Tronox Holdings Plc quarterly report, Q1 FY2017

Tronox Limited — Q1 2017 Form 10-Q

Reporting period: Three months ended March 31, 2017; filed May 4, 2017. The filing is for Tronox Limited, a global producer of titanium dioxide (TiO₂), mineral sands and natural soda ash. Financial statements are unaudited and amounts are in U.S. dollars unless noted.

Financial results and liquidity

Metric	Q1 2017	Q1 2016
Net sales	$569 million	$476 million
Gross profit / margin	$90 million / 16%	$21 million / 4%
Operating income (loss)	$16 million	$(31) million
Net loss	$(38) million	$(94) million
Net loss attributable to Tronox	$(41) million	$(93) million
Loss per share, basic and diluted	$(0.35)	$(0.80)
Operating cash flow	$60 million	$1 million
Capital expenditures	$32 million	$33 million

• Sales increased 20%, mainly on higher volumes and selling prices/product mix. Gross margin improved to about 16% from 4%; management attributed the improvement chiefly to lower production costs, stronger pricing/mix and higher volumes, partly offset by unfavorable currency translation.
• TiO₂ sales rose 33% to $378 million; segment operating income improved to $32 million from a $36 million loss. Volumes rose 9% and average selling prices 16%. Alkali sales were $191 million, unchanged; volumes were up 5% while prices were down 4%, with severe winter weather reducing production and sales.
• Adjusted EBITDA, a non-GAAP measure, was $101 million versus $40 million. Corporate operating costs increased, including higher Cristal-related professional fees and share-based compensation.
• Cash and cash equivalents were $265 million; total liquidity was reported as $560 million, including $198 million available under the UBS revolver and $97 million under the ABSA facility. Working capital was $735 million.
• Total borrowings were approximately $2.94 billion; reported net debt was $2.8 billion. Interest and debt expense was $46 million. There were no significant principal payments due until 2020, and the company reported compliance with its financial covenants.

Material changes and unusual items

• Compared with Q1 2016, operating results improved substantially, driven primarily by the TiO₂ segment’s recovery and lower production costs. Alkali performance was broadly stable, with weather affecting output.
• The Q1 2016 comparative figures were revised for prior-period errors, including an $11 million liability related to a late statutory filing and other adjustments. Management concluded the errors were not material to previously issued periods, but said the cumulative correction would be material if recorded entirely in the current period; prior statements will be revised as applicable. Revised Q1 2016 net loss was $94 million, and the changes had no net effect on that quarter’s operating cash flow.
• The quarterly dividend was reduced to $0.045 per share ($6 million total) from $0.25 per share ($30 million) in Q1 2016. A further $0.045-per-share quarterly dividend was declared in May.
• Management reported a $14 million increase in share-based compensation expense year over year, including awards tied to the proposed Cristal transaction.

Outlook, transactions and risks

• Tronox agreed to acquire Cristal’s TiO₂ business for $1.673 billion in cash, subject to adjustment, plus 37.58 million Class A shares. Closing was expected in Q1 2018, subject to financing, regulatory approvals, shareholder approval and other conditions. The FTC issued a second request in April 2017. A $100 million termination fee may apply in specified circumstances if the deal does not close by May 21, 2018.
• The company began marketing its Alkali business in March 2017 and was exploring other asset sales and financing options to help fund the acquisition. Alkali was not classified as held for sale at quarter-end. Exxaro, holding about 44% of voting securities, announced plans to pursue monetization of its stake over time, likely beginning no earlier than the second half of 2017.
• Management expected operations and revolving credit availability to cover operating costs, capital spending, interest, debt repayments and dividends over the next 12 months. Renewal negotiations were underway for the ABSA revolver, which matured in June 2017; the company said it had received alternative offers.
• Management described TiO₂ demand and pricing as recovering, with tight supply-demand conditions, and expected 2017 zircon sales volumes to exceed 2016. Alkali was described as sold out; export pricing remained exposed to Chinese producer costs and potential Turkish capacity additions. No specific earnings or revenue guidance was provided.
• Key exposures include commodity prices, foreign exchange, energy costs, floating interest rates, customer/industry concentration, environmental obligations and financing or regulatory risks around the Cristal deal. A 1% interest-rate increase was estimated to raise annualized pretax loss by about $13 million. Wyoming reclamation obligations were self-bonded at approximately $80 million; the state was reviewing the application, and Tronox anticipated replacing the bond with a third-party surety guarantee.
• The filing reported no pending legal or administrative proceeding expected to have a material adverse effect individually or in aggregate. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

• Whether the Cristal acquisition obtains financing, antitrust and other regulatory clearances, and shareholder approval; also assess the cash funding plan, dilution and potential termination fee.
• Whether the ABSA revolver was renewed before maturity and whether reported facility availability remains accessible under borrowing-base and other conditions.
• Whether the TiO₂ pricing, volume and cost improvements persist, and whether Alkali production recovers from the quarter’s weather disruption.
• How the prior-period restatement is reflected in future filings and whether any related control or reporting issues arise.
• Progress on the Wyoming reclamation bond replacement and the company’s broader environmental and asset-retirement obligations.