Tronox Holdings plc (TROX) Q3 2020 Earnings Report, Transcript and Summary

Good day, and welcome to the Tronox Holdings Q3 2020 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Jennifer Guenther, Vice President of Investor Relations. Please go ahead.

Thank you, and welcome to our third quarter 2020 conference call and webcast. On our call today are Jeff Quinn, Chairman and Chief Executive Officer; Jean-François Turgeon, Chief Operating Officer; John Romano, Chief Commercial and Strategy Officer; Tim Carlson, Chief Financial Officer; and John Srivisal, Senior Vice President, Business Development and Finance. We will be using slides as we move through today's call. Those of you listening by Internet broadcast through our website should already have them. For those listening by telephone, if you haven't already done so, you can access them on our website at investor.tronox.com. Moving to Slide 2. A reminder that comments made on this call and the information provided in our presentation and on our website include certain statements that are forward-looking and subject to various risks and uncertainties including, but not limited to, the specific factors summarized in our SEC filings. This information represents our best judgment based on today's information. However, actual results may vary based on these risks and uncertainties. The Company undertakes no obligation to update or revise any forward-looking statements. During the conference call, we will refer to certain non-U.S. GAAP financial terms that we use in the management of our business and believe are useful to investors in evaluating the Company's performance. Reconciliations to their nearest U.S. GAAP terms are provided in our earnings release and in the appendix of the accompanying presentation. Moving to Slide 3. It's now my pleasure to turn the call over to Jeff Quinn. Jeff?

Thanks, Jennifer. Good morning, everyone, and thank you for joining us today. I will first review the highlights of the quarter before turning it over to other members of my team for a deeper dive into the results for the quarter. I will then share an update on several of our ongoing strategic projects and our outlook for the full-year. We were very pleased with our third quarter results, which continued to reflect the strength of our vertically integrated business and our ability to optimize our operations and deliver strong financial results across a variety of business conditions. Revenue in the third quarter increased 17% sequentially, driven largely by improved TiO2 sales volumes and recovery in feedstock and other revenues. The improved TiO2 market demand we began to see in July continued through the remainder of the quarter, resulting in a sequential volume growth in all geographic regions. As we would discuss that trend also gave us some momentum as we've entered the fourth quarter and we have seen that materialized in our October order book. TiO2 sales volumes recovered strongly in the quarter, increasing 16% sequentially, outpacing our previous expectations while pricing remain stable. Adjusted EBITDA for the quarter was $148 million with an adjusted EBITDA margin of 22%. Utilizing our proprietary enterprise optimization model, we adjusted our operations in the quarter to accommodate the effect of the pandemic, which resulted in temporary higher production costs and a slight negative impact to margins as we had foreshadowed on our second quarter earnings call. These temporary impacts were minimized through continued cost reduction as well as increased acquisition synergies. Synergy captured for the year-to-date now totals $183 million, a $134 million of which has been reflected in the EBITDA. Today, I invited John Srivisal, our Senior Vice President, Business Development and Finance to join the call, to discuss our continued outstanding achievement in synergies in more details a bit later. John is our internal guardian of our robust program to track and quantify synergy delivery. The robustness of this tracking mechanism is one of the reasons we have been successful in delivering the promise of the Cristal acquisition. To preview his comments, given our success to date and achievement of synergies and our view that we will continue to deliver even more synergies at an accelerated pace, we are raising our full-year 2020 synergy target to $235 million, but the $185 million of that expected to be reflected in EBITDA. We continue to deliver synergies ahead of schedule while increasing our expectation for the total synergies to come. At our Investor Day last year, we've laid out a target of $120 million in total synergies in 2020. Our new target for this year is almost twice that much. As I have said before, we remain encouraged by the value creation through the combination of our two legacy businesses, which has led to an expectation of increased achievable synergies, both in terms of pacing and the absolute amount. Given our synergy trajectory, we will significantly see the increased longer-term synergy targets laid out at the beginning of this year for future years. After we complete our budget process for the year, at the year end call in February, we will lay out new significant increased synergy targets for future years. John will provide more details on the breakdown of the synergies achieved year-to-date in 2020 to help demonstrate the areas of value creation that continue to grow. Our third quarter net income of $902 million included a non-cash deferred tax benefit of $895 million due to the reversal of a portion of our U.S. valuation allowance relating to net operating loss carry forwards. This reversal of a portion of our U.S. valuation allowance is based upon an analysis of our improved profitability, as well as our expectations for continued profitability in the U.S., increasing the likelihood that our U.S. subsidiaries will be able to utilize the substantial deferred tax asset on our balance sheet. This is yet again, further evidenced the strength of our business model and how Tronox will deliver value to our shareholders in the future. Adjusted EPS for the quarter was $0.05. From a liquidity and capital resource perspective, we are pleased with how well our business is positioned despite the pandemic. We have $1.1 billion in cash and available liquidity, more than sufficient to sustain our business. As we move closer to the end of the year, we are evaluating incremental debt pay down options utilizing excess liquidity on the balance sheet to advance further towards our gross debt target of $2.5 billion. I will now turn the call over to John Romano, our Chief Commercial and Strategy Officer, who will comment on our commercial performance and the trends we are seeing in the global marketplace. John?

