U.S. Markets closed

Edited Transcript of TROX earnings conference call or presentation 6-Nov-18 3:30pm GMT

Q3 2018 Tronox Ltd Earnings Call

Nov 10, 2018 (Thomson StreetEvents) -- Edited Transcript of Tronox Ltd earnings conference call or presentation Tuesday, November 6, 2018 at 3:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brennen Arndt

Tronox Limited - SVP of IR

* Jean-François Turgeon

Tronox Limited - Executive VP & COO

* Jeffry N. Quinn

Tronox Limited - President, CEO & Director

* John D. Romano

Tronox Limited - Senior VP & Chief Commercial Officer

* Timothy Craig Carlson

Tronox Limited - Senior VP & CFO

================================================================================

Conference Call Participants

================================================================================

* Christopher Silvio Perrella

Bloomberg Intelligence - Research Analyst

* Frank Mitsch

* Hassan Ijaz Ahmed

Alembic Global Advisors - Partner & Head of Research

* John Ezekiel E. Roberts

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals

* John Patrick McNulty

BMO Capital Markets Equity Research - Analyst

* Matthew P. DeYoe

Vertical Research Partners, LLC - VP

* Patrick Duffy Fischer

Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen. And welcome to the Third Quarter 2018 Tronox Limited Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Mr. Brennen Arndt, Senior Vice President of Investor Relations. Please go ahead.

--------------------------------------------------------------------------------

Brennen Arndt, Tronox Limited - SVP of IR [2]

--------------------------------------------------------------------------------

Thank you, Christie. And welcome, everyone, to Tronox Limited's Third Quarter 2018 Conference Call. On our call today are Jeff Quinn, President and Chief Executive Officer; John Romano, Chief Commercial Officer; Jean-Francois Turgeon, Chief Operating Officer; and Tim Carlson, Chief Financial Officer.

We'll 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 the next slide. A reminder that our discussion will 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, including those under the heading entitled Risk Factors in our annual report on Form 10-K for the year ended December 31, 2017. 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. These include EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted earnings per diluted share and free cash flow. Reconciliations to their nearest U.S. GAAP terms are provided both in our earnings release and the Appendix of the slide deck.

Moving to Slide 3. It's now my pleasure to turn the call over to Jeff Quinn. Jeff?

--------------------------------------------------------------------------------

Jeffry N. Quinn, Tronox Limited - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Brennen. Good morning, and thank you for joining us for our third quarter conference call.

I'll begin this morning with a few comments on the progress we are making towards closing the Cristal transaction. I will share with you what I can which represents everything that is public, not legally privileged or not confidential or sensitive to the transaction's current status. Due to these constraints, I will not be able to make any further comments on this subject during the Q&A session. So please bear with me in that regard. And thanks in advance for understanding the delicacy of the situation.

That being said, I am pleased to report we have made good progress. First, in Europe, as most of you are aware, we received final approval from the European Commission back in the summer to close the Cristal transaction conditioned upon divesting our 8120 paper laminate product grade produced at our [Botlik] plant to Venator Materials PLC. Consummation of this divestiture will occur following the approval of the Cristal transaction by the U.S. regulatory authorities.

Just to confirm, we have a signed, binding, definitive agreement for that divestiture. And it is not affected in any way by the status of any remedy transaction here in the U.S. Since that agreement was signed and the remedy approved by the EU, that business has been managed by an independent hold-separate manager, and a monitoring trustee has been in place. So effectively, that business is being held separate, just waiting to be sold.

Here in the U.S., in late September, the exclusivity period under our memorandum of understanding with Venator expired without the 2 companies agreeing on a potential divestiture by Tronox to Venator of Ashtabula. Upon expiration of this exclusivity period, and as a result of the sales process that we had run before entering exclusivity with Venator, we commenced discussions with a well-capitalized global chemical company not currently in the TiO2 industry concerning a potential divestiture of Ashtabula.

Substantial progress has been made in these discussions. As with any complex carve-out transaction, there are a lot of details. And a few details are yet to be sorted out. But given the pace of progress that has been made, I am optimistic that these discussions will result in an agreement. We have not yet executed a definitive agreement. And just as a word of caution, until we do so, there can be no certainty that a deal would be reached and no certainty that the deal will be approved by the FTC. However, Tronox, Cristal and the prospective buyer are engaged in ongoing discussions with the FTC regarding the terms and conditions of a potential remedial transaction that would allow the Cristal transaction to proceed with the divestiture of Ashtabula.

We are optimistic that these discussions will conclude in the coming dates. The FTC is appropriately going through their internal processes in a very professional and thorough manner to ensure that the divested business will be a viable competitor. The dialogue and the feedback from the FTC has been constructive and productive. And the parties have been responsive and transparent in addressing the questions, concerns and suggestions of the agency.

While the FTC must complete its work and internal processes, we are optimistic that the FTC will come to the conclusion that the proposed remedial transaction addresses their concerns about the Cristal transaction and that the proposed buyer is well qualified and capable of being a strong competitor in the North American TiO2 market.

As I've said, all but a few issues have been sorted out in the proposed agreement. In fact, a near-final draft definitive agreement with these few open issues highlighted has been tendered to the FTC this morning for its review and comment. This is another important step in our process.

Our priority continues to be to close the Cristal acquisition as soon as possible, so we can get to the business of unlocking value for our shareholders and better serving our global customer base. We will, of course, keep you apprised in the coming days of material developments regarding this transaction.

