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Edited Transcript of TROX earnings conference call or presentation 2-Aug-18 12:30pm GMT

Q2 2018 Tronox Ltd Earnings Call

Aug 15, 2018 (Thomson StreetEvents) -- Edited Transcript of Tronox Ltd earnings conference call or presentation Thursday, August 2, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* Hassan Ijaz Ahmed

Alembic Global Advisors - Partner & Head of Research

* James Michael Sheehan

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* 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

* Owen Douglas

* Patrick Duffy Fischer

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

* Roger Neil Spitz

BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst

* Vijay Vikram

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Tronox Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Senior Vice President of Investor Relations, Brennen Arndt. You may begin.

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

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Thank you, Shelby, and welcome, everyone, to Tronox Limited's Second Quarter 2018 Conference Call. On our call today are Jeff Quinn, President and Chief Executive Officer; John Romano, Chief Commercial Officer; Jean-François 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 today 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'll 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 in our earnings release and in the Appendix of the slide deck.

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

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

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Thanks, Brennen, and good morning to all of you. I'll begin this morning with a few comments on the significant progress we've made over the last few weeks towards closing the Cristal acquisition. I'm going to share with you everything that I can that is public, not legally privileged or not confidential and sensitive to the ongoing situation. However, due to those constraints, I may not be able to make any further amplification on this subject during the Q&A session. So please bear with me, if that is the case.

As you know, the hearing in the United States District Court in Washington, D.C. to determine whether the FTC is entitled to a preliminary injunction to block our merger with Cristal is scheduled for next week, beginning on August 7. We look forward to the opportunity to demonstrate in the District Court as we did in the recent Part 3 hearing before the FTC's Administrative Law Judge, how this pro-competitive output-enhancing combination will benefit customers throughout North America and around the world and position us to succeed in a fiercely competitive global market.

In Europe, we received approval on July 4 from the European Commission conditional upon divestiture of our 8120 paper laminate product grade that we supply from our Botlek facility in the Netherlands. As a reminder, our 8120 grade does not represent a significant amount of the volume at Botlek, and we do not believe the divestiture will have a material impact on Tronox.

On July 16, we submitted to the commission and executed definite agreement with Venator Materials PLC to divest the paper laminate product grade. The approval process of that agreement has progressed very well. A so-called monitoring trustee has been appointed and has reviewed the definitive agreement and the proposed business plan of our transaction partner. A hold harmless -- I'm sorry, a hold separate manager has also been approved. The hold separate manager will manage the business pending the completion of the divestiture.

Yesterday, we received feedback from the EC on the agreement and have agreed to make 1 minor change that was requested. That revised agreement has been executed by the parties and will be resubmitted to the EC this morning. Under the terms of the commitment entered into with the EC, the divestiture of the paper laminate product grade must occur within 90 days of receiving the commission's final approval of the Cristal acquisition. We anticipate that final approval in the coming days, but the exact timing of that is not within our control.

Also, on July 16, as previously disclosed, we entered into a binding memorandum of understanding with Venator for the negotiation of a definitive agreement to sell Cristal's Ashtabula, Ohio complex to Venator if such divestiture is required to secure final regulatory approval in the United States. The MOU grants Venator exclusivity through September 29, 2018, to negotiate that definitive agreement. These negotiations are ongoing and progressing.

It was contemplated in the MOU that the definitive agreement will cover the following scenarios: if the District Court does not issue an injunction, we will proceed to close the transaction promptly upon receiving final approval from the EC. Under this scenario, the Part 3 administrative proceeding would likely proceed to a conclusion, unless dismissed by the FTC. If we receive an adverse ruling from the District Court, we have the right but not the obligation to require Venator to purchase the Ashtabula complex for $1.1 billion. We can either sell the Ashtabula complex to Venator at that price or decide to continue to pursue the resolution in the administrative proceeding in front the ALJ. That is at our sole election. If after an adverse District Court ruling we elect to continue to pursue a resolution before the ALJ but then the ALJ rules against us, we then have the right to require Venator to purchase the Ashtabula complex for $900 million. If we do not exercise that right, Venator has the right to require us to sell Ashtabula to them for that price. So at that point, it is not just at our election. If we are able to consummate the Cristal transaction without divesting Ashtabula and the paper laminate product grade divestiture is completed, we have agreed to pay Venator a $75 million break fee.

We expect next week's hearing in the District Court to last 3 days. The judge has limited each side to 3 witnesses and 7 hours of total presentation time. The judge will also consider the full record developed before the ALJ. Obviously, we don't control the timing of the court's decision after the conclusion of evidence, but we think it's possible that a decision could be forthcoming in just a matter of weeks.

