messages from the quarter. Our solid second-quarter performance was a result of continued market recovery from the first quarter and our ongoing discipline around costs. Tronox delivered adjusted EBITDA at the high end of our previously guided range and adjusted EBITDA margins above our expectations. Additionally, as a result of the team's proactive approach to aligning the business with the current market conditions, we generated $81 million of free cash flow above previously anticipated levels. Tronox results continue to demonstrate the strength and advantage of our vertical integration. These results would not be possible without the hard work and dedication of our global employees, and we thank the team for their commitment to Tronox. As an update on our operations at our Atlas mine in Australia, the primary roads are open, and we're currently utilizing them for hauling, which is allowing us to move more material and reduce inventory levels at the mine. Additionally, we published our 2022 sustainability report in the second quarter, outlining the targets that we've set for our business to become an increasingly sustainable operator in our ever-evolving world. Turning to slide 6, I'll briefly review the sustainability-related targets we've set for Tronox. We are very focused on our sustainability efforts at Tronox as this area is becoming an increasingly significant focal point and part of our conversations externally with investors, customers, and other key stakeholders. Tronox has reinforced our previously disclosed path to carbon neutrality by 2050. Additionally, we committed for the first time to targets to reduce Scope 3 emissions intensity by 9% by 2025 and 16% by 2030 against a 2021 baseline. We recommitted to our target of zero waste to external dedicated landfills by 2050, and we continue to prioritize safety and have also enhanced efforts internally to improve diversity within our organization. We are excited about the continued progress we make each year to become more fully aligned with the expectations of our key stakeholders. Please review our sustainability report, which is available on our website for more information. Now, let's move to slide 7 for a review of our second-quarter financial performance in more detail. Revenue of $794 million improved 12% sequentially due to the improved sales volumes across all products. This represented a decline of 16% relative to the prior year due to continued market softness. The income from operations was $84 million in the quarter. We reported a net loss in the quarter of $269 million, which included a $293 million valuation allowance in Australia relating to our deferred tax assets. Our normalized Q2 effective tax rate was 20%, adjusting for the evaluation allowance and non-benefiting items, and our adjusted diluted earnings per share was $0.16. Adjusted EBITDA in the quarter was $168 million and our adjusted EBITDA margin was 21.2%. Free cash flow on the quarter was $81 million. Now, let's turn to slide 8 for a review of our commercial performance. TiO2 revenues increased 9% versus the first quarter, driven by 9% increases in sales volume. TiO2 pricing was 1% lower compared to the first quarter as expected, which was offset by a 1% tailwind from exchange rates. TiO2 pricing increased 1% compared to the year-ago quarter. We continue to deliver against our commercial strategy and realize relatively stable pricing trends despite volumes remaining well below seasonal normal levels. Zircon volumes increased 33% compared to the first quarter, representing a 21% decline year-over-year. Zircon pricing was lower by 1% compared to the prior quarter, which represented an increase of 7% year-on-year. Revenue from other products was $88 million, an increase of 35% to the prior year, largely driven by improved pig iron volumes and higher sales of rare earths, which increased 87% year-over-year. As a result of our unique portfolio, we are continuing to evaluate a range of options to leverage our expertise to further unlock the value of the rare earths generated from our operations. Our differentiated integrated position sets us apart as a global leader in sustainable mining and upgrading solutions. Looking ahead, we expect pigment volumes to be relatively flat to the second quarter, as we expected our demand to remain higher than the trough levels seen in Q4 of 2022. While we previously anticipated volumes might continue to increase into the third quarter, the weak market conditions in China, as well as broader Asia, Europe, and the Middle East have brought our expectations down. Our commercial strategy and differentiated offering have enabled more stable pricing trends than during previous years of demand decline. However, we do anticipate that the softer demand conditions will result in slightly lower TiO2 pricing in the third quarter compared to the second quarter. On zircon, we do expect a more challenging second half of 2023 than we previously anticipated. At this time, based on our current market outlook, we expect zircon volumes for the third quarter to decline by 15,000 tons to 20,000 tons from the second quarter '23 levels. Zircon is a critical mineral and a key part of our portfolio. Approximately half of the total zircon market is consumed in China, which is heavily influenced by housing market completions. Global supply and demand for zircon will come back into balance when China recovers. As quickly as the decline has impacted us on the downside, we will see the benefit of the upside when the market improves. We strongly believe in the strategy of being vertically integrated and the value that our zircon provides to our customers. 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 9. Our adjusted EBITDA of $168 million represents a 39% decline year-on-year, driven by unfavorable fixed cost absorption due to lower production rates, lower sales volume, and lower pig iron pricing, partially offset by favorable exchange rates and lower freight costs. Sequentially, adjusted EBITDA increased by 15% due to higher product sales volume and exchange rate tailwinds, partially offset by lower average selling prices and higher freight costs associated with higher volume. We are continuing to run our operating site at reduced rates as a result of lower demand levels in order to manage inventory and cash. As a result, the second quarter includes $25 million of impact to EBITDA from lower cost to market and idle facility charges. Looking to the third quarter, as a result of the market dynamics John previously outlined, we anticipate adjusted EBITDA for the third quarter 2023 to be $115 million to $135 million. This range includes $35 million of impact to EBITDA resulting from adjusting the production rate of both our pigment and mining site to better align with the latest market demand levels and manage working capital and free cash flow. Turning to slide 10. We will continue to balance the medium and long-term strategic need of the business to position Tronox for future success while ensuring we are taking the right decision to manage what is within our control in the short term against the current macroeconomic landscape. This includes disciplined actions to reduce costs. We have 380 different cost reduction initiatives happening at all our different sites around the world. We are optimizing our fixed costs and driving additional supply chain initiatives. We are prudently managing working capital. This quarter, we were able to relieve some of the working capital built in the first quarter as a result of our actions. While our long-term strategic target is to be approximately 85% vertically integrated on feedstock, as a result of current lower TiO2 production levels driven by customer demand, which was down 30% year-on-year in Q1 and 21% year-on-year in Q2, we are continuing to run our feedstock assets at lower rates. This results in slightly higher mining and upgrading costs in the second quarter, which will continue in the third quarter of the year. On capital expenditure, as we have highlighted previously, we'll invest less than $275 million this year to adapt to the macroeconomic environment as it unfolds by delaying investment primarily associated with volume growth not required in the short term. While this will delay our ability to realize benefits from our key capital projects, we do believe this is the appropriate decision for the business at this time and it's consistent with our ability to flex our capital spend. We do believe it is important to continue to invest in the business throughout the cycle and we'll continue to proceed with the business-critical projects that will contribute to the future growth of the business. 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. Before I turn the call over, I want to briefly provide an update on Jazan. As we have disclosed in our filing, the original Jazan Option Agreement expired on May 10, 2023. We agree with TASNEE that until September 30th, 2023, all chloride slag produced by the slagger will be delivered to Tronox as a repayment in-kind of the $125 million Tronox loaned to the project. The first shipment of chloride slag to reduce the loan balance is expected in the third quarter. Full repayment of the Tronox loan is required by January 2025 in either cash or in-kind through chloride slag delivery. Tronox and TASNEE additionally agreed to extend the term of the Technical Service Agreement to September 30th to enable Tronox's continued support to the Jazan's smelter complex. We are currently conducting a value engineering exercise and we'll keep the market updated on the status of this assessment. I would now like to turn the call over to John Srivisal for a review of our financial position. John?

