Tronox Holdings Plc quarterly report, Q1 FY2016

Tronox Holdings Plc — Q1 2016 Form 10-Q

Reporting period: Three months ended March 31, 2016; unaudited. Amounts are in U.S. dollars unless noted. Tronox produces titanium dioxide (TiO₂), mineral sands products and natural soda ash. Q1 2016 includes Alkali, acquired April 1, 2015; the comparable 2015 quarter does not.

Financial performance and liquidity

Metric	Q1 2016	Q1 2015
Net sales	$475 million	$385 million
Gross profit; gross margin	$20 million; 4%	$35 million; 9%
Operating loss	$29 million	$9 million
Net loss attributable to Tronox	$91 million	$49 million
Basic and diluted loss per share	$0.78	$0.42
Adjusted EBITDA, non-GAAP	$40 million	$64 million
Cash from operating activities	$1 million	Use of $65 million
Capital expenditures	$33 million	$32 million

Cash and cash equivalents were $152 million at March 31, down from $229 million at year-end 2015. Total reported liquidity was $444 million: cash plus $204 million available under the UBS revolver and $88 million under the ABSA facility. Working capital was $677 million, versus $753 million at December 31, 2015.

Total borrowings were approximately $2.95 billion; net debt was reported at $2.9 billion, compared with $2.8 billion at year-end. Q1 interest and debt expense was $46 million. Debt includes a $1.5 billion floating-rate term loan, $900 million of 2020 notes and $600 million of 2022 notes. The company reported compliance with its financial covenants.

Material changes and segment results

• Sales rose $90 million, or 23%, primarily because the quarter included $190 million of Alkali revenue. TiO₂ sales fell $100 million to $285 million, reflecting lower selling prices and product mix ($72 million), lower volumes ($27 million) and unfavorable currency translation ($1 million).
• TiO₂ operating results weakened: segment operating loss was $36 million, compared with $9 million of income a year earlier. Alkali contributed $190 million of sales and $20 million of operating income.
• Consolidated gross profit declined despite Alkali’s contribution. Management cited lower TiO₂ prices and mix, higher production costs and lower volumes, partly offset by favorable currency translation, lower inventory write-down reserves and Alkali gross profit.
• Adjusted EBITDA declined to $40 million from $64 million. By segment, TiO₂ was $22 million versus $85 million; Alkali contributed $35 million; corporate was negative $17 million versus negative $21 million.
• Interest expense increased, including a full quarter of interest on the 2022 notes in 2016. Tronox repurchased notes below par, recording a $4 million gain on extinguishment of debt. Other expense included a $10 million net foreign-currency loss.
• Cash declined by $77 million during the quarter. Operating cash flow was nearly breakeven; dividends of $30 million, debt repayments of $19 million and capital spending were significant cash uses.

Outlook, commentary and risks

• Management expected operations and available revolver borrowings to fund operating expenses, capital spending, interest, debt repayments and dividends for the next 12 months. It also described a goal of generating more than $600 million of aggregate cash in 2015–2017 through cost and working-capital initiatives; this is a management objective, not a guarantee.
• Management said TiO₂ demand began recovering in Q1, restarted previously idled processing lines at Hamilton and Kwinana, and was running all three pigment plants at capacity. Pigment prices were lower sequentially, while announced price increases were being implemented. Zircon and high-grade feedstock pricing remained under pressure.
• The company commissioned the Fairbreeze mine in April 2016 as a replacement feedstock source. It reported 139 million metric tons of proved ore reserves and a reserve life of more than 12 years.
• Management expected soda ash demand to grow about 3% annually through 2024 and prices to remain stable through the rest of 2016, while noting that increased Chinese exports could pressure prices in Asian markets.
• The Wyoming Alkali workforce agreement expires July 1, 2016. A failed negotiation could lead to a work stoppage and affect results from Q3, despite management’s plan to maintain operations.
• Moody’s rating was B2 with a negative outlook at quarter-end. S&P lowered the rating to B+ with a negative outlook on April 15, 2016.
• Other exposures include volatile TiO₂ and soda ash markets, energy and input costs, floating-rate debt, foreign exchange, customer concentration, environmental obligations and South African BEE/mining-charter requirements. The filing describes broad environmental and legal exposures but states no pending proceeding was then expected to have a material adverse effect.
• Tax benefits are constrained by valuation allowances on deferred tax assets in several jurisdictions. The company said it expected deductions over time from expenditures by trusts funded by the Anadarko litigation settlement; approximately $2.4 billion of expected trust expenditures had occurred by March 31, 2016.
• The Board declared a Q2 dividend of $0.045 per share, totaling $5 million, payable May 27, 2016, compared with the Q1 dividend of $0.25 per share and $30 million total.

Important facts for investors to verify

• How much of the sales and earnings trend reflects underlying TiO₂ pricing, mix and demand versus the Alkali acquisition and currency movements.
• Whether liquidity and operating cash generation can support debt service, capital spending and dividends, particularly with approximately $2.3 billion of scheduled debt maturities in 2020.
• Progress on TiO₂ restructuring, cost savings, working-capital reductions and the stated 2015–2017 cash-generation objective.
• Developments in soda ash pricing, Chinese exports and the Wyoming labor negotiations before the July 1 contract expiration.
• Implications of the April S&P downgrade, South African BEE and mining-charter developments, and environmental and reclamation commitments.
• Dividend sustainability and the extent to which cash balances are available across jurisdictions; the filing notes restrictions on some intercompany cash transfers.