Tronox Holdings plc — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Tronox mines and processes titanium-bearing mineral sands and produces TiO₂ pigment, zircon and other products. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $662 million | $895 million | $2,164 million | $2,805 million |
| Gross profit / margin | $94 million / 14.2% | $232 million / 25.9% | $384 million / 17.7% | $727 million / 25.9% |
| Operating income | $32 million | $163 million | $178 million | $422 million |
| Net income (loss) attributable to Tronox | $(14) million | $121 million | $(260) million | $512 million |
| Adjusted EBITDA (non-GAAP) | $116 million | $247 million | $430 million | $762 million |
| Cash provided by operating activities | Not separately stated for quarter | $74 million | $358 million |
At September 30, cash was $246 million; total available liquidity was $726 million, including $480 million available under revolving facilities. Debt was approximately $2.8 billion and net debt approximately $2.6 billion; net debt to trailing-twelve-month Adjusted EBITDA was 4.8x. Working capital was $1.5 billion. The company reported compliance with debt-facility financial covenants and said approximately 64% of interest rates were fixed through 2028.
For the nine months, capital expenditures were $202 million, dividends paid were $69 million, and cash increased by $82 million to $246 million. Inventory rose to $1.422 billion from $1.278 billion at year-end 2022. The filing reports $200 million of receivables sold under its securitization facility, with a $200 million facility limit.
Material changes versus comparable periods
- Q3 sales declined 26% year over year; nine-month sales declined 23%. Management attributed the weakness mainly to lower TiO₂ and zircon volumes, with lower selling prices also affecting the quarter.
- Q3 TiO₂ revenue fell 17% and zircon revenue fell 74%; nine-month TiO₂ revenue fell 22% and zircon revenue fell 42%.
- Q3 gross margin fell 11.7 percentage points year over year; nine-month gross margin fell 8.2 points. Management cited weaker product mix, lower prices, higher production and commodity costs, increased cost structures and idle-facility charges, partly offset by favorable currency effects.
- Nine-month operating cash flow fell to $74 million from $358 million. Management cited working-capital outflows, including higher inventory and lower accounts payable. Lower capital spending partly reflected completion of development of the Atlas-Campaspe mine.
- Interest expense rose $10 million in Q3 and $21 million for the nine-month period, primarily reflecting higher effective interest rates and short-term borrowing balances.
- A $293 million non-cash tax charge for an Australian deferred-tax-asset valuation allowance drove the nine-month tax provision to $339 million and materially contributed to the reported net loss. The prior-year period included an $85 million Venator settlement charge and a $21 million debt-extinguishment loss.
Outlook, commentary and risks
Management did not provide specific forward financial guidance in the supplied filing text. It expects operations to provide sufficient cash over the next 12 months for operating expenses, capital expenditures, interest and debt repayments, subject to achieving its forecast. It said adverse conditions could require reductions in capital spending or operating costs. Management described continued investment in cost reduction, growth and vertical integration, while also identifying debt reduction, dividends and potential share repurchases as intended uses of cash.
- Business conditions remain exposed to cyclical demand, product and raw-material prices, inflation, production costs, foreign exchange, supply-chain disruptions and geopolitical instability. Management noted sequential Q3 sales and gross profit declines versus Q2.
- A hypothetical 1% rise in interest rates was estimated to reduce annualized pretax income by approximately $7 million, net of higher earnings on floating-rate financial assets. Floating-rate debt was approximately $786 million at quarter-end; the company had $950 million of interest-rate swaps.
- The company recorded a $42 million provision for remediation at the former Hawkins Point plant. It reported $108 million of outstanding letters of credit and bank guarantees, including $50 million related to the Hawkins Point sale, and substantial purchase, debt, lease, environmental and asset-retirement commitments.
- Tronox UK pleaded guilty in a health-and-safety matter relating to a 2021 contractor incident; a £207,681 penalty, including costs, was imposed in September 2023. A separate investigation into a 2022 incident remained ongoing; the company did not expect either matter to have a material adverse effect based on its current understanding.
- The company’s option to acquire the Jazan slag facility expired in May 2023; negotiations were extended to November 1, 2023. In-kind repayments of Tronox’s AMIC loans began in Q3; the outstanding loan principal was $102 million and full repayment is required by January 2025, in cash or slag deliveries.
- Moody’s rating was Ba3 with stable outlook; S&P’s rating was B+ with stable outlook after a change from positive in August. Management reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether TiO₂ and zircon volumes, prices and product mix recover, and how these trends affect margins and operating cash flow.
- Whether inventory levels and working-capital needs decline, and whether the $726 million reported liquidity remains available under operating conditions and facility terms.
- The effect of the Australian deferred-tax valuation allowance and the evidence supporting future realization of deferred tax assets.
- Debt costs, refinancing and covenant headroom, including the company’s leverage and exposure to floating interest rates.
- Progress on repayment of the AMIC loans and the outcome of negotiations regarding the Jazan slag facility.
- Potential cash costs and timing for Hawkins Point remediation, other environmental obligations and the outstanding UK investigation.