The agreement with Venator and the timing of the preliminary injunction hearing enables us to vigorously defend the merits of the Cristal transaction in relatively short order, while ensuring we are prepared to move forward swiftly with a remedy transaction at a reasonable valuation if a divestiture of Ashtabula is required. As this process approaches a near-term conclusion, there are, obviously, discussions ongoing between the parties that could potentially lead to other scenarios or other outcomes, and we cannot speculate on all of these, but I have tried in my comments this morning to address the most likely scenarios.

While we continue to work hard at securing regulatory approvals, we also continue our integration planning efforts and have picked up the pace of that work as we contemplate a closing as early as September 1. We plan to hit the ground running on day 1, following the closing of the acquisition, quickly begin to deliver on the substantial synergies and get to the business of creating the world's leading TiO2 producer. As the integration planning has reinitiated and gained momentum, I have had the opportunity to get to know the Cristal organization much better and have been able to spend some time with our future colleagues.

We are combining with a great company; a company with great assets, a company with talented and dedicated people and a rich history. It is also a company that has performed very well despite the uncertainty around the acquisition. I've had the opportunity in recent weeks to visit many of the facilities around the world, including the Yanbu pigment plant and Jazan smelter in Saudi Arabia. Based on these interactions and these visits, I am even more excited about the future and the quality of the company that we will build together. The team here at Tronox will get many opportunities for growth over the years, and the Cristal organization under Dr. Talal's leadership will get many opportunities over the years as well. But I am convinced that in this deal, the 2 companies found their perfect dream dates. I am looking forward to leading the combined company and working with the soon-to-be-combined management team to create value for our shareholders and to better serve our global customer base.

Before I turn the call over to John and JF for a discussion of our second quarter results and the market trends that we see, I'd like to briefly share my own perspective on those topics. First, as we expected, we had another strong quarter. Our strong top line and bottom line performance, once again, reflected the benefits of our vertical integration with all of our assets in full operation and favorable market conditions across pigment, feedstock and zircon. Our TiO2 business delivered revenue growth of 17%, adjusted EBITDA growth of 37% and adjusted EBITDA margin of 34% and free cash flow of $93 million.

Second, I'd like to address the ongoing debate in the investment community about the direction of near-term trends in the global TiO2 industry. Are we approaching a cyclical peak that will be followed by downturn? Or is the cycle solid and what we are currently seeing just a pause that will be followed by another upward turn, although at a lower pace than in 2016 and 2017? Here at Tronox, based upon everything we see, everything we know and what we believe, we are clearly in that latter school of thought.

From our vantage point, we see supply and demand in balance and continued favorable market conditions across the value chain. In pigment, we believe producers globally continue to run at high utilization rates. And though there may be some transient inventory builds on some sales channels, we believe inventories, in aggregate, are at normal levels and not excessive levels across the industry. We do not see incremental capacity additions that would materially exceed the levels needed to satisfy demand growth, whether those incremental volumes are sourced from restarts, debottlenecking, the continued ramping of brownfield expansions or greenfield projects. Again, there may be some transient periods of inventory builds in some regional supply chains, such as those used by Chinese traders and distributors, but we believe the overriding trend is one of balanced supply and demand.

In addition, we are getting traction on our value stabilization initiatives. We are working successfully with our pigment customers on longer-term agreements with the intent to dampen margin volatility across the cycle. In feedstock and co-products, we see continued tightening of supply-demand balances, especially in zircon and high-grade feedstock. Rising high-grade feedstock prices, in turn, will likely put cost pressures on nonintegrated pigment producers. However, as a fully integrated producer, we expect to benefit at both feedstock and pigment levels.

I'll now talk -- turn the call over to John Romano for a review of the commercial aspects of the quarter and more color on our view of the global market trends and then to JF for an operations performance review. John?

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

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Thanks, Jeff. Moving to Slide 4, I'll start with a look at revenue growth in the second quarter compared to the year ago second quarter. Our TiO2 segment revenue of $492 million increased 17%. Higher pigment and zircon selling prices were the primary drivers of the increase. Foreign currency translation benefited the revenue growth by approximately 2% or $8 million due to the strengthening of the euro. Pigment sales of $354 million increased 16% as average selling prices increased 17% or 15% on local currency basis, while sales volumes were 1% lower. Pigment selling prices were higher on all regions. Titanium feedstock and co-product sales of $123 million increased 23% from $100 million in the year ago quarter, and the primary driver there was zircon. Zircon sales of $78 million more than doubled from $38 million in the year ago quarter, as selling prices increased 47% and sales volumes increased 39%. I'll speak more about the favorable market conditions we see in zircon when we walk through the sequential comparison.

