Tronox (TROX) Q4 2019 Earnings Call Transcript

Tronox (TROX -1.77%)
Q4 2019 Earnings Call
Feb 26, 2020, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Tronox Holdings plc Q4 2019 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to introduce your host for this conference call, Mr. Brennen Arndt, senior vice president, investor relations.

You may begin, sir.

Brennen Arndt -- Senior Vice President, Investor Relations

Thanks, Kevin, and welcome, everyone, to our fourth-quarter and full-year 2019 conference call and webcast. On our call today are Jeff Quinn, chairman and chief executive officer; Jean-Francois Turgeon, chief operating officer; John Romano, chief commercial and strategy officer; Tim Carlson, chief financial officer; and Jennifer Gunther, incoming vice president of investor relations. We will be using slides as we move through today's call. Those of you listening by internet broadcast through our website should already have them.

For those listening by telephone, if you haven't already done so, you can access them on our website at tronox.com. Moving to Slide 2. A reminder that comments made on this call and information provided in our presentation and on our website, include certain statements that are forward-looking and subject to various risks and uncertainties, including but not limited to, the specific factors summarized in our SEC filings. This information represents our best judgment based on today's information.

However, actual results may vary based on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements. During the conference call, we will refer to certain non-U.S. GAAP financial terms that we use in the management of our business and believe are useful to investors when evaluating the company's performance.

Reconciliations to their nearest U.S. GAAP terms are provided in our earnings release and in the appendix of this 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 fourth-quarter 2019 performance compared to the fourth quarter of '18 and full-year 2019 performance compared to the full year 2018. Our primary focus on those comparisons will be on the pro forma results to enhance your understanding of the underlying trends in our business performance and in our markets.

In the appendix of our earnings release and this presentation are a statement of operations and adjusted EPS and adjusted EBITDA reconciliations, all on a pro forma basis for the fourth quarters of 2019 and 2018 and the full year 2019 and 2018. Moving to Slide 3. It's now my pleasure to turn the call over to Jeff Quinn. Jeff?

Jeff Quinn -- Chairman and Chief Executive Officer

Thanks, Brennen. Good morning, everyone, and thank you for joining us today. Before diving into the financials, I want to take just a brief moment to reflect on last year, on 2019. 2019 marked a transformative year for Tronox with the close of the Cristal acquisition, through which we formed the world's largest vertically integrated TiO2 producer.

Now with nine pigment plants and eight mineral sands facilities across six continents, we operate with an unmatched global footprint. That footprint allows us to continue to grow with our customers, as they grow anywhere in the world, and continue to benefit from our alignment with customers who are growing faster than the overall market. The success of our bespoke win-win margin stability initiative has enhanced the stability of our topline relative to historic industry patterns. This stability is reflected in our global average TiO2 selling price, which remained essentially level on a sequential basis across 2019.

We over delivered on our 2019 synergy target and are increasing our synergy targets for 2020 through 2022 as we discover additional and increased value-added opportunities in the new Tronox, which I'll cover in more detail in a couple of slides. We returned approximately $315 million to shareholders in 2019 through share repurchases and our regular dividend and made a $100 million discretionary debt payment. We've maintained a relentless focus on safety and enhanced our commitment to sustainability, including the appointment of our chief sustainability officer to manage our ESG initiatives. Of course, none of this would be possible without our employees.

Investing in and developing our people is a key focus area of mine. To this end, we've renewed our employee development initiatives, including improving diversity and inclusion. 2019 was an accomplished year at Tronox, despite a challenging macroeconomic environment. We believe we are well situated to create value for our shareholders as we move forward.

Now turning to the next slide. I'll walk you through the financial highlights for the year. Our financial performance in 2019 was driven by strong execution on the many operating and commercial initiatives that were within our control, such as delivering synergies through our accelerated acquisition integration program, optimizing our global vertically integrated footprint, managing our cost structure and wisely allocating capital. Despite macroeconomic challenges, our adjusted EBITDA margin remained strong at 23%, and we generated free cash flow of $214 million.

I am happy to report that the synergies from the Cristal transaction continue to exceed our targets. We achieved total acquisition synergies of $89 million through December, exceeding our Investor Day target by $44 million, and our third quarter increased target by $24 million. Given our outperformance, we are increasing our synergy targets once again, which I'll review in more detail in a moment. Global TiO2 volumes and average selling price remained relatively stable across 2019, with volumes down 2% and pricing down 5% on an FX-adjusted basis, owing to the success of our win-win commercial margin stability programs.

We saw a slight pickup in zircon in the fourth quarter due to shipment timing and some restocking in India and China. While demand overall remains soft and prices declined in the second half of 2019, this high-value co-product continues to deliver strong profitability and margin enhancement. However, the weak back half of the year resulted in us entering 2020 at a lower starting point. This and a slight further decline we have experienced in the start of 2020 is reflected in our guidance that Tim will discuss in a few minutes.

