Tronox Holdings PLC (TROX) 2020 Q2 法說會逐字稿

Good day, and welcome to the Tronox Holdings plc Q2 2020 Earnings Call. (Operator Instructions) Please note this event is being recorded.

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 second 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; and Tim Carlson, Chief Financial Officer.

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 done so already, 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 will 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.

As you saw in our earnings release, we provided our results on both a reported basis and a pro forma basis to assist in our discussion of second quarter 2020 performance compared to the second quarter 2019 performance. Our primary focus on this call will be on the comparison of pro forma results to enhance your understanding of the underlying trends in our business performance and our markets.

In the appendix of our earnings release and the accompanying presentation are a statement of operations and adjusted EPS and adjusted EBITDA reconciliations, including on a pro forma basis for the second quarter of 2019.

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.

Tronox delivered solid financial results in the quarter despite the significant reduction in demand and the other challenges associated with the COVID-19 pandemic. Our results reflect a demand profile consistent with the outlook provided at the time of our first quarter earnings release, offset partially by our Cristal transaction synergies, cost reduction initiatives and prudent management of working capital. I will briefly discuss some of the highlights of the quarter before turning it over to the other members of my team for a deeper dive.

Revenues in the second quarter declined 30% versus the year ago quarter, and 20% sequentially compared to the first quarter. This decline in revenue was driven by lower sales volumes due to the economic impact of the COVID-19 pandemic in the various world regions. TiO2 sales volumes and pricing were consistent with our outlook for quarter 2, while zircon volumes and pricing were slightly favorable to our expectations due to shipment timing and favorable product mix.

Within the quarter, TiO2 volumes reached a low point in May when the full impact of the lockdown was felt before recovering significantly in June, which was the best month of the quarter. We expect that momentum to carry forward into the third quarter. John Romano will provide more commentary on the market in a moment.

Adjusted EBITDA was $142 million for the quarter, and our adjusted EBITDA margin was a very strong 25%, attributable to delivery of the synergies from the Cristal transaction and our continued focus on operational excellence. Jean-François will discuss both of these contributors to our results in a few minutes.

But to steal a little bit of his thunder, we achieved total synergies of $107 million year-to-date, of which $84 million was reflected in EBITDA and $23 million in tax and other synergies. We remain on target for achieving our anticipated synergy targets for the year.

Certainly, we are in a very different economic and market situation than what we anticipated at the time the Cristal transaction was completed, but the ability to deliver the synergies from the acquisition is making a huge difference in our financial performance. As I have said before, the combined company is much stronger and is weathering the storm much better than either of the predecessor companies would have done on their own.

Adjusted EPS of $0.03 was impacted by lower sales volumes as well as an unusually higher effective tax rate for the quarter due to the generation of losses in tax jurisdictions in which we have valuation analysis. Our CFO, Tim Carlson, will discuss this in further detail in a few minutes.

We have over $1.1 billion in available liquidity which is more than sufficient to sustain our business through any situation. During the quarter, as we previously announced, we signed a definitive agreement to acquire the TiZir TTI business from Eramet for $300 million.

This is a highly strategic acquisition, which will further our vertical integration strategy by increasing our titanium feedstock production capacity, thereby enabling us to more fully meet our feedstock requirements internally and better serve our pigment customers with an even lower cost position. The facility will reduce our costs by reducing our reliance on third-party feedstocks, and also presents an opportunity for cost and operating synergies.

In addition, only TTI will provide technology support for Jazan, increasing the likelihood of success there, even further enhancing our vertical integration and lowering our costs. We are continuing to work through the regulatory approval process and other customary closing conditions associated with the TTI acquisition.

Speaking of Jazan, during the quarter, we also entered into an amendment to the technical service agreement related to that facility as we briefly addressed in our Q1 earnings call. This amendment will allow Tronox to increase technical and managerial resources devoted to the project as the project continues to advance towards start-up in the first half of 2021 and sustainable operations in late 2021. The project has experienced some delays due to travel restrictions associated with COVID-19. But we are working with AMIC and AutoTech to call back some of that time.

All in all, it was a very good quarter for Tronox. Solid operating results given a truly unprecedented situation, and several significant strategic advancements. I am pleased with our delivery of these results given the challenges the men and women of Tronox overcame in the quarter. As an organization, we have remained relentlessly focused on the health and safety of our employees, managing our ongoing operations, protecting, preserving and strengthening our business and laying the foundation for the future.