Pig iron sales of $20 million, increased 54% from $13 million in the year ago quarter as selling prices increased 4% and sales volumes increased 52%. This volume gain was primarily driven due to the increase in availability as we brought one of our slag furnaces in South Africa back online.

In feedstock and other products, sales of $25 million declined from $49 million in the year ago quarter due to the timing of shipments. CP titanium slag sales were $4 million lower than in the year ago quarter, and there were no ilmenite sales in the second quarter compared to $11 million of ilmenite sales in the year ago second quarter. We are not actively selling ilmenite in the market at this time in preparation of our expanded internal requirements for the -- following the closing of the Cristal transaction.

Moving on to Slide 5. For the sequential comparison versus the first quarter, our TiO2 revenue of $492 million increased 11%. The increase was primarily driven by higher pigment, zircon and CP titanium slag volumes. Pigment sales of $354 million increased 6% from $333 million in the prior quarter, as our selling prices were level on a U.S. dollar basis and 1% higher on a local currency basis. Sales volumes increased 7%, and the euro translation was a $3 million headwind on the pigment sales in the second quarter. As Jeff said previously, we believe pigment producers globally continue to run at high utilization rates.

I would like to add a quick comment about utilization rates. As you track pigment capacity and operating rates, it's important to distinguish between nameplate capacity and effective capacity. Using nameplate capacity as the denominator in the utilization rate calculation can often understate utilization rates and give the impression there's more untapped capacity available than there actually is. Regarding inventory globally, we do expect to see the short-term effects of some transient inventory builds in Europe and Asia in the next quarter, but these trends are consistent with what we've seen historically as seasonality tends to shape the demand of our products. We are getting traction on our value stabilization initiatives, as Jeff mentioned earlier. We are working successfully with our pigment customers on long-term agreements with the intent to dampen margin volatility across the cycle.

Moving to titanium feedstock and co-products, sales of $123 million increased 27% driven by higher zircon and CP titanium slag shipments. Zircon sales of $78 million increased 28% from $61 million in the first quarter as selling prices were level and sales volumes increased 27%. Over the last several quarters, we have successfully moved a significant portion of our zircon business to 6-month price agreements. The fact that selling prices are level to the first quarter is a result of that success and in no way any indicator of a softening in the market. The opposite, in fact, is true, as we see -- as we continue to see favorable supply-demand balance in zircon and expect to realize higher selling prices in the second half of the year compared to those in the first.

The medium-term outlook also looks favorable as there appears to be no significant zircon mining projects coming onstream until late 2019 or early 2020. Pig iron sales of $20 million increased 5% from $19 million in the prior quarter, as selling prices were 3% lower due to product mix and customer mix, while sales volumes increased 10%. Feedstock and other product sales of $25 million increased 47% from $17 million in the prior quarter. CP titanium slag sales in the second quarter totaled $14 million compared to no sales in the prior quarter. And conversely, there were no ilmenite sales in the second quarter compared to $5 million in the prior quarter. We expect that our high-grade feedstock business will continue to strengthen as we have more opportunities to sell feedstock, and we have inventory to support those opportunities at this time.

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

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

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Thanks, John. Moving to Slide 6. All our plants are performing well. Our focus and guiding principle across our global TiO2 business remain on producing safe, quality, low-cost tons for our customer. Let's first look at our EBITDA performance in the second quarter compared to a year ago quarter. TiO2 adjust EBITDA of $169 million increased 37% versus year ago quarter. Higher pigment and zircon selling prices were the primary driver of the increase. Partly offsetting the strong sales gain were higher input costs, notably petroleum coke, electrode and anthracite and, to a lesser extent, unfavorable foreign exchange. However, since the second quarter, pet coke price are showing sign of moderation, the electrode market continued to be balanced and anthracite price are also leveling off.

Compared sequentially to the first quarter, TiO2 adjust EBITDA of $169 million increased 22%. The increase was largely driven by higher pigment and zircon sales volume and favorable foreign exchange, primarily the South African rand. If you recall, foreign exchange headwind on cost significantly hit our first quarter results, principally the rand and, to a lesser extent, the Australian dollar. In the second quarter, we recovered about 3/4 of that impact. Our adjusted EBITDA margin in the second quarter increased to 34%, up from 31% in the first quarter and 29% in the year ago second quarter.

In last quarter call, I reported on what at the time were severe drought condition affecting the Western Cape of South Africa, including our Namakwa Sand mine and smelter. I discussed how we managed through those severe condition in the first quarter without significant disruption to our operations during that period. I'm very pleased to report that condition there have improved significantly. The water level at the dam, which serve our mining operation at Namakwa, is now at 100% of capacity, rising from the 60% level in late June. To ensure redundancy, we have commissioned a desalination plant that is scheduled to be operational later this month. This should further minimize the impact on our operation should severe drought condition reoccur in the future.