Thank you, JF. Turning to slide 11, we ended the quarter with total debt of $2.7 billion. Our net leverage at the end of June was 3.8 times on a trailing 12-month basis. In the first quarter, we amended and extended our interest rate swaps, such that approximately 76% of our interest rates are fixed through 2024 and approximately 67% are fixed from 2024 through 2028 aligning with the maturity of our term loan. 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 at June 30th was $447 million, including $167 million in cash and cash equivalents, which is well distributed across our global operations. Capital expenditures totaled $55 million in the quarter; approximately 60% of this was for maintenance and safety capital, and about 40% was for strategic growth projects. Depreciation and amortization expense was $68 million for the quarter. As John mentioned earlier, our free cash flow was $81 million. This is above our expectations, primarily due to the team's proactive approach in aligning the business with current market conditions. We returned $50 million to shareholders in the form of dividends. We paid both the first and second quarter dividends, equivalent to $0.50 per share on an annualized basis in the second quarter. Moving to slide 12, based on the current view that John and JF outlined, we anticipate third-quarter adjusted EBITDA to be $115 million to $135 million. Pivoting to our expectations for our 2023 cash uses, our working capital assumptions increased to a use of approximately $150 million to $175 million due to softer market demand than previously anticipated. Our net cash interest expense assumption remains unchanged at $130 million. Our expectations for cash taxes were lowered to approximately $40 million and our expectations for capital expenditures remain unchanged at less than $275 million for the year. We will continue to assess and execute against the levers we can pull to ensure sufficient liquidity and continued alignment of our production and costs to respond to the economic environment we are operating in. We remain focused on delivering on our commitments. That concludes our prepared remarks. With that, I'd like to turn over the call for questions. Operator?

Thank you, sir. Your first question comes from the line of David Begleiter from Deutsche Bank. Please go ahead.

Good morning, and thank you. John, you have mentioned some pricing pressure in TiO2. Could you talk a little bit more about how much that pricing pressure is and where it's coming from by region?

Yes. Thanks, David. So, we don't typically provide a breakdown by region, but what we can say is that as we saw in the last quarter in the Middle East and Latin America, we are seeing a little bit more pricing activity and where we're competing a little bit more heavily with the Chinese. I'd say globally, when we think about that reduction in Q2 to Q3, we're talking about 2% to 3%. And again, a significant portion of that movement is in areas like Asia, Latin America, and the Middle East.

Very good. And just on zircon, how long do you expect this downturn is destocked to persist?

