Q1 2024 Tronox Holdings PLC Earnings Call

Participants

Jennifer Guenther; Chief Sustainability Officer, Head of Investor Relations and Financial Planning; Tronox Holdings PLC

John Romano; Chief Executive Officer, Director; Tronox Holdings PLC

D. John Srivisal; Chief Financial Officer, Senior Vice President; Tronox Holdings PLC

David Begleiter; Analyst; Deutsche Bank

John McNulty; Analyst; BMO Capital Markets

Duffy Fischer; Analyst; Goldman Sachs

Joshua Spector; Analyst; UBS Equities

Frank Mitsch; Analyst; Fermium Research

Michael Leithead; Analyst; Barclays

Hassan Ahmed; Analyst; Alembic Global Advisors

Presentation

Jennifer Guenther

Thank you, and welcome to our first quarter 2024 Conference Call and Webcast. Turning to Slide 2. On our call today are John Romano, Chief Executive Officer, and John service, our Senior Vice President, Chief Financial Officer. We will be using slides as we move through today's call. You can access the presentation on our website at investor dot Tronox.com Moving to slide 3, a friendly 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 specific factors summarized in our SEC filings. This information represents our best judgment based on what we know today. 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-US 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. Additionally, please note that all financial comparisons made during the call are on a year-over-year basis, unless otherwise noted, it is now my pleasure to turn the call over to John Romano.

John Romano

John?
Thanks, Jennifer, and good morning, everyone. We'll begin this morning on slide 5 with some key messages from the quarter. As mentioned in our preliminary results announcement, we delivered a stronger first quarter than anticipated. This was driven by production costs through our global operate, lower production costs through our global operations, destocking having largely run its course supply chain, paired with the demand trajectory, outpacing normal seasonal levels and our ability to respond to that demand through the strength of our global footprint, our revenue increased 13% compared to the prior quarter or 20% on TiO2 and zircon revenue alone, excluding other product sales, which saw a decrease due to nonrepeating sales of ilmenite and a portion of our rare earth tailings deposit in South Africa. The 18% increase in TiO2 volumes from the fourth quarter exceeded both our guidance of 12% to 16% and a growth that would be more typical for this time of year. However, this type of rebound is indicative of what we would expect to see on the front end of a recovery. Demand improved across all region and outperformed even more so in Europe, Middle East and Africa and Latin America, where volumes declined more significantly over the past six quarters, zircon continued to recover from the trough volume seen in July of 2023, driven by stronger underlying demand. Despite the market in China remaining relatively muted, our volumes increased 54% versus Q4, which was well above our guidance of 15% to 30% pricing for TiO2 and zircon, zircon was in line with our expectations. On the operational side, we incurred significant costs in 2023 from running our assets at low utilization rates due to softer underlying demand as we saw the market beginning to turn late last year, we began increasing our operating rates, which had a positive impact on our manufacturing cost. As a result, our first quarter cost improved when compared to both for the prior quarter and prior year This helped drive better than anticipated EBITDA margin of almost 17% and adjusted EBITDA for the quarter totaling 131 million, which was above our guided range as the high cost inventory continues to move through our internal supply chain. Efficiencies from investments made in the business to reduce costs will enable margins to return to levels realized prior to the downturn. The first quarter has been a true inflection point. We believe the trends, both on the demand side and in reducing our costs will continue going forward. We're well on our way to delivering a step change in our earnings power, having already worked through much of the remaining high-cost inventory on the balance sheet, our free cash flow for the quarter was a use of 105 million, but we will begin clawing back this use beginning in the second quarter and expect to generate positive free cash flow for the full year. I'll let John run through more of the first quarter numbers and the balance sheet, but we're comfortable with where we are from a liquidity and a debt position. We recently consolidated and repriced two tranches of our term loan, which will result in an estimated annual savings of approximately $5 million. I'm proud of how our team has continued to work to strengthen the business. And as we stand here today, we are well positioned to continue to capitalize on the recovery that is underway.
On the sustainability front, we're happy to confirm that we officially began receiving power from the 200 megawatt solar project in South Africa. This is not only a significant development on our journey to net zero by 2050 as we will realize an additional 13% CO2 emissions reductions from this project alone for a total of 18% relative to our total 1920 19 baseline, but will also provide some cost avoidance benefit from increasing electricity costs in South Africa. We're already working on our next power purchase agreement in South Africa this time on wind as this is the highest cost contributor to carbon emissions. So it remains a high area of focus. We expect to publish our 2023 sustainability report this quarter that will outline these and other key initiatives across emissions and waste reduction, water management, social initiatives and more. We firmly believe that preserving our premise to operate is critical for our strategy today and for our future. At the end of the day, our people and our planet enable us to carry out our work. And as a result, we have a responsibility to do so in a manner that is both safe and sustainable.
I'll now turn the call over to John to review some of our financials from the quarter in more detail. John?