We maintain a disciplined approach to capital allocation, returning $315 million to shareholders, as I mentioned, through the share repurchase and our dividend and made the $100 million discretionary debt payment. Our global team is moving forward in 2020 together as one new Tronox. We remain focused on execution and delivery of our vertical integration strategy, which is creating an enterprise that displays greater stability in financial performance and cash generation throughout the cycle. We will continue to manage what we can control, achieving the increased synergy targets, investing in our business through well-conceived, well-executed high-return projects, deleveraging the balance sheet and returning capital to the shareholders through an increased dividend.

We believe 2019 evidenced the capabilities that we have as an organization, and we look forward to continue to demonstrate those on a full-year basis in 2020.Now I'd like to turn to Slide 5 to discuss the synergies in more detail. You'll recall this as the slide we have been using to track our progress since our Investor Day. Through the end of the fourth quarter, we achieved total synergies of $89 million, of which, $47 million was actually reflected in our 2019 EBITDA. Slightly over half of this figure is SG&A related savings with the balance coming from additional realized, feedstock benefits from our integrated footprint and pigment related supply chain benefits.

$22 million of the achieved synergies will be reflected in EBITDA in future quarters. This figure reflects feedstock and other money related supply chain synergies achieved and on our balance sheet, which we will see in the P&L in future quarters. And $20 million are other cash synergies not reflected in EBITDA, consisting of interest and tax savings. The increased target for 2019 set during our third-quarter earnings call was $65 million, which was exceeded by $24 million.

Given our continued strong performance and delivery synergies, we are increasing our 2020 target to $190 million, our 2021 target to $275 million and our 2022 target to $325 million. These new targets represent a significant increase over the targets we originally said on Investor Day, which were increased from the original estimates at the time of the acquisition. Every day, we find additional value creating opportunities in the New Tronox, and we are excited to continue to go through on these opportunities. I'll now turn the call over to John Romano, our chief commercial officer, who will report on our commercial performance and the trends we are seeing in the global markets.

John?

John Romano -- Chief Commercial and Strategy Officer

Thanks, Jeff, and good morning. Moving to Slide 6. First, the year-on-year comparison, which as Brennen said, focuses on the pro forma numbers to give you a clear understanding of our commercial performance and the trends in our markets. With revenue of $693 million was 5% lower than a year ago.

TiO2 pigment sales of $544 million were 1% lower. Sales volumes increased 3% while selling prices were 4% lower on a local currency basis. On a U.S. dollar basis, selling prices were 5% lower as FX translation, primarily in the euro, was a $6 million headwind on revenue.

The sales volume increase reflects the continued strength in North America, offset by the completion of destocking in Europe and Asia. Inventories across regions, across the value chain, largely appear to be at normal levels today. The reason for the lower year-on-year average TiO2 selling price is, once again, primarily a prior year issue due to Cristal's commercial approach in 2018. And we will see this carry forward to the first quarter as price harmonization was completed in Q2, shortly after we closed the acquisition, as we've discussed.

As you'll see in the sequential comparison, our global average selling prices, once again, have remained essentially stable as they did in each sequential comparison in 2019. Moving to zircon. Sales of $71 million were 34% lower than a year ago. Sales volumes were 29% lower when compared to Q4 2018, which was one of our strongest quarters on record, as well as softer market conditions, primarily in China, with the continued impacts of the trade war, environmental regulations and generally slower growth.

Selling prices were 6% lower, primarily due to increased competitive activity from lower quality zircon products, which had a negative impact on product mix and price. However, that decline was back-end loaded in the third and fourth quarters and has impacted our starting point in 2020. Our sales of standard grade zircon products versus premium grade continued to run at a higher rate in Q4. And in feedstock and other products, sales of $78 million increased 10% on higher CP slag sales.

Now moving to Slide 7 for the sequential comparison versus the third quarter. Revenue of $693 million was down 10% from the prior quarter on lower TiO2 and feedstock and other sales volumes, partially offset by higher zircon sales. TiO2 pigment sales of $544 million were 10% lower compared to $603 million. Sales volumes were 9% lower within the seasonally typical range for Q4, and selling prices were 1% lower on a local currency basis and a U.S.

dollar basis. Moving to zircon. Sales of $71 million increased 4% from the previous quarter. Sales volumes were 7% higher due to some restocking in India and China, and the timing of zircon shipments from Q3 to Q4, as we discussed on the last earnings call.

Zircon continues to deliver strong profitability and margin enhancement for Tronox. We are still forecasting volumes to recover in the second half of the year and the medium- to long-term fundamentals for zircon remain positive. And finally, feedstock and other product sales of $78 million decreased 20% driven by lower sales of CP slag and pig iron. Now moving to the next slide, I'd like to comment on our outlook for the TiO2 market.

As I've mentioned previously, this last cycle has been the longest demand contraction in my 30-plus years in TiO2. We are cautiously optimistic that the contraction is showing signs of a reversal. We are seeing early signs of stabilization, indicating a general market recovery. Back in May, we introduced a slide outlining the data we track, which we believe has served as a good leading indicator of the TiO2 market conditions.

We've updated the chart, which is what you see on this page. The bars on this slide represent changes in the trailing three-month moving average of total reported imports of TiO2 pigment from net importing countries in Asia Pacific. We found that this data set has historically served as a proxy for Asia Pacific demand and a leading indicator for global TiO2 demand. Using this latest data, as you can see, we're seeing an uptick in demand, which we haven't seen in the last 17 months.

