Tronox Holdings Plc quarterly report, Q2 FY2018

Tronox Holdings plc — Form 10-Q Summary

Reporting period: Three and six months ended June 30, 2018. The filing describes a global producer of titanium dioxide (TiO₂) pigment and titanium-bearing mineral sands products, operating one reportable segment, TiO₂. The 2017 comparative period includes Alkali as discontinued operations; Alkali was sold in 2017.

Financial performance and position

Metric	Q2 2018	Q2 2017	Six months 2018	Six months 2017
Net sales	$492 million	$421 million	$934 million	$799 million
Gross profit / margin	$144 million / 29%	$95 million / 23%	$259 million / 28%	$158 million / 20%
Income (loss) from continuing operations	$50 million	$(17) million	$9 million	$(70) million
Net income (loss) attributable to Tronox	$36 million	$3 million	$(8) million	$(38) million
Adjusted EBITDA (non-GAAP)	$147 million	$99 million	$260 million	$162 million

• For Q2, higher selling prices contributed $73 million to sales growth; the stronger euro added about $8 million, partly offset by a $10 million reduction in sales volume, mainly lower external feedstock sales as more feedstock was used internally. Pigment and zircon sales were $354 million and $78 million, respectively.
• Management attributed improved margins mainly to higher selling prices, partly offset by higher direct-material costs. Six-month gross profit also included a $9 million refund of previously paid South African mineral royalties.
• Six-month operating cash flow was $31 million, versus $45 million in 2017. Capital expenditures were $55 million; investing cash outflow was $69 million, including a $14 million loan to AMIC. Cash, cash equivalents and restricted cash totaled $1.692 billion at June 30, 2018.
• Cash and cash equivalents were $1.036 billion; restricted cash was $656 million, primarily tied to the Blocked Term Loan and not included in management’s stated $1.348 billion liquidity total. That total included $257 million available under the Wells Fargo revolver and $55 million under the New ABSA revolver.
• Long-term debt, net, was $3.147 billion, with $22 million due within one year. Net debt, as defined by the company and excluding $650 million of restricted cash related to the Blocked Term Loan, was $2.1 billion, compared with $2.0 billion at year-end 2017. Working capital was $2.3 billion.

Material changes and unusual items

• Tronox issued $615 million of 6.5% senior notes due 2026 and redeemed its 7.5% notes due 2022. The refinancing extended maturities and was associated with a $30 million debt-extinguishment loss, including a $22 million call premium. Management reported no other significant debt principal payments due until 2024.
• A $48 million non-cash tax benefit resulted from releasing the valuation allowance on Dutch deferred tax assets. The company continued full valuation allowances on net deferred tax assets in the U.S. and Australia. Six-month results also included a $25 million impairment and expected loss on the planned sale of Henderson Electrolytic Operations.
• Foreign-currency gains contributed to other income in 2018; Q2 other income was $29 million. Foreign currency translation produced a $185 million comprehensive loss in Q2 and a $126 million loss for the six-month period.
• Q2 SG&A increased by $16 million year over year, mainly due to professional fees associated with the proposed Cristal acquisition. The filing reports a $6 million reversal of previously recorded expense following a modification to integration-related share awards.

Outlook, risks and contingencies

• Management expected operations, cash on hand and available borrowing capacity to fund the Cristal acquisition, operating costs, capital spending, interest, debt repayments and dividends over the next 12 months. It gave no specific earnings or revenue guidance.
• Management described recovering pigment pricing and a tight zircon supply-demand balance, with further zircon price gains expected in 2018. It also noted easing European supply constraints, possible moderate cost increases for inputs such as electrodes, coke and electricity, and continued exposure to commodity and currency fluctuations.
• The proposed Cristal TiO₂ acquisition was valued at $1.673 billion cash, subject to working-capital adjustment, plus 37.58 million Class A shares. Seven of nine required regulatory approvals had been obtained. European Commission approval was conditional on divesting the 8120 paper-laminate grade; approval of Venator as buyer remained necessary. The FTC challenged the transaction, and a U.S. District Court hearing was scheduled for August 2018. Tronox and Venator also agreed to negotiate a possible sale of Cristal’s Ashtabula complex if required for U.S. approval. A $75 million break fee could apply under specified circumstances.
• If the Cristal transaction is terminated, the $650 million Blocked Term Loan must be repaid and Tronox would be required to prepay $800 million of its New Term Loan Facility, as described in the filing.
• Tronox agreed to provide up to $125 million in loans to AMIC for start-up of a Saudi titanium-slag smelter; $14 million had been loaned by June 30. Tronox holds an option, and AMIC may have a put right subject to production and other conditions, for Tronox to acquire 90% of the relevant entity.
• The filing cites potential risks from debt covenants, floating-rate borrowing costs, financing access, environmental compliance, customer and industry concentration, and tax attributes potentially limited by an ownership change. Exxaro intended to sell its remaining Tronox shares over time. The filing reported no material changes to previously disclosed risk factors.

Most important facts for investors to verify

• Final U.S. and European regulatory decisions, required divestitures, and whether and when the Cristal acquisition closes.
• Availability and restrictions on cash, particularly the $656 million of restricted cash, and the substantial prepayment consequences if the acquisition terminates.
• Whether improved operating performance and cash generation persist after excluding the Dutch tax benefit, foreign-exchange effects, and other unusual items.
• Completion and final proceeds of the Henderson Electrolytic sale, and the potential funding, repayment and acquisition obligations under the AMIC arrangements.
• Changes in Exxaro ownership, tax-loss carryforward availability, and any resulting effect on Tronox’s tax position or financing.