Next, I'll give you an update on the Jazan smelter project. Last quarter, we reported that we signed a Technical Service Agreement and an Option Agreement with AMIC regarding the titanium slag smelter located in Jazan, Saudi Arabia. AMIC, Advanced Metal Industry Company, is an entity equally owned by Cristal and TASNEE. The Jazan slagger will enable us to further optimize the level of vertical integration between our TiO2 pigment and feedstock operation, following the close of the Cristal merge and across the cycle over the long term. We are combining our slagger operational expertise with that of AMIC to work together to ensure the successful commissioning of this world-class smelter. Under the term of this Option Agreement, we agreed to lend AMIC and the special-purpose vehicle that was created up to $125 million for capital expenditure and operational expense to facilitate the start-up of the slagger. These funds may be draw down on quarterly basis as needed based on a budget agreed upon Tronox and AMIC. During the second quarter, we loaned $14 million for capital expenditure and operational expense to facilitate the start-up of the slagger. The project is progressing well, so we anticipate loan of $25 million in each of the next 2 quarter.

My team and I continue to drive our very successful operational excellence program to work to offset the impact of foreign exchange and any inflationary pressure, much in the same way we overcame them in the last 3 year. As Jeff mentioned, our acquisition integration planning work is very advanced. We are busy planning for the deployment of our operational excellence program across the combined Cristal and Tronox asset to quickly deliver on the substantial synergy in our combination.

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

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

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Thank you, JF. Moving to Slide 7. Our June 30, 2018, debt is $3.17 billion and debt net of cash and cash equivalents is $1.48 billion, including $656 million of cash restricted for the Cristal transaction. Liquidity was $2 billion comprised of cash and cash equivalents of $1.69 billion, including the $656 million of restricted cash and $312 million available under revolving credit agreements. Our blended cost of debt was 5.5% in the second quarter, and on June 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 $170 million. Capital expenditures were $27 million in the quarter. This excludes the $14 million loans provided to the Jazan slagger project. The loans are recorded on our balance sheet within other long-term assets and reported on our cash flow statement separately from capital expenditures. Depreciation, depletion and amortization expense was $49 million in the second quarter.

During the second quarter, we had a net $30 million foreign currency remeasurement gain that was recorded in other income. The gain was primarily driven by the weakening of the South African rand used in the remeasurement of our U.S. dollar-denominated open trade and notes receivable positions. This gain is included in our reported EPS and adjusted EPS results. However, it is not included and has been removed from our total company and our TiO2 adjusted EBITDA results. We are reaffirming our expectations for capital spending, DD&A and cash tax in 2018 with capital spending of approximately $120 million, DD&A of $180 million to $200 million and cash tax of approximately $20 million. Each estimate is on a Tronox stand-alone basis.

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

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

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Thanks, Tim. I'll close by reiterating a few of the key points we'd like you to take away from today's call. First, we continue to work relentlessly towards closing the Cristal acquisition and have made significant progress over the last few weeks towards achieving that goal. We are anticipating final approval from the European Commission in the coming days. Under the terms of the MOU with Venator, we will proceed to negotiate a definitive agreement for the sale of the Ashtabula complex, if that divestiture is required to ensure that we are prepared to move swiftly with a remedy transaction at the reasonable valuation. We are making progress in that regard.

Our focus is now on next week's hearing in the District Court. As I've said, we look forward to opportunity to demonstrate as we did in the recent Part 3 hearing before the ALJ, how this pro-competitive output-enhancing combination will benefit customers throughout North America and around the world and position us to succeed in a fiercely competitive global market. While we continue to work hard at securing regulatory approvals, we also continue our integration planning work. Our acquisition integration planning work is very advanced and has positioned us to hit the ground running on day 1, following the closing of the acquisition to quickly deliver upon the synergies.

Second, we see favorable market conditions across the entire value chain with supply and demand in relative balance. We believe producers globally are running at high utilization rates. And despite transient inventory builds in some sales channels, inventories across the industry, in aggregate, are at normal and not excessive levels. We do not see incremental capacity additions that would materially exceed levels needed to satisfy demand growth. We're getting early traction on our value stabilization initiatives with our pigment customers with the intent to dampen margin volatility across the cycle. We see continued tightening of supply-demand balances in zircon and high-grade feedstock. As a fully integrated producer, we expect to benefit across the entire value chain from this trend.