Yes. Look, it's a great question. I think we provided some color previously around what our position is in China. So zircon, we mentioned in the prepared comments is about 50% of the market. And historically, we were aligned with that when we sold down inventory; when the market picked up significantly, we repositioned a lot of what we were doing. So, our sales into China is only about 35% of our total selling of zircon at this stage, compared to 50%. That being said, in the second quarter, we were selling pretty much everything we were making, and we were restricted by what we could produce. And that's when we talked about the Atlas transition moving into the third quarter. So, what's happened in China has happened relatively quickly and I would say over the course of the last 30 days, we just finished the quarter, and we had a pretty strong quarter on zircon. So, it's happened relatively quickly. We do not believe there's a significant amount of inventory in the chain right now. Call it, 45 to 60 days, depending upon the region. And because what we're seeing in China, although China has not been strong for the last two quarters, we have seen it start to turn down and it didn't pick up after Chinese New Year, it didn't pick up after the opening from COVID, and I would say it's worse than what we would expect. And so we are now seeing some of the zircon that would have been sold in China moving into other markets. So, even though our position in China is not as significant as it was, zircon moves around a little bit more freely than we would say TiO2 does. So, short answer to your question is, we would expect that there's not much inventory in there. And as our customers start to get a better feel for what's happening in the market, we should start to see a return in the volume in the fourth quarter. July was a very low month. We're already seeing the August and September order pick up. But the range that we gave in that 15,000 tons to 20,000 tons assumed that we'd see a pickup in July and August, excuse me, in August and September. And we would expect that we'd start to see that same kind of a similar rebound moving into the fourth quarter. But the recovery is largely going to be dependent on what happens in China, how quickly that market recovers. And that's something that we're just not really in control of.

Thank you.

Thank you. Your next question comes from the line of Josh Spector from UBS. Please go ahead.

Yes. Hi. Thanks. So, just within TiO2 and the charge you're taking this quarter from the lower operates, the $35 million. Just curious how we should think about that on a go-forward basis. I know some of it's bringing down your inventory levels, but if operating rates stay at this level, is that $35 million charge something we should be extrapolating another quarter or two beyond Q3 until we see volumes pick up? And what's the threshold to consider? Thanks.

Yes. Thanks, Josh. If you take a look, we did say that we were going to be burdened in Q3 by $35 million, primarily due to fixed cost leverage as we brought down our production. We do expect to see that and we have been operating most of the year at less than 70% of our capacity and expect to continue at that the rest of the year. So, we would expect a similar amount in Q4. Obviously, we have significant leverage in our business. As volumes increase, we will bring that production back and expect that $35 million charge to go away pretty quickly once the market recovers. And when we think about the market recovery again, we called the bottom in the fourth quarter. We saw a 14% increase in the first quarter, 9% increase in the second quarter, which was below what we initially anticipated, and the recovery is just not coming back as strong. So, when we think about third quarter volumes, we referenced flattish as we think about the fourth quarter, where you would normally see some sort of maybe a seasonal downturn. Because we are at lower levels than what we would have historically been, we don't expect the fourth quarter at this particular stage to see much of a seasonal downturn from Q3.

And Josh, I'd like to add that, I mean, the drop in TiO2, as John mentioned, running our plant at less than 70% capacity, we had to adjust our mine and upgrading facility as well, and we have lower production on that side of the business. So, it's a double impact for us. But as soon as there's a recovery, it will have a double positive impact on our costs.

Understood. I appreciate that. Going back to the earlier question about pricing and the pressure we are seeing, how should we assess the impact of Chinese TiO2 in those markets and its effect on market share? You're managing to maintain pricing better than the overall market. However, do you believe you might be losing some incremental share, which could lead to a recovery that is lower than the levels we saw in the previous couple of years?

Well, thanks, Josh. Again, we just mentioned the numbers on our maybe pick up from the fourth quarter. So again, 14% increase in the first quarter, 9% increase in the second quarter. And if you look at exports of TiO2, which were high last year, they're up 10% if you look at the last year-to-date. So, 10% year-to-date compared to the year-to-date previously. So, they're not growing at the rate that they were. What I would also say is that most of the Chinese suppliers, we believe almost all of them are operating at a loss right now. As recently as this week, we've seen China increasing TiO2 pricing, both inside of China and on the export market. And we do believe that's going to stick. Thus anecdotally, we're hearing some other issues about the high temperatures in China, which are causing plants to have to actually slow down to manage energy consumption. So, there are a lot of things that are happening that we believe could lend itself to China starting to pull back. So, short answer is, are we losing some market share in less strategic areas? The answer is probably yes. But we're managing our business to ensure that we're also continuing to compete. Now, when we talk about small price reductions like 2% to 3%, the price gap between Chinese material and Western TiO2 is significantly different than that. So, we're making some small adjustments, but our customers are also seeing us for other things other than just price. They appreciate our regional footprint. They appreciate a lot of what we're doing on the ESG effort. And we're spending more and more time as we clearly identify what we're doing on our scope 1 and scope 2. As our customers are looking at Scope 3, we're starting to become a lot more valuable and pricing is not the only thing that our customers are considering when we think about our strategic value to them.

Yes. And we're in a downturn, so obviously, customers have choice, but they know how it's important as things will turn up to have a reliable supplier. And I think our vertically-integrated position is a key advantage in that regard.

Okay, thank you all.

Thank you. Your next question comes from the line of Duffy Fischer from Goldman Sachs. Please go ahead.