Now moving to Slide 4. Before I turn the call over to John Romano and Jean-Francois Turgeon for a discussion of our third quarter results and the market trends we see, I would like to quickly share my own perspective on those topics. First, as we expected, our results in the third quarter once again demonstrated the benefits we derived from our vertical integration. Solid performance was realized across the board in pigment, feedstock and co-products, with all of our assets in full operation. Our TiO2 adjusted EBITDA margin of 33%, an increase of 2 percentage points over last year, reflected this broad-based contribution and was achieved despite lower year-on-year sales volumes in pigment and zircon.

As we anticipated and communicated to you in last quarter's call, pigment sales volumes in the third quarter were impacted by transient inventory builds in certain sales channels in Europe and Asia. Customers in these channels met their pigment needs in part by destocking their inventories. We are anticipating a return to normal demand and inventory levels as this destocking runs its course. John Romano will share his views with you on this important topic in just a few minutes. In addition, we are working successfully with our pigment customers on our unique win-win margin stability initiatives with the intent to dampen margin volatility across the cycle.

In zircon, we continued to see favorable market conditions as a result of a tight global supply-demand balance. We benefitted from higher selling prices in the quarter, which more than offset lower sales volumes due to shipment timing. As you know, zircon, like feedstock and pig iron, is delivered in large shipments via ocean freight, with each shipment representing significant revenue and profits. The shipments are periodic, and their timing can be subject to poor congestion and weather conditions. So it's not a product that lends itself well to quarter-by-quarter predictability but is better suited to track on a multi-quarter or annual basis. But suffice it to say, zircon is a very attractive product for us that delivers significant profitability and margin enhancement to our TiO2 business. The market for high-grade feedstock also remains tight as a result of industry supply disruptions in the first half of 2018 and declining production at other industry producers' existing operations.

As a vertically integrated pigment producer in a rising feedstock price environment, we expect to derive significant and differentiating benefits relative to non-integrated pigment producers. A rising price environment is what we currently see and what we expect we will continue to see across 2019.

I'll now turn the call over to John Romano, our Chief Commercial Officer, for a review of the commercial aspects of the third quarter and more color on our view of the global market trends; and then to Jean-Francois Turgeon, our Chief Operating Officer, for an operational performance review. John?

--------------------------------------------------------------------------------

John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [4]

--------------------------------------------------------------------------------

Thanks, Jeff. Moving to Slide 5. I'll start with a look at revenue growth in the third quarter compared to the year ago third quarter. Revenue of $456 million increased 5% compared to $435 million in the year ago quarter, driven by higher selling prices across all major products, including pigment, zircon, chloride process slag and pig iron. The pricing gains were partially offset by lower pigment sales volumes and the timing of zircon shipments that Jeff referred to earlier.

Pigment sales of $315 million were essentially level to the $316 million in the year ago quarter, as average selling prices increased 7%; also 7% on a local currency basis. While sales volumes were 6% lower and in line with what we discussed in our second quarter call.

As Jeff discussed, the lower year-on-year sales volumes in our view were the result of transient inventory builds and certain sales channels, primarily in Europe and Asia. Customers in those channels met their pigment needs in part by destocking its inventories. Nonetheless, pigment selling prices were higher in all regions. Translation of the euro was a $1 million headwind on revenue in the quarter.

Our titanium feedstock and co-product sales of $131 million increased 21% from the $108 million in the year ago quarter, driven by higher selling prices in zircon, CP slag and pig iron. Zircon sales of $72 million increased 36% from $53 million in the year ago quarter, driven by 50% higher selling prices, which more than offset the 9% sales volumes that were due to timing of shipments.

Demand remained strong in pig iron, especially in the foundry grade material. Pig iron sales of $23 million increased 28% from $18 million in the year ago quarter, as selling prices increased 8% and sales volumes increased 17%. Feedstock and other product sales of $36 million compared to $37 million in the year ago quarter. Chloride process slag selling prices increased 22%, and there were no ilmenite sales in the third quarter compared to the $4 million of sales in the year ago quarter. As we stated in our last call, we are not actively selling ilmenite in the market in preparation for our expanded internal requirements following the closing of the Cristal acquisition.

Now moving to Slide 6 for the sequential comparison versus the second quarter. Our TiO2 revenue of $456 million in the third quarter decreased 7% from $492 million in the second quarter as higher zircon and pig iron selling prices were more than offset by lower pigment sales volumes and the timing of zircon shipments.

Pigment sales of $315 million were 11% lower than the $354 million in the second quarter. Pigment selling prices were level to the second quarter on a local currency basis. On a U.S. dollar basis, selling prices were 1% lower, as translation of the euro was a $2 million headwind.

Sales volumes were 10% lower, driven by 2 primary factors: First, the normal seasonal decline from the second quarter to the third quarter. The second quarter is the strongest quarter of the year typically. This seasonal volume decline from the second quarter to the third quarter is typically in the range of 5% to 8%. And second, the balance of the 10% sequential decline we reported resulted from transient inventory builds we see in certain channels in Europe and Asia, as customers met their pigment needs in part by destocking these inventories.

In North America, a market that represents 40% to 45% of our annual pigment sales, favorable market conditions continued in the third quarter. The fourth quarter is historically the lightest quarter for the year. For this reason, we typically expect volumes to decline in the high-single digit percent range from those in the third quarter. Given our expectation of continued destocking of transient inventory builds in the fourth quarter, coupled with a normal seasonal decline, we expect our volumes to be 12% to 14% lower in the fourth quarter than in the third quarter. We expect selling price levels in the fourth quarter to be similar to those in the third quarter.