Thanks Jeff. Now moving to Slide 4. First, I'll take you through the year-on-year comparison. Revenue of $675 million was 12% lower than $768 million for the year ago quarter, primarily due to impacts from the COVID-19 pandemic. TiO2 pigment sales of $543 million were 10% lower driven primarily by a sales volume decline of 9%, reflecting weaker demand in Asia Pacific led by India due to the impacts of COVID-19. A slight lag in Europe, while volumes in Latin America exceeded and in North America were leveled with Q3 2019 volumes. The year-over-year volume decline of 9% for Q3 is a significant improvement from the previous quarter where volumes were 27% lower year-on-year. As Jeff will share with you in a few minutes when he provides our outlook, we expect this year-over-year negative variance to be eliminated in the fourth quarter. TiO2 selling prices were 3% lower on a local currency basis year-over-year or 1% lower when adjusted for currency. This represents very little pricing movement from this point last year, despite the challenged macroeconomic backdrop largely attributable to our margin stability initiatives. Now moving to Zircon. Sales of $56 million were 18% lower than a year ago. Zircon sales volumes were 7% lower when compared to Q3 of 2019 driven by softer market conditions and the timing of shipments. Selling prices were 11% lower than a year-ago quarter. As we mentioned before, Zircon pricing declined late in the fourth quarter and early in the first quarter. So this comparison demonstrates the roll forward of that trend on a year-over-year comparison. In feedstock and other products sales of $76 million declined 22% largely due to lower mandated CP slag sales associated with the remedy for the Cristal transaction and lower pig iron sales volumes due to COVID-19. Now moving to the sequential comparison versus the second quarter of 2020. Revenue of $675 million increased 17% from the prior quarter on improved TiO2 and feedstock and other products sales due to increased market demand. TiO2 pigment sales of $543 million were 17% higher compared to $466 million. Sales volumes were 16% higher as we saw sequential volume growth in all regions led by strong volumes in North America and a significant recovery in Latin America. Selling prices were leveled on the U.S. dollar basis or down 1% on a local currency basis. TiO2 pricing in 2020 has been relatively stable despite the challenging macroeconomic environment we have been operating in. Moving to Zircon. Sales of $56 million decreased by 18% from the previous quarter, sales volumes declined 15% as a result of shipment timing on some volumes that shifted from Q3 into Q2 as we communicated in our second quarter earnings call, as well as volumes that have shifted into what will now be a very strong fourth quarter. Zircon selling prices declined by 2% largely driven by product mix. And finally, feedstock and other product sales of $776 million increased 73% due to improved pig iron volumes and the resumption of mandated CP slag sales as per the FTC consent order. Looking back over the quarter, September was our strongest TiO2 volume month. The trajectory moving out of the third quarter is encouraging as we see this strength continuing into October indicative of an improving market condition, which we expect to see through the end of the year and into 2021. Jeff will speak to our fourth quarter volume outlook later in the call. And finally, we're expecting TiO2 pricing in Q4 to remain in line with the third quarter. As we discussed on our last earnings call, following a precipitous drop off in the second quarter, Chinese sulfate pricing began to increase in July and has continued to increase into the fourth quarter supported by improving demand and an increase in Chinese and imported ilmenite pricing. I will now turn the call over to JF for a review of our operating performance and profitability in the quarter. JF?

Thank you, John. Moving to Slide 5, let me first review the year-over-year comparison. Adjusted EBITDA of $148 million was 20% lower than a year ago quarter. We benefit this quarter versus the year ago quarter from $34 million in synergy and favorable foreign exchange rate, primarily the South African rand, euro and Brazilian real. This was offset by lower sales volume and pricing mix, increased production costs driven by the adjustment of our operation to accommodate the effect of the pandemic, idle facility and LCM charges, and the absence of the deferred margin benefit from Q3 2019. Sequentially, adjusted EBITDA of $148 million increased 4% from the $142 million, driven primarily by the improved volume John discussed earlier, a favorable comparison of production cost in South Africa due to COVID-19 related slowdown on our operation in the second quarter, and an incremental $4 million of synergy achieved in Q3 versus Q2. This improvement was achieved despite increased pigment production costs in the quarter, due to the adjustment of our operation to accommodate the effect of the pandemic and unfavorable foreign exchange rate, primarily the South African rand and the Australian dollar. Overall, our operation continue to remain stable, an achievement I'm proud of considering the challenge presented by COVID-19. Using our operational excellence program in our integrated business planning tool, we have reduced our anticipated back half fixed costs by approximately $50 million to offset the impact of the COVID-19. Combined with the strength of our synergy captured, we have minimized the impact on our margin profile. While many of this cost reduction were deferral that will be incur once we returned to normal operation in the first half of 2021, the benefit from the synergy will carry forward. I would now like to turn the call over to John Srivisal to discuss the synergy in further detail. John?