We are encouraged by the trends we're seeing in both the data and the market, including an earlier-than-normal uptick in demand in Europe in Q1. We're cautiously optimistic about the current outlook and still believe demand will continue to increase over and above the normal seasonal increase as we approach the second half of the year. As we've mentioned previously, given the current supply demand fundamentals of TiO2, even a modest rebound in macroeconomic conditions should result in a recovery in TiO2 demand. And Tronox is well positioned to capitalize on recovery, given our sales mix is balanced across the world.

One of the key factors we're currently monitoring is COVID-19 and the impact it will have on our sales in both TiO2 and zircon. At this point, it's still too early to determine the full impact of that outbreaks may have on the markets that we serve. The short-term effects have been modestly positive as we've seen a slight increase in orders coming in from Europe and Asia. There remains, however, uncertainty in the medium to long term.

We will continue to monitor the situation day by day, but believe that our global network of assets and our vertically integrated business model, we are well positioned to respond to changing market conditions as they develop. And with that, I'll now turn the call over to JF for a review of our operating performance and profitability for the quarter. JF?

JF Turgeon -- Chief Operating Officer

Thanks, John, and good morning, everyone. Moving to Slide 9, let's first review the year-on-year pro forma adjust EBITDA comparison. Adjust EBITDA of $156 million was 28% lower than pro forma adjust EBITDA of the year-ago quarter. As John discussed, lower TiO2 selling price related to Legacy Cristal commercial approach in 2018 and lower zircon volume were the primary commercial driver.

Additionally, we were met with higher production costs, including general inflation, higher ore costs and normal seasonal maintenance in our integrated operation. Partially offsetting this factor was favorable foreign exchange on costs, primarily the South African rand and the Australian dollar. In addition, synergy contribute an improvement to EBITDA of $25 million. We are very pleased with the synergy delivery to date.

As Jeff outlined, we continue to find additional, value-add opportunity from the combination, driving the increased target we previously mentioned and the benefit are coming from true cost saving, grounding opportunity to use feedstock across our network to benefit our operation and realize significant cost savings in our supply chain. In 2020, we will continue to realize incremental saving in these area and start to see additional operational synergy, such as improving the cost position and quality of our product produced at Yanbu. Utilizing this practice across our operations and reducing costs at Legacy Cristal plant, such as Brazil. On the last point, we are already seeing cost reduction out of Brazil this year and are excited about the additional opportunity the team has identified, which we will start to realize in the remainder of 2020.

Delivering the synergy is only one part of our operational excellence program. Our global team is relentlessly driving to lower our cost per tonne across all our operations. Increasing product quality, optimizing our global footprint, and most importantly, continually improving our safety performance on our Journey to Zero, as we call this initiative within Tronox. Moving to the sequential comparison.

Adjust EBITDA of $156 million decreased 15% from $184 million, driven primarily by seasonally normal, lower TiO2 sales volume, lower feedstock and other sales volume and the absence in the fourth quarter of the one-off time integrated margins benefit realized in the second and third quarter. Synergy contribute $10 million to EBITDA compared to Q3. I am pleased with our fourth-quarter result and look forward to what we can deliver in 2020. Before turning the call over, I would like to discuss the impact COVID-19 has had on our operation in China.

With the acquisition of Cristal, we had to our footprint, the 46,000 tonne sulfate plant in Fuzhou in Jiangxi province, which is over a five-hour drive from Wuhan, where the COVID-19 outbreak originate. The safety and welfare of our employees has remained our top priority through this uncertain time. To that end and in cooperation with the local authority, we shut down our operation at Fuji for 22 days around the Chinese New Year holiday. This had less than a $2 million impact on our EBITDA.

In addition, there has been no impact of COVID-19 on our global supply chain. To date, we have had no case of the outbreak at our site. We safely resume operation on February 18 and have been fully operational since February 23. We are grateful to the team in China and their safe management of the plant through this uncertain time.

We will continue to closely monitor the safety of our employee and work with the local government to ensure the operation of our plant comply with regulation. With that, I thank you. I look forward to continuing to report on our progress in next quarter call. And I'll turn the call over to Tim Carlson for a review of our financial position.

Tim?

Tim Carlson -- Chief Financial Officer

Thanks, JF. Moving to Slide 10 and starting with our balance sheet. We ended the year with total debt of $3 billion and net debt of $2.7 billion. Given our strong free cash flow, we made a $100 million discretionary debt repayment on our term loan in December.

Our liquidity was $648 million comprised of cash and cash equivalents and $302 million and $346 million available under revolving credit agreements. In addition, we ended the year with $9 million of restricted cash. Our net leverage was four times on a pro forma, trailing 12-month basis. We continue to target a net leverage ratio of two times to three times, which we are targeting to achieve by the end of 2021, consistent with the guidance given at Investor Day.

Our capital allocation policy remains unchanged. We continue to prioritize disciplined capital spending on high-return projects and on deleveraging. Capital expenditures in the fourth quarter were $58 million compared to our depreciation, depletion and amortization expense of $75 million. In 2019, our cash capital expenditures were $198 million, slightly below our guided range of $200 million to $215 million.