Now moving to feedstock and co-products. Sales of $131 million increased 7% from the $123 million in the second quarter, driven by higher selling prices for all major products, including zircon, CP slag and pig iron. Zircon sales of $72 million were 8% lower than the $78 million in the second quarter. Selling prices increased 15%, reflecting successful implementation of price increases announced earlier in the year.

As a reminder, the majority of our zircon business is on 6-month contracts that begin in January and July of each year. Similar to the year-on-year comparison, these higher selling prices were more than offset by the 19% lower sales volume due to shipment timing. We are currently expecting increased zircon shipments in the fourth quarter versus the third quarter. As a result, we anticipate double-digit sequential zircon growth in the fourth quarter.

Pig iron sales of $23 million increased 15% from $20 million in the prior quarter, as selling prices increased 7% and sales volumes increased 7%. Similar to zircon, our pig iron shipments are also subject to shipment timing. We are currently expecting increased pig iron shipments in the fourth quarter versus the third quarter and expect double-digit sequential revenue growth in pig iron in the fourth quarter. As a reminder, the contribution margin for pig iron is significantly lower than zircon. So while the sequential increase in pig iron shipments will help our top line significantly, less of an increase will pass through to adjusted EBITDA.

Feedstock and other product sales of $36 million increased 44% from $25 million in the prior quarter, driven primarily by higher sales of CP slag and slag volumes. There were no ilmenite sales in the third or second quarter, as I said earlier. We are not actively selling ilmenite in the market in preparation of our increased internal requirements following the closing of the Cristal acquisition.

We are also currently expecting increased CP slag shipments in the fourth quarter versus the third quarter. And as a result, we expect our fourth quarter CP slags to be roughly double those of the third quarter.

And finally, we sold our nonstrategic electrolytic business on September 1. And as a result, approximately $15 million of quarterly revenue will no longer be reflected in our results.

And with that, I thank you. And I'll turn the call over to J.F. for a review of our TiO2 operating performance, profitability and cash flow in the quarter.

--------------------------------------------------------------------------------

Jean-François Turgeon, Tronox Limited - Executive VP & COO [5]

--------------------------------------------------------------------------------

Thanks, John. Moving to Slide 7. All our plants are performing well. As Jeff said, our third quarter results clearly reflect the benefit of our vertical integration with all our assets in full operation. Our guiding principle across our global TiO2 business is to produce safe, quality, low-cost [ton] for our customer.

One measure of the high level of our performance in the quarter was our adjusted EBITDA margin of 33%. This represents the 2-percentage point increase over last year despite lower pigment and zircon sales volume than a year ago. And when comparing it to the adjusted EBITDA margin in the first 2 quarters of the year, it is also an indication of our consistency. Our adjusted EBITDA margin was 34% in the second quarter and 31% in the first quarter.

Let's first look at our EBITDA performance in the third quarter compared to a year ago quarter. TiO2 adjusted EBITDA of $150 million increased 10% from the $136 million in the year ago quarter. The primary drivers were higher selling prices for pigment and zircon and, to a lesser extent, favorable foreign exchange on costs. In the quarter, we benefitted from favorable movement in the South African rand and Australian dollar relative to the U.S. dollar. Partially offsetting the increase were lower pigment and zircon sales volumes that John covered, plus higher production costs primarily from petroleum coke, anthracite and electrodes.

Looking at the sequential comparison versus the second quarter, TiO2 adjusted EBITDA of $150 million decreased 11% from the $169 million in the prior quarter. The major factors driving this are essentially the same as on the year-on-year comparison. Higher selling prices and favorable foreign exchange on costs were more than offset by lower sales volume and higher production costs; in this case, primarily process chemicals and energy.

Also in the quarter, we successfully signed new union labor agreements in South Africa, which are notably longer in term than the prior agreements. At our largest site, Namakwa Sands, the agreement will last 5 years. And at KZN Sands, the agreement would last 3 years.

TiO2 also delivered strong free cash flow of $120 million in the quarter. Cash provided by operating activities was $148 million, and capital expenditures were $28 million, as we continued our disciplined approach to capital spending.

Moving to an update on the South African mining charter. During the third quarter, after receiving comments from industry participants, the South African of Mineral Resources, or DMR, published for implementation a revised mining charter. The revised mining charter, commonly referred to as mining charter 3, met with mostly positive response by the South African Mineral Council and other industry participants. The DMR will publish implementation guidelines by the end of November 2018.

The implementation of the new mining charter will provide a greater degree of certainly than as [profusely] exists for the South African mining industry. This is very positive.

Next, we would like to give you an update on the Jazan smelter project. As you know, earlier this year, we entered into a technical service agreement and an option agreement with AMIC, the owner of the smelter. AMIC is an entity equally owned by Cristal and TASNEE.

Under the technical service agreement with AMIC, we agree to provide technical advice to AMIC to facilitate their startup of the smelter. The Jazan smelter represents one path for us to further optimize the vertical integration between our pigment production and feedstock production after the closing of the Cristal transaction. Under the option agreement, AMIC grants us an option to acquire 90% of the special purpose vehicles to be created, which will be comprised of AMIC ownership of the smelter; and $322 million of debt currently held by AMIC.

During the term of this option agreement, we agree to lend AMIC up to $125 million for capital expenditures and operational expense intended to facilitate the startup of the smelter. These funds show up as a loan on our balance sheet and may be drawn down on a quarterly basis as needed, based on a budget reflecting the anticipated needs of the smelter startup.

