Tronox Holdings plc — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Tronox operates mineral-sands mines and smelters and nine TiO₂ pigment facilities. The results reflect the combined Cristal business; 2019 reported comparisons include Cristal only from its April 10, 2019 acquisition date, so pro forma comparisons are more representative of underlying year-over-year trends.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $578 million | $791 million reported; $827 million pro forma | $1.300 billion | $1.181 billion reported; $1.547 billion pro forma |
| Gross profit / margin | $129 million / 22% | $100 million / 13% reported; 22% pro forma | $304 million / 23% | $183 million / 15% reported; 21% pro forma |
| Operating income (loss) | $49 million | $(13) million | $128 million | $3 million |
| Net income (loss) attributable to Tronox | $(4) million; $(0.03) per share | $(62) million; $(0.41) per share | $28 million; $0.19 per share | $(96) million; $(0.69) per share |
| Adjusted EBITDA (non-GAAP) | $142 million | $195 million reported; $200 million pro forma | $315 million | $275 million reported; $341 million pro forma |
| Cash from continuing operations | Not separately presented for the quarter | Not separately presented for the quarter | $72 million | $133 million |
Q2 sales fell 27% on a reported basis and 30% versus pro forma 2019. TiO₂ revenue was $466 million, down 25% reported and 29% pro forma; zircon revenue was $68 million, down 23% reported. Six-month reported sales rose 10%, largely reflecting Cristal being included for more of 2020; pro forma sales declined 16%. Six-month pro forma Adjusted EBITDA was down from $341 million to $315 million, although its margin rose to 24% from 22%.
At June 30, cash and cash equivalents were $722 million, restricted cash $27 million, and total available liquidity $1.123 billion, including $401 million of revolver availability. Working capital was $1.8 billion. Total debt was approximately $3.5 billion and net debt $2.7 billion; net debt to trailing-twelve-month Adjusted EBITDA, pro forma for Cristal, was 4.2x. Cash from operations declined year over year as working capital used $160 million, including a $117 million inventory build. Capital expenditures were $82 million.
Changes, outlook and material matters
- COVID-19 and demand: Management attributed lower sales principally to pandemic-related volume declines. Q2 revenue fell 20% sequentially, primarily as TiO₂ volumes declined 19%; average TiO₂ selling prices were flat sequentially. South America and India were especially weak, while North American demand was relatively resilient. South African mining and smelting were disrupted by the countrywide lockdown.
- Margins and cost actions: Management said Q2 gross margin declined sequentially due to volume and mix, cost structure, and South African disruption, partly offset by currency-related cost benefits. Year-over-year margin comparisons also benefited from prior-year Cristal inventory step-up expenses and the 2019 Venator contract-loss charge. Tronox reported $107 million of synergies delivered through the first half of 2020, including $84 million reflected in EBITDA. Targets were $190 million for 2020, $275 million for 2021 and $325 million for 2022.
- Debt and liquidity actions: Tronox issued $500 million of 6.5% secured notes due 2025 in May, using part of the proceeds to repay $200 million drawn on revolving facilities in March as a precaution. It reported compliance with debt financial covenants and no term-loan or bond maturities before 2024. Management expected operations and available borrowing capacity to fund the next 12 months, but cautioned that adverse economic conditions could require lower capital spending and operating costs. Moody’s outlook moved from positive to stable; S&P’s moved from stable to negative.
- Acquisition and obligations: Tronox agreed to acquire Tizir Titanium and Iron for approximately $300 million in cash, plus 3% annual accrual from January 1, 2020 until closing. Closing remained subject to approvals and other conditions; an $18 million termination fee was escrowed, potentially increasing to $20 million under extensions. No formal earnings guidance is provided in the filing.
- Risks and contingencies: The filing identifies pandemic-related demand and customer credit risks, commodity prices, foreign exchange, floating-rate debt and environmental compliance as exposures. Environmental liabilities totaled $70 million, including a $61 million provision for Hawkins Point remediation. Venator claims a $75 million break fee; Tronox disputes the claim and counterclaims for $400 million. The ultimate litigation outcome is uncertain.
Investor verification points
- Assess the underlying trend using pro forma comparisons, given Cristal’s different inclusion periods in reported 2019 and 2020 results.
- Track whether TiO₂ volumes, pricing and working-capital needs recover, and whether cash generation improves from the first-half level.
- Verify delivery of synergy targets and distinguish realized EBITDA benefits from cash and other synergies.
- Monitor leverage, refinancing and liquidity, including the cost and use of the 2025 secured-note proceeds.
- Follow TTI closing conditions, funding and any termination-fee exposure, as well as the Venator litigation and Hawkins Point remediation.