Approximately one-third of our capital was focused on increasing our EBITDA per tonne and the remaining two-third was on maintenance, ESG and other projects. Our depreciation and amortization expense was $280 million, in line with our guided range of $280 million to $290 million. Both figures are quoted on an as-reported basis. Regarding returning capital to shareowners.

We returned $315 million in 2019 through the repurchase of approximately 21.5 million shares and our regular dividend payments. As Jeff mentioned, we will be increasing our quarterly dividend by 56%, which results in an annual dividend of $0.28 per share, reflecting our confidence in the consistently strong cash generation capability of our vertically integrated business model across cycles. Regarding our 2020 outlook, while global macroeconomic conditions remain uncertain and considering the near-term softness in the zircon market, we remain confident in our ability to deliver the commitments within our control. For the full year 2020, we expect to achieve revenue of $3 billion to $3.3 billion, adjusted EBITDA of $700 million to $800 million, adjusted diluted EPS at $0.55 to $1.10, free cash flow of over $200 million, capital expenditures of $260 million to $290 million and we're targeting our net leverage at three times by the end of 2021.

Before returning the call back to Jeff, I'd like to take a moment to thank our global finance team for their dedication and efforts to account for and report on, the Cristal acquisition. We're still finalizing our purchase accounting analysis and disclosures, and we'll take advantage of the 15 calendar day extension to file our 10-K, which will be on or before March 16. With that, I'd like to turn the call back over to Jeff to add additional color to our outlook and key focus areas for 2020. Jeff?

Jeff Quinn -- Chairman and Chief Executive Officer

Thanks, Tim. The numbers that Tim just walk you through represent our current outlook, balancing global macroeconomic uncertainty and near-term softness in zircon with the beginning of an uptick in the TiO2 sector and our confidence in our ability to deliver our increased synergy targets. At the midpoint, our guidance range for adjusted EBITDA represents a 10% increase over 2019 pro forma results, reflecting the macro conditions and market dynamics we face coming out of the back half of 2019 and our expectations for an uptick in the back half of 2020. Just as a reminder, a $100 a tonne increase in average pigment selling prices has a $20 million to $25 million EBITDA impact for quarter and $100 per tonne increase in zircon prices has an approximately $4 million to $5 million EBITDA impact in the quarter.

So there is significant leverage in our system to an improved pricing environment. Our guidance also reflects an estimated $30 million EBITDA impact of the ongoing furnace reline at KZN, which will take one of our five furnaces offline for approximately 95 days. The financial impact includes the expense of the reline and the fixed cost impact from the feedstock and pigment business. Advancing this reline to this quarter, we'll have a positive effect on the availability of feedstocks in future quarters as feedstocks continue to tighten and pigment prices likely increase.

Our guidance also reflects what we are seeing in terms of cost inflation and the current tight feedstock market. While due to our vertical integration, the impact of rising feedstocks on us is muted compared to our peers, it does have some impact. Free cash flow of over $200 million reflects our plans to invest $275 million in high-return capital projects during the upcoming year through our disciplined capital allocation program, consistent with what we've laid out previously. This level of free cash flow will also provide funds for deleveraging, which will continue to be a key priority.

Our guidance range factors in the known impacts of COVID-19, including the short-term shutdown of our Fuzhou plant that JF discussed and the near-term positive effects, John outlined. However, it does not fully account for the unknown. We remain somewhat cautious as we are unable at this time to precisely quantify the potential impacts of this situation on our 2020 results. The situation in which we continue to diligently monitor changes daily.

It really is a case of balancing the potential effects on the micro environment, that is, the TiO2 industry dynamics, with any potential macro effects on global GDP. However, based on what we know at this time, we do not see this situation as a significant headwind for the year. But in any event, as John said, we believe our global network of assets and vertically integrated business model positions us to respond quickly and, as needed, to changing market conditions as they develop. Clearly, economic and global macro uncertainty remain as we have entered 2020, but we believe that the outlook for the TiO2 market is strong.

As we emerge from a, prolonged but shallow, industry trough, we have seen the beginning of an uptick in volumes and believe that historically, this has been a precursor to an improving price environment. Due to our competitive advantage of a vertical integration through a global footprint, we are confident that we will continue to outperform our industry peers in terms of EBITDA margin and free cash flow generation, irrespective of the economic environment. We believe 2020 will be a year where we deliver industry-leading financial performance, take a number of strategic actions to prepare us for the future, all while remaining committed to safety and sustainable development. With that, we'd now like to open up the call for your questions.

Kevin?

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Frank Mitsch, Fermium Research.

Unknown speaker

It's Susan for Frank. The first question I had on the synergy increases. Could you guys just elaborate more and within which areas you guys are seeing those increases?

JF Turgeon -- Chief Operating Officer

Look, it's basically some of the work that we did last year that will start to generate on the best practice transfer. So obviously, combining chlorination know-how of Tronox with Legacy Cristal, there was some trick, if I could use that term, from operator of one business that had to be transferred to the operator of the other business and those takes time. And obviously, the synergy on supply chain, the synergy on moving our additional feedstock to the new asset that we quickly react, and we will continue to get more out of those quick reaction. But the best practice transfer is really where we will start to eat the advantage this year.