However, our obligation to fund up to $125 million is contingent on our continued reasonable belief that this amount will be sufficient in addition to any amount supplied by AMIC to bring the smelter up to certain sustained production levels.

Through the end of the third quarter, we loaned $39 million for capital expenditures and operational expenses to facilitate the startup of the smelter. An additional $25 million was loaned on October 1, 2018, bring the total amount of loan exposure to $64 million.

AMIC recently attempted to start up the smelter but was unsuccessful. Through our technical service agreement, we are monitoring and assisting AMIC's investigation to understand the root cause of the technical issue. Both TASNEE and [Autotec], the engineering and construction firm for the project, has made public statements regarding the status of the project. And I would refer you to those statements for more details. We are currently evaluating whether our future commitment under the option agreement, which today stands at $61 million, will be sufficient to bring the smelter up to the specified sustained production levels.

Moving to the Cristal acquisition. As Jeff said, we are optimistic that it will soon be a reality. Our integration planning work is very advanced. And we are ready to deploy our operational excellence program across the combined Cristal and Tronox asset to quickly deliver on the substantial synergy in our combination. We look forward to reporting our progress in merging our 2 operations and delivering the substantial synergies inherent to our combination.

With that, I thank you. And I'll turn the call over to Tim Carlson for a review of our financial position. Tim?

--------------------------------------------------------------------------------

Timothy Craig Carlson, Tronox Limited - Senior VP & CFO [6]

--------------------------------------------------------------------------------

Thank you, J.F. Moving to Slide 8, and beginning with our balance sheet. On September 30, 2018, debt was $3.17 billion. And debt net of cash and cash equivalents was $1.43 billion, including $659 million of cash restricted for the Cristal transaction. Liquidity was $2.01 billion comprised of cash and cash equivalents of $1.74 billion, including $659 million of restricted cash and $271 million available under revolving credit agreements. Our blended cost of debt was 5.6% in the third quarter. And on September 30, 2018, 34% of our total indebtedness was set at a fixed rate.

We expect cash interest expense for the full year net of interest income to be approximately $160 million to $170 million. Capital expenditures were $28 million in the third quarter. This excludes the $25 million in loans provided to the Jazan smelter project in the quarter. As J.F. mentioned, the Jazan loans are recorded on our balance sheet within other long-term assets and are reported on our cash flow statement separately from capital expenditures.

Depreciation, depletion and amortization expense was $48 million in the third quarter. We have fine-tuned our expectations for capital spending, DD&A and cash taxes for the year, with capital spending of approximately $120 million to $125 million, DD&A of $185 million to $195 million, and cash taxes of approximately $20 million to $25 million. Each estimate is on a Tronox standalone basis.

With that, I thank you. And I'll now turn the call over to Jeff for closing comments. Jeff?

--------------------------------------------------------------------------------

Jeffry N. Quinn, Tronox Limited - President, CEO & Director [7]

--------------------------------------------------------------------------------

Thanks, Tim. I'll close by summarizing the key points that we'd like you to take away from today's call regarding the status of the Cristal acquisition, the significant and differentiating benefit of our vertical integration strategy and our priorities over the next few months.

First, the Cristal acquisition, just to reconfirm my earlier comments. We are making substantial progress in our discussions with a potential buyer of Ashtabula. Together with Cristal and the prospective buyer, we are engaged in ongoing real-time discussions with the FTC regarding the potential remedial transaction. We are optimistic that these discussions will conclude successfully in the coming days as the FTC completes its internal processes and their review of the proposed divestiture transaction.

The FTC is appropriately and thoroughly going through their internal processes to ensure that the divested business will be a viable competitor. We are absolutely committed to assisting in that necessary and appropriate work. Our dialogue has been and will continue to be constructive and productive, and the parties will continue to be responsive and transparent in addressing the questions and concerns of the agency. While there can be no certainty that the FTC will approve the proposed remedial transaction, we are optimistic that the FTC will come to the conclusion that the proposed remedial transaction addresses their concerns about the Cristal acquisition and that the proposed buyer is qualified and capable. Our priority continues to be to close the Cristal acquisition in the coming days, so we can get to the business of unlocking value for our shareholders and better serving our global customer base.

Second, we expect to continue to derive significant and differentiating benefits from our vertical integration. We see generally favorable market conditions across our value chain with supply and demand and relative balance over the medium and long term. Our plants across the entire value chain continue to run well under Jean-Francois's leadership.

Yes, there are macro factors that we are watching closely, including geopolitical tensions, the China economic growth, rising interest rates, exchange rate fluctuations, rising cost structures, and certainly trends in housing and auto demand. Some of these factors have impacted current conditions in our industry, such as the transient inventory builds in pigment we're seeing in certain sales channels in Europe and Asia. However, we believe that across our value chain, inventories and aggregate are at normal and not overly excessive levels.

In addition, we do not see incremental capacity additions in pigment or feedstock that would materially exceed levels needed to satisfy demand growth over the next couple years. We are anticipating a return to normal demand in inventory levels in pigment, as these transient inventory destockings that we've mentioned are depleted. It's just a question of when.

We see continued favorable market conditions in zircon, with a tight global supply-demand balance. We also see tightening supply-demand conditions in feedstock. As a fully integrated producer, we expect to benefit across the entire value chain from these market conditions. From our vantage point, the medium- and long-term outlook for our vertically integrated position in the industry is good.