Yes. Good morning. If you look at your volume on a two-year stack over the last three quarters, it's down 34%, 36% and 31%. Clearly, your customers, paint and plastics folks aren't down anywhere near that much. When you look at your sell-in versus their sell-out, how much longer do you think you can continue to be significantly more negative than your end customers?

It's a difficult question, Duffy. I think that John kind of explained it with what's happening in China. Look, the Chinese have built capacity and increased export in a market that is not growing. I mean, our customers have obviously not dropped in volume as much as we did, but the Chinese have continued to increase their market share at that time and they're doing it at no profit. In fact, they're doing it at a loss. I mean it's clear that they're kind of subsidized, and more specifically, the government-owned entity in China. Look, ore has not moved down. So, their cost structure is just wrong. And I think that even the best player like LB in China have a margin that is lower than Tronox at the moment. So, we don't see that as sustaining and we continue to work on our costs to be a stronger competitor. And we have prepared our business for a rebound, because we believe that will happen.

And I think it's a great question, because we don't think it can last very much longer. I mean, the reality is a lot of our customers, which you hear reports from, are talking about they're not holding, destocking is complete. Some of our customers are even talking about building inventory in the fourth quarter in preparation for the coating season next year. So, it's a valid point. A lot of that was attached to destocking. We talk about China, we talk about the recovery and we can't control. When the market recovers, we can control what we do to manage the business between now and then. We definitely believe we're well beyond midpoint of a downturn and an upturn is coming. It's just a little bit. China, I think, is creating a little bit more uncertainty on when that might happen. But it's a great point and we don't think that can continue much longer. And when you think about again, the two-year stack, we don't typically look at it that way, but we look at it sequentially moving into the third quarter, kind of with what we talk about on flat pricing. We should be down 9%-ish to 10% compared to the prior year quarter, which is again, not great. But it's a significant improvement from where we were in the first quarter and a significant improvement from where we were in the second quarter.

Fair enough. And then two other areas that you haven't talked about price, but that are seeing weakness. One is zircon and the second is, and JF, you just kind of mentioned the ore side, both high-grade and low-grade ilmenite. With the weakness we're seeing in volume, should we expect to see pricing in those three products start to wane?

So, Duffy, I'll cover the ore and I'll let John talk about zircon. But on the ore side, look, starting with ilmenite. Ilmenite price has been very stable. They have stopped increasing, but they haven't moved down. And that's truly worthwhile. And look, obviously ilmenite is used to make high-grade feedstock like slag, and we haven't seen slag prices going down. In fact, slag prices have continued to slightly creep up, and the same thing with natural rutile. Natural rutile has been very stable. So, I think this reflects the fact that remember only a year ago, we were talking about a shortage of raw material and nobody has invested to develop new mines and significantly increase. So, I think submarket that looks obviously, because of the slowdown in TiO2 at the moment, there is enough feedstock. But as soon as the market turns, I think that's where you will see the advantage of a company like Tronox that owns its own mine, have invested recently in new mines, and continue to invest in the mining side of the business, which will differentiate ourselves from the competition, but very stable price on that side of the business.

Yes, regarding zircon, there are many factors at play. The main issue for us this quarter is the volume decline. We experienced a 1% price decrease from Q1 to Q2, primarily linked to the lower quality zircon we sell, which we refer to as Zircua rather than high grade. While we've noticed some movement, the pricing changes have not been significant. There's been a shift in the market, particularly with China slowing down, causing inventory that typically would go to China to be redirected to India. There are assumptions in the market that are influencing this volume reduction, based on our customers' expectations. The major concern with zircon is related to volume rather than price. It remains one of our higher-margin products, and as mentioned in my prepared comments, the decline was swift, but we anticipate a quick recovery as China rebounds.

Great. Thank you, guys.

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

Yes. Good morning. Just a question on how to think about cash flows as we progress through the year. I think there was certainly some hope you would start to unlock some working capital and drive some greater free cash flow. I guess, given the further pullback in your operations, is that something that we should see as kind of a good counterbalance where, look, the EBITDA is off, but the cash flows accelerate? Or is that not the case? I guess, how should we be thinking about that as the year progresses?

Yes, John, thanks for your question. Your assertion is correct; we are taking significant action in light of the current market environment. We have reduced production substantially to help improve cash flow. Additionally, we have implemented various cost initiatives that will enhance our performance for the remainder of the year. Generally speaking, we believe there is a realistic chance to recover the significant cash usage experienced in the first quarter. While the first quarter saw substantial cash use, which we anticipated, the second quarter exceeded our expectations, clearly driven by the proactive measures we took. We intend to continue these efforts in the third and fourth quarters.

From a cash flow perspective, although it hasn't impacted tremendously in the third quarter yet, we're starting to see the impacts of raw materials starting to move down. So, not only raw materials, we're seeing freight move down, container freight, bulk freight. So, we're starting to see a lot of the things that were headwinds for us, that although we've got a long way to go, we'll start to be a tailwind. And we would expect that to start to impact us in the third quarter and we'll start to get more momentum in the fourth quarter.

Okay. So, just to be clear, do you think working capital will be a use or source of funds this full year? Like full '23?

Yes. I mean, we've guided working capital for the full year as negative $150 million to negative $175 million.

Okay.