Tim Carlson -- Chief Financial Officer

It's Tim. And to follow on that, when we made our targets for synergies, we actually risk adjusted them. And as we get into the activities, we're more and more comfortable in terms of where we're ending up, in terms of cost reductions across the system, whether it be SG&A and operations in very, very little on volume.

Unknown speaker

Great. And then as a follow-up. I know you guys touched on the early supply demand, the impact you guys are seeing from a coronavirus. But could you guys just elaborate a bit more on industry supply tightening in the region and what you guys are seeing on the demand side as well?

John Romano -- Chief Commercial and Strategy Officer

Yes. This is John Romano. So from the standpoint of supply demand and inventory. As I mentioned earlier, inventory, we believe, is where it should be for this time of year.

So I'd say at seasonal norms. And the uptick that we talked about, as a result of COVID-19, was just a short-term impact. We saw volumes picking up as we entered the first quarter at least a month before COVID actually took hold. So what we're seeing is an effect, as I mentioned on slide, I think it was Slide No.

8, where we saw the recovery from a 17-month downturn. We're starting to see a good indicator that demand has returned and supply demand is in a position where, as Jeff mentioned, we're likely to start working toward looking at upsides on pricing as we enter this second half of the year.

Jeff Quinn -- Chairman and Chief Executive Officer

But clearly, from what we've seen from customer inquiries and just anecdotally from storage on the ground, this has impacted Chinese supply.

Unknown speaker

Got it. Thanks you guys.

Operator

Our next question comes from Duffy Fischer with Barclays.

Duffy Fischer -- Barclays -- Analyst

Good morning fellows. First I got this done on zircon because it's the market at least, I don't spend as much time on is TiO2. So volume down big, prices hung in well like-on-like. So can you talk about, when you look at your footprint because you talked about mix shift being a little bit negative.

But just like-on-like, how much are prices down from the peak of the last couple of years? And then if you did like a 10-year look back, where are prices for your products today versus maybe a normalized number in the last 10 years?

John Romano -- Chief Commercial and Strategy Officer

If you look at the last 10 years includes a spike, which is not, I would say, something that will be duplicated. Prices were in the 2,400 range. So the 6% down is really from about where we peaked somewhere in the 50 and 60 range. And when we look at how we're moving into the first quarter of 2020, the guidance we provided had some additional price erosion factored into the first quarter.

So from a demand perspective, first half and second half were going to be kind of flipped from where it was last year. So it's kind of a tale of two years where the first year continue to be a bit slower. And as we move into the second half of the year, we're planning for a recovery.

Duffy Fischer -- Barclays -- Analyst

OK. And then if you hit the midpoint of your capex this year, the $275 million, roughly how would that break down just regular maintenance versus efficiency projects, versus kind of true growth in volume?

Tim Carlson -- Chief Financial Officer

Hey Duffy, it's Tim. Of the $275 million, our maintenance and safety capital ranges anywhere from $100 million to $125 million. We've got capital in the plan for continuing cost reduction in terms of driving the EBITDA per tonne. And then we've got some additional capital in our plan from mine extension that we'll be doing in Australia, associated with leveraging our vertical integration benefits.

Duffy Fischer -- Barclays -- Analyst

Great. Thank you guys.

Operator

Our next question comes from John McNulty with BMO Capital Markets.

John McNulty -- BMO Capital Markets -- Analyst

Good morning. Thanks for taking my question. So with regard to the, what looks like an early uptick in the supply demand balance, I guess, like what are you seeing in terms of demand for some of the margin stability initiatives that you've put out there? Have you seen a notable increase yet in customers looking to lock in? Or is that something that's maybe more on the comp?

John Romano -- Chief Commercial and Strategy Officer

Yes. Jeff, this is John Romano. So from margin stability, again, it played a significant role, I think, in our profitability in the last 18 months. And with regards to customers' interest in that program, it continues to accelerate.

And when we think about across segments, regions, it's not just North America where we're getting traction on that, it's also in the other regions of the world, including paper, plastic and coatings.

John McNulty -- BMO Capital Markets -- Analyst

Got it. And then, with regard to the free cash flow guidance. So the $200 million that you're -- or the $200 million plus that you're looking for in 2020. So assuming that you can hit that even at the bottom of your range, I guess, in terms of EBITDA range.

If you come in at the high end, is it as simple as you're going to come in closer to $300 million number? Or are there levers that you're pulling in that kind of downside scenario that you wouldn't necessarily pull as you're looking toward the higher end of that range? Like, how should we think about the cash flow variance?

Tim Carlson -- Chief Financial Officer

Hey John, it's Tim. Excellent question. There are a couple of levers that we can pull, but you're spot on, in terms of we come in the higher end of the range. We'll have a direct impact in terms of increase in our free cash flow.

We continue to work our balance sheet in terms of optimizing working capital. We do have a $50 million to $70 million working capital burn in that cash flow forecast. We hope to minimize that. But at the same point in time, if there are opportunities where we see incremental spend that we can do to increase EBITDA per tonne by taking costs out of assistant, we may increase a little bit of capital spend in that regard.

John McNulty -- BMO Capital Markets -- Analyst

Great. Thanks very much for the color. Thanks Jeff.