As we've anticipated the closing of the Cristal transaction, we have reviewed our vertical integration strategy and remain convinced that this strategy will differentiate us in a variety of market conditions as we move forward. Our goal remains unchanged. That is to create the world's premiere TiO2 company for our investors, for our customers and for our employees.

As you have heard us stay consistently since the day we announced the Cristal transaction, this highly synergistic combination is all about increasing asset utilization across the value chain, lowering our cost position, unlocking incremental production volumes, and generating strong cash flow. With the benefit of our third quarter results and the year-to-date results of Cristal, we estimate that 2018 pro forma adjusted EBITDA will be in the range of $900 million to $950 million, excluding Ashtabula and before synergies.

The next few weeks before the new year will be about getting the Cristal deal closed, beginning our integration efforts, completing the 8120 and Ashtabula remedial transactions, and setting up a successful 2019. As we close out the year, we also expect to be able to share with you progress on the potential Exxaro share sale and are re-domiciling transaction to the U.K.

In late March, as we near what we believe will be the end of our first full quarter with the Cristal TiO2 business in our portfolio, we'll be holding an Investor Day. At that time, we will more fully introduce to you our global management team, share with you our vision for creating premium shareholder value, outline our strategic and capital allocation priorities, and demonstrate what we believe truly makes Tronox different. We look forward to that discussion and look forward to seeing you here in New York in the spring. With that, I thank you.

And now we'll turn it back over to Christy, the operator, to open it up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) John McNulty with BMO Capital Markets.

--------------------------------------------------------------------------------

John Patrick McNulty, BMO Capital Markets Equity Research - Analyst [2]

--------------------------------------------------------------------------------

So I guess a couple of things. On the synergy expectations around Cristal, now that it looks like Ashtabula has to go, and you've also got the 8120 move as well -- how should we be thinking about what kind of the net synergy number's going to be going forward?

--------------------------------------------------------------------------------

Jeffry N. Quinn, Tronox Limited - President, CEO & Director [3]

--------------------------------------------------------------------------------

John, as we move into the new year and get the transaction closed, we'll be refreshing our view on synergies. We still expect, frankly, all the cost reduction synergies and everything are there. The baseline for which those synergies were originally estimated is now a 2016 baseline. And so when we get the transaction closed, we'll be giving you an update of that. But all of the synergies that we see, in terms of all the different buckets and everything, are still there. And we'll just refresh the estimate a bit.

--------------------------------------------------------------------------------

John Patrick McNulty, BMO Capital Markets Equity Research - Analyst [4]

--------------------------------------------------------------------------------

And then, when you think about the inventory issue, kind of the speed bump that's out there I guess, how are you adjusting to that in terms of your production levels? Like how should we be thinking about that? And how long do you expect this to continue to be a headwind? Do we largely get through it as an industry by the end of the fourth quarter, or does it drag into the first half of next year? How are you thinking about it at this point?

--------------------------------------------------------------------------------

John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [5]

--------------------------------------------------------------------------------

So when we think about -- as far as production, we're running our plants at regular rates. I think when I made some points earlier with regards to where volume is versus -- that we're projecting in the fourth quarter versus the third quarter, there's a seasonality impact of it. And then, these transitional inventories are about another 3% to 5% on top of that. So it's not what I would describe as significantly different than what we would normally see in the fourth quarter. Jeff and R.F. may have a comment?

--------------------------------------------------------------------------------

Jean-François Turgeon, Tronox Limited - Executive VP & COO [6]

--------------------------------------------------------------------------------

Yes, and maybe, John, I can add that we started with the position where our inventory were lower than normal. So obviously, when you have a little bump like that, it's not a problem to go back to normal inventory. And as I had mentioned in previous calls, the fourth quarter is always the quarter where we put our plant in good condition. So it's the time of shutdown for our operations. And we're obviously managing those shutdowns in what I call the cost fashion. So we're not driving for volume; we're driving for cost efficiency. And that's how our shutdowns are being managed at the moment.

--------------------------------------------------------------------------------

Jeffry N. Quinn, Tronox Limited - President, CEO & Director [7]

--------------------------------------------------------------------------------

Yes. And that's a part of this, the regular normal annual cycle, where we really position things for that strong [coating] season that comes in the spring. And that's no different than usual in terms of anything that we're doing there.

--------------------------------------------------------------------------------

John Patrick McNulty, BMO Capital Markets Equity Research - Analyst [8]

--------------------------------------------------------------------------------

And then, maybe just one last follow-up. With regard to the potential for re-domiciling in the U.K., I guess, can you help us to think about what some of the benefits to that might be, and the timing of when we might see that actually roll through?

--------------------------------------------------------------------------------

Jeffry N. Quinn, Tronox Limited - President, CEO & Director [9]

--------------------------------------------------------------------------------

Yes, John. I mean, there are numerous benefits, significant governance benefits, significant greater flexibility in terms of things like share buyback and things that are shareholder value enhancing. And that is something that we're working on real time. And we expect to have an update on that before the end of the year. And it would be something that would be consummated, we believe early in 2019, sort of the first quarter-ish of 2019. But we believe there are significant governance benefits and flexibility in terms of various actions that can drive shareholder value.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Our next question is from Duffy Fischer with Barclays.

--------------------------------------------------------------------------------

Patrick Duffy Fischer, Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst [11]

--------------------------------------------------------------------------------

I realize you can't answer anything about the deal itself, but some stuff around the deal? If the deal gets done, as you kind of laid out here with that other third-party, do you have to pay the $75 million to Venator that was in the one MOU you talked about or that you signed? And two, is the smelter contingent on the actual deal happening? Or could that be something that, if the deal actually didn't happen, is completely separate, and you could go one way or the other on that?