D. John Srivisal

Thank you, John. Turning to slide 6, we generated revenue of $774 million, an increase of 9% compared to the prior year or 13% sequentially, driven by higher revenue from both TiO2 and zircon. Income from operations was 41 million in the quarter, and we reported a net loss of $9 million, while our profit before tax was $2 million.
Our tax expense was $11 million in the quarter. This was due to the fact that we generated higher than expected earnings in jurisdictions where we pay taxes driven mainly by higher zircon sales. As a result, our adjusted diluted earnings per share was a loss of $0.05. As John previously mentioned, our adjusted EBITDA in the fourth quarter was $131 million and our adjusted EBITDA margin was approximately 17%. And free cash flow was a use of $105 million, of which 76 million was from capital expenditures.
Now let's move on to Slide 7 for a review of our commercial performance. As John mentioned, the recovery outpaced our expectations and drove TiO2 and zircon volume growth versus prior quarter and prior year. Pricing was largely in line with our expectations and consistent with our margin stability program.
Tio2 revenues increased 8% versus the year-ago quarter and 17% versus the prior quarter as sales volumes improved 18% in both comparisons. The volume increase was driven both organically by both organic demand and restocking, which we saw across all regions with a higher recovery rate in Europe, Middle East, Africa and Latin America, where volumes declined more notably in the past six quarters as expected, TL pricing including mix, saw a 1% decrease quarter over quarter. Circled volumes increased 54% sequentially. We've continued to see recovery from the trough levels of July 2023. The stronger underlying demand in Q1, zircon pricing was level to the prior quarter. Revenue from other products decreased 26% compared to the prior quarter, driven by an opportunistic sale of ilmenite and the portion of our rare earth tailings deposit in South Africa in the fourth quarter that, as we had communicated last quarter, would not repeat.
Turning to slide 8, I will now review our operating performance for the quarter. Our adjusted EBITDA of $131 million represented a 10% decline year on year, driven by lower average selling prices and mix and higher SG&A was partially offset by improved sales volumes, exchange rate tailwinds and favorable reductions in input cost for materials such as chlorine, coke, caustic soda. Additionally, we saw favorable fixed cost absorption and freight costs as compared to Q1 2023. Sequentially, adjusted EBITDA improved 39%. As we mentioned last quarter, we expected to see improvements in costs as we increased our operating rates beginning late last year and continuing into this year compared to Q4, production costs improved 57 million. This was comprised of $32 million relating to favorable absorption and lower cost of market charges from the higher production, 15 million from the Q4 Botlek idle facility charge to the supplier outage that did not repeat in Q1 and 10 million for lower mining costs, primarily from Atlas. By the end of the year. We expect to recover approximately 15 million from insurance claims relating to the downtime at Botlek due to the supplier outage. Our TiO2 and zircon volume benefit to EBITDA was partially offset by the nonrepeating opportunistic sale of ilmenite and a portion of our rare earth tailings deposit in Q4. Other headwinds versus the prior quarter, as expected, were price mix, FX, freight cost from the Red Sea impact and higher SG&A.
Turning to slide 9, I will now review our balance sheet and cash position. We ended the quarter with total debt of 2.8 billion and net debt of 2.7 billion. Our net leverage at the end of March was 5.2 times on a trailing 12 month basis. Our balance sheet remains strong with ample liquidity ahead of anticipated critical vertically integrated integration related to capital expenditures. As John mentioned, we successfully completed a repricing transaction on two of our existing term loan tranches, which will result in approximately 5 million of annualized interest expense savings. We also extended the maturity of one of these tranches to 2029. Our nearest term significant maturity remains 2028, and we have no financial covenants on our term loans or bonds. Our weighted average interest rate in Q1 was 6.5%. We maintain interest rate swaps such that approximately 73% of our interest rates are fixed through 2024 and approximately 64% are fixed from 2024 through 2028, aligning with the maturity of our earliest tranche of our term loan total available liquidity as of March 31st was $629 million, including $152 million in cash and cash equivalents, very well distributed across the globe. Capital expenditures totaled 76 million in the quarter. Roughly 44% of this was for maintenance and safety, and 56% was for strategic growth projects working capital was a use of 127 million in the quarter. The massive majority of this was related to higher revenue, driving an increase in accounts receivable for inventory, we would normally expect to see an increase in the first quarter in preparation for the spring coating season. While we did plan for the upturn by running at higher production rates. The increased demand across our business resulted in inventory being a source of cash for the quarter. Accounts payable was a decrease, which is typical of our Q1 profile. We declared a dividend of $0.5 per share on an annualized basis in the first quarter that was paid to shareholders in the second quarter.
I will now turn the call back over to John Romano for some comments on the year ahead in our outlook. John?

