Tronox Holdings plc — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited results are presented in millions of U.S. dollars unless otherwise noted. Tronox produces titanium-bearing mineral sands and TiO₂ pigment, and natural soda ash. Its reportable segments are TiO₂ and Alkali; Alkali was acquired in April 2015, so the nine-month comparison includes nine months of Alkali results in 2016 versus six months in 2015.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $533 | $575 | $1,545 | $1,577 |
| Gross profit | $80 | $39 | $157 | $98 |
| Gross margin | 15% | 7% | 10% | 6% |
| Operating income (loss) | $25 | $(21) | $4 | $(80) |
| Net loss | $(42) | $(54) | $(182) | $(218) |
| Net loss per share | $(0.35) | $(0.52) | $(1.56) | $(1.97) |
| Adjusted EBITDA (non-GAAP) | $98 | $81 | $209 | $212 |
Segment results: Q3 TiO₂ sales were $339 million and operating income was $18 million, versus sales of $380 million and an operating loss of $26 million in Q3 2015. Alkali sales were $194 million and operating income was $23 million, compared with $195 million and $21 million. For the first nine months, TiO₂ sales were $957 million and operating loss was $12 million; Alkali sales were $588 million and operating income was $54 million.
Cash flow and liquidity: Nine-month operating cash flow was $123 million, versus $45 million; capital expenditures were $87 million, versus $141 million. Cash and cash equivalents were $202 million at September 30, down from $229 million at year-end. Reported liquidity, including available revolver capacity, was $470 million. Working capital was $669 million, compared with $753 million at December 31, 2015.
Debt: Reported net debt was $2.9 billion, versus $2.8 billion at year-end. The balance sheet reported $150 million of short-term debt and $2.889 billion of long-term debt. The main maturities are in 2020: the $1.5 billion variable-rate term loan and $900 million of 6.375% senior notes; $600 million of 7.50% senior notes mature in 2022. The company said it was covenant-compliant and had no significant principal payments due until 2020.
Changes versus the prior comparable period
- Q3 sales declined 7%, primarily from lower volumes; nine-month sales fell 2%. TiO₂ drove most of the year-to-date decline, while Alkali’s nine-month sales comparison benefited from the additional three months included in 2016.
- Gross margin improved in both comparison periods. Management cited lower production costs, lower inventory valuation reserves, and favorable foreign-currency effects for the year-to-date improvement.
- Operating results improved substantially: Q3 moved to operating income from a loss, and the nine-month operating loss narrowed. Net losses also decreased.
- Adjusted EBITDA was higher in Q3 but slightly lower year to date. These are non-GAAP measures and may not be comparable with similarly titled measures from other companies.
- Operating cash flow increased, while capital spending fell. Cash declined by $27 million over the nine months, including dividends and debt repayments among financing uses.
Outlook, commentary, risks and unusual items
- Management expected operations and available revolver borrowings to fund operating costs, capital expenditures, interest, debt repayments, and dividends for the next 12 months. No formal consolidated earnings or revenue guidance was provided.
- TiO₂ pigment pricing improved sequentially in Q2 and Q3, and global demand was recovering. Pigment capacity utilization exceeded 100% in Q3. Management reported $43 million of incremental cash cost reductions and approximately $104 million of working-capital reductions in the first half of 2016.
- Management expected 2016 zircon sales volumes to exceed 2015 by approximately 5%. Soda ash demand was expected to grow over the medium term; the filing noted possible European price pressure from additional Turkish capacity beginning in 2017.
- Tronox commissioned its Fairbreeze mine in April 2016. It continued operating two of four South African furnaces at reduced rates. The TiO₂ restructuring was expected to finish in Q4 2016; management expected to pay the remaining $1 million restructuring liability over the next three months.
- Foreign currency movements were a notable earnings swing: other expense was $14 million in Q3 2016 versus other income of $23 million in Q3 2015, primarily reflecting foreign-currency losses versus gains. Nine-month other expense was $23 million versus income of $22 million.
- Interest-rate, currency, energy-price, product-market, and customer-credit risks remain relevant. A hypothetical 1% interest-rate increase was estimated to raise annualized pretax loss by about $12 million. Credit ratings were B2 negative (Moody’s) and B+ negative (S&P).
- Environmental and legal matters include asset-retirement obligations of $82 million and an approximately $80 million Wyoming mine reclamation self-bond. The company stated it was not party to pending legal or administrative proceedings expected to have a material adverse effect. It also disclosed broad environmental compliance obligations and risks.
- The $5.2 billion Anadarko settlement was paid to trusts and other entities, not to Tronox. The company believes it is entitled to tax deductions as trust funds are spent; approximately $2.7 billion of trust expenditures had occurred by September 30, 2016.
- Unusual items included $4 million of gains from repurchasing debt below par, a $1 million pension-plan curtailment gain, and a $21 million actuarial loss recorded in other comprehensive income. Natron X approved cessation and dissolution activities; Tronox recorded a $1 million reserve and said it expected no further termination expenses.
Most important facts for investors to verify
- Whether sequential TiO₂ price and demand improvement continues and translates into sustained segment profitability.
- Whether cost reductions, working-capital improvements, and Fairbreeze production perform as management expects.
- Liquidity availability under borrowing-base facilities, debt covenant compliance, and refinancing or repayment needs ahead of the 2020 maturities.
- The sustainability of dividends given ongoing net losses, debt levels, and cash requirements.
- Exposure to foreign exchange, energy prices, customer concentration, environmental obligations, and the uncertain timing and realization of tax deductions tied to the Anadarko trusts.