--------------------------------------------------------------------------------

Jeffry N. Quinn, Tronox Limited - President, CEO & Director [12]

--------------------------------------------------------------------------------

The answer of the last question first is probably the smelter probably would only happen if the deal does happen. Because if we ended up not buying Cristal, we would have significantly less incentive to help them get that up and running. But the deal could happen without the smelter part happening on the option agreement. In terms of the Venator MOU and the break fee, a number of conditions had to be satisfied for the break fee to be payable. The Cristal deal has to close, the 8120 divestiture has to close. And Venator has to otherwise have complied with all of its obligations under the agreement. So that's an ongoing thing that will develop as the Cristal transaction closes and we move towards the end of the year.

--------------------------------------------------------------------------------

Patrick Duffy Fischer, Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst [13]

--------------------------------------------------------------------------------

And then, just one question on the high-grade ore. So far, we've had a number of the Western players talk about volumes this quarter and kind of what they're looking forward to in fourth quarter. It looks like volumes are going to be down high single digits, maybe low double digits in aggregate. Western players use a lot more, a higher percentage of the high-grade ore. That plus the unplanned outages earlier this year -- why wouldn't that be in a little bit of oversupply as we get into next year, with lower consumption at the back half of this year, and then more supply of it in the first half of next year, in kind of being a risk from a price standpoint?

--------------------------------------------------------------------------------

Jean-François Turgeon, Tronox Limited - Executive VP & COO [14]

--------------------------------------------------------------------------------

Duffy, it's J.F. here. Look, in our case, as a standalone Tronox, we have excess high-grade feedstock. And we obviously have seen a lot of synergies in this combination with Cristal. Because we'll be able to use all of that extra feedstock to alleviate the tight supply-demand situation that exists at the moment. So that's good for us. And that's obviously with that in mind that we have taken decisions in the third quarter, like the one John talked about where we decided not to sell ilmenite, and keep it for our future needs. We also had put our smelter in a good operating condition. So this year, we realized one of our furnace rebuilds. And we did that in between quarter 2 and 3. So all of those decisions were done so Tronox would be in a good situation to react positively to this tight supply-demand on the high-grade feedstock.

--------------------------------------------------------------------------------

John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [15]

--------------------------------------------------------------------------------

I think there's also an element, though, when you think about the inventory that we've referenced -- going into 2017, we had, I would say, well below seasonal norms of inventory as Tronox. And so as we move into the fourth quarter, as we mentioned a bit earlier, there's not a big adjustment being made from a production standpoint on our side. Because we are still at a level where we've comfortable with seasonal norms on our inventory going into the fourth quarter.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Our next question is from Frank Mitsch with Fermium Research.

--------------------------------------------------------------------------------

Frank Mitsch, [17]

--------------------------------------------------------------------------------

Just to follow-up. Jeff, you indicated that you want to give greater details around synergies, refresh the numbers, as you said, at your Investors Days. But is there any reason for investors to think that there's any material changes one way or the other relative to what you've previously laid out, that it's simply just kind of updating numbers, et cetera; but the core of the synergies are still kind of around the levels that were talked about before, the $200 million after a few years?

--------------------------------------------------------------------------------

Jeffry N. Quinn, Tronox Limited - President, CEO & Director [18]

--------------------------------------------------------------------------------

Yes, Frank, I think that's absolutely true. And I certainly don't want to create any impression to the contrary. I think what I was talking about is that as we move forward, we'll be comparing the synergy estimate to this updated baseline. And so the exact quantification may variable [around] on the margins. For example, if there are positions in the consolidated company that we would've eliminated, but those positions hadn't been filled, as we update the baseline, that will change the number. But I think the important thing is all of the big buckets remain unchanged. And order or magnitude wise, all of the quantification we don't expect to change. So especially in that longer-term number, it's still a very solid number.

--------------------------------------------------------------------------------

Frank Mitsch, [19]

--------------------------------------------------------------------------------

And John, I think you were talking about the decline in the fourth quarter, 12% to 14%, of which it seemed like 3% to 5% is the destock. So it's really -- the vast majority of the decline is just something that you see every year, correct?

--------------------------------------------------------------------------------

John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [20]

--------------------------------------------------------------------------------

That's correct. This decline -- that we're talking about on destocking is really not significantly different than what we saw in the third quarter, either.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Our next question is from Hassan Ahmed with Alembic Global.

--------------------------------------------------------------------------------

Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [22]

--------------------------------------------------------------------------------

Jeff, obviously fairly favorable comments on the mineral sand side of the operation. And as one thinks through sort of cost cycles, it seems to be playing out in line with that, where obviously you see a run up in utilization rates/pricing for TiO2. And then there tends to be a 2- to 4-quarter lag between ore following suit. So it seems that it's moving in that direction. So as I sort of sit there and think about 2019, 2-part question. One is, is it safe to assume, barring any sort of meltdown in global GDP and the like, that the earnings contribution from the mineral sand side of the operations in '19 may be higher than '18? So that's one part of it. And then, secondly, let's assume for a second that this inventory destocking on TiO2 is done and dusted as we go through the seasonally stronger period next year. I mean, in that environment, in a higher sort of ore pricing environment, would that not provide sort of a landscape for higher TiO2 prices as well?