The efforts of my colleagues to proactively implement effective access protocols and other safeguards at all of our worldwide locations had minimized the spread of the virus at our facilities and preserved our ability to operate. As a result, we have continued to meet our customers' needs despite the environment. This focus will not waver as the economic climate improves in the back half of the year.

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 markets. John?

Thanks, Jeff. Moving to Slide 4. First, I'll take you through our year-on-year comparison, which Jennifer said focuses on the pro forma numbers for the year ago quarter for comparison purposes.

Revenue of $578 million was 30% lower than $827 million for the year ago quarter due to the impacts of COVID-19 pandemic. TiO2 pigment sales of $466 million were 29% lower, driven primarily by the sales volume decline of 27%, reflecting weaker demand across all regions following the onset of the global COVID-19 pandemic.

While the pandemic has had a significant impact on the sales volumes, pricing has remained relatively stable. TiO2 selling prices were 2% lower on a local currency basis or 3% lower when adjusted for currency. Pricing in 2020 has been relatively stable, with some larger movements in sulfate pricing, though the declines in sulfate pricing appear to be improving in Q3.

Moving to zircon. Sales of $68 million were 24% lower than a year ago. Zircon sales volumes were 12% lower when compared to Q2 of 2019, driven by softer market conditions globally, and selling prices were 13% lower than a year ago. As you may recall from our first quarter discussion, zircon pricing declined late in the fourth quarter and early into the first quarter so this comparison demonstrates the roll forward of the trend on a year-over-year comparison.

Product mix actually had a favorable impact on pricing this quarter, so the decline was less significant than the Q1 year-over-year comparison.

And in feedstock and other products, sales of $44 million declined 46%, largely due to the lack mandated CP slag sales associated with the remedy for the Cristal transaction and lower pig iron sales due to the global economic slowdown.

Moving to the sequential comparison versus first quarter of 2020 revenue of $578 million declined 20% from the prior quarter on lower TiO2 and feedstock and other product sales due to lower demand attributable to COVID-19, and partially offset by higher zircon revenues. TiO2 pigment sales of $466 million were 20% lower compared to $580 million. Sales volumes were 19% lower, and selling prices were level on both the local currency and a U.S. dollar basis, both in line with the expectations that we discussed on our first quarter call. Sales volumes in June recovered significantly off a low in May, leading June to be our best month of the quarter.

Moving to zircon. Sales of $68 million increased by 5% from the previous quarter, slightly above our outlook. Sales volumes were up 2% as a result of shipment timing, representing some volumes that were expected in Q3 that shifted into Q2, and selling prices also increased by 2% due to favorable product mix.

And finally, feedstock and other product sales of $44 million declined 43% due to no mandated CP slag sales in the quarter, as I mentioned previously, lower pig iron sales due to COVID-19 and an opportunistic spot sale of excess ilmenite in Q1 that did not repeat in Q2.

Now turning to the next slide. I'd like to speak to the demand trends we saw in Q2 by region and how we're seeing those transition into Q3.

In North America, social restrictions began lifting halfway through the second quarter. We've continued to see strength in the DIY market with construction and professional paint market seeing improving conditions later in the quarter, which we believe will continue into the third quarter. While the U.S. is experiencing a resurgence of cases in some regions, which could influence the recovery, we have not seen any significant impact on demand in Q3 and believe that recovery will continue into the quarter.

Similarly, in Europe, social restrictions began lifting midway through the quarter on a country-by-country basis. Our customers' operations started to reopen in May. And as a result, we began to see a greater demand pull in June. We are continuing to see improving demand into Q3 and believe the recovery in Europe will continue, factoring in the seasonal slowdown that we normally see due to the holiday period.

South and Central America were the most impacted during the quarter and remained challenged. Volumes there are beginning to recover, but the region remains behind the curve relative to other regions.

India, like South and Central America, also saw a significant surge in cases in Q2, but began reopening in early June. Despite an increasing number of cases in the country, we have not seen a signaling of another complete lockdown and have not seen a pullback in orders for Q3 up to this point.