John Romano

Thanks, John. So with the first quarter behind us, we can confidently reaffirm what we stated in the last quarter. 2024 has already demonstrated a reversal of several trends from the last 18 months, and we anticipate the recovery to continue on the market. We've already begun to see an uptick in TiO2 demand that is indicative of what we would see on the front end of a recovery on pricing, we expect TiO2 pricing to reverse its downward trend to improve as we move through the remainder of 2024.
Regarding zircon volume volumes continue to improve from the trough levels realized in July of 2023, and there was a significant improvement in the first quarter. Further recovery would be recover. We will be somewhat reliant on China given its significant share of the overall zircon market. Nevertheless, demand has rebounded even in the absence of a major shift in China.
On the operational side, we incurred significant costs in 2023 in the range of 25 to $35 million per quarter from running our assets at lower utilization rates due to soft market demand. At the end of 2023, we began increasing our operating rates in line with the demand improvements we were beginning to see in the market, which has and will continue to have a positive impact on our manufacturing costs, although we still have some high-cost inventory to move through the business with sales outpacing our previous guidance. Our EBITDA margins will now be in the range of 20% this quarter. We will continue to deploy technology at our sites to reduce costs and improve efficiencies, which will also benefit our cost position as we ramp up. And we're investing in key capital projects to sustain our vertical integration from a growth perspective, our R&D efforts remain focused on product and process innovations to enhance profitability. Additionally, we're continuing to explore opportunities in the rare space.
Moving to Slide 11. I'll now review two key capital projects in more detail. As a reminder, this year, we're investing approximately $130 million into key mining projects in South Africa to replace our existing mines reaching end of life. These projects are critical to continuing our vertical integration strategy and are important to pursue now to ensure a smooth transition to replace existing mines reaching end of life. These investments will maintain our more than $300 per ton advantage relative to market pricing for feedstock and are very high return projects with internal rates of return in excess of 30%.
Turning to slide 12, I'll review our outlook for the quarter and year ahead in more detail. For Q2, we expect TiO2 volumes to increase between 7% and 10% and zircon volumes to remain relatively flat, both compared to the first quarter, and we expect TiO2 pricing to increase slightly versus the first quarter as a result, we're expecting Q2 2024 adjusted EBITDA to be 160 to $180 million and adjusted EBITDA margins to be in the range of 20%. Our expectations for 2020 for cash uses are as follows. Our capital expenditures are expected to be approximately $395 million. Our net cash taxes are expected to be less than $10 million as the significant capital expenditures in South Africa are deductible. Our net cash interest expense is expected to be 140 million and we're expecting working capital to be a tailwind. The magnitude of the cash flow will depend on how significant the market recovery is as we move through the year, our capital allocation strategy remains largely unchanged. We are prioritizing investments in the business that are critical to furthering our strategy and driving value from our vertically integrated portfolio. And even at this investment level, we expect to generate positive free cash flow for the full year. We will also be focused on bolstering our liquidity. And as the market recovers, we'll look to resume debt paydown, we will continue to prioritize our dividend. And finally, we will continue to evaluate strategic high-growth opportunities as they arise. Currently, we're focusing on the rare space, and we will keep the market updated on any key developments as they arise.
That concludes our prepared comments. We'll now move to the Q&A portion of our call. So I'll hand the call back over to the operator to facilitate operator.

Question and Answer Session

Operator

(Operator Instructions) David Begleiter, Deutsche Bank.

David Begleiter

Good morning, John. A Chinese exports were at an elevated level in March. What are the things driving that is sustainable? And how much of a concern is it to your forecast for higher price back half of the year?

John Romano

Yes.
Thanks, David. And look to the March numbers were significant. If you look at February and March, some significant, but February numbers were down and I would say they were not really consistent with what we saw with our volumes in February for Chinese New Year. That being said, if you compare Q4 to Q1, there was a significant move on, but there's a lot of discussion going on around anti-dumping, and I would expect part of what's happening. There is some repositioning of some inventory. Again, what you're looking at is exports out of China, not imports into Europe. So I think there's an element there. There's also I think that move from February to March with March being significantly higher, probably had something to do with the shipping delays. So no question that the volumes are moving up some. But yes, I think part of that was maybe they are normal. You'll see a bump in the first quarter, again, 500,000 ish tons, if you look at the number for the first quarter was higher than what we saw last year. But I think part of it might be repositioning volume in anticipation of something that might happen later in the year, maybe into third quarter with dumping.

David Begleiter

And just on the antidumping case, do you expect provisions provisional duties to be enacted? And if so, is it Q3 or earlier? And is there any change yet that you're seeing in customer buying behavior in Europe due to these antidumping investigations?

John Romano

Yes.
So look at some I'd say I'm not going to presuppose what's going to happen, but I think there's clearly a an indication that if duties go into place provisional duties should happen sometime at the end of June, maybe latest early July. So there's an assumption that that is going to happen on the in addition to the EU investigation in the last three weeks, there's been two other formal investigation, launched one in India and one in Brazil. So there's lots of moving parts on dumping when we think of our forecast as I mentioned in the last call, because we don't expect a lot of dumping actual duties to be imposed our provisional duties to be imposed before the end of the second quarter. There's not a lot of volume moving in our numbers, um, with regards to that, could there be some positioning as possible?
It's hard to really tell at this stage, we should we ought to get some better visibility in that as we kind of move through the balance of this quarter.