--------------------------------------------------------------------------------

Jeffry N. Quinn, Tronox Limited - President, CEO & Director [23]

--------------------------------------------------------------------------------

I think the answer to probably both of your questions is -- the simple answer is yes. Clearly, the mineral sands contribution to our overall profitability as an integrated producer will be higher during that period of time as others in the space see compression, will benefit from our vertical integration. And that relative contribution will -- although we manage this business as one integrated business, the relative contribution does change a bit during certain market conditions. And then, secondly, I think as John said in his comments a little bit, I think we believe that the return to more normal inventory levels and the elimination of destocking [is going to] win over the next few quarters. And I think as that plays out and we move into what is traditionally a stronger period of the year, with typical seasonality, I think it does create a strong environment and with supply-demand being better balanced, which may lead to a more favorable pricing environment.

--------------------------------------------------------------------------------

Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [24]

--------------------------------------------------------------------------------

And as a follow-up, Jeff, obviously valuations in share prices across the space have come down tremendously. And I think, as I talk to a variety of investors, the hangover from, call it, '12 to '16 is sort of fresh in their minds as well. It also started with pricing going up -- the downturn of '12 to '16 -- pricing going up, the inventory bloated nature thing sort of caught a lot of people by surprise. What gives you guys confidence that this time around it's different? And again, I'm not looking for a sort of global GDP or economic forecast, but just looking at it through the lens of TiO2, looking at it through the lens of what you see in your inventory levels, customer inventory levels. Because some of the chatter is the same, right? I mean, [coatings] volumes aren't great. Some of the coatings company are talking about quantization and the like. So would love to hear your views about what may be different this time around.

--------------------------------------------------------------------------------

Jeffry N. Quinn, Tronox Limited - President, CEO & Director [25]

--------------------------------------------------------------------------------

Yes. And we believe as a company that it is very different this time around. When you go back and look at sort of the 2012, there were a number of factors that just aren't present right now. You had the fact that in that '11-'12 time frame that [approx a] million tons of Chinese capacity had been brought on. You had the fact that there was significant feedstock capacity that had been added leading up to that period. You had sort of significant double-digit global demand declines. And you've got a pricing level that was way above anything we're talking about now, where you reached $4,000 levels versus the current level, which was about $1,000 a ton less. I think now, as you look back at it, you look at 2018, capacity is similarly flat, with some sulfate closures expected and some moderate chloride capacity increases. You see not a lot of new expansion projects being on the drawing board to come online. And the quality of those new projects may be somewhat declining. You see modest demand declines, rather than the double-digit type declines we saw in '12, with the U.S. market being very, very stable. And you see probably inventory levels just in general not being near what they were as you went into the '11-'12 time frame. So we do think the situation is much different. This is always going to be a cyclical industry that has some topsy-turvy movement. But overall, the industry structure and some of the other things going on, we believe, will contribute to more modest volatility compared to what we saw before.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Our next question is from Matthew DeYoe with Vertical Research Partners.

--------------------------------------------------------------------------------

Matthew P. DeYoe, Vertical Research Partners, LLC - VP [27]

--------------------------------------------------------------------------------

I think in the past, you've stated more normal pigment inventory balances of like 30 or 40 days, or 4 to 7 weeks, something like that. But the color I've received puts inventory balances closer on a global basis to like mid-50s as of the end of 2Q on a days basis. Where do you see global balances at the end of 3Q? And do you have any read on inventory balances by geography? I mean, anecdotally, it sounds like Asia and Europe were higher, which makes sense given price pressure. But if it's mid-50s globally, what was it in Asia and Europe, versus where was it in North America, where presumably it was lower?

--------------------------------------------------------------------------------

John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [28]

--------------------------------------------------------------------------------

So when we think about our inventory, it is global. And we don't typically break it out by region. We're trying to keep our inventories suitable to meet our customer demand in every region. So the numbers that you're referring to at the end of Q3 are not far, I think, off from where we are at this particular stage. The 30- to 40-day number that you referenced earlier kind of goes back to the comment I made earlier. Going into 2018, we were below seasonal norms. And we're getting back up into that seasonal norm range and would expect to exit 2018 at about that range.

--------------------------------------------------------------------------------

Matthew P. DeYoe, Vertical Research Partners, LLC - VP [29]

--------------------------------------------------------------------------------

And then, I'm not certain if you'll be able to answer this. But can you talk a little bit about potential tax hit on the sale of Ashtabula, and whether you'd be able to use your domestic NOL balance to offset all of it, most of it? What's the thought there?

--------------------------------------------------------------------------------

Timothy Craig Carlson, Tronox Limited - Senior VP & CFO [30]

--------------------------------------------------------------------------------

Matthew, it's Tim. Just given the structure that we're looking at from a stock sales standpoint, we don't anticipate any negative tax consequences from that transaction.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Our next question is from John Roberts with UBS.

--------------------------------------------------------------------------------

John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [32]

--------------------------------------------------------------------------------

I understand there might be some recoveries in Jazan from their E&C providers. Does your loans to them have recourse to that? Or you're comfortable with the credit quality there, that there's no risk to the loans, even if they don't get recoveries?

--------------------------------------------------------------------------------

Jeffry N. Quinn, Tronox Limited - President, CEO & Director [33]

--------------------------------------------------------------------------------

John, I don't think it would be appropriate for us to speculate on recoveries. And that absolutely [has the] AMIC [hype] issue. But we are and remain confident of the recovery of our loan balances at this point.

--------------------------------------------------------------------------------

John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [34]

--------------------------------------------------------------------------------

And I apologize, I jumped on late. Did you comment on whether you've been able to move significant volume into longer-term contracts with some price stabilization in them?