Thank you, JF. Turning to Slide 6. As JF mentioned on the previous slide, in Q3, we achieved $34 million of incremental synergies year-over-year reflected in EBITDA. This amounts to year-to-date synergies of $134 million reflected in EBITDA from $183 million achieved in total synergies, the balance being tax and other synergies. As Jeff mentioned earlier in the call, given our continued demonstration of the benefits of our vertically integrated business model, we have raised our full-year 2020 synergy targets to $235 million from the $190 million target set earlier this year. The $185 million of this amount is expected to be reflected in EBITDA, which has also increased from the $140 million target from earlier this year. As we have mentioned on previous earnings calls, the majority of the targeted synergies are coming from true cost savings and not tied to volumes. We continue to realize more synergies faster despite the macro backdrop with a slight shift in allocation across the anticipated synergy buckets, which I will walk through in more detail. 36% of the EBITDA synergies realized year-to-date comes from SG&A. While the majority of these savings were realized early on, we expect to achieve incremental SG&A synergies through 2022. 24% of the synergies comes from supply chain benefits or network optimization opportunities by leveraging the larger footprint, skills and experience of the combined company in our purchase of goods and services. This opportunity continues to increase as new initiatives are identified and better-than-expected performance is realized on current projects. 19% is from operations driven by best practices for the exchange of technology, intellectual property and maintenance materials and procedures across our expanded portfolio, as well as operational performance improvements at historically higher costs legacy Cristal sites, such as [indiscernible] in Brazil. The teams at these sites continue to deliver on targets and identify new opportunities for implementation of what was initially identified. Feedstock makes up the balance of the significant EBITDA synergies, representing 18% of the year-to-date figure. We realized significant savings in what we call value in use, or the ability to optimize the use of feedstocks internally, reducing the processing costs of our pigmented plants. The last point I wanted to make about synergies is that at Investor Day in May 2019, we had committed to achieving $120 million of total synergies in 2020 and $220 million by the end of the program in 2022. We are pleased to report that we expect nearly double the 2020 target, delivering our 2022 target over two years earlier than expected and we'll continue to further unlock and drive cost savings and synergies. To be clear, not only have we been able to deliver synergies at a more rapid pace, the synergy opportunity has been much more robust than we had expected. I'll now turn the call over to Tim Carlson for a review of our financial position. Tim?

Thanks, John. On Slide 7 in the top left quadrant, we've outlined our liquidity and capital resources at the end of the quarter. We have $1.1 billion in total available liquidity, including $722 million of cash and cash equivalents. Our cash is appropriately distributed amongst our global operations and we have no trapped cash. The $722 million of cash and cash equivalent excludes $27 million of restricted cash, of which $18 million is in escrow related to the TTI acquisition. Our current liquidity is sufficient to fund the TTI acquisition, pay down debt and preserve optionality for our business. Moving to the top right quadrant. Our current total debt is $3.5 billion and our net debt is $2.8 billion. Our current trailing 12 months net leverage is 4.5x. We've included a chart to visually outline our debt maturity schedule. As you can see, we have no maturities on our term loans or bonds until 2024. We also have no financial covenants on our term loans or bonds. Our capital allocation policy remains unchanged. We continue to prioritize disciplined capital spending on high return projects and deleveraging with a targeted net leverage of 2x to 3x in a gross debt level of $2.5 billion. Moving to the lower half of the page. Capital expenditures in the third quarter were $47 million and our depreciation, depletion and amortization expense was $76 million. Year-to-date capital expenditures totaled $129 million. We expect capital expenditures for the fourth quarter to increase to $70 million due to a couple of critical capital projects that Jeff will discuss next. Our free cash flow for the quarter was $37 million. While our inventory balance overall remained relatively flat quarter-over-quarter, our pigment inventory volumes declined as we adjusted our operations to accommodate the effects of the pandemic, while feedstock and other inventory volumes increased as we continue to operate our mines at 100% to meet internal high-grade feedstock requirements. Additionally, unfavorable FX rates contributed to approximately $20 million inventory increase. Our outstanding receivable balance remains at 95% current, and we have no accounts receivable aging concerns. I'd now like to turn the call back to Jeff to provide an update on some key strategic developments and our outlook. Jeff?