David Begleiter

Thank you very much.

Operator

John McNulty, BMO Capital Markets.

John McNulty

Yes, thanks for taking my question, Tom.
So in terms of the asset utilization rates, obviously a lot stronger, I think at 32 million. I think you cited as as a reduction in fixed cost absorption. I guess how should we be thinking about that as we progress through the year? And I guess can you give us some relative assumptions for kind of maybe what utilization rates are at or the change that you've seen that might just give us some ability to calibrate how much more there may be ahead in terms of improvement there?

John Romano

Yes. So John, I guess from the standpoint of we were pretty clear last year talking about where our on for the 12 months, we average capacity utilization across our nine pigment plants at around 70%. In some instances, we were lower than that. But on average of those nine plants over that 12 month period was 70%. And I would say at this stage, we're creeping up north of 80%, um, and I talked a lot about the recovery and what's happening. We have to think about where we're coming from, right? We're coming from a pretty low base. We had a very strong quarter with regards to volume. I do believe that that is the front end of a recovery. And it's those kind of inputs are indicative of what's happening. We saw some of that happening and the back of the end of last year. And that's why we started ramping up and some of that high-cost inventory that we said it was going to take maybe more towards the end of the second quarter to work through because the volumes are moving a little quicker than we thought we're running through that a bit quicker. So we'll continue to evaluate how we're going to run the assets on that. We're running at a rate now, which is much more consistent. I mean, running assets at 70% on average is a difficult thing to do. So we're still bringing the assets back up. But at the rates we're running at right now, we believe we're running at a much more reliable rate. A lot of those downtime that we had from running at lower rates, we don't believe is going to happen again. So those are some of the things that are in the rearview mirror, but we still have some upside depending upon how the market continues to evolve. And as it does, we'll continue to adjust our production through our integrated business planning process, which also factors in how we manage our ore blend.
John, did you have accounting?

D. John Srivisal

I was just going to say, you know, as John mentioned, as you we've said before, we did start ramping up in Q4 of last year. And so just given our vertically integrated chain, it takes three to six months to flow through. So you saw a big portion of that go through in Q1 and then we expect that lower cost, the higher cost inventory to work through by Q2. You'll see probably not quite the same level as you saw in Q1, but pretty significant improvement close to that level.

John McNulty

Got it. Okay.
No, that's that's really helpful color. And then I guess as a second or a follow-up, so it does look like the volumes are coming in better than kind of the usual seasonal uptick both from in 1Q and in 2Q. I guess how are you thinking about usual seasonal patterns for TiO2 demand as we go into the back half of the year. Should we assume at this point it does kind of return to a more normalized level? Or could could it be it may be a little less down as we go into the into the back half?

John Romano

Yes.
So I mean, we had we guided to 7% to 10% increase in Q2 that I would say that's depends on the year, but we had a lot of different second quarters over the course of the last three years with COVID and then the recovery from COVID. So I would say that's not a very abnormal on the maybe a little bit on the higher side. So it's a little bit early for us to determine exactly what's going to happen in the third quarter, although we're already kind of getting visibility on what that order book looks like. Typically in some instances, you could see a third quarter being slightly lower depending upon what year you're in, where you are in a cycle. But in a normal market, you'd see inventory being built in the first quarter and typically you'd consume that inventory in Q2 and Q3, and then you build inventory in Q4 as well. So I would expect it to be somewhat similar to the U.S. that and we're not expecting right now based on what we're looking to see a huge uptick in the third quarter volumes. But again, it's a little bit too early. And again, I'm not giving any predictions on what's going to happen on anti-dumping, but that could have an impact if duties are imposed. And I stress the word if Got it. Thanks very much for the color. Thank you.

Operator

Duffy Fischer, Goldman Sachs.

Duffy Fischer

I guess good morning.
Can you walk through the major geographies when you look at your Q2 guide, both on price and volume.
Can you give us some color on how that will vary between Europe, the US and Asia?

John Romano

Yes, that is a looked at when we think about the first quarter. As I mentioned in the call, we saw growth in every region and that we saw, I'd say, disproportionate growth in the areas where we had further reductions over the last six quarters. So Europe, Middle East, Africa, Asia Pacific was a bit higher on the growth side. Moving into Q2, we're starting to see what we would normally project in the first quarter for our coating season builds. So the Americas is starting to pick up. We're seeing some green shoots in Brazil and but we're seeing a pretty consistent growth. But I'd say the difference between Q1 and Q2 is that we're starting to see a little bit more growth on North America, not to say we didn't see growth in the first quarter but we're seeing what's more indicative in the Northern Hemisphere coating season with volumes picking up in North America and still getting increases in Europe, Middle East, Africa and Asia Pacific as well, but I'd say that we're getting a bit more of a push in North America as well in the second quarter.
Okay.

Duffy Fischer

And then if you look at your debt ratio you've talked about obviously wanting to get that better. How should we think about how much of that repair comes from just EBITDA moving higher versus how much you actually want to pay down net debt or pay down gross debt from here?