--------------------------------------------------------------------------------

Jeffry N. Quinn, Tronox Limited - President, CEO & Director [35]

--------------------------------------------------------------------------------

John, you want to address that?

--------------------------------------------------------------------------------

John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [36]

--------------------------------------------------------------------------------

Yes. Look, as we mentioned on the last call, we're working collaboratively with our customers on margin stability initiatives that are designed to minimize the volatility in pricing. And quite frankly, as we move into the fourth quarter, we believe that those initiatives are going to do just that. To the extent we actually can migrate to more of our volume on that as we close the transaction, we'll be migrating in that direction.

--------------------------------------------------------------------------------

Jeffry N. Quinn, Tronox Limited - President, CEO & Director [37]

--------------------------------------------------------------------------------

Yes. And John, I think it's fair to say that some of the progress that we will have in that has probably been deferred a little bit as we've gone through the final stage of the Cristal process. Because obviously, with some of these big customers, our presence at those customers changes pretty dramatically depending upon the closing of the Cristal transaction and what's included, what's not included, and that type of thing. So as you can imagine, some of those longer-term stabilization features are a little bit easier to work out once you really understand what your full presence at a customer will be.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

Our next question is from Christopher Perrella with Bloomberg Intelligence.

--------------------------------------------------------------------------------

Christopher Silvio Perrella, Bloomberg Intelligence - Research Analyst [39]

--------------------------------------------------------------------------------

A quick one. Is there anything that would preclude you from buying the shares directly from Exxaro down the road? And would that be impacted or facilitated by the re-domiciling to the U.K.?

--------------------------------------------------------------------------------

Jeffry N. Quinn, Tronox Limited - President, CEO & Director [40]

--------------------------------------------------------------------------------

Chris, a great question. That absolutely is facilitated by the re-domiciling. Under Australian law, there are significant limitations on share buybacks in general. And as we said, in days to come, we hope to be able to give you an update on our discussions with Exxaro as well as the re-domiciling transaction. And those 2 are related and intertwined.

--------------------------------------------------------------------------------

Christopher Silvio Perrella, Bloomberg Intelligence - Research Analyst [41]

--------------------------------------------------------------------------------

And then, pending the Exxaro -- and maybe this is one for the Investor Day -- would any of that change in the Exxaro holding change the BEE requirements for the operations in South Africa?

--------------------------------------------------------------------------------

Jeffry N. Quinn, Tronox Limited - President, CEO & Director [42]

--------------------------------------------------------------------------------

No, Christopher, it wouldn't. And that again kind of relates back to J.F.'s comments earlier about the new mining charter and the whole finalization once and for all, the kind of once [empowered] always empowered issue. And obviously, until that happens, Exxaro has an obligation continuing for a number of years to ensure that we're empowered. But we will definitely address that fully at the Investor Day. Because that is sort of a long-term strategic issue in South Africa, especially as we look at development of new resources there. And new projects continuing to be BEE certified will be important for us as we move forward there. And we continue and plan on being a significant presence in South Africa for some time to come.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

Our last question is from [Carl Blendon] with Goldman Sachs.

--------------------------------------------------------------------------------

Unidentified Analyst, [44]

--------------------------------------------------------------------------------

One of your peers had commented on price stabilization contracts reaching 50% and a little bit above that of their portfolio. Is there any color you can give us on how far along you are now, and where you'd ultimately like to get to?

--------------------------------------------------------------------------------

John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [45]

--------------------------------------------------------------------------------

I think I made reference on the last call that our goal would be to get somewhere in the range of 50% in 2019. But to the point that I made on the last question as well as Jeff's comments because of where we are with the transaction and the fact that we haven't closed yet, some of those negotiations with customers are a bit delayed more so than we would've expected. So we're working towards that. Those stability initiatives are in place kind of as an add-on to our value proposition. And they're designed to help us grow with our customers. So the sooner we close that transaction, which is, to Jeff's point, in the coming days, we will have an opportunity to start working on that, I guess, in a more wholesome way.

--------------------------------------------------------------------------------

Unidentified Analyst, [46]

--------------------------------------------------------------------------------

And some of the lengths of the contracts, as you've kind of seen and had discussions so far with customers, what's a typical or target length to think about?

--------------------------------------------------------------------------------

John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [47]

--------------------------------------------------------------------------------

3 to 5 years.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

And that does conclude our Q&A session for today. I'd like to turn the call back over to Mr. Jeff Quinn for any further remarks.

--------------------------------------------------------------------------------

Jeffry N. Quinn, Tronox Limited - President, CEO & Director [49]

--------------------------------------------------------------------------------

Thanks, Christy.

I would just like to conclude today by saying thank you. And that's a thank-you to my colleagues here at Tronox and our future colleagues at Cristal. It's been a long process. But the dedication and the focus that the collective employee group has shown has truly been extraordinary and inspirational. Our employees have continued to operate the business professionally and in a safe manner. You have my sincere gratitude and appreciation for that. And also, my thanks to the respective leadership teams of the 2 organizations for the tenacity and the perseverance that they've shown during these many, many months.

As we enter the holiday season, the end of the year, the end of this transaction process, I just urge our colleagues around the world to continue to operate safely and to really focus on that each and every day. Because that's the most important thing.

So thank you very much for your time today, your continued interest in Tronox. This ends our call. But we look forward to reporting progress to you in the coming days as well as speaking with you next quarter.

Thank you very much, and have a good day.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect.