Tronox Holdings Plc annual report, FY2019

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Tronox Holdings plc — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019; the filing also reports unaudited fourth-quarter results. Unless stated otherwise, financial figures are in millions of U.S. dollars. Tronox manufactures titanium dioxide (TiO₂) pigment and mines and processes mineral sands. The April 2019 Cristal acquisition expanded its pigment, mining and feedstock operations.

Financial performance and liquidity

  • 2019 revenue: $2.642 billion, up 45% from $1.819 billion in 2018, largely reflecting Cristal’s inclusion from April 10. On a pro forma basis, revenue was $3.008 billion versus $3.339 billion, down 10%.
  • Product revenue, reported: TiO₂ $2.049 billion; zircon $290 million; feedstock and other products $303 million. Pro forma TiO₂ revenue declined 8% and zircon revenue declined 24% year over year.
  • Profitability: Reported gross profit was $464 million and gross margin 18%, versus $498 million and 27% in 2018. Pro forma gross margin fell to 21% from 25%. Operating income was $95 million, down from $200 million. Continuing-operations net loss was $102 million; net loss attributable to Tronox was $109 million, or $0.78 per share.
  • Adjusted EBITDA: Reported Adjusted EBITDA was $615 million versus $513 million in 2018; reported margins were 23% and 28%, respectively. Pro forma Adjusted EBITDA declined to $681 million from $923 million. Adjusted EBITDA is a non-GAAP measure.
  • Fourth quarter: Revenue was $693 million and gross profit $148 million. Continuing-operations net loss was $5 million; net loss attributable to Tronox was reported as zero. Management said pro forma sales fell 5% year over year, principally from lower zircon volumes and prices, and fell 10% sequentially due mainly to seasonal pigment-volume declines.
  • Cash flow and investment: Continuing-operations operating cash flow was $412 million, compared with $170 million in 2018. Capital expenditures were $198 million, versus $117 million. Operating cash flow less capital expenditures was approximately $214 million, a simple calculation from reported figures. Investing cash outflow was $1.185 billion, including $1.675 billion paid for Cristal, partly offset by $701 million from the North American business sale.
  • Debt and liquidity: Year-end debt, net of issuance costs and discount, was $3.026 billion; net debt excluding restricted cash was $2.7 billion, compared with $2.1 billion a year earlier. Available liquidity was $648 million, including $302 million cash, down from $1.283 billion. Working capital was $1.371 billion. The company reported compliance with financial covenants at year-end.

Material changes and unusual items

  • Cristal was acquired for approximately $2.2 billion in cash and shares. The FTC-required sale of Cristal’s North American TiO₂ business generated about $701 million net proceeds; Tronox also sold the 8120 paper-laminate grade to Venator.
  • Acquisition accounting contributed a $98 million inventory fair-value step-up charge. Other significant 2019 items included $32 million transaction costs, $22 million restructuring costs, $16 million integration costs, and a $19 million estimated loss under the Venator supply agreement.
  • Tronox repurchased and cancelled 14 million shares from Exxaro for approximately $200 million and another 7.45 million shares for approximately $87 million under its repurchase authorization. The program was not completed because of Section 382 tax restrictions.
  • Reported results include only Cristal from the acquisition date; pro forma comparisons assume the acquisition and related divestitures occurred at the start of 2018 and are illustrative, not a forecast.

Outlook, commentary and risks

  • Management targeted approximately $220 million of operating synergies by 2022, then raised its targets to $190 million for 2020, $275 million for 2021 and $325 million for 2022. It reported $89 million of synergies delivered since closing, with portions not yet reflected in EBITDA.
  • Management expected TiO₂ pricing to improve as demand recovered in late 2020, while noting weak zircon demand, geopolitical uncertainty and a weaker Chinese economy. These statements are forward-looking, not guaranteed guidance.
  • Key exposures include volatile TiO₂ and zircon prices and demand, energy and raw-material costs, foreign exchange, South African power and regulatory risks, Middle East instability, integration and synergy execution, and debt restrictions. The filing also identified the emerging coronavirus outbreak as a potential risk to demand, operations and supply chains.
  • The European Commission adopted a regulation in February 2020 classifying powder-form TiO₂ as a Category 2 carcinogen by inhalation, with labeling requirements expected to take effect around June 2021.
  • Contingencies include a $56 million provision for remediation at the acquired Hawkins Point site and $65 million in total environmental liabilities. In litigation, Venator claimed a $75 million break fee; Tronox counterclaimed for $400 million. The company said the outcome could not be assured.
  • The auditor gave an unqualified opinion on the financial statements and internal control. Cristal, representing 38% of year-end assets and 39% of 2019 revenue, was excluded from management’s and the auditor’s internal-control assessment because it was acquired during 2019.

Important facts for investors to verify

  1. Track actual TiO₂ and zircon volumes, prices and margins against management’s market commentary and pro forma comparisons.
  2. Verify synergy realization, associated restructuring and integration costs, and whether targets are reflected in cash flow and EBITDA.
  3. Review liquidity, debt maturities, floating-rate exposure, covenant headroom and the use of remaining divestiture proceeds.
  4. Monitor the Venator litigation, Hawkins Point remediation costs, and any changes to environmental liabilities.
  5. Assess Cristal purchase-price valuation and integration controls; the purchase-price allocation remained subject to measurement-period updates.
  6. Check effects of EU TiO₂ classification, coronavirus-related disruption, and South African operating and mining-right risks.