Thanks, Tim. As I have emphasized many times in the recent months with the support and counsel of our Board of Directors, our management team were very focused on navigating our company through the pandemic has not lost our focus on planning for the future and positioning for the recovery to come. I would like to take a moment to provide an update on several ongoing strategic projects that remain key to contributing to our long-term strategic goals. In May, we announced the signing of a definitive agreement to acquire the TiZir TTI business from Eramet for $300 million, representing a synergy adjusted multiple of approximately 5.2 2019 adjusted EBITDA. This highly strategic acquisition will further our vertical integration strategy by increasing our titanium feedstock production capacity, thereby reducing our reliance on third-party feedstock suppliers, which will lower our costs and in turn allow us to better serve our pigment customers. We continue to work through the customary closing process with the regulatory authorities and we are making progress towards closing as anticipated. While the pandemic has diminished internal CP slag demand in the short term, we still believe that TTI will be a great asset and help us achieve our vertical integration strategy in the future. As we mentioned at the time of the announcement, the TTI acquisition will also improve the likelihood of a successful commissioning ramp up and eventual acquisition of their design smelter. In May, we announced an amendment to the design technical services agreement, which has allowed Tronox to increase technical and managerial resources devoted to the project. The design project has experienced delays due to travel restrictions associated with COVID-19, but we are working to call back some of that time. We remain cautiously optimistic that the ongoing design modifications will result in a successful startup and currently anticipate achieving sustainable operations. The trigger for Tronox to acquire a 90% interest in the asset by mid 2022. Design also remains an important element of advancing our vertical integration strategy. Moving to the next project. We introduced project newTRON at our Investor Day last year. It is a global multi-year digital transformation strategy aimed to reduce operating costs to enable Tronox to maximize the benefits of our vertical integration and achieve a sustainable first quartile integrated cost position. This higher return project will reduce our costs per ton by introducing proven enhanced automation technology, implementing process improvements and deploying operational excellence across the portfolio. Our $200 million capital expensive target for this year reflects investment associated with this project. The project ramp up in the fourth quarter will drive the increase in CapEx in the quarter as Tim mentioned, and a portion of the increased anticipated CapEx expenditure in 2021. The timing and pacing of this project is within our control. We have the ability to manage our investment in newTRON as macroeconomic environment and industry conditions merit. We are excited for the benefits this project would deliver to our shareholders. newTRON is an essential part of our strategy. Two years ago, we laid out a five-prong strategy for success. Having a competitive cost structure across the value chain is foundational to that strategy. Having that cost position will allow us to maximize the benefit of our distinct advantages of our unique global footprint in our vertical integration. Our strategy is also founded on the premise that being the TiO2 technology leader and having the right people, the right culture and capabilities will enable successful execution of our strategy. newTRON directly addresses several of those components. Lastly, the Atlas Campaspe project is the next mine development in our pipeline of high value mine projects available to maintain our feedstock integration from existing assets. This project will replace supply from our existing Snapper/Gingko mines, which are nearing the end of their life. This mine site located in Eastern Australia is abundant in natural rutile, high value zircon and will be a significant source of high-grade ilmenite suitable for direct use synthetic rutile production or slag processing. The project ensures that we maintain current levels of feedstock integration in Zircon supply strengthening our strategy of verticals integration. This high return capital project has commenced development and will contribute to capital expenditures for 2021 in line with levels indicated at Investor Day for the medium-term, which we will manage as required depending on the global macroeconomic conditions and resulting market demand. These projects represent key investments in the future competitiveness of Tronox and the differentiation of our vertically integrated profile. While we continue to contend with the ongoing global pandemic, we remained simultaneously focused on enhancing our competitive position for the medium and long-term. As part of our year end results call early next year, we will provide more details on each of these projects. Now turning to Slide 9. I'd like to share our outlook for the remainder of the year. As I mentioned earlier, the momentum we have moving out of the third quarter is indicative of the improved market conditions we expect through the end of the year, while the macroeconomic environment remains uncertain. We anticipate a favorable deviation from normal fourth quarter seasonality resulting in strong fourth quarter TiO2 sales volumes at or above third quarter 2020 and the fourth quarter of 2019. Additionally, as a result of shipment timing and continued recovery and end market demand, Zircon’s sales volumes for the fourth quarter are expected to be the strongest of the year, improving sequentially from the third quarter in the range of 25%. Our expectation of incremental synergy achievement combined with the strength of our commercial outlook and offsetting cost reductions should result in adjusted EBITDA in the fourth quarter, in the range of $155 million to $170 million with an adjusted EBITDA margin improving back to first half 2020 levels. Additionally, we recognized that given the tax valuation allowance, reversals and charges this year, our tax expense has been a challenge for many of you to anticipate. We maintain our expectation of full-year tax expense, excluding valuation allowance adjustments to be $30 million to $40 million. As John Srivisal reviewed, we continue to demonstrate our ability to exceed the initial synergy targets laid out and subsequently raised and expect that in addition to achieving the newly increased targets for 2020, we should also continue to exceed the long-term synergy targets laid out early in the year. Moving on to our expectations for the full-year. We anticipate our full-year 2020 adjusted EBITDA to be in the range of $619 million to $634 million and the following uses of cash. Net cash interest between $160 million and $165 million, $15 million to $20 million of cash taxes. Working capital would be a use of cash between $75 million and $90 million. Capital expenditures of $200 million, which is at the low end of our previous range and net pension contributions of between $15 million and $20 million. These represent our estimates based on our current market outlook. We also remain confident in our ability to generate strong free cash flow for the year. Our capital allocation priorities remain unchanged with high return internal investments and debt pay down taking precedent. As I mentioned earlier in the call, we are evaluating accelerated debt pay down options in the fourth quarter, utilizing excess liquidity on the balance sheet to advance farther towards our gross debt target of $2.5 billion. You may also note then on the bottom of this Slide 9, we've modified our safe, quality, low cost tons mantra to include sustainability. During the quarter led by Melissa Zona, our Chief Sustainability Officer, we published our 2019 GRI report for the combined Tronox and Cristal businesses. Sustainability and ESG continued to grow as an increasingly important aspect of our operations and we felt that acknowledging this in the way we think and talk about the tons we produce is critical to keeping these aspects of our business at the forefront of everything we do. If you have not had the opportunity to review our GRI report, I encourage you to do so. A link to it can be found on our website. I am very pleased with the results delivered in the third quarter, as they are a manifestation of our ability to leverage our unique portfolio to optimize our assets and secure our position as the most adaptable resilient TiO2 industry leader and allows us to continue to deliver industry-leading financial performance. The outlook provided today is based upon our current information available to us. Globally, we are seeing a reversion of some economies to various forms of shutdown due to resurgence of COVID-19, undoubtedly uncertainty remains. At this stage, we have not seen an impact to our end markets. However, we have developed the ability to adapt very quickly as needed, should market demand significantly change. We are cautiously optimistic that the strong sales trends we have seen through this month will continue through the end of the year and into 2021. In closing, I am extremely proud of how focused our entire Tronox team has remained throughout the prolonged pandemic, prioritizing safety and looking out for the health and wellbeing of one another while continuing to deliver safe, quality, low cost sustainable tons for our customers. I would like to extend my thanks once again, to my nearly 7,000 colleagues around the world. The strength in our performance speaks to the resiliency of our business and the caliber of our people, which reinforces my confidence and Tronox’s positioning for the recovery to come. That concludes our prepared remarks today. With that, I'd like to open the call for your questions. Operator?