Operator

Our next question comes from Jim Sheehan with SunTrust Robinson.

Pete Osterland -- SunTrust Robinson Humphrey -- Analyst

Good morning. This is Pete Osterland on for Jim. Can you comment on the pricing environment for titanium based ores? And the magnitude of cost inflation you expect in 2020 for the ores that you do not?

JF Turgeon -- Chief Operating Officer

So Pete, it's JF. We are, in 2020, 75% vertically integrated. So we think that we're the best position versus our competitor for digesting those price increase. Look, if you look at different product that we use in our pigment plant, rutile is the one that has increased the most, and it's more than a double-digit increase that we have experienced on price of rutile.

Because look, it's a product that is in high demand, and it's rare. I mean there is not that much available in the world. Flag and FR is also very tight as a market, and we have seen significant price increase in that front. And even ilmenite, as recently as what we have seen out of China, the ilmenite price has jumped because of the COVID-19.

And look, it's obviously positive for the whole TiO2 side of the business because margin, specifically in China, are very tight. And as soon as their feedstock increase, TiO2 has to increase to match those. So that would be my comment on feedstock.

Pete Osterland -- SunTrust Robinson Humphrey -- Analyst

And then you spoke about deleveraging as a priority. But given where shares are currently valued, would you consider share repurchases as well as the use of cash during 2020?

Jeff Quinn -- Chairman and Chief Executive Officer

Yes. I mean, Jim, we always allocate sort of between those three priorities we've talked about, but deleveraging remains first and foremost among those. So we will look aggressively at that, and then the high-return projects we have and then maybe look at share repurchases. But I would think that in those priorities are sort of in that relative order.

Tim Carlson -- Chief Financial Officer

And Jim, it's Tim. As a follow on, we do have some limitations on share repurchase as a result of our NOL limitations.

Operator

Our next question comes from Jeff Zekauskas with JP Morgan.

Jeff Zekauskas -- J.P. Morgan -- Analyst

Thanks very much. Since you are a titanium dioxide producer in China, are your prices going up already, given the raw material inflation? Do you want to sell to the domestic market? Do you want to sell to the export market? How do you see the world from the point of view of your China operation?

John Romano -- Chief Commercial and Strategy Officer

Hi Jeff, it's John. So on both those questions, as far as how we're going to sell and how we've been looking at selling the Chinese material out of our plant in Fuzhou, we've been looking at optimizing that margin whether we sell in China or maybe take some of that product and move it to higher margin areas. With respect to pricing in China, we have seen prices move up and that was before COVID-19 actually took hold. So we started raising that price in China early in January and have gone through an implementation process.

So we're seeing pricing move. Now to JF's point a few minutes ago, this whole Panzhihua feedstock supply constraint is having a significant impact on company's ability to actually procure or at a price that's not inflated significantly. And with lower percentages of TiO2, by two tonnes to get a tonne of pigment. So for a variety of reasons, I think we're optimistic around where pricing is going for China.

Jeff Zekauskas -- J.P. Morgan -- Analyst

OK. And then for my follow-up. On Slide 9, you have your EBITDA bridges. And on the left-hand part of the slide, you indicated that there were $45 million in higher production costs year-over-year.

I was wondering why that was the case? And then on the right-hand side of the slide, it says there was an absence of integration margin benefit of $20 million sequentially in the fourth quarter versus the third quarter. And I was wondering what that was? Can you clarify those two red downward bars?

Jeff Quinn -- Chairman and Chief Executive Officer

Sure. JF?

JF Turgeon -- Chief Operating Officer

Jeff, I will start. You have to realize that in Q4 '18, the business was owned by someone who was about to sell the business. And I'd say that in Legacy Cristal plant, maintenance was not at the level that it should have been and Q4 is always the quarter where we try to do more maintenance and put the asset in a good condition to operate. As we took control, Q4 was the quarter where we had time to assess what needed to be done, and we probably did a little bit more than less on that front.

And that's obviously come at a cost and that's an increase in cost. And that's, I'd say, one of the important component. Tim, you want to add?

Tim Carlson -- Chief Financial Officer

Jeff, as it relates to the absence of the integration margin benefits. Just as a reminder, in Q3, Q4 of 2018, we made a decision to stop selling feedstocks to the open market. And as a result of putting that feedstock on our balance sheet and not selling into the open market, all of the profit in our South African operation, our Australian feedstock operations that we would normally have realized by selling the procured product, third parties. When we sold it internally to our pigment plants, we actually had to capture that incremental profit on our balance sheet, and we put about $40 million to $50 million of profit on our balance sheet in Q4 and Q1.

And you'll probably remember, if you look back at those calls, it was actually quite a bit of headwind. And then we realized in Q2 and Q3 of this year as we manufacture the pigment and sold the pigment with that ore in it, we realized the profit from that product. And as a result, it's really just a shift of timing of margin benefit from Q4, Q1 to Q2 and Q3.

Jeff Quinn -- Chairman and Chief Executive Officer

That's both ends of a onetime thing that we shouldn't see as we go forward.

Jeff Zekauskas -- J.P. Morgan -- Analyst

So if I understand what you said to me, just now your inventory costs in the fourth quarter were higher than they were in the third quarter.