But as you know, the biggest use was in Q1. So, we're taking Q1 and Q2 net-net, the rest of the year, it's flat to slightly positive from the working capital.

And the inventory that we were building in TiO2, which we've slowed down on, I mean, JF made reference to we are also adjusting mines. But we're still mining, we're still mining heavy mineral concentrates. So, the zircon drop-off will also allow us to build some inventory, which quite frankly could be a positive as the market returns. Because as I mentioned before, in the fourth quarter, I mean, the second quarter, which was only two months ago, we were selling everything that we could make.

Yes. And John, you would remember that we talked about $150 million of cash use earlier in the year. We have increased that number to $175 million and that's linked to zircon.

Yes. Okay, got it. Fair enough. And then maybe, just as the follow-up, the TiO2 industry has had much better pricing resiliency than we've seen in downturns, especially ones of this magnitude, which I think was believed that it would actually lend stability in general to the industry. But with the Chinese producers running at rates that are actually losing money, I guess, does it make you rethink the pricing strategy that you have for your TiO2 business going forward if you're going to have this level of lapse in discipline from major producers in the industry? I guess, how would you answer that?

I think the answer is no. We will stick with our current pricing strategy, which is designed to help us navigate downturns. This downturn is more significant than we anticipated, even more than what was discussed on Investor Day. However, it’s not just the Chinese suppliers who are losing money; other suppliers are also undergoing restructuring. The industry is facing challenges. Despite this, our margins remain significantly better, and we believe we are in a stronger position to endure this situation than others. The extent of the losses in this industry will largely depend on how robust each company's balance sheet is to manage through it. That’s our perspective. When we observe some of these aggressive actions, we are not necessarily responding in kind. As I mentioned, our pricing reductions targeted the 2% to 3% range for the quarter. These changes may not seem substantial, but they are necessary to maintain our strategic market share.

Got it. Very clear. Thanks very much.

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

Great, thanks. Good morning, guys. First question, I wanted to go back to working capital, sort of getting back to John's question just now. I think last quarter, you thought it would be a use of $150 million. Now you're taking actions, rightfully so, to reduce production rates to work down inventories, yet your working capital use of cash is going higher. I would have thought it would have gone lower. So, why is that?

Yes. thanks, Mike, for the clarification question. And you're right. I mean, we did end up guiding being last quarter, $150 million and kept the bottom end of that range and then ranged it up about $25 million. Part of the thing that's driving that change is what JF mentioned is the zircon inventory increase. So, while we are bringing down pigment production and we do see volume-wise pigment is going down across the year, we are burdened a little bit there from higher costs. So, overall dollar value of inventory is going up. And combined with the zircon ton increase, as you know, we are slowing our mines down a bit, but we still are building zircon inventory. So that's really driving that band. If we do end up selling more zircon than we expect, obviously we will be able to hit the lower part of our range.

And when John, I think it's another point on that. John referenced, we've been running at slightly below 70% on capacity utilization. Our plan when we reported last was we'd be ramping up production, because we were expecting to see a higher third quarter. So, there's an element of that inventory costing that's just based on where we're running today versus what we might have anticipated we were going to be running three months ago.

Great, thank you.

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

Great, thank you. Good morning, guys. It's Aziza on for Frank. So my first question, I think John Romano included a comment on rare earth in the prepared remarks. Can you elaborate on the long-term strategy in that arena?

Yes. Thanks, Aziza. Look, it's something, as I mentioned in the prepared comments, that we're continuing to look at it. It's something where we feel as a mining and upgrading company, we're uniquely positioned to do that. The monazite that we had historically been, I'd say, stockpiling as a waste has now turned into a revenue stream and that revenue continues to generate. So, when we start to think about how we develop that we've got a plan on what we're doing. We mentioned that we're going to let the revenue come from that be the investment in the initial stages. So, it'll be self-funding. But as we think about moving, even between now and the end of the year, there's opportunities that we're looking at that will allow us to continue to expand that. And we'll probably be in a better position, maybe in the third quarter call to give you more clarity around that. But it's absolutely something that we believe could be a core part of our business. And we're taking steps, I'd say, measured steps to ease our way into that. So that we're self-funding it for right now. But it's an exciting part of our business. And I can tell you there's a tremendous amount of our people that are engaged and looking at opportunities on how we can expand that.

Got it. Thank you. And how should we be thinking about the expected lingering impacts from the flooding in Australia as they flow through Q3 and Q4 P&L? And on the Atlas project, are you still expecting it to contribute $70 million or more in a normal year?

Aziza, the answer to that is the flood is gone and everything is back to normal. Look, the unfortunate reality is with what's happening with the zircon market, we would be in a very good position to supply at the moment, but the market has kind of dried out. But as soon as the market recovers and with Zircon, I mean, I can tell you 30 days ago everything was fine. We had no issue. It's in July that we had this huge drop. It can turn up the same way as quickly, and we'll be in a very good position. As mentioned by John, we'll have built inventory of zircon, and our mine will be ready to operate and produce to meet that market demand.