John Romano

So maybe I'll start with what our goal is and it's still to get to we're talking about 2.7 to 2.8, depending upon gross or net debt, we still have a goal to get to 2 billion, and I'll let John talk about.

D. John Srivisal

Yes, I think if you look at it. The leverage obviously is relating to net debt, which, you know, obviously it's either paying down debt or generating cash. I think as John mentioned in his comments, we will look to bolster liquidity through the end of this year and then staying on the market pay down debt. But Tom, as we mentioned, we do expect positive free cash flow for the year. Q1 was significant news. So we do expect a pretty significant amount of free cash flow the last three quarters of the year, which will help that metric.
And secondly, if you take a look at our guide of one 60 to 1 80, we were we will start producing a much better EBITDA year over year, even as early as Q2 depending on where we land. But the second half of 2023 was on a pretty easy on a goalpost that we are we will be able to beat through the second half of the year. So we do expect that our net leverage ratio will go down pretty significantly through the rest of this year and going forward. But I guess that was kind of my question. What's the baseline EBITDA you want to use?

Duffy Fischer

When you look at that ratio, would you want to use kind of the trough of the LTM as we sit today?

D. John Srivisal

Or is it just going to be the LTM floating, you know, as we go through time, which will have a higher EBITDA number behind it?
Yes, definitely at a higher level.

Duffy Fischer

Okay.
Thank you via the latter.
Thanks, guys like you.

Operator

Joshua Spector, UBS.

Joshua Spector

Yes, hey, guys. Good morning, and I want to ask if you think your volumes benefited in the first quarter from competitor outages or not, and to the extent that they did or didn't Is any of that a permanent shift in your view and share gains for Tronox that maybe you've locked down the contracts or give you any of that as more transitory?

John Romano

Josh?
So look, I guess when I made the comment that we ramped up our assets in anticipation of what we saw as far as green shoots in the fourth quarter, where we saw demand starting to improve and we were able to respond to that because of them. But I believe a lot of that has to do with the global strength of our footprint or the strength of our global footprint heading, yes, assets on six continents are located closer to our customers. There's a lot of issues with the Red Sea and the Panama Canal. So is there some volume that we were able to respond to because of how we're positioned. I think the answer to that is yes. And I'm not exactly sure if I would call that share gain, I would call that being able to respond to what we indicated as the early signs of a pickup. And I wouldn't expect that when we think about that moving forward, I made the reference that we're continuing to see growth into the second quarter. So there were a lot of things that were playing into our demand. There was a growth in our volumes. So you had demand, you had the supply chain basically had worked through all the inventory. So we're getting customers just back to a normal order buying pattern and there was a little bit of, I'd say, of our volume that did come from our global position and being able to respond to the demand at all the regions that we're supplying. And because, as I mentioned, we saw an uptick in every region that we sold and two in the first quarter.

Joshua Spector

Okay.
Thanks. I appreciate that. And I wanted to ask on the cost side. So I mean, John, you mentioned earlier, I think pretty clearly on the sequential improvements that you guys expect. But I guess if I look back a year ago, the operating cost impact, it was minus PLN100 million and it was negative the year before. So just trying to think a little bit longer term, can you recover any of that as we look over the next couple of years, is that higher operating rates or is that related with some of the CapEx projects around the mine?
Just helping frame how that layers in over the next couple of years would be helpful.

D. John Srivisal

Yes.
I think you know, obviously the higher production rates we will see and as we mentioned you should see that by the end of Q2.
Additionally, I think the biggest increase that we've had over the past couple of years is general raw materials have been up from 2020 to 2022, we were up over $400 million if you look at constant volumes in constant currency. So we haven't seen quite feed the they on lowering costs, they're about 4%. In 2023, we expect high single digits, 2024. So we do expect that those even at those levels, it's unsustainable costs. So we do expect to see that, but likely not in 2024.

Joshua Spector

Okay.
Thank you.

Operator

Frank Mitsch, Fermium Research.

Frank Mitsch

Good morning and congrats on the beat and raise. I wanted to drill down a little bit more into the fixed cost absorption production level issues. You indicated that this was a negative of over $100 million in 2023. So as we think about 2024 and given the start that you're that you're off to, is it fair to assume that absent those costs, all else equal, EBITDA should be up over 100 million in 2024?

John Romano

Yes, that's a fair, simple math of K. fantastic.

Frank Mitsch

Much appreciated because obviously the Street's not there, but I suspect, as I said, given the beat and big the Street will get there.
And then on the pricing side, you indicated that you anticipate a slight uptick here in 2Q versus 1Q. Can you comment at all with respect to the geographic expectations on that?