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Frank Mitsch with Fermium Research. Please go ahead.

Hey. Good morning, everybody. I'm trying to get at what might be normalized when I look at your third quarter given the negative impact from the pandemic. I mean, your volumes in TiO2 moved up 16%, but they were down 9% year-over-year. Is there any way to quantify when you reigned – as you reigned in production with the fixed cost absorption might've been in terms of a negative impact in the quarter?

Hey, Frank. It's Tim. Just to let you know from a cost absorption standpoint, we did reduce our production to match the economics of the pandemic. In doing so, we did take about $14 million of idle facility charges in the quarter. And those are just U.S. GAAP charges, whereby you've got to expense rather than capitalize a certain cost in the inventory. So that was about two margin points. Those idle facility charges will actually decline quite a bit, probably cut in half in Q4 as we start to ramp up production at a couple of our sites. But we will still see a little bit of unfavorable fixed overhead absorption in Q4. So probably a similar margin profile from Q3 in terms of as it's flipping from idle facility cost to overhead absorption. So we'll see that to continue to improve just given some of the Zircon that we see flowing through in Q4.

Got you. Thank you. And if I think about the very positive progress that you've made on synergies, one of them was tied to operating the Yanbu facility at higher rates. Now I do understand that we are in the midst of a pandemic, so that is having an impact on production. But can you talk about how you are progressing in terms of ramping Yanbu up to where your Hamilton rates are, and where you stand in that whole process?

So Frank, it's JF. Look, what we have done is we have a team and obviously because of COVID-19, what we have done is that team has kind of focus on quality and costs instead of focusing on volume. And as John mentioned, when he detailed the synergy, I mean, we have overachieve on other buckets of synergy and we're confident that we will continue to overachieve even if none of those synergy are linked to volume addition.

Frank, this is Jeff. I think also we have increasing confidence of our ability to ramp up the volumes when the market demand calls for it. So while we've not yet stepped up to those Hamilton lock rates, we certainly have improved our visibility to be able to get there.

Terrific. Thank you so much.

The next question is from Hassan Ahmed with Alembic Global. Please go ahead.

Good morning, Jeff.

Hi, Hassan.

Hey. How are you? In the comments that you made, you touched on the Chinese market and you talked about how pricing had infected positively in China TiO2 wise, and you also touched on how ilmenite prices were going up through the course of the quarter. So two-part question; one is, obviously there was a bit of a de-stock in China earlier, so is that de-stock behind us? And then in terms of ore pricing, you talked about ilmenite, but broadly speaking, if you could just tell us where you see supply demand right now? Because it's kind of been all over the place, right? As we were sort of going through the course of 2019, it seem that high-grade ore in particular was pretty tight and pricing was sort of trying to go up, and then the pandemic happened and it seem that pricing was weakening, and now it just seems that pricing is going up again. So like I said, one on the de-stock in China, and two, just the ore pricing side.

Hey, Hassan. It's John Romano. So on the de-stocking in China, I would agree with you. We have seen inventories come down. That's one of the reasons why we're starting to see not only an uptick in demand, but from the de-stocking price improvements that really started back in July. And it's continuing into the fourth quarter on the ilmenite pricing. That's not only on Chinese ilmenite pricing that would be imported ilmenite into China as well. And we've seen in the range of, I'd say from Q2 25% to 30% increase in ilmenite pricing and that ultimately is reflected as it’s a Chinese TiO2 pricing, and then ultimately that'll have an impact on pricing in general. With regards to high-grade feedstock, we haven't seen a significant move there. The pandemic obviously has had some impacts on production. So I'd say at this particular stage, although we're not in the market to sell other than what we're doing as mandated by the FTC with the transaction with Cristal when we posed that, we've seen stable, I'd say high-grade feedstock pricing, but the likelihood that it should start to move up as we get into early 2021.