When you think about the roads being open now, we're able to move that material from Atlas to Broken Hill so that we can upgrade it and it's ready to ship as zircon. So, not to say we wouldn't have gotten any benefit in the third quarter. We would have, but those roads opening allow us to build that inventory in a position where we can ship it in the fourth quarter. So, it's definitely having a drag on the third quarter. But if the market does come back, which we're not saying it's going to come back completely, but we do believe it's going to bounce off the bottom. We should start to see that inventory being consumed in the fourth quarter.

Aziza, to your question, we do see once we're back up to normal, the atlas will give us additional $70 million benefit for the year, $70 million to $90 million.

Perfect. Thank you, guys.

Thank you.

Thank you.

Thank you. Your next question comes from the line of Matthew DeYoe from Bank of America. Please go ahead.

Good morning, everyone. So, there's the $70 million to $90 million benefits you just said. But obviously, there's the headwinds from just the lower mine operating rates in general. So, if we were to move to 2024 and volumes aren't down 30%, they're down, maybe, they're up or they're down 10% or whatever. Whatever it takes to get operating rates back at the mine to full rate, I mean how much of a tailwind is that? If you think about just full rate operating at the mine sites and then moving Atlas back to full rates like what monetarily should we expect comes back to the company?

Matt, I'd try to help. Look, obviously it all depends, I would say. But it has a huge drag on the $35 million that we mentioned of running at low rates on the mining side. And the reason is simple mining is a high fixed cost operation, and when you talk about mining, you're more at 60%, 70% fixed cost. So, unfortunately, as you slow down, you're not saving as much. With the pigment plant, we have developed what I call flexibility in our operation, and we're able to turn them down with less impact. Look, obviously, there's a limit to what you can do and being below 70% is not a great place to be. But I'd say that in '24, we're convinced that that $35 million of downturn, we could probably recover all of it.

It's a quarter number as well.

Yes.

And from an operational perspective, I mean, that mine is ready to go. Atlas is running. This is just a matter of now having a market to support all the additional volume.

I understand, and the $35 million is helpful, particularly for the context of this quarter. But production costs have been about $100 million headwind for the last two quarters. I think presumably, a fair amount of that is just from other mine operating rates being below. So, I'm just trying to contextualize a more normal operating rate environment.

Yes. I mean, when we quote the $35 million, it really relates to the fixed cost leverage of bringing our production down. We obviously have seen headwinds in costs, but we are seeing that as John mentioned, tail off towards the end of this year. So, we view it as obviously $35 million is good from a fixed cost leverage. And if we see further cost decline, it'll be above the $35 million per quarter.

Yes, just maybe a little bit more color on the raws. We've talked about chlorine a lot over the course of the last, I'd say four quarters. The chlorine market in the U.S. is starting to soften, and that's going to translate into prices coming down from record high levels. And we're well positioned contractually to take advantage of that downturn as early as this quarter. So, we would see chlorine as an opportunity. And I'd say our procurement team has done a really good job of establishing some strategic relationships, which will put us in a better position on that in the future as well.

Okay. And then if I can, price was up year-over-year across both segments. But I think price was a $4 million headwind to EBITDA. Is that just mix or what's driving that?

Primarily, a pig iron price.

All right. Understood.

Thank you.

Thank you. Your next question comes from the line of John Roberts from Credit Suisse. Please go ahead.

Thank you. I just have one. What's the rate in dollars, at which Jazan can send you chloride slag?

Well, John, I mean, as you can imagine, we're not going to give that type of detail. But when we compare Jazan, I mean, we would like that operation to be producing at a similar cost than what we are producing in South Africa. And at the moment, I think that with only one furnace running and running at 50% of its original capacity, it's not meeting the level that we were expecting. And that's why the option agreement just lapsed. Look, at the moment, the furnace is running, and it's still producing slag, and it's obviously a TASNEE asset. And they work with their supplier of technology to try to see how that could be improved. And meanwhile, TASNEE has agreed to supply that slag to us to pay back the loan. And look, it's like the commercial agreement that we had in the previous year. We're paying market price for that slag.

And as opposed to paying cash for it, going against debt.

Yes. And as we've mentioned before that assuming Jazan operates as it has historically, we expect that loan to be paid back, assuming they apply all the slag to it sometime about a year plus from now.

Thank you.

Thank you. Your next question comes from the line of Jeff Zekauskas from JPMorgan. Please go ahead.

Thanks very much. Your TiO2 demand was down. Your volumes were down, whatever it was, 22%. If you look at your end markets, plastics, paper, and coatings, were the demand decreases different, or were they the same in the quarter, as best as you can tell?

Yes, Jeff. I would say we experienced a more significant downturn in the plastics segment compared to coatings. However, coatings represent about 79% of our volume, which spans various applications. Paper and specialty, which is even smaller than plastics, also experienced a decline. Much of the paper and specialty demand is in the Asia-Pacific and European markets, where we noticed this drop earlier. In summary, coatings have likely performed slightly better than plastics, paper, laminate, and specialty, but overall, there hasn’t been a significant shift in either direction. Generally, all segments are down, with the plastics segment seeing the most decline. We're beginning to observe some signs of customer demand picking up again in plastics, although it's still at a low level.

So, when you look at your coatings customers is the way you think about it is that their end market demand is flat to down and their inventories are 20% too high in order of magnitude, and we're going to go through a period. And then depending on whether they build inventory next year or things stay pretty flat, that's the way TiO2 demand will go. Is that your conceptualization, or is it something different?

