US Tronox confident on Cristal, despite Q1 accounting issue

Author: Stefan Baumgarten


HOUSTON (ICIS)--US titanium dioxide (TiO2) major Tronox remains confident in its recently acquired Cristal TiO2 business despite a Q1 accounting issue, the CEO of the US-based producer said in an update on Thursday.

“Predominantly, what we have found with the Cristal business and the assets is what we expected, or better,” said CEO Jeffry Quinn in a webcast analysts' call.

The acquired TiO2 assets were “high-calibre”, and “we are very confident of what we can do by adding these assets to our existing asset base”, he said.

What surprised Tronox after completing the acquisition in April was that Cristal’s reported Q1 adjusted earnings before interest, tax, depreciation and tax (EBITDA) of $63m were higher than anticipated, and inconsistent with run rates of $19m in January and $13m in February.

Q1 adjusted EBITDA was also higher than the Cristal $50m had budgeted, and it appeared inconsistent with Cristal’s Q2 earnings forecast.

However, this was “an isolated and narrow matter”, Quinn said.

Tronox chief financial officer Tim Carlson explained that Cristal likely made “certain adjustments” to maximise working capital, including overstating inventory as of 31 March.

While Tronox has not yet completed its review, it may make a working capital adjustment - reducing Q1 income while increasing Q2 income, leaving first-half results unchanged, he said.

Tronox disclosed the anomaly in results immediately, to be transparent and to make clear that simply annualising Cristal’s reported Q1 adjusted EBITDA would lead analysts to “improper assumptions” about 2019, Carlson said.

Tronox currently estimates that the legacy Cristal portion of Tronox’s 2019 results will come in at the high end of an adjusted EBITDA range of $190m-215m in 2019, he said.

“We have no concerns about [Cristal’s] historical financial results,” he added.

Chief commercial officer John Romano said that Tronox was “very pleased” with the product portfolio it acquired.

Cristal’s customer overlap with Tronox was less than expected, and any “price harmonisation concerns” were minimal, Romano said.

Tronox legacy business remains strong, with April performance in line with expectations. This keeps the company on track to deliver forecast $125m-$135m adjusted EBITDA in the second quarter, and $475m-$535m for the full year, the executives said.

TiO2 demand is starting to pick up and Tronox is seeing “more orders on the books”, making the company confident that the destocking the market has seen will end in the second quarter, Romano added.

Tronox this week began a $100m share repurchase programme, as it believes that “our shares are drastically undervalued, and purchasing shares at the current price levels is a high-return use of a portion of our discretionary capital”, said Quinn.

The share repurchases will not impact Tronox’s commitments to deleverage, with a targeted reduction of gross debt to $2.5bn by 2023, and it will not affect the company’s ability to deliver on synergies from the Cristal acquisition, the CEO said.

TiO2 is used to make white paint like the material shown in this photo. Image by Shutterstock