And third, both Tronox and Cristal continue to perform well. In our first quarter call, we raised our estimate for the 2018 pro forma adjusted EBITDA to the $1 billion to $1.1 billion range, that is before synergies. With the benefit of second quarter results, we now expect 2018 pro forma adjusted EBITDA to be at the top of that range before synergies. In addition, we expect year 1 synergies of $100 million.

As you have heard us say consistently since the day we announced the transaction, this highly synergistic combination is all about increasing asset utilization, lowering our cost position, unlocking incremental product volumes to serve growing markets worldwide and generate strong cash flow. Our goal remains unchanged, that is simply to create the world's premier TiO2 company for our investors, for our customers and for our employees.

With that, I thank you very much. And we now like to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from John McNulty from BMO Capital Market.

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

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I guess I have 2 questions. On the stabilization initiatives that you've been making on the pigment side, can you give us an update as to how far along you are on that? And kind of what -- where your targets are? Or where you are, at least relative to your targets?

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John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [3]

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Yes, this is John Romano. Again, as I mentioned on the call, we've made progress with that. We're not going to provide a whole lot of color with regards to exactly where we are by customer, but it's our objective to try to get somewhere in the range of about 50% of our business in line with these agreements. And we're further along with some than others, but we made progress in the second quarter.

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

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Okay, fair enough. And then, I guess, a follow-up question on -- regarding the Cristal assets, I know you don't own them yet, so it -- I'm sure there's some curtain up in between you at this point. But I guess in -- I guess, some of the court documents that we have gone through, it looks like that was running kind of in the first half at a run rate of about $350 million of EBITDA. Is that kind of the right type of run rate to think about as we look at 2018 in totality? Or is there -- are there some puts and takes that we should be thinking about?

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Jeffry N. Quinn, Tronox Limited - President, CEO & Director [5]

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I think the Cristal business continues to perform very, very well. And as I said in my comments, my hat's off to Christian and the entire team there because in some face of tremendous uncertainty, they've kept their focus and have continued to perform. I think the Cristal results were embedded in TASNEE's earnings release, and we probably cannot -- no, shouldn't speculate beyond that because we don't want to get beyond what TASNEE has disclosed in their release, John.

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Operator [6]

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And our next question comes from Hassan Ahmed from Alembic Global.

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [7]

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Jeff, as we know, obviously, no 2 cycles are the same. But as I have sort of tried to sort of think through the previous upcycle, call it 2010 through 2012, we saw this major escalation in ore price, and it was kind of just back and forth in terms of upward mobility. The ore guys would come out, announce price hikes. There would be a bit of a margin squeeze on the pigment side. The pigment guys would obviously follow suit. And it seemed that supply-demand fundamentals on both ore and pigment were relatively tight. Now this time around, obviously, utilization rates quite tight on the pigment side. Ore pricing, thus far -- I mean, it seems, at the beginning, to show some signs of life. But the upward movement in ore prices has not been that significant. So a 2-part question. One is, what's your view -- now having the luxury of sort of having your doors in both places, what's your view in terms of supply-demand fundamentals on the ore side? And if at all they are tightening and let's say that ore prices start moving up in 2019 and onwards, most the other guys, apart from yourself and nonintegrated, would that not translate to further upward movement in pigment pricing going forward in a relatively tight TiO2 utilization rate environment?

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John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [8]

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Yes, this is John Romano. So from the -- on the high-grade feedstock side, I'd say that it's definitely tightening up. Although we're not selling significant volumes of high-grade feedstock out on the open market, prices are moving. To your point, they haven't been moving, I would say, probably as rapidly as they were in the previous upcycle. But there's also been a number of disruptions that have exacerbated the tight supply-demand situation. So from that standpoint, I would expect that as we move forward, we're going to continue to see pressure on high-grade feedstock. And again, that's something that will benefit us because of our vertical integration.

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

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Yes, and as I said in my comments, I think when that occurs, we'll benefit from that and also benefit from what may be upward pressure on pigment prices as other producers incur those costs because they're not fully integrated.

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [10]

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Understood. Understood. Now I know you guys mentioned this. I mean, there were 2 calls going on, so I was bit distracted. But returning back to sort of your views about incremental TiO2 supply and supply-demand fundamentals on the TiO2 side of things, obviously, all eyes tend to be focused on China and particularly sort of certain or a Chinese producer announcing chloride-based capacity out there. Now 2 things, one is, what's your view in terms of utilization rates in China, number one? Number two, it seems that the chloride-based capacity that operates in China operates at relatively depressed operating rates, right? I mean, it's a new technology to them and the like. Even if they were to bring about chloride-based capacity, at least, in my mind, and I'd love to hear your views, I'd imagine it'd take much longer than most people expect. And eventually, once it comes online, again, similar to what we have seen in the last few years, I would imagine it would run at depressed operating rates. So again, chloride capacity-specific question around timing of the arrival of capacity, and what sort of run rate utilization rates we should think about as we think about operating rates for those facilities?