China demand continues to recover, but given an excess of TiO2 inventory in the region, we have not yet seen a full recovery. We have, however, started to see a tightening of inventory levels and signals of increasing demand. The rest of Asia Pacific remains mixed and varies significantly by country, and we will continue to diligently monitor the recovery into Q3.

For the third quarter, we anticipate TiO2 demand will continue to improve relative to the second quarter. And with zircon, we expect the market to remain relatively level with the last several quarters. Zircon volumes are expected to remain largely in line with first quarter volumes or down slightly relative to Q2 due to the shipment I referenced earlier that sailed in Q2 as opposed to Q3. We anticipate lower demand in Southern Europe and India will continue to offset improving demand in China through the end of the quarter.

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 6. Let's first review the year-on-year adjusted EBITDA comparison. Adjusted EBITDA of $142 million was 29% lower than pro forma adjusted EBITDA of the year ago quarter. As John mentioned, demand decline across the business were driven by the global economic condition. We benefit this quarter versus the year ago quarter from $40 million in synergy, favorable exchange rate, primarily the South African rand and improved Australian mining costs.

This was offset by the absence of the deferred margin benefit from Q2 2019, higher net cost and cost associated with the shutdown of the South African mining operation and slowdown of the South African smelting operation during the 21-day countrywide lockdown period combined with the remaining cost impact of the KZN shutdown for the relining discussed on the fourth quarter call.

Sequentially, adjusted EBITDA of $142 million decreased 18% from $174 million, driven primarily by decreased TiO2 and feedstock and other product sales volume as well as increased net costs and the impact of the 21 days countrywide lockdown period on our South African operation. This was partly offset by incremental synergy of $9 million achieved in Q2 versus Q1 and favorable foreign exchange rate.

Turning to Slide 7. We achieved $46 million of synergy reflected in EBITDA in Q2, amounting to year-to-date synergy of $84 million in EBITDA or $107 million in total, with the balance in tax and other synergy.

We remain on track to achieve our target for the year of $190 million in total synergy, of which, $140 million will be reflected in EBITDA. As a reminder, the majority of the targeted synergy are coming from true cost saving and not anticipated volume. So we, therefore, feel confident in our ability to achieve this figure despite the macro backdrop.

Overall, our operation has been stable and uneventful in the quarter, which is always a positive in the operating world. This is particularly a great accomplishment considering the environment in which we are operating. I owe many thanks to my team and our employees for making this a reality. Thank you.

Our focus continues to be on satisfying our customers' needs, providing the same high level of service our customers have grown to expect from Tronox, while executing on our cost reduction opportunity. Using our operational excellence program and our integrated business planning tool, we have identified and are implementing a cost reduction program to mitigate the impact of increased fixed cost absorption on our cost per ton.

I will now turn the call over to Tim Carlson for a review of our financial position. Tim?

Thanks, JF. On Slide 8, we've outlined our liquidity and capital resources at the end of the quarter. We have over $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 in any jurisdiction.

The $722 million of cash and cash equivalents 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 and preserve optionality for our business.

Turning to the next slide. On Slide 9, we highlight the strength of our balance sheet. Our current total debt is $3.5 billion, and our net debt is $2.8 billion. Our current trailing 12-month net leverage is 4.2x on a pro forma basis. 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 2 to 3x and a gross debt level of $2.5 billion.

Capital expenditures in the second quarter were $44 million and our depreciation, depletion and amortization expense was $72 million. Capital expenditures totaled $82 million in the first half of the year. We anticipate capital expenditures for the back half of the year to increase to $118 million to $128 million due to critical capital projects in Q3 and Q4, including our newTRON business transformation initiatives, and the development of our Atlas-Campaspe mine prepare for a seamless transition succeeding the Snapper-Ginkgo mine, which is expected to phase out next year.

Our free cash flow for the quarter was $56 million, driven by working capital improvements. Our accounts receivable balance in mid-July was 97% current, so I don't see any impact on our aging that causes this concern.

Turning on to the next slide. I'll discuss our outlook. As John mentioned, we anticipate third quarter TiO2 volumes continue to improve versus Q2 2020, and we anticipate the zircon market to remain relatively stable as compared to the last several quarters.