John Romano

Yes, Frank. So in some of the areas where we saw the biggest decline in volume. So over the last six quarters, Europe, Middle East, Africa, Latin America, Asia Pacific, that's where we're starting to see the market recover the strongest, and that's where we're starting to see some, I'd say progress on pricing. There's a lot of announcements out there on pricing, and I think it's probably worth spending a little bit of time talking about it takes a little bit of time for price. So anytime the market rebounds, and that's what we saw in the first quarter, you wouldn't normally see that kind of a pickup in the first quarter. So again, what we saw was indicative of this starting to have a recovery, and it takes a little bit of time for pricing to actually roll through. So when people make announcements, it takes time for those announcements to get implemented, typically capacity utilization needs to get to a certain point before and inventories need to get to a certain place before pricing actually starts to move through. So we're making progress up again, Latin America, Asia-Pacific, Europe, Middle East and Africa. And as we move into the second half of the year. We'll start to make progress in other regions, but those are the areas where we're starting to get some progress. And like I said, it typically takes a little bit of time to get that pricing traction once the volume comes along doesn't happen overnight. And we get a lot of questions about why our price was down in the first quarter that was down 1% was in line with what we thought, and that's largely just mix. So we have a good feel for where we are on the second quarter because we've already negotiated those increases. That's why we've made that reference to a slight increase. But as we get into the second half and we kind of evaluate how the markets continuing to evolve and we'll continue to make those prop the progress on pricing.

Frank Mitsch

Terrific.
John, thank you so much.

John Romano

Thank you.

Operator

Michael Leithead, Barclays.

Michael Leithead

Great, thanks.
Good morning.
I just had one question maybe for John or for CFO. John, on inventory dollar inventory decreased maybe 1% sequentially and your sales volumes improved something like 20% sequentially. And you mentioned you recently burned through a lot of the high cost inventory. So I would have thought inventories would have declined more. So if you help explain that.

D. John Srivisal

Yes.
I mean that's a great question there. Obviously, we did see inventory lower, which normal seasonality in this quarter would be a build of it. So you have to take that into account versus looking from overall ending balance ending balance. And but you also have to take a look at we are a vertically integrated suppliers. So it's not just pigment inventories, not just zircon inventory, which obviously were very robust, so also the mining side of it as well.
And secondly, you did mention some of the costs have come down, but we still carry pretty significant cost on our books relating to the CAD400 million increase from the over the past couple of years. So I think that's what's driving the change. But ultimately, we do expect that we will recover a good portion of that $400 million build over time. And frankly, it's when input costs do go down, we will see that additionally, once more, our robust commercial in the second half of the year, just like we saw in 2021, we will see that inventory turn into cash. If you look at 21 as a reference, we did generate $468 million of free cash flow. So on the earnings potential cash flow potential is there in the business.
And but specifically on the inventory that we said we drew down that was on TiO2. I mean, we're ramping up Atlas now. So I think John's point is it's we don't only have TiO2 inventory. We've got pig iron inventory. We've got ilmenite inventory. We've got slag inventory and natural rutile. So it's a whole mixture of thing. And I think the key is as to John's point, as our costs go down, the cost of that inventory goes down. So it's not there's a day's element of inventory. And then there's also a value of that inventory. And we expect that to continue to go down throughout the rest of the year.
And the other thing to note is obviously we do have a contract with us, and so we are buying feedstock and that is building our inventory of feedstock.

Michael Leithead

Thank you so much.

Operator

Hassan Ahmed, Alembic Global.

Hassan Ahmed

I'm wondering, John, your question on the guidance. You guys reported 130 million in EBITDA in Q1 and obviously 160 to 180 million is the guidance range for Q2. So I mean, taking the midpoint of Q2 guidance, you're roughly sort of guiding to around EUR300 million in the first half of the year. And it seems, you know, from all your commentary that its earnings momentum is developing great sort of back half should look far better than the first half. And yet I take a look at consensus numbers and they are slightly shy of EUR600 million. So which to me, you know, seems seems highly beatable. I mean, is that a fair way of thinking about 2024?

John Romano

Yes. It it another interesting way to ask the question that Frank asked, but looked at.
Yes, I think your comments are reasonable right at it. If you doubled 300, you've gotten your still shy of the number that we just kind of confirm with Frank. So we've got some upside as we move through and them. I'm not supposed to talk to you about consensus because Jennifer tells me not to do that, Chad. I won't reference that. But you did. But Tom, I think your comments are accurate.

It's a fantastic.
Fantastic. And again, just sort of digging a little deeper into that on you guys talked about a fixed cost absorption being a 25 to $35 million penalty last year.

John Romano

Right.

So you know, as your operating rates sort of move up and you were talking about sort of operating rates being sort of above 80%. Now, how much of that penalty was an offset in Q1? How much of it is going to be an offset in Q2 and what does the back half look like?

John Romano

So we're not going to provide the back half yet, but but but I would expect if we continue running at this rate, so I will let John kind of work through the numbers because we kind of gave you it. It was about 25 to $30 million in the first quarter. So but you have to think about how those numbers work through last year and wasn't rate, you know, we said 25 to 35 million a quarter, but there were quarters where that number was higher.