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John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [11]

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So on the chloride question, based on the announcements that came out from Lomon, they had indicated a couple of hundred thousand tonnes coming online late in 2019. And I think, on the last call, I made the comment that, that seemed a bit aggressive, considering they just announced it earlier this year. And typically, you're going to see a little bit of a longer transition when chloride capacity tonnes come on just due to the nature that that's a relatively new technology there. On the sulfate side, when you think about demand or capacity there, you've really got 2 buckets. You've got the small- and medium-sized plants that typically can't run at rates much higher than low to mid-70s as far as capacity utilization and then the bigger plants that are running maybe in the low 80s to mid-80s on that. So capacity utilization, when it's running at its highest, it's nowhere significantly north of 80%. That's why we made this comment on the call regarding what effective capacity is versus nameplate. Nameplate capacity can easily be adjusted if somebody is using a 3-day run rate. And we don't typically do that. Did I answer your question?

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [12]

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Fair enough. Yes, that's it.

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Operator [13]

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And our next question comes from Matthew DeYoe from Vertical Research.

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Matthew P. DeYoe, Vertical Research Partners, LLC - VP [14]

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So I know you mentioned we may hear something from the U.S. District Court in a matter of weeks. But does the 90-day time line from the EC impact your ongoing process with the FTC and your ability to maybe go the distance should the case get drawn out?

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Jeffry N. Quinn, Tronox Limited - President, CEO & Director [15]

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No, I don't think it does, Matt. I think the timing will work because the closing of the Cristal acquisition is obviously a condition precedent to the divestiture of the paper laminate grade. So I don't think we get into a situation where we're running -- that we run out of time to get to being done in Europe.

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Matthew P. DeYoe, Vertical Research Partners, LLC - VP [16]

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All right, that's helpful. And then so we're seeing price pressure in European pigment markets just due the premium price there and global trade flows capturing the margin, but at some point, it's going to run its course in the U.S. market. It will probably regain its status as the highest global pigment market. So how sheltered from any excess supply do you think the U.S. market will be given quality standards or product trade flows and the like?

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John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [17]

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Well, look, as we've continued to say with the FTC for the longest time, this is a global market, and prices tend to move globally. So there'll be points in times where pricing in Europe is higher. There'll be points in times where pricing in the North American market is higher. As we move forward and look Q2 to Q3 based on some of the work that we're doing with our value stabilization program, we don't see a significant change Q2 to Q3 with regards to our pricing. So it ought to be somewhat similar, and I prefer not to really get into regional price variances.

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Operator [18]

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And our next question comes from Jim Sheehan from SunTrust.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [19]

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Could you talk about where we are in high-grade titanium feedstock in terms of reinvestment economics? And also, related to that, where do you see the class being for developing new feedstock capacity?

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Jean-François Turgeon, Tronox Limited - Executive VP & COO [20]

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Look, it's JF Turgeon. Jim, the high-grade business obviously depend on the ilmenite that feed those high-grade plants. And the value come when you can use a technology that enhance the co-product that you generate from that ilmenite. And that's why in the case of Tronox, we're very excited with the Option Agreement that we have signed with Cristal to start their slagger and be able to take low-value ilmenite that cannot be used in a chloride pigment plant and convert it into a high-grade feedstock that could make our pigment plant more competitive. So look, obviously, that slagger was already built. It just needed someone with the expertise, and we have that expertise to make it work. So the economic for us were very, very attractive to basically make that slagger run and produce material to feed our plant. That slagger has a capacity of 0.5 million tonne of slag, so 500,000 tonnes. So it's significant side. In fact, Jeff and I had the chance to visit the slagger 2 weeks ago, and it's a very well-built asset. And in the fourth quarter of this year, we're going to start operating that unit. Is there a need for additional high-grade feedstock to come on to the market? Absolutely, in time, there will because the ilmenite that could be directly used in pigment production, those mine are running down, and they're not easy to find. What you can find is ilmenite that could be used for high-grade feedstock, but ilmenite that can use directly in chloride production is quite rare. And that's why you will need the high-grade feedstock price to continue to move up to justify further investment, so the feedstock can meet the demand of the pigment. I hope that does answer your question, Jim.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [21]

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Yes. Yes, it does. And also, on the situation in Europe with a competitor having an extended outage and maybe a delayed time line for rebuilding their plant or perhaps not completing the rebuild, what impact do you think that might have on pricing in the second half of the year? Do you think that Chinese exports into the region are fully offsetting that? Or do you expect more price support going forward?