As JF mentioned, we are managing our operations, utilizing our integrated business planning capabilities to ensure we continue to satisfy customer needs, while prudently managing working capital. We will continue this focus through the rest of the year, which as a result, will increase the amount of fixed costs absorbed in the inventory, resulting in a slight reduction in margins until the higher cost inventory works its way through the system. But were it not for the cost-saving initiatives, JF mentioned, the impact would be greater.

I would also like to comment on our income tax expense. This quarter, our effective tax rate was 167%, influenced by income and losses in jurisdictions with full valuation allowances. A $2 million valuation allowance charge we took in Saudi Arabia and our jurisdictional mix of income as tax rates different than the U.K. statutory rate. We anticipate our full year income tax expense to be $30 million to $40 million. As JF said, we also maintain our previous synergy target of $190 million, of which $140 million will be in EBITDA.

Moving on to our expectations for full year 2020 uses of cash. We anticipate net cash interest expense of $165 million to $170 million, cash taxes of $20 million to $25 million reduced slightly from our previous expectation of $20 million to $30 million. Working capital of $75 million to $90 million increased from our previous expectation of $40 million to $50 million. Capital expenditures of $200 million to $210 million, which were reduced from $225 million, and cash for pension contributions remains unchanged at $15 million to $20 million.

These represent our estimates based upon our current market outlook. We have ample levers to maintain flexibility and manage cash generation, and we remain confident in our ability to generate strong free cash flow for the year.

With that, I'd like to turn the call back to Jeff to provide closing remarks before turning the call over to Q&A. Jeff?

Thank you, Tim. Tim just walked you through our latest views on the demand profile for the quarter and cash outlays for the year based upon the current macroeconomic situation. While globally, there appears to be more optimism about the recovery, uncertainty remains. This outlook is based on current information available to us.

We remain diligent in monitoring the status of our markets and have developed the ability to adapt very quickly. The cost reduction initiatives we have implemented have shown results, and we have identified other actions that could be taken if there is a further decline in the economic environment.

I continue to believe in our differentiated global network of assets in our vertical integrated business model. Our business model will continue to define us as the most adaptable, resilient TiO2 industry leader and allow us to continue to deliver industry-leading financial performance.

The TTI acquisition, as the next step in furthering our vertical integration strategy, will enable us to continue to lower our costs and provide improved service to our customer base.

I would like to thank my colleagues around the world for continuing to tackle any new challenge that is presented. I am proud of their commitment to delivering safe, quality, low-cost sustainable tons for our customers. I especially want to thank our senior leadership team around the world.

During this time, they have provided strong positive leadership, consistent with our Tronox values. Leadership does matter, and in a time like this, even more so. I am very grateful to have the privilege of working with this team every day.

We remain focused on providing the same high level of service our customers have grown to expect from Tronox, while ensuring the safety of our employees who make this possible and being a good steward of our shareholders' capital.

This concludes our prepared remarks for this morning. With that, I'd like to turn the call back to the operator, Grant, for your questions. Thank you.

(Operator Instructions) Our first question comes from Frank Mitsch with Fermium Research.

It's actually Aziza on for Frank. My first question was, we've been seeing Chinese producers announcing price increases. Just to get a sense of how you're seeing that playing out, and any regional impacts associated with it?

John, do you want to address that?

Yes. Sure, Jeff. So we have been seeing -- we believe, as we exited the second quarter, pricing in China has bottomed out. We are in the midst of implementing some pricing in the upward direction. As I mentioned in our prepared comments, we do expect to see pricing on the sulfate side start to move up.

Okay. And I know you guys mentioned synergies are still on track irrespective of volume trends. Is there a level where you guys think you might have been ex-coronavirus? And might we see a step-up when and if we return to normal?

Aziza, I think the synergies in general, most of those -- the synergies were not related to volumes at all. So I think as volumes do improve in the back half of the year as we get through this pandemic a bit. There is some slight change in sort of the buckets that the synergies will be realized in, but I would not expect to see a significant increase in that number.

We remain on target with what we've said before with perhaps a little upside there as we progress through the rest of the year.

Our next question will come from Duffy Fischer with Barclays.

Yes. First question is just some of your customers on the tank side and the plastic side have come out with their numbers already. In aggregate, it looks like they're down kind of high teens versus your TiO2 volume down high 20s, so do you think your volume was off more than industry? And can you kind of triangulate where you think industry volumes in the second quarter were versus real consumption at the customer level?

