Tronox Holdings plc — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Tronox operates mineral-sands mines and processing operations and nine TiO₂ pigment facilities; its products include TiO₂, zircon and other mineral products. Amounts below are in millions of U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $794 | $945 | $1,502 | $1,910 |
| Gross profit / margin | $157 / 19.8% | $263 / 27.8% | $290 / 19.3% | $495 / 25.9% |
| Income from operations | $84 | $190 | $146 | $259 |
| Net income (loss) attributable to Tronox | $(269) | $375 | $(246) | $391 |
| Adjusted EBITDA (non-GAAP) | $168 | $275 | $314 | $515 |
| Adjusted EBITDA margin | 21.2% | 29.1% | 20.9% | 27.0% |
| Diluted earnings (loss) per share | $(1.72) | $2.37 | $(1.58) | $2.46 |
Cash flow: First-half operating cash flow was $57, versus $221 in the prior-year period. Capital expenditures were $148, compared with $202; investing cash outflow was $145. Financing provided $92, largely reflecting net activity in short-term borrowings, while dividends paid were $50. Cash increased $3 to $167.
Liquidity and debt: June 30 liquidity was $447, including $167 cash and $280 available under revolving facilities. Total debt was approximately $2.7 billion and net debt approximately $2.5 billion. Net debt to trailing-twelve-month Adjusted EBITDA was 3.8x. Working capital was $1.1 billion. The company reported compliance with financial covenants; approximately 67% of interest rates were fixed through 2028.
Changes versus comparable periods
- Q2 sales fell 16% year over year; first-half sales fell 21%. TiO₂ and zircon volumes were the principal drags. Q2 TiO₂ volume declined 22% and zircon volume 21%; TiO₂ average selling prices rose 1% and zircon prices 7% year over year.
- Q2 TiO₂ revenue declined 21% and zircon revenue 14%; other-product revenue rose 35%, mainly on higher pig iron and rare-earth sales. First-half TiO₂ and zircon revenue each declined 24%.
- Gross margin contracted 8.0 percentage points in Q2 and 6.6 points in the first half. Management cited lower volumes, unfavorable mix, higher production and commodity costs, increased cost structures and idle-facility charges; foreign exchange and higher selling prices partly offset these effects.
- Q2 interest expense rose $10, primarily from higher effective rates and higher average short-term debt. First-half interest expense rose $11 on similar factors.
- Q2 results included a $293 non-cash tax charge to establish an additional Australian deferred-tax-asset valuation allowance. The prior-year first half included an $85 Venator settlement charge and a $21 debt-extinguishment loss; those items did not recur in first-half 2023.
Outlook, commentary and risks
- Management said second-quarter revenue and gross profit increased sequentially from Q1, mainly on higher TiO₂, zircon and pig-iron volumes, lower freight costs and lower inventory cost-of-market adjustments. No numerical earnings or revenue guidance is provided in the filing.
- Management expects operations to provide sufficient cash over the next 12 months for operating costs, capital spending, interest and debt repayments, based on achieving its forecast. It noted that adverse macroeconomic conditions, inflation, geopolitical instability and supply-chain disruption could undermine that forecast; spending or costs may need to be reduced to maintain liquidity.
- Working capital used cash: first-half operating cash flow reflected a $189 net outflow from changes in assets and liabilities, including higher inventory (up $122 from year-end on the balance sheet). Management attributed the year-over-year cash-flow decline in part to higher inventory, including Jazan slag purchases, and lower payables.
- The company has floating-rate debt exposure; a hypothetical 1-percentage-point rate increase was estimated to reduce annualized pretax income by about $6. It had $950 of interest-rate swaps at quarter-end. Commodity prices, foreign exchange, customer credit and cyclicality are additional risks.
- The Jazan smelter option expired May 10, 2023; Tronox and AMIC agreed to continue discussions through September 30. Slag deliveries were agreed as in-kind repayment of Tronox’s $125 loans, with full repayment due by January 2025 in cash or product. First repayment shipment was expected before September 30, 2023.
- Environmental liabilities included a $42 provision for Hawkins Point remediation. Tronox UK pleaded guilty to a health-and-safety allegation relating to a 2021 incident; sentencing was scheduled for September 2023. The company said neither this matter nor a separate investigation into a 2022 incident was expected to have a material adverse effect.
- Purchase commitments were $2.41 billion in total, including $331 due within one year. The filing states that material risk factors were unchanged from the 2022 Form 10-K.
Important facts for investors to verify
- Whether TiO₂ and zircon demand, volumes, pricing and production costs recover, and whether sequential improvement is sustained.
- Cash conversion, inventory levels, short-term borrowing needs and access to the $280 of undrawn revolving capacity.
- The basis and potential reversibility of the $293 Australian deferred-tax valuation allowance, and the realization of deferred tax assets in other jurisdictions.
- Debt maturities, interest-rate exposure, leverage and the 3.8x net-debt-to-Adjusted-EBITDA measure; Adjusted EBITDA is non-GAAP.
- Progress and repayment terms for the AMIC/Jazan loans, the Hawkins Point remediation provision and the outcome of the UK health-and-safety proceedings.