Tim Carlson -- Chief Financial Officer

No, not exactly, Jeff. What happened was, all of the profit that we would normally have realized in Q4 and Q1 of last year as a result of selling to third parties, we sold internally. So that profit actually went on to the balance sheet and that low-cost inventory flowed through, just from a timing standpoint, from Q4, Q1 into Q2 and Q3. So as Jeff mentioned, it was pretty just a onetime benefit and the shift to profit between those four quarters.

Jeff Zekauskas -- J.P. Morgan -- Analyst

OK. Great. Thank you so much.

Operator

Next question comes from Vincent Andrews with Morgan Stanley.

Steve Haynes -- Morgan Stanley -- Analyst

This is actually Steve Haynes for Vincent. Just wanted to ask a question on zircon. Can you help us think about how much EBITDA was actually generated from zircon in 2019? And what's kind of assumed at the high end and the low end of your guidance in 2020?

Tim Carlson -- Chief Financial Officer

So we haven't disclosed publicly EBITDA from zircon, but zircon does generate higher contribution margins than TiO2 north of 50%. So any degradation in terms of zircon volume does have a significant impact on our overall EBITDA.

Steve Haynes -- Morgan Stanley -- Analyst

OK. And then maybe just a quick follow-up on the working capital because I thought, and maybe I misheard that. You guys are going to have a headwind in 2020, but it looks like there is a pretty significant tailwind in 2019. So was there a timing benefit in 2019 that's reversing in 2020? Or could you just help us bridge the two pieces?

Tim Carlson -- Chief Financial Officer

Yes, it's really a mix of working capital. The team did a phenomenal job in the fourth quarter, as it relates to DSO and DPO, where we're getting hurt a bit in 2020, is around the inventory levels. Inventory levels are building a bit, just given the recovery that John talked about. We see them reversing and declining again in Q3 and Q4.

But obviously, any acceleration in terms of that recovery would reduce our inventory balances and drive significantly more free cash.

Jeff Quinn -- Chairman and Chief Executive Officer

It's normal for us to build inventory in Q1 and Q4.

Operator

Next question comes from Josh Spector with UBS.

Unknown speaker

This is [ inaudible ]. You mentioned you're seeing early uptick in demand in Europe. Can you just provide a little bit more color, what end markets you're seeing this uptick? And specifically, which markets are the strongest? And then you also talked about back integration. Can you just remind us when your feedstock contracts roll-off?

Jeff Quinn -- Chairman and Chief Executive Officer

Yes. So on the uptick in Europe, I'd say it's largely across all segments. It's not focused in one particular area. And as we exited the in 2019, we had started to see the effects of the destocking being complete and the order book started to improve moving into January.

And so we've got pretty good visibility. As I mentioned before, our order book is a good indicator on what we're seeing. And the numbers that we're looking at right now that go out past the first quarter would support this uptick that we're referring to. Most of that is not on the back of COVID-19.

JF Turgeon -- Chief Operating Officer

And Matt, on the back integration, we still have contracts that we have to honor in 2020. But by 2021, will be out of all our commitment.

Unknown speaker

That's helpful. Thank you so much.

Operator

Our next question comes from Roger Spitz with Bank of America.

Roger Spitz -- Bank of America Merrill Lynch -- Analyst

Thanks very much. Would you be interested in giving the EBITDA guidance for the first quarter of '20?

JF Turgeon -- Chief Operating Officer

No, Roger, I don't think that's something that we're prepared to do. I think we have a lot of moving dynamics in the marketplace right now. And as we've said, we're cautiously optimistic about what we see as what we believe is an uptick. And then we have, obviously, offsetting that the one-time issue with the furnace reline at KZN.

So we look at this business over a longer term, longer periods and really don't think it's appropriate to start separating into quarter.

Roger Spitz -- Bank of America Merrill Lynch -- Analyst

That's fine. And can you say what the cash expenses to obtain this 2020 synergies that are not in capex that are instead otherwise in your free cash flow guidance.

Tim Carlson -- Chief Financial Officer

It's going to be minimal $5 million or $6 million.

Roger Spitz -- Bank of America Merrill Lynch -- Analyst

OK. The Chinese tile industry is back to work? Or they can't get to work because of coronavirus. Can you comment on the demand on Chinese?

John Romano -- Chief Commercial and Strategy Officer

Yes. So look, the majority, I would say, of our customers. And again, there our customers' customers are starting the process back up. As J.F.

mentioned, our plant is now back up and running since the 22nd or 23rd of this month. So we're starting to see that process of restarting plants, but they're not all up and running at this particular stage. But again, as we look at our sales of zircon in the first quarter, Q3 to Q4 '19, we were up 7% and we're seeing numbers that are very similar to that in Q1. Not up 7%, but in line with Q4.

Roger Spitz -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you very much.

Operator

Our next question comes from Brian Lalli with Barclays.

Brian Lalli -- Barclays -- Analyst

Maybe first, just on a housekeeping item on the EBITDA outlook and synergies. I just want to make sure we're thinking about this correctly on a year-over-year basis. And correct me if I'm wrong on any of this, but if I take the $681 million of pro forma EBITDA and then you add the $22 million of basically future savings that were realized and enacted in 2019. Is that a right starting point that we would then have the $100 million improvement on from a synergy basis? I appreciate that maybe that $190 million doesn't have all of it in the EBITDA number specifically.