John, do you want to address that?

Yes. So I can't really speak to the industry at whole, but I don't believe we've lost any share. And when we think about our quarter-over-quarter comparison being down 19% on volume, a lot of that had to do with customers pulling back on purchases. So we do believe that there was an inventory drawdown on that as well. So they weren't buying as much early in the quarter. I think, early in the second quarter, we anticipated that could be a little bit higher than that. I think our guidance was high teens to low 20s on the downside from Q2.

So I think based on what we know right now, I believe we're in line with what was happening in the market-based on the COVID-19 pandemic.

Okay. And the second question. Just on the doubling of the cash needed for working capital with the volumes being downside, usually working capital throws off more cash than you would expect. So what's the dynamics happen there? Why that needs to consume so much more cash than we thought originally?

Tim, do you want to address that?

Duffy, thanks for the question. It was more of an increase in inventory in Q2 as a result of the significant decline in demand. As we adjust our operations to meet customer demand, we're managing working capital a little bit more prudently in Q3 and Q4, but it was just a little bit bigger build in Q2 than we anticipated.

Our next question will come from Hassan Ahmed with Alembic Global.

Over the last couple of quarters, we started seeing some sort of pricing momentum develop on the ore side of things, particularly the high-grade ore. Did you guys see that continuing through Q2? And what's the outlook, Q3 and beyond? And how do you see the industry reacting to that?

Yes. Thanks, Hassan. JF, you want to address that in terms of what we're seeing on the ore side?

Yes. I'd say, Hassan, that the ore price has been quite stable. I think that there was a momentum in price moving up as we enter the first quarter. And that momentum hasn't stopped because, as you know, those contracts are long term, and they take time to react. So I'd say that some of the high-grade feedstock like rutile that was in very high shortage, we have seen price still moving up. But I think that this will pause because of COVID-19 and the fact that look, everybody has to react to lower demand. So we will have a more balanced high-grade feedstock going forward.

Understood. Understood. Very helpful. And as a follow-up, again, over the last few quarters, we had seen certain market share sort of shifts within the pigment side of things. Particularly, on the plastics additives side and market-wise.

I mean, are those mostly behind us? Did you guys mostly in the industry see relatively stable market shares?

Yes, Hassan. I think from our viewpoint, we've maintained market shares, not to say that if there's been a certain situation out there where we saw pricing moving in a direction that wasn't consistent with the value we believe we need to get from our product that we haven't adjusted.

But our strategies remain the same, to focus on getting at least fair value for the products we produce and aligning ourselves with strategic customers that are growing faster than the market. So I'd say we're consistent on that line.

Our next question will come from Jim Sheehan with SunTrust.

Yes. Could you talk about your TiO2 volumes, what the year-over-year decline rate was in June? And what you're seeing so far in July? You talked about improvement there, just curious about what your year-over-year change is in July relative to June?

John?

We're not going to break down the quarter by month. But what I can tell you is similar to what we had in the prepared comments, April was down obviously. May was the worst quarter we had -- the worst month we had in the quarter and June rebounded significantly. And when we look at July, July is in the same kind of range as we saw in June.

So we think about moving into the quarter, that's why we're pretty confident at this point in time, assuming that there's no significant change, which we haven't seen in COVID-19 resurgence or slowed or lockdowns in economy so that our volumes in Q3 will be north of where they were in Q2.

And when we look at the TiO2 -- go ahead. I'm sorry, so on TiO2, the industry in China, can you talk about the high-cost producers there and what pressures they might be under? Do you expect any high cost capacity in China to be shutting down anytime soon?

Look, I think at this particular stage, there's always a risk of Chinese producers closing down. Clearly, pricing coming out of China had dropped, we talked about that. Those were not sustainable levels, in my opinion, or in our opinion as a company. And it's always possible that those plants could close down. And actually, you've got some third-party analysts in the market that are actually expecting that to happen. So the issue is as pricing moves up, you typically can start sulfate plants up again.

But from the standpoint of where the pricing was and factoring in environmental liabilities and restrictions that are changing in China, it's definitely a possibility that as those close this time, they could close permanently, but it's yet to be seen.

I don't know. If you have another -- anything else to add on that, Jeff?