Understood. Very clear. Thank you. And as a follow-up, Q4 Zircon volumes obviously expected to be quite strong then obviously the guidance overall for the company is quite strong as well. Just trying to get a sense of that 25% sequential Zircon volume incremental guys are talking about in terms of sort of incremental EBITDA contribution for Q4, what would that translate to?

I'll give you a little color on the volume and then Tim can provide whatever code we would on EBITDA. But if you think about our volume in 2019, and it kind of gives some impact on the resilience of the market even in the midst of a pandemic. 2020 volumes are going to be about the same. The timing of the shipments had an impact on it, but we have seen a pickup in the fourth quarter, and to Jeff – the point that Jeff made earlier, in the range of 25% over and above where we were in the third quarter. We're seeing good demand again, and that trend moving into 2021 as well. Tim?

Hassan, just from a margin standpoint, as you know, we don't comment specifically on margin structures of our product, other than to say just given the co-product nature of Zircon, it does provide good margins for us.

Very helpful. Thank you so much guys.

The next question is from John McNulty with BMO. Please go ahead.

Yes. Thanks for taking my question. I guess the first one would just be around the incremental synergies that you came up with the incremental $45 million or so for this year. I know you're going to give more detail. It sounds like at the end of the year. But can you give us some color as to if these are just accelerated synergies that were coming from the out year? Or if these are just new opportunities that you've developed? And also, it looks like – if I understand it, right, the 3Q run rate and the 4Q run rate in terms of synergies are about the same, why wouldn't that be inching higher as we look to 4Q?

Hi, John. This is John Srivisal. As Jeff mentioned, and I mentioned in my comments, we do expect synergies to continue to outperform throughout the year. It's why we raised our guidance. We believe that in Q3 there were some one-time synergy benefits, but as we go to Q4, we expect to report at or above where we – we believe the full-year number is going to come out at.

So John, and just to be clear, I mean, I think as John said in his early comments, the increased synergy amount is both in the quantity, the overall quantity and the pacing. So it is some new things that we've been able to realize synergies from, and also delivering some of the things that we anticipated quicker. There's been some things that we've not been able to fully capture because of some of the effects of the pandemic and whatnot. And that's why some of the allocations, the percentages have moved around a little bit. But overall, I think the story there is more sooner and faster.

John, just adding one more thing – it's Jennifer. So your question regarding this, the fourth quarter being aligned with the third quarter. As we've said, we didn't really tie a lot of our synergies to volumes. So while we're expecting a pretty strong recovery on the volume front in the fourth quarter, we're still managing our operations to align with the demand we've seen this year. So I think that's more attributable to why you're seeing kind of a level amount in the fourth quarter.

Got it. Fair enough. That all makes sense. And then I guess, on the stronger TiO2 demand, can you give us some color as to what you're hearing from your customers? Is this a function of them trying to catch up for maybe being caught off guard a little bit in terms of the stronger demand in 3Q where they're kind of trying to get their own inventories back in shape. Or is this more a function that, look 4Q total end product demand is just that much higher. I guess, how should we be thinking about that? Or how are you thinking about that? And what does it mean in terms of kind of how you think the customer base ends the year in terms of overall inventories.

Yes. So from the standpoint of where we are – our view on customer inventories. In the second quarter, I do believe, although our numbers were down significantly, our customers were running through and consuming a lot of the inventory they had on hand. So there is an element of inventory rebuilding that was going on, but I do also believe that this is true demand development. When we went through our scenario analysis, looking at the outcomes that might happened as the pandemic kind of ease. This is pretty much one of the more optimistic views that we had and our volumes have recovered. And as we look into the fourth quarter, actually October is the second strongest month that we had this year, only I guess, less than the number we had in March. So we continue to see strong volumes and that's why we're not going to see the seasonal impact that we would normally see in the fourth quarter because the recovery is outpacing what would normally be seasonal downturn in the fourth quarter.

Great. Thanks very much for the color.

The next question is from Duffy Fischer with Barclays. Please go ahead.

Yes. Good morning, guys. First question is just around the Saudi smelter. As it stood before, it was supposed to start ramping in Q1, and I thought the commentary was, we would know pretty quickly after it starts to ramp whether the fixes worked or not. So in the new timeline, when does it actually ramp up and when will we know if the fixes are generally working and has the amount of money that is going to cost us going up with this delay?

Duffy, its JF. Look, versus what we have said previously, there's only about a one to two-month delay that it had because of the COVID-19 situation and adding difficulty to have some of the key people on the site to realize some of the modification. So we're now envisaged to start in the middle of next year the plan. When Jeff referred that it's in 2022, he referred that Tronox will acquire the smelter. And that would be probably a year after start-up that we would do that because as you know, the smelter has to deliver a certain level of success for us to take the ownership. But as of today, the construction is at about 70% complete on those modification. We're making good progress. Look, we have on site, [indiscernible] a crew of almost more than 300 people that are working on making that construction and making it ready for the startup that we see in Q2 2021.

And then Duffy, in regards to your question as to whether or not our costs will up with any delay, we are capped at $125 million. We have $113 million at the end of Q3. We've made the additional $12 million contribution in Q4 already. So there would be no additional cash outflow related to design going forward. We're capped at $125 million.