And again, I know there are a lot of pieces moving around, furnace relines, zircon pricing, would love to maybe summarize some of the key puts and takes on the $700 million to $800 million outlook, if that's possible? And then I have a follow-up. Thanks.

Tim Carlson -- Chief Financial Officer

Hey Brian, it's Tim. The components of the EBITDA, in 2019, we had $47 million that hit our EBITDA line. We had another $22 million associated with synergies in our pigment plants. In our mineral sands operations that capitalized to inventory and the remaining $20 million in interest and taxes and some miscellaneous items.

That $22 million in the synergies we realize in our pigment plants in our mineral sands operations, they roll into the P&L and the pigment plants in two to three months, and they rolled through mineral sands in the pigment plants in a matter of probably five or six months. So there is always going to be a component as we flow through the year that's going to be onto the balance sheet in terms of incremental synergies. But I would expect that 22% to decline a tad in 2020, then increase again in '21, as we ramp some additional synergy items. On the bottom of that page, we've actually tried to identify for the investors the amount of EBITDA that we're actually expecting to achieve in our calendar year for the P&L.

And you can see that's $140 million in 2020.

Brian Lalli -- Barclays -- Analyst

Got it. I appreciate that. I actually missed the bottom line, so I apologize. And then, Tim, maybe just as a follow-up.

Again, I appreciate the comments around priorities for capital allocation and continued debt repayment. Is it fair, are you still thinking about the $2.5 billion gross debt as the target? So basically another $500 million of debt reduction sort of in front of us over the next two years, given the '21 target? Is that the right way to think about it?

Tim Carlson -- Chief Financial Officer

Absolutely, Brian.

Brian Lalli -- Barclays -- Analyst

OK. Great. I appreciate the confirmation. Thanks guys.

Operator

Thank you. Our next question comes from Jeff Zekauskas with JPMorgan.

Jeff Zekauskas -- J.P. Morgan -- Analyst

Thanks very much. You may have answered this. In 2020, when you extract an incremental, I don't know, $90 million in cost savings or $100 million on a run rate basis. How much will that cost you? And how much will it cost you incrementally versus in 2019? I mean what are the cash outlays? That's what I mean by cost?

Tim Carlson -- Chief Financial Officer

The cash outlays, as it relates to SG&A and some of the miscellaneous synergies, will be pretty much flat year on year, and the capital needed to achieve those synergies are within the $275 million that we've outlined.

Jeff Zekauskas -- J.P. Morgan -- Analyst

Right. And so, how much capital will be spent on that in 2020?

Tim Carlson -- Chief Financial Officer

My guess, JF, correct me if I'm wrong, of the $275 million, maybe $15 million to $20 million.

Jeff Zekauskas -- J.P. Morgan -- Analyst

It's a good number.

Jeff Quinn -- Chairman and Chief Executive Officer

Yes. And what happens, Jeff, obviously, a lot of the SG&A synergies you're able to deliver early have cash cost, but some of the things in best practices and some of those things that we're now starting to see impact really don't have a significant cash cost, but you start to get more and more benefit from those as you move forward.

Jeff Zekauskas -- J.P. Morgan -- Analyst

OK. And then lastly, are you seeing any new China chloride-based TiO2 coming into the global markets?

Jeff Quinn -- Chairman and Chief Executive Officer

There's been nothing more than what has already been announced. I mean obviously, there is companies that are continuing to work on perfecting that technology, including Lomon. But there's been no significant announcements in China recently.

Jeff Zekauskas -- J.P. Morgan -- Analyst

Do you feel it in the market? That is, is it being shipped at higher rates in the market?

Jeff Quinn -- Chairman and Chief Executive Officer

No. Quite honestly, we don't.

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back to Jeff Quinn for closing remarks.

Jeff Quinn -- Chairman and Chief Executive Officer

Thank you. Well, I just want to thank you for your time today. We are optimistic on the outlook for the TiO2 sector as we move forward. We continue to focus on execution of the things that we can control, and we continue to be very focused on delivering industry-leading financial performance irrespective of whatever the macro economic conditions we face.

So thank you very much, and we look forward to talking to you on our first quarter call in a few months.

Operator

[Operator signoff]

Duration: 57 minutes

Call participants:

Brennen Arndt -- Senior Vice President, Investor Relations

Jeff Quinn -- Chairman and Chief Executive Officer

John Romano -- Chief Commercial and Strategy Officer

JF Turgeon -- Chief Operating Officer

Tim Carlson -- Chief Financial Officer

Unknown speaker

Duffy Fischer -- Barclays -- Analyst

John McNulty -- BMO Capital Markets -- Analyst

Pete Osterland -- SunTrust Robinson Humphrey -- Analyst

Jeff Zekauskas -- J.P. Morgan -- Analyst

Steve Haynes -- Morgan Stanley -- Analyst

Roger Spitz -- Bank of America Merrill Lynch -- Analyst

Brian Lalli -- Barclays -- Analyst

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