Well, I think what you said absolutely related to what was going on in Q3 and Q4. So last year, that destocking event was what we were thinking actually did happen. So, we've started to see a pickup. Our customers are starting to order again. So, we talked about the bottom in the fourth quarter. We had 14% growth in the first quarter, 9% growth, which was not quite what we expected. So, it's not as if it's getting worse in the third quarter. It just hasn't rebounded. So, I do not believe, nor does JF believe, that we have a significant amount of destocking to complete now. This is the market. And as the market rebounds, to the extent there is a coating season next year and people start building inventory; as I said, we've heard some customers talking about building inventory in the fourth quarter. We'll start to see the volumes move. But a lot of that's going to be driven by macroeconomic activity, which we can't control or influence.

Yes. Jeff, year-over-year in Q3 of this year, we're expecting an improvement versus the drop that we had in Q2. I mean, Q1 was 30% down, Q2 was 20% down, and Q3 will be 10% down versus 2022. So, when we called the bottom, that was Q4 '22. On TiO2, that's still how we believe the market is playing. It's really the zircon in Q3 of this year that is a surprise to us. At a time when we had geared up to increase zircon sales with our mine. Unfortunately, the market is not there. But look, we'll be ready for when it turns.

So, you have a certain amount of optimism around zircon. I mean, zircon pricing was under $2,000 a ton from 2012 through 2020, and then zircon prices spiked beginning in '21. And I don't know, maybe they got all the way up to like $3,500 a ton. And now maybe we're at something like $2,200. Like why can't we go from $2,200 a ton to $1,500 a ton? What is it about the zircon market that makes prices more stable now than they've been historically?

Yes. So that $3,500 number, which I guess was regularly out there on Bloomberg, was more of the spot market. So, we didn't have a lot of spot market volume at those numbers.

Call it wherever it was, yes.

Yes, in the $2,000 range. It all comes back to supply. When the market recovered in 2021 and 2022, we sold 100,000 tons more than we produced in 2021. We adjusted our footprint to reduce our exposure to China, and not much additional capacity has been added. Up until the second quarter, we were selling nearly everything we produced. Now, with China's slowdown and about 50% of the markets in China, prices have risen above historical levels. We indicated that prices might fluctuate, but we don't expect much volatility in that area. The notable decline in July happened because customers anticipated market changes and decided to hold off on purchasing. There isn't a significant amount of inventory in the system—only about 30 to 60 days' worth, depending on the customer and region. This limited inventory means customers won't be able to wait too long before they need to repurchase. While we’re not predicting the market will fully rebound in the fourth quarter, we believe July represented a low point, largely influenced by speculation on future developments.

So, have zircon spot prices begun to rise or are they still falling?

Well, I will tell you, as recently as three months ago, spot prices were starting to move back up. And Indonesia started raising their price again. And Indonesia is a good indicator for what's happening in the spot market. And now, I would say, they've stalled out a bit, because of what's happening in China. I would say no rebound at all. And with 50% of the demand there, and call it, a significant portion of that, that's tied to housing finishes. A lot's going to depend on how quickly China recovers. And there's things out there. China's talking about more stimulus. I'm not sure how they can continue to put stimulus into housing and infrastructure, but they're talking about that. So that could stimulate some growth in this area.

We believe that the lowest point for new construction has passed, and as conditions improve, zircon will be a crucial material for those projects. Therefore, we are not concerned about a large inventory in the pipeline.

And everywhere else that we sell. Again, we were selling what we were producing up until the second quarter, and Europe, North America, Latin America, Asia-Pacific were already depressed. So, the real driver was China in this most recent downturn.

Okay, thank you very much.

Thank you. Your next question comes from the line of Roger Spitz from Bank of America. Please go ahead.

Thank you very much. If the impact of the unabsorbed fixed costs in Q3 is going to be about $35 million of EBITDA, can you provide the numbers for Q1 and Q2, please.

Roger, we laid out for Q2, it was $25 million approximately, and a similar level for Q1, excluding the impacts of the Atlas and the KZN.

Got it. I missed that, sorry. And then otherwise, pigment volume has been increasing substantially sequentially, 14% to 9% as you mentioned. And you've been running your pigment plants at lower rates to manage inventory, you spoke about 70%, although maybe that was for the entire system. So, I mean, is this because you had a large pigment inventory at December 31st that you can absorb this increase in pigment volume sequentially, but you're still having to run at low rates? And if that is the case, how should we think about 2022 EBITDA of $875 million, which presumably would have benefited from overproduction or a benefit from better fixed cost absorption?