D. John Srivisal

So John, you might know, I mean, we said in Q1 versus Q4, production costs are about $57 million, 32 was favorable absorption and lower costs, our lower of cost or market changes 15 from the Botlek idle and then 10 million from higher mining. So if you take a look at that 32 million or so and then we didn't answer on the Q&A recently. We do expect a similar amount, not quite the amount, but a similar amount in Q2. So if you take a look at that, it's additional to this 32 million that we've quoted. So you're already seeing a good amount of that, and that will continue through Q3 and Q4. So that's why we've said that we expected that to recover that a third, 25 to 35 million from what running at lower through Q2.

John Romano

And we're not being as on I mean, we're not at the rate we're running at full capacity yet because, again, the we're seeing a recovery on the front end of it, but we've still got some capacity to respond to further demand improvement as we see the recovery continue. So we're continuing to come off of we've been talking forever about the fourth quarter of 2022 was the bottom it was and we saw 2023, there was some slow progression. And we finally seeing what we would say is a good indicator of the front end of it, a real recovery. So as we continue to move through the rest of the year, we'll evaluate that. China is still kind of an unknown from. So if China recovers, you'll start to see impact not only on TiO2, but on zircon as well.

Very helpful. Thank you so much, Ed.

John Romano

Thank you.

Jennifer Guenther

Next question will be from Jeff Zekauskas at JPMorgan. Please go ahead.

D. John Srivisal

Thanks very much. When you take a step back and you look at the coatings markets in the United States, they didn't grow in the first quarter and maybe they shrank a little bit in the coatings markets in Europe, maybe they're flat.

John Romano

And when you listen to the commentary of PPG or Sherwin-Williams, what they say is that they have plenty of TiO2 and so when you look at your volume growth, where did it come from and why isn't it simply just the restocking of lower inventories with volume to fall off because the TiO2 growth rate is so much higher than the end market coatings growth. How do you assess those different pulls and pushes?

Yes.

John Romano

Thanks, Jeff. I think you got to go back to the last 24 months, right. So let Lou, let's wind the clock back to the 22 and 23, where volumes dropped 15% each year. So over that 24 month period, we lost 27% of our volume. That's not sustainable lending either. And you didn't hear that kind of a reduction from all of those coatings companies so there is an element of a tremendous amount of inventory that was in the supply chain that we talked about, the destocking effect. So part of it was destocking and now we're just getting back to normal buying patterns. We're not back to where we were in 19 yet, you know, to get to 21 levels in 2021 was a boom year for a lot of reasons for the TiO2 industry because people were staying home, they weren't going out to eat and they were using products that our products are in so we're not suggesting we're to get back to 21 volumes. But what we saw over the last two years wasn't sustainable either. Now we're getting back to what we would refer to as just more normal buying patterns. There has been no significant risk replacement for TiO2 where 15% of the demand can just drop away on an annualized basis. So when you think about our growth, a lot of that growth is just getting back to normal buying patterns and feeding through that supply chain, which has been bloated with inventory and has been now depleted, and we're starting to see upticks and demand. And I mean, I'm not going to speak to what or who you're speaking to with regards to the customers but we're supplying all of them.

D. John Srivisal

Okay.

John Romano

Thanks very much.
Thank you.

Jennifer Guenther

Next question will be from Vincent Andrews at Morgan Stanley. Please go ahead.

D. John Srivisal

Hi, this is Turner Hendrix on for Vincent, I'm wondering if you could provide some additional color on industry operating rates and how to supply and demand balances trended by region.

John Romano

And so on industry operating rates, we're not going to really comment that it's hard for us to comment on what everybody else is doing, but we gave you an indication on where we were and I would expect as the market recovers. Not everybody is going to start looking at how that their operating rates on and how they're going to respond as the demand continues to recover from. So with regards to demand. If we do the second part of your question, was it some regional demand or could you repeat time demand balance?
Yes. So look, TiO2 is a global market on it. So when we think about supply and demand, TiO2 flight, it flows pretty freely in a normal market. I would say over the course of the last probably eight months considering everything that's going on and the geopolitical environment, it's been a little bit difficult, more difficult to ship material around. And that's why I made that reference to our ability to capture maybe the front end for this. Our recovery has been a little bit better poised for us because of our global footprint and having our assets closer to our customers with them. But Europe, Europe, Latin America and Middle East over the last six quarters was down more significantly. We're seeing that rebound a bit more on China on the demand side, obviously, has been a big part of the growth over the course of the last 10 years with regards to capacity, the exports kind of identify that. But as far as supply and demand goes globally. There's puts and takes in those regions. But that from a demand side, some we're starting to see inputs of growth with the exception of, as I mentioned, China is still a bit muted, but we're seeing growth everywhere. As far as our demand goes. Those areas that were further impacted over the last six quarters, we're seeing stronger recover recovery from a lower base at the at this stage. And then in North America, as I mentioned, we're starting to see in the second quarter and in the first quarter, but more predominantly in the second quarter, what we would normally see as a normal coating season. So demand in North America starting to impact us as well.
Great.

Great.

D. John Srivisal

Appreciate all the additional color. Just to confirm, it sounds like there's been some improvement of local for local selling this year, perhaps due to higher freight trends. And Dom, if you don't mind providing as well, just an update of how global trade flows have been so far this quarter.