No, John, I think that's exactly right. I mean, there is pressure. And you coupled that economic pressure with the continuing environmental regulation and enforcement and the fact that sulfate is sort of falling out of favor a bit. I think there is, certainly, the likelihood that some of the marginal producers will be under extreme pressure.

When you think about where pricing is today and compare that to where ilmenite pricing is, Chinese ilmenite price is still in the $170 to $200 range, which is significantly higher than it was the last time pricing dropped down to this level.

So the pressure there is more significant. And I mean, we have a bit more visibility into that at this time around because we have a plant in China.

Our next question will come from Roger Spitz with Bank of America.

Given the additional design smelter services agreement advisory activity that you'll be doing, should we take away that there are more issues regarding starting up the smelter than you were previously aware of?

No. I don't think there are more issues, Roger. I think what it is, is that the arrangement that was put in place at the time of the Cristal acquisition assumed a set of circumstances but there several -- a significant time ago. And as the prices has developed, there's just more opportunities that were identified where the resources and experience and expertise of Tronox could make a real difference. And so I think by being more involved, not only do we bring our technical services, we bring our project management skills and whatnot so it's just an enhancement of that and increasing the likelihood of success, but not really any new issues. I mean, it's not a certainty, right? Jazan is always identified as being something where there was risk. And so we think this is just a very prudent manner of increasing the overall likelihood of success.

Jean-François, you want to comment on sort of your perspective as leading our efforts there?

Yes. And I think Jeff mentioned the project management skill. It is clear that Tronox, with our global footprint and our experience, we had good people that we could dedicated to help Jazan and put some more discipline in how to make the modification that are being made at the moment and increase the likelihood of success, and that's really what that enhanced technical agreement is all about.

So we're more involved in also getting ready for when AutoTech will had modify the smelter with the operation readiness. And so training, preparation of the operator, preparation of how we're going to ramp up and operate will be more involved than last time around. So all of that, hopefully, will help the probability of success to increase.

The risk on our side hasn't changed. I mean what we have explained to you or commit -- our financial commitment hasn't changed, and we're not putting more risk on our side. On the contrary, I think that the possible gain are higher for Tronox.

That's great. Secondly, can you compare the TiZir ilmenite to the cost position and quality of your South African and Australian ilmenite operations?

And any thoughts regarding the comparison to the relatively nearby Kronos' Norwegian ilmenite mines?

I guess, I'll comment and JF, maybe you can follow-up. But I think, all in all, with our integrated business planning capabilities, we'll be able to use the TTI ilmenite, I mean the TTI output at our plants in Europe, where we can get the most effect for that and improve our overall cost of feedstocks through the entire portfolio.

JF, you want to comment on the relative competitiveness of the various sources?

Sure. And look, one element that I want to emphasize, Roger, is TTI for us is the best way to increase the chance of Jazan to be successful because the TTI smelter in Norway use a technology that is the most similar to the Jazan technology. And that's obviously a big driver of strategic -- of strategically acquiring that asset, so we could increase the HUD of Jazan of being successful. So that's the first element.

Another big element is the Norwegian smelter use hydropower as the source of energy. And it's a clean power, so that make it one of the most green titanium smelter in the world. And we see that as a big advantage with a stability on the highest cost, which is power. So we see that as an advantage in our portfolio.

And look, we identify synergy that are real, like the synergy that we have identified with the Cristal pigment plant, there will be gain in technology exchange between South Africa and Norway. And this is only us having the capability to extract those synergy versus what Eramet was able to do.

So all in all, look, there's plus or minus from a cost point of view, but a very good asset with comparative cost structure to what we have in South Africa.

Yes. I think, JF, that's the crude. Now this is a world-class asset. We've been the majority customer from this facility for a number of years. And the ability to internalize this production and to eliminate sort of the double marginalization will reduce our cost and lower our cost position and make us an even more competitive producer of TiO2 pigment.

(Operator Instructions) Our next question will come from John McNulty with BMO Capital Markets.

This is Colton Bina on for John. So I guess my first question is kind of a follow-up to the pricing question that was asked earlier. So a number of North American coatings producers pointed to the possibility for chloride TiO2 prices to be up modestly in the coming quarters. Is that something that from where you guys sit is starting to look like more of a possibility?