Yes. And Duffy, I think your premise that when we begin to ramp up, we'll know shortly after. I think that's accurate. I mean as we begin to ramp up, certainly we'll get a lot of good read on whether it's going to be successful. And then obviously you ramp up and start to push it. You get a better feel of how long it might take to ramp up to sustainable operational level. But yes, you're right mid next year, we should get a really good read on whether the design modifications have done the trick.

Great. Thanks. And then this year the net exports out of China have gone up pretty significantly. So two questions here. One, that incremental additional tons, geographically, where do you see or where have you seen most of that end up? And then the second one is, do you think that's a new structural level of Chinese net exports, meaning they added more supply maybe than we thought, or was that just a result of weak demand in China? And so there's a chance of Chinese net exports actually decrease next year.

Yes. I'll answer the last question first. And I think, demand in China has been, I'd say suppressed a bit. And so that does drive the exports up. And when you think about the change in the volumes in September, it's down a little bit from August about 3%, but on average, it's still at this particular point in time, trailing 12 months is about 1.17 million tons. So I do think that there's no question that Chinese have added some capacity. There's also been some capacity that's been pulled out as well. So it's a bit hard to say that 1.17 million tons is a new trend, but I definitely believe that some of the demand pickup in China will now start to absorb that volume. As far as where the volumes have gone, obviously we have a facility in Brazil, so we compete head-to-head with the Chinese there on a regular basis. There's been some volume input in Turkey, in Europe specifically, I would say. And then in India, we've seen a little bit of an uptick as well. But as we talked about earlier, we have seen a significant move in pricing. We have great visibility into that because we have an asset in China now and our pricing on sulfate material has moved up and will continue to move up as we enter the fourth quarter, I mean, we end the fourth quarter into 2021.

Terrific. Thank you, guys.

Next question is from Vincent Andrews with Morgan Stanley. Please go ahead.

Hi, this is Steve Haynes on for Vincent. I wanted to ask a question on margins. I think, given that in 2019, when you kind of had big de-stock, 2020 where you've had, obviously pandemic and you guys have taken out a ton of synergies, it sounds like there's some temporary kind of cost deferral that’s also going to come back next year. So I mean, how should we be thinking about EBITDA margin directionally, and any kind of directional guidance would be helpful there.

Yes, Steve. This is Jeff. I think, as you said, I think EBITDA margins in the fourth quarter will recover to sort of what we had in the first half. So we recovered to that mid-20 range and I think longer-term, we certainly believe that we can sustain EBITDA margins in that range with maybe a little upward movement as volume recover. So I think that's a good long-term outlook for sort of our EBITDA margin profile.

Okay. Thank you.

The next question is from Josh Spector with UBS. Please go ahead.

Yes, hi. Thanks for taking my question. I was just wondering if you could maybe share what you would think would be an upside volume scenario in fourth quarter, and I understand seasonally it's maybe a little bit tough to predict, but if October strength continues, what would you expect to see for the fourth quarter as a whole?

Look, we're not going to give a specific number, but we do expect the fourth quarter number is based on where we are today to be at or above where we were in Q3, as well as where we were in Q4 of 2019. We've seen a significant increase in demand for coatings and plastics and the one market where we hadn't seen much of a recovery was in the laminated paper business. And in September, we started to see that volume recover as well. Again, October sales are strong. We will have some seasonality, but because we're recovering that seasonality has been muted by the recovery. And I guess what I would say confidently at this particular stage is that Q4 will be at or above Q3 levels.

Yes, Josh. The other thing that still happened is the order book is still coming together a little bit different than it historically has, and look, even yet this month, we will continuing to place orders very, very late into the month as recently as even this week for shipment this month. So that's a little unusual, but just shows that buying patterns have changed a bit because of the pandemic.

Thanks. Maybe if I could try one more time, you'd be willing to share how much October volumes were up year-over-year?

No, Josh. I mean, we don't track and report month-to-month, year-over-year volumes. But again, as John said, we're very confident that fourth quarter volumes will be at or above third quarter volumes and at or above 2019 levels.

Our typical seasonality for the fourth quarter from the third quarter is approximately in the high-single digits are still down sequentially. So we're talking, when we say a favorable deviation to be flat or above is a pretty big move away from what we typically see trend wise.

Yes. Understood. Fair enough. And if I could ask just on the synergy front, I mean, you're obviously doing a lot better than you guys expected. I guess when I look at SG&A specifically for this quarter relative to last year, it's kind of flattish. I'm not sure maybe what I'm missing in that year-over-year comp or some of the synergies are maybe offsetting some expected inflation. How would you characterize that?

Josh, we had some incremental employee benefit costs in Q3 of this year, and we had a little bit of a credit in employee benefit cost in Q3 of last year.

And your comment about the inflation is right. Some of the synergies have offset inflation and some of the cost items.

Okay. What would be normalized SG&A for 3Q have been without that incentive comp approval?

I'd say about $3 million to $4 million less.

Okay. All right. Thank you.

Your next question is from Travis Edwards with Goldman Sachs. Please go ahead.