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John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [22]

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Look, with regards to exports into Europe, clearly, those have gone up significantly, and we're able to track those with import and export steps to show that Lomon's taken a significant piece of that volume. Lomon has, in the recent weeks, announced within the last 30 days, $50 to $80 of price increase for export volumes. So it's kind of too early to get any indication on where they may actually be with that. But I would expect that we're probably -- as I mentioned earlier, we're not forecasting a significant amount of growth on pricing globally, and there may be puts and takes regionally.

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Operator [23]

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And our next question comes from Roger Spitz of Bank of America.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [24]

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It sounds like the slagger will start up in Q4. You're putting $25 million each in more loans in Q3 and Q4. That leaves $61-odd million that you could be loaning, I guess, for start-up costs. Do you expect in 2018, as the slagger starts up, to put in more loans? Do you have -- and if so, do you have a view of how much of the additional $60-odd million you have to loan into it?

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Timothy Craig Carlson, Tronox Limited - Senior VP & CFO [25]

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The Jazan slagger actually has 2 furnaces. The first furnace is expected to come up early in Q3; the second furnace in 2019. We've committed the loans up to $125 million, $25 million a quarter. So we would expect to continue to loan on a quarterly basis in Q1 and Q2 of '19.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [26]

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Sort of that same $25 million a quarter basis?

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Timothy Craig Carlson, Tronox Limited - Senior VP & CFO [27]

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Correct.

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Jeffry N. Quinn, Tronox Limited - President, CEO & Director [28]

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Yes.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [29]

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Great. And it's -- I take it from your prepared remarks that those zircon 6-month contracts, within those contracts, it sounds like prices you have fixed over the 6 months. Is that correct? And has -- is that just you or is more of the other sellers in the industry and buyers in the industry entering 6 months contracts, meaning you're entering a new contractual regime for zircon?

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John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [30]

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Yes. So look, over the course of last 12 months, we've been working actively with the customers to try to make sure we don't repeat what happened the last time in the market when it peaked. And we believe that along those same lines of value stabilization, that 6-month pricing agreements for us make more sense and for our customers. Can't speak too much specifically with regards to what our competitors are doing at this time, but I believe it's been viewed favorably by our customers. And for us, it's good for planning. And as we move into the second half, as I mentioned, we do see further price improvements on that 6-month basis.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [31]

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And you would presumably renegotiate pricing when it rolls over, say, in, I guess, July 1 or something? Is that what you do? Or is there -- within these contracts there's an evergreen...

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John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [32]

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Yes, we've already been -- I'm sorry, go ahead.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [33]

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I was going to say...

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John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [34]

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We've already been...

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [35]

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Please go ahead.

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

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I would -- I'll go, and then if I don't answer your question, you can ask it again. We have already renegotiated pricing for the second half. So yes, it was done prior to July 1. And we would do that again moving into Q1 of 2016 -- '19.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [37]

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I guess, I was going to add, do these contracts have sort of evergreen where it's basically you just renegotiate the price every 6 months, but the contracts -- the volume contracts continue? Or is it a new contract every 6 months, looking back (inaudible) presumably?

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John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [38]

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Yes. I think what I specified in the comments were they were 6-month price agreements, the contracts are longer than 6 months. So it's not renegotiating 6-month contracts. It's just 6-month price agreements with the existing contracts that we have, which are longer term.

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Operator [39]

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And our next question comes from Duffy Fischer from Barclays.

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Patrick Duffy Fischer, Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst [40]

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I apologize, I missed the first part of the call. But just on the deal, the potential deal with Venator, there used to be some thought that maybe one of the remedies would be splitting Ashtabula and only remedying half of it or 1 of the lines. There doesn't seem to be anything in that agreement. Is that half of Ashtabula remedy off the table now where it's basically either all or nothing?

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Jeffry N. Quinn, Tronox Limited - President, CEO & Director [41]

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Duffy, in my comments, I tried to lay out the most likely scenarios and the scenarios that are covered under the Venator agreement. It's probably -- there are other potential outcomes and remedies that may be less than the entire Ashtabula complex, might be less than 1 plant or whatever. So I'm really not going to speculate on that. We've kind of outlined what the Venator agreement covers, and we think those are the most likely scenarios.

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Patrick Duffy Fischer, Barclays Bank PLC, Research Division - Director & Senior Chemical Analyst [42]

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Fair enough. And then on your inventory question or comment where you said there were parts of the chain where inventory is high, but through the whole chain, you think it's normal. Where do see those high levels of inventory? And then where do you see the low levels of inventory that would offset the high to make it neutral?

