Tronox Limited — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited results are presented in U.S. dollars. Tronox produces titanium-bearing mineral sands and titanium dioxide (TiO₂), and natural soda ash. Its reportable segments are TiO₂ and Alkali.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $537 million | $617 million | $1,012 million | $1,002 million |
| Gross profit / margin | $57 million / 11% | $24 million / 4% | $77 million / 8% | $59 million / 6% |
| Operating income (loss) | $8 million | $(50) million | $(21) million | $(59) million |
| Net loss attributable to Tronox | $(50) million | $(119) million | $(141) million | $(168) million |
| Loss per share, basic and diluted | $(0.42) | $(1.03) | $(1.21) | $(1.45) |
| Adjusted EBITDA (non-GAAP) | $71 million | $67 million | $111 million | $131 million |
Cash flow and liquidity: First-half operating cash flow was $69 million, versus $13 million a year earlier. Capital expenditures were $55 million, and cash used in investing activities was $54 million; the prior-year figure included $1.653 billion for the Alkali acquisition. Cash declined $41 million to $188 million. Working capital was $669 million, down from $753 million at year-end 2015. Cash plus stated available borrowing under the UBS and ABSA revolvers totaled $460 million.
Debt: Debt carrying amounts were approximately $2.945 billion, including $150 million drawn on the UBS revolver; net debt was approximately $2.9 billion. Long-term debt included a $1.5 billion variable-rate term loan, $900 million of 6.375% notes due 2020, and $600 million of 7.5% notes due 2022. Tronox reported compliance with financial covenants and no significant principal payments due until 2020. The filing states that $16 million of long-term debt is due within one year.
Material changes and segment results
- Q2 sales fell 13% year over year, with lower prices and product mix accounting for $53 million of the decline and lower volumes $24 million. TiO₂ segment sales fell 19% to $333 million; segment operating income was $6 million, versus a $41 million loss.
- Q2 Alkali sales were $204 million, down 2%; segment operating income fell to $11 million from $25 million, reflecting lower ANSAC pricing, higher costs, and $5 million each of longwall-move and pre-labor-contract-renewal costs.
- First-half sales rose 1% largely because 2016 included six months of Alkali results versus three months in 2015. TiO₂ sales fell $176 million to $618 million, while Alkali sales increased $186 million to $394 million on that comparison basis. First-half TiO₂ remained loss-making at the operating level.
- Gross margin improved year over year, reflecting lower inventory write-down reserves, lower production costs and favorable currency translation. Q2 TiO₂ operating results also included a nonrecurring $5 million insurance settlement gain.
- First-half Adjusted EBITDA declined to $111 million from $131 million. This non-GAAP measure is company-defined and should be considered alongside GAAP results.
Outlook, management commentary and risks
- Management expected operating cash flow and available revolver borrowings to fund operating costs, capital spending, interest, debt repayments and dividends over the next 12 months. This is a liquidity expectation, not earnings guidance.
- Management reported $43 million of incremental cash cost reductions and approximately $104 million of working-capital reductions in the first half, and continued to target more than $600 million of aggregate cash generation from 2015 through 2017. The filing does not provide a quantified earnings forecast.
- TiO₂ pigment capacity utilization reached 94% in Q2, with all pigment lines operating. Tronox expected Hamilton capacity benefits of 3%–5% beginning in Q3 2016. Fairbreeze mine was commissioned in April 2016; two of four South African slag and pig-iron furnaces remained suspended.
- Management described recovering TiO₂ pigment demand and Q2 price improvement, but said zircon and high-grade feedstock prices remained under pressure. It expected Alkali pricing to remain stable through year-end, while noting possible European price pressure from Turkish capacity additions beginning in 2017.
- Key exposures include volatile TiO₂, mineral-sands and soda-ash prices; energy, labor and transport costs; foreign exchange; customer credit and concentration; and floating-rate debt. A 1% interest-rate increase was estimated to increase annualized pretax loss by about $9 million.
- The filing reported no pending legal or administrative proceedings believed to be materially adverse individually or in aggregate, while cautioning that environmental matters and compliance costs could be significant. Wyoming mine reclamation self-bonding was approximately $80 million; asset retirement obligations were $78 million.
- Other notable items: the Botlek lease amendment reduced the asset-retirement liability by $10 million; Natronx planned to cease operations and deliveries on June 30, 2016, with no material dissolution costs expected. Tronox disclosed B2 and B+ credit ratings, both with negative outlooks.
Important facts for investors to verify
- Whether TiO₂ pricing, volumes and margins continue to recover, and whether Alkali pricing and operating costs stabilize.
- Progress against the stated 2015–2017 cash-generation target, including the durability of reported cost and working-capital reductions.
- Liquidity and refinancing capacity ahead of the substantial 2020 debt maturities, including the availability and borrowing-base conditions of revolvers.
- Cash conversion and working-capital movements, particularly whether the first-half operating cash flow improvement is sustainable.
- Environmental, reclamation and asset-retirement obligations, and the assumptions underlying the $80 million self-bond and liability estimates.
- Customer and related-party concentration: ANSAC represented 13% of first-half consolidated sales, and the company had $45 million of ANSAC receivables at quarter-end.
- The effect of tax valuation allowances and the timing and realization of tax benefits associated with the Anadarko trust expenditures; Tronox did not receive the $5.2 billion settlement proceeds.