John Romano

That would also be of interest global trade for well located. There's been an impact on global trade flows, but go ahead.

D. John Srivisal

Yes. Any updates on what you're seeing out of China like Chinese exports and some like high March figures or imports and exports in other regions? Just considering my additional sort of question on local for local selling.

Yes.

John Romano

So clearly, there has been a big bump in March on exports out of China. And again, that's exports that those are actually aligned with the imports going into Europe. And so it's my opinion that some of that is probably pre-positioned and bonded warehouses in anticipation for what might be happening on dumping. And there has been an impact on a company's ability to move material and that the time to move material from one country to another has been impacted. But based on what's going on in the Red Sea and the Panama Canal. So again, our global footprint, our global footprint allows us to take advantage of that because we have inventory positions because of the location of our assets, it allows us to respond quicker to some ups and downs in demand.
I'd bet and I'm not being impacted as much. I'm not saying it's no impact to us because we do ship globally. But the impacts of the Red Sea in the Panama Canal probably have less impact to us than they do the balance of our competitors.
Great.

Great.

D. John Srivisal

Thanks so much for all of us color.

John Romano

Thank you.

Jennifer Guenther

Once again, ladies and gentlemen, if you do have any questions, please press star one on your telephone keypad.
And your next question will be from Roger Spitz of Bank of America. Please go ahead.

John Romano

Thank you, and good morning. It sounds like a number the EBITDA and cash flow our questions kind of a large component of talk, what are your working capital from the excess costs and inventory from 2023? And just to be clear, am I correct in thinking about when you say 2024 is going to be capital working capital inflow and you're also expecting higher volumes and prices that that inflow is being driven by working down, yes, of the high cost inventory, the high cost extra, our coal excess cost from running 2023 up production is slower. So you had the unabsorbed fixed costs in that inventory? And then related to that sort of how much is in there. So December 23 in round numbers, inventory was 1425 in 2022 is 1275, 20 December 21 was 1050. And then in December 19 in December 20 was both one one two five. Should we think about the one one two five to kind of be like the sort of normalized level once you work through this excess of pricing or inventory through? Or how should we think about that?
Let me just make one comment where in 2021, you've got to think about where we were on inventory from a days perspective. So forget it about the value we had inventory that was much lower then where we're comfortable doing it and where we were normally comfortably operating because that was when things peak, we ramped to 100,000 tonnes of zircon inventory over and above what we produced. We got our inventory at our locations on the TiO2 side, way below where it would normally would be. So there's two things, and I'll let John answer this one is kind of where we're what does that mean with regards to a normalized inventory as far as volume and then normalized based on value.

D. John Srivisal

And so that's exactly right. So obviously, in 2021, we had sold pretty much everything we could produce at that point. So we were at low values of inventory. So I wouldn't take 2021. As a normalized level, we do did have to rebuild our inventory as well as our safety stock there. So starting from 2021, as I mentioned, we did see significant cost increase across the next couple of years over 400 million. So you would expect to get a significant amount of that back, albeit in 21 we actually did have some pretty favorable contracts. So again, I wouldn't expect the full 400 million to come back on. But you are right, Roger. And that Q1, we did see some of the benefit from lowering our inventory, the higher cost selling the higher cost with replacing it with lower-cost inventory. And but the other thing was, as we mentioned, we did have higher sales volume than we had expected.

John Romano

And so that did drive some of the a good amount of the cash flow beat, if you will put it that way from an inventory perspective in Q1, got effect of the 1425 and then inventory 2020 through, which includes that excess inventory costs, is it the extra 100 million that will get other cash flow as you run that through or looking at the historical numbers, it feels like there's an extra 200 million of what I'm calling access question your inventory, what how much, you know, which is the like, which is a number we should focus on when we think about, yes.
Of 100 million.

D. John Srivisal

Yes, no, it's 100 million. It frankly, it will depend it will be yes, it's well north of 100 million, I think ultimately will depend on the size and scope of the recovery because a big part of it is selling down that inventory in excess of your production levels. And secondly, ultimately, if you if raw materials do turn and hence how significant that that does turn into how costs revert back to more normalized levels.

John Romano

And we're not suggesting we're going to get that in 2024. It's going to be over a longer period of time, but we should be able to recover north of 100 million of that.

D. John Srivisal

Got it.

John Romano

Thank you very much for that.

Jennifer Guenther

Thank you. And at this time, Mr. Romano we have no further questions, please.

John Romano

So Kevin, thank you. And thank you all for joining us today. And look, we're very confident that our vertical integration strategies we've talked about at length will continue to provide a competitive advantage for Tronox. We're optimistic about the short, the medium and long-term potential for Tronox and the value that we continue to create through what we're kind of referring to as our leading sustainable mining and upgrading solutions.
So with that, we appreciate your time and thank you for your support and interest in Tronox. Have a great day.

Jennifer Guenther

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you please disconnect your lines and your interest.