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John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [43]

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Yes. So on the inventory, when we talked about specific channels, it's typically agents and distributors. They will buy regular volumes from us, and I'm talking specific now to Tronox because I can't speak for the rest of the competition. But when they buy from us, they're buying regular volumes. And to the extent they may be building a little bit of inventory in the channel, that's what I'm specifically referring to, and that's largely in Asia. I'm just going to add to that because I didn't answer the question on the other side, and that was when we say that it's balanced, our inventories are at or below. When I say at Tronox' inventories are actually at or below seasonal norms. And when we look at North America and Europe, we don't see any significant build in inventory.

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Operator [44]

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And next question comes from Owen Douglas from Baird.

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Owen Douglas, [45]

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So I just wanted to go back to the comment about supply-demand balance and ask it at a slightly different way. As far as the period over time which you're kind of looking forward and saying you believe that the incremental capacity or supply is going to essentially meet demand, can you give me a sense for over what time period? And what is that demand growth rate that you guys are anticipating for pigment?

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John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [46]

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Yes. So demand growth rate typically runs about 3%. And when you think about consumption being about 6.2 million tonnes per year in 2017, that's about 180,000 to 100,000 -- or 200,000 tonnes of additional capacity that's needed just to stem and feed the existing demand as it grows at a regular rate. When you think China, specifically, we don't see any significant growth in capacity moving into 2019. It's largely flat with some larger plants expanding some volume and some other plants actually closing or derating their plants based on the environmental regulations. So quite frankly, with the capacity adds that are known out there, they're quite -- they're not largely keeping up with demand as it grows at a 3% rate as it is today.

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Owen Douglas, [47]

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Okay. So at this point in the economic cycle, you're still using that 3% CAGR as the baseline expectation.

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John D. Romano, Tronox Limited - Senior VP & Chief Commercial Officer [48]

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Yes, we haven't completed our budgets for 2019 yet. I use that 3% as an average growth rate over the time period.

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Owen Douglas, [49]

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Okay. Understood. And just a quick one on the feedstock. So as you guys think about it, so you've divested or you have an agreement, a memorandum of understanding for Ashtabula. But just kind of trying to understand on a go-forward basis, where do you see the majority of the benefit to Tronox if there were to be a material price move upwards in terms of feedstock? Would that be primarily in terms of thinking about your actual feedstock third-party sales? Or would it be just more of that implied savings you get by not having to be a big third-party buyer?

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Jean-François Turgeon, Tronox Limited - Executive VP & COO [50]

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That's JF answering your question, Owen. And it's the latter, which is basically, we're going to use that material internally. And obviously, internally, it's the cost of producing that material that we absorb, so we won't have the pressure of the increased price of feedstock.

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Operator [51]

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And our next question comes from John Roberts from UBS.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [52]

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When you entered into the agreement with Venator for Ashtabula, were you thinking antitrust with Venator's Kronos JV wouldn't be an issue for you doing a possible deal with them? Or were you thinking that Venator would sell that JV to be able to do a deal with you?

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Jeffry N. Quinn, Tronox Limited - President, CEO & Director [53]

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John, the whole regulatory approval conditions and obligations are something that would be set forth in the definitive agreement that's being negotiated. So we're very aware of the situation and believe that regulatory approval can be obtained for that, and that will be sorted out in the definitive agreement in terms of what actions may be required in that regard.

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Operator [54]

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And our question comes from Vijay Vikram from Goldman Sachs.

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Vijay Vikram, [55]

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Just a quick question on -- to the extent that you do the Ashtabula sale and you receive $1.1 billion, could you just give some clarity around how you would go about using that? Would that be primarily directed towards debt reduction or something else?

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Timothy Craig Carlson, Tronox Limited - Senior VP & CFO [56]

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Yes. A chunk of it would absolutely be directed at debt reduction. However, we would look very closely at also opportunities, return some capital to shareowners in terms of a share repurchase or a dividend.

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Operator [57]

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And I'm showing no further questions. I would like to turn the call back over to Jeff Quinn for any further remarks.

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Jeffry N. Quinn, Tronox Limited - President, CEO & Director [58]

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Thank you, operator. Just wanted to thank all of you for being on the call this morning. We look forward to reporting our progress as we move forward on each point we discussed today. We look forward to the District Court proceeding next week and the chance to defend the Cristal acquisition on the merits and notwithstanding the focus on securing regulatory approvals. We have our eye clearly on the ball in terms of running our own business, and we continue to run very well. The business is functioning well, thanks to the talented team we have here at Tronox, not only profitably, but very safely as well.

So thank you for your time this morning. And we'll talk in the next few weeks to update you on the progress. Thank you.

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Operator [59]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.