Hey, good morning. That's sort of a two-part question here on the vertical integration side. Jazan coming on in 2022, you've got TTI progressing. I just wanted to confirm that those two assets will fully get you to your vertical integration targets, both sort of in the level and in the timeframe that you'd like. And then second part would be, I guess, more generally just what does the availability of the mineral sands feedstock assets look like in the market right now? Just in the event that you’re competitors want it to be more active on that front.

So Trevor, maybe I can answer the first part of your question. Look today we're about 70% to 75% vertically integrated. And with TTI, we will move to 90% to 95%, that assume obviously that we would get 100% of the TTI production. But look it's slightly that TTI would have some contract that we will need to respect. And obviously when we start Jazan the intention is to ramp up Jazan with the need of the increase in our pigment production. So that's really the planning that we have to achieve our vertical integration.

Yes. And Travis, if we end up in a situation where design comes on and we are structurally long in high-grade feedstock, it's not our intention to enter the commercial market going to be a merchant seller of high-grade feedstock, but what we will look for opportunities to put that asset to work to create value for our shareholders. So we'll be very proactive in that regard. And then regarding your overall question about mineral sands assets, I mean that activity continues. There always a number of projects that are out there looking for investment, looking for sponsors to help make successful. So I think for anybody who wants to become more aggressive in that area, there are projects available that are in need of investment and need of probably fresh money.

That's helpful color on both ends. And maybe just as an extension to common share. Just wondering when you talked about considering that pay down before the end of the year, I guess one, are you – I guess our base case would be, you're looking to pay down, [indiscernible] is that generally how you're thinking about things? And then two, anything like M&A or anything else that we should be aware of that might sort of not disrupt, but delay, any plans on debt pay down? Thanks.

Hey, Travis, it's Tim. Just as it regards to your first half of the question in terms of the debt pay down, we're looking at all options, but right now the most likely option just given the facts and circumstances is the pay down on the term debt.

Yes. And Travis, in terms of other capital allocation priorities, as we said in our prepared comments, the projects we have going on to strategic projects, newTRON, Atlas Campaspe, are real priorities along the pay down the debt. We don't expect other than closing the TTI acquisition that's already been planned. We don't foresee M&A being something that would interfere with those priorities.

[Indiscernible]

Your next question is from Roger Spitz with Bank of America. Please go ahead.

Good morning. What is your normalized liquidity target and how much excess liquidity do you have at September recognizing their synergy plans [indiscernible], and I'll ask that first.

Targeted liquidity depends, if you'd have asked me a year ago is a little bit different just given the pandemic, might probably on the higher end of target liquidity now in terms of $300 million, $400 million of cash and then the $300 million to $400 million of ABLs and lines that we have not used. Excluding the TTI, we have over $800 million of liquidity, which is far and above what we need is, which is the reason that we're looking at targeting to pay down some debt.

I just want to make sure I understand this $300 million to $400 million of normalized liquidity of cash plus term loan of availability of each. It may just sound like it was beach, but…

Yes. Still combined, it's probably more $500 million right now – combined about $500 million right now where we are given the pandemic, without the pandemic it's probably $200 million lower than that. Just given the strength of our business model proven that we can generate free cash despite the environment we're in.

Got it. Do you have an initial 2021 CapEx, given the Australian project? And what would that project be that's going to replace the Snapper/Gingko mines? How much would that cost? Because it sounds like Greenfield would require infrastructure, et cetera. Thank you.

So on the capital expenditures, we're currently estimating – I should say this, at Investor Day we communicated that we have some elevated levels of CapEx due to these high investment high return projects. We communicated I think in the mid 300 range, I think we could be lower than that. We're still going through our 2021 planning process. So as a part of our Q4 results, like Jeff said, we'll disclose our current forecast, but Atlas Campaspe and newTRON are the projects, largely driving that increase like Jeff outlined on the call. And Atlas Campaspe is the name of those mining development sites that we are building out that will replace Snapper/Gingko. It's similarly located, so there’s some shared benefits there, but there's still development capital required for those sites. But also like Jeff said, depending on the market conditions, should the need be there to pull capital, we can certainly manage that. So we anticipate currently those targets, but that can be adjusted if needed much like we did this year with our capital plans given the market demand environment.

Thank you very much.

This concludes our question-and-answer session. I would like to turn the conference back over to Jeffry Quinn, Chairman and CEO, for any closing remarks.

Thank you, operator. Again, thank you for your time today and thanks for all your questions. Certainly has been a memorable year for us here at Tronox. Despite a lot of uncertainty, the year is playing out much as we anticipate at one point with a very strong first quarter, a tough second quarter due to the pandemic and then recovery in the third quarter and closer sort of back towards normalcy in the fourth quarter. We are not out of this yet, obviously, but we are encouraged. We look forward to speaking with many of you in the weeks to come as some of the conferences that we're doing and addressing all of you in February for our year-end call to discuss the close out of the year, which we believe will be very strong and our path forward in 2021. And as I said, at the time, we'll update you on a couple of the key projects and provide an updated view on overall longer-term synergies. So thanks very much. We appreciate your time. Everyone have a great day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Good bye.