So Roger, we're going to recall, what we said in the fourth quarter was that we were going to bring down our operating rates to align more closely with the market, but we didn't bring it down to align with that 35% year-on-year decline, because that level we did not believe was sustainable. And we've been right about that. Q4 was a trough and we've seen TiO2 rebound from there. So, we've expected a continued step-up in pigment tons from that level. So, we've always been working to balance the replenishment of some of our inventory at year-end, which was needed because we were well below safety stocks earlier in 2022, and then also planning for the expected demand to come. As we mentioned, the second quarter saw a 9% increase versus what we had previously thought might be the mid-to-high teens percent increase. So now, instead of increasing the operating rates as we previously anticipated, we're keeping them lower and managing that inventory. So it's all a trade-off between looking at our cash, inventory build, and short-term impacts to EBITDA. But again, these are just charges that we're incurring in the short term. We believe it's the right decision to manage and generate higher cash, and the leverage of our business will be significant when we ramp back up our operations. We'll see savings from the projects we've been investing in. We'll see the margin improvement, and all of that will come back quickly as we bring the assets back up.

And when we think about where our inventory is now, it's above seasonal norms. but that's another reason why we were expecting a bigger uptick in the third quarter than we're seeing. So, we talked about flattish. So, we've maintained our volumes at the same production level that we had in the second quarter. And when we start thinking about if there is a build in the first quarter, I mean, in the fourth quarter for the first quarter coating season, we'll still have enough inventory, where we can meet that uptick if there is one. And when we see that pickup, we would then start pulling production back up.

Thank you very much.

Thank you. Your next question comes from the line of Hassan Ahmed from Alembic Global. Please go ahead.

Good morning, John and JF. I wanted to revisit the $35 million charge you guys are talking about for Q3. I don't know whether you'd be able to sort of parse it out for me, because obviously, you guys are talking about flat sequential TiO2 volumes. So obviously, production isn't going down over there. So to me, obviously that hit is primarily from the mining operations. And then you're obviously guiding to 15,000 tons to 20,000 tons of lower zircon volumes. And I understand that's a high-margin business for you guys. And if I were to sort of run my numbers based on some estimates, I'd like to think that that 15,000 to 20,000 ton reduction in zircon volumes may be around a $20 million hit to EBITDA. So, I'm just trying to understand the different components of that $35 million.

Well, the 20 million that you reference on zircon is not part of the $35 million anyway. So the $35 million, let's just talk about fixed cost absorption on the TiO2 side. Again, we were anticipating moving into Q3 that we would see a pickup. We also thought that Q2 was going to be more like 13%, 14% as opposed to 9%. So, the assumptions that we had were that we were going to increase production as we saw demand increasing, and we didn't see it to that level. So, John referenced this 70%-ish kind of capacity utilization, which at this particular stage, we will probably continue to run at through Q3, which is having an impact on fixed cost absorption for TiO2.

And John, you want to add? Yes. That's exactly right. And when you ask about our range of $115 million and $135 million, the range was primarily related to zircon volumes.

Understood. As a follow-up, where do you guys stand now? Obviously, market conditions sort of having moved the way they have, and we're all sort of obviously learning of the impacts. But in terms of just you guys' view of the trough earnings power of the company, I mean, it just seems that every quarter, the range sort of keeps getting more volatile, right. I mean, if I were to go by your $115 million to $135 million Q3 guidance, that would imply annualized $460 million to $540 million. If I were to sort of credit it for that $35 million hit that you guys are giving on an annualized basis, that would imply $600 million to $680 million in 'trough EBITDA.' So, where do you guys stand with your views around the trough?

Yes. I don't think Hassan, our view on where we think trough EBITDA is going to be. As you know, if you start on this year, we did have and go through a couple of one-off challenges, primarily relating to Atlas and KZN, that is lowering the base of where we're starting from. But as you also know and we've chatted about this entire call, we are up against market dynamics that are unprecedented from our view and that we don't have a lot of control over. We did think that more demand would materialize from China, which it hasn't. And that's a big driver of both our TiO2 and zircon performance and outlook for the rest of the year. We don't think it's going to stay depressed from these levels. And we do think we are past John mentioned the midpoint of the cycle, and we'll expect to crawl out of where we are today.

Yes. I think the short answer is we do not believe where we are today is a multiplier by four to come to an annualized number. And the reality is this is, in fact, a much deeper recession, and we use the recession word downturn, pick the word you want to use. We believe the TiO2 industry leads in and out of one. We believe we're in one, and we're much further or much closer to a recovery. So, we still believe in the long-term dynamics of this business to the points that were brought up on this call around. The reality is our customers have managed their inventories down. TiO2 has not been displaced at the rates that our sales have been displaced. It's not a permanent thing and we do believe the market is going to recover. The zircon piece, which was quick to John's point, is the one that probably for this quarter was the most significant one and the one that turned the quickest. And as recently as June, the market was much stronger than it is, in July for sure the bottom regarding what we're seeing on demand.

Yes. Hassan, I'd like to finish on a positive note that would add to that. And it's the rare earth. I mean, this is a business that is growing very fast. The demand for rare earth material is very strong and will be very strong with the electrification of the world. And Tronox is well positioned to become a key player in that space, and that would also help be a bit countercyclical to our TiO2 and zircon business.

Very helpful. Thank you so much.

Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. JF, Co-Chief Executive Officer for any closing remarks.

Thank you, Lara, and thank you for joining the call, everyone. Our key priority for 2023 remains unchanged. 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 project without losing sight of the long-term benefit to Tronox, including reducing our cost per ton and managing working capital and free cash flow in the current market environment. That concludes our call. Have a great day. Thank you.

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.