John, do you want to address that?

Yes. Sure. I mean, what I mentioned in our prepared comments, again, talking about pricing moving into the third quarter, we didn't give too much specificity on that. But with regards to what we're seeing right now, pricing in the Americas has remained stable or at least in the U.S. And we have seen a bit of variability, but nothing out of the range of what we would have seen over the course of the last 6 quarters.

So obviously, I would say, yes, there's a possibility in the coming quarters that we could see price improvement. Moving into the third quarter, when we think about where we are today, and we're not going to provide a lot of guidance, but not going to be significantly out of line with where we were on pricing for the last 6 quarters with regards to movement.

With regards to China, I think we all are aware, at least we mentioned it on the call that there has been some volatility there. Pricing in China in the second quarter, at least as far as Chinese TiO2 and sulfate products moved down more significantly in the back half of the quarter. So entering the third quarter, our average on that sulfate price is a bit lower. And again, we're starting to see that price move up as we move into Q3.

Okay. Okay. That's helpful. And just one more question. I mean, you guys mentioned the sequential pickup in zircon mix. I was just wondering, is any of that pickup, is that customers in China switching back to the kind of premium quality zircon? And are you starting to see some real possibly longer-term improvement at the Chinese zircon markets?

Yes. So that mix variance, when you think about the pandemic in China, there was a fair amount of concentrate that was shipped into China in the first quarter and into the early part of the second quarter, and some of those Chinese concentrate producers who upgrade that material didn't have product available. So they gave us an opportunity to actually fill that void with some of our higher-grade products.

So I wouldn't say at this particular stage that, that may be long term sustainable. But moving into Q3, we're seeing a similar pattern, maybe not as significant as it was in Q2.

Our final question will come from Travis Edwards from Goldman Sachs.

This is Brodie Wray on for Travis. Just a few quick questions. Could you remind us what your target is around vertical integration? Now with the TTI acquisition announced and the guidance you provided on Jazan, will those 2 projects be sufficient to get to your optimal vertical integration level?

Yes. No, currently, we're sort of in the 75% range. And depending upon exact pigment demand of that, that might increase a little bit as we go through the year with less third-party feedstock purchases. But as we bring TTI into the portfolio, that will increase and certainly will increase towards full vertical integration. And then when Jazan comes on, we'll be able to reach actually full vertical integration.

But of course, Jazan will come on in a sort of a staged manner. Plus, I think it's important to say that Jazan, when Jazan comes on, we'll have the ability to grow and still remain at a very high vertical integration level.

So there may always be some third-party feedstocks in the mix, just for the mix profile. But with TTI and Jazan, we will effectively be fully vertically integrated.

Great. And secondly, as a follow-up, as we saw one of the major TiO2 producers give up material amounts of share last year, and as we think about the path to recovery, how should we expect to pick up the demand to be distributed among pigment producers?

John, do you want to address that?

Yes. I'm sorry. I heard -- that was a bit broken. Could you repeat the question one more time, please?

Sure. Sorry about that. So AVISA, one of the major TiO2 producers, gave up material amounts of share last year. And as we think about the path to recovery, how should we expect the pick up in demand to be distributed among pigment producers?

Look, so it's our intent, moving into the quarter, to try to maintain our share, as I mentioned earlier. I can't give clear guidance on what our competitors are doing. That was obvious that one of our competitors had lost some share due to a different program they had in place.

Our project, our plan, is to be consistent with how we've been growing our business over time. So aligning ourselves with customers that are growing faster than the market so that we can continue to develop and gain share as the market grows.

Does that answer the question?

Yes.

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

Thanks, Grant. I just want to conclude by thanking all of you for your time this morning and your continued interest in Tronox. Certainly, it's an unprecedented time. We look forward to being able to reengage with many of you in person in the months to come. We look forward to speaking with you here in a few months to update you on the third quarter as economies around the world start get -- start to get back to business.

I think, in some, the state of Tronox is very strong, solid operating performance, prudently managing working capital and cash, managing our working -- our capital expenditures, but not turning a blind eye to the future. We think it's very important to continue to position the company from a position of strength to fully participate in the recovery that will come, and we look forward in future quarters talking with you guys about that.

So thank you very much. Everyone, have a great day.

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