Tronox Holdings plc (TROX) Q3 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Tronox Limited Q3 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference call, Brennen Arndt, VP of Investor Relations. Sir, you may now begin.

Thank you, and welcome, everyone, to Tronox Limited's Third Quarter 2014 Conference Call and Webcast. With me this morning are Tom Casey, Chairman and CEO, who will review our third quarter performance; and Kathy Harper, Senior Vice President and CFO, who will report on our financial position. Tom will then conclude our call with closing comments and we'll be happy to take your questions. We'll be using slides today as we move through the conference call. Those of you listening by Internet broadcast through our website should already have them. And for those listening by telephone, if you haven't already done so, you can access them on our website at tronox.com. Let me begin this morning with 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 2013 Form 10-K, our most recent Form 10-Q and other SEC filings. This information represents our best judgment based on today's information. However, actual results may vary based on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements. During the conference call, we will refer to certain non-U.S. GAAP financial terms that we use in the management of our business, including EBITDA, adjusted EBITDA and adjusted earnings of per diluted share. EBITDA represents net income before net interest expense, income tax and depreciation, depletion and amortization expense. Adjusted EBITDA represents EBITDA as further adjusted for noncash, unusual and nonrecurring items. Adjusted earnings per diluted share represents EPS adjusted for unusual and nonrecurring items on a fully diluted basis. A reconciliation is provided in our earnings release. And thank you. It's now my pleasure to turn the call over to Tom Casey. Tom?

Thanks, Brennen, and I thank all of you for joining us this morning. As you saw in our earnings release, we again delivered strong performance in the third quarter as a result of our vertical integration. And as we did in Q3, we believe that we can consistently deliver a higher level of consolidated adjusted EBITDA per ton of pigment sold. Our adjusted EBITDA margin reached 23% in the quarter, which is the highest in the last 8 quarters. Our gross margin on sales was 16%, a 500 basis point improvement from 11% in the prior year, and a 300 -- excuse me, 400 basis point from the 12% in the prior quarter. In Mineral Sands, despite what we consider to be essentially trough pricing conditions, adjusted EBITDA margin was 34% compared to the 39% in the prior year and 36% in the prior quarter. In Pigment, our adjusted EBITDA of $57 million, improved by $60 million over last year, and our adjusted EBITDA margin of 19% increased for the seventh consecutive sequential quarter. Lower feedstock prices continue to contribute greater margins on our Pigment business and will continue to do so as pigment made from that feedstock is sold. In Mineral Sands, we expect, now that the pigment plant operating rates have returned to normal, that feedstock inventories are being worked down and prices should recover as that process completes. In Pigment, we expect to see normal, which means seasonally lighter market conditions as we complete the year, and we look for positive developments in 2015. Finally, we continue to pursue our growth strategy and focus on unlocking superior value in both our operating businesses and across several strategic options. And for the 10th straight quarter, our board declared quarterly dividend of $0.25 per share payable on December 3 to shareholders of record of the company's Class A and Class B ordinary shares at the close of business on November 17. That 25% share dividend is currently yielding more than 4%. Turning now to our third quarter operating results. Let me begin with the Mineral Sands segment. This is on Slide 4, for those of you are following the slides. Mineral Sands segment revenue of $206 million was 16% lower than the $245 million in the year-ago quarter, which reflects our decision earlier this year to withdraw from the external chloride pigment titanium slag market in the current quarter. In other words, we are not selling to third-party customers in the Pigment business of CP titanium slag. Recall we made that decision, given that in our opinion, current selling prices for high grade chloride feedstock produced inadequate returns. And we will not start selling again until we change policy on that matter. External -- excluding the external CP titanium slag revenue of $40 million in the prior year, again, which we did not try to match this year, revenue was leveled to the year-ago quarter. Sales volumes were up 12%, excluding prior year external CP titanium slag volume sales -- sales volumes. Selling prices for primary titanium feedstocks declined in the 20% to 25% range versus the prior year quarter. Compared sequentially, and again, excluding the external CP titanium slag sales of $25 million in the second quarter, third quarter revenue increased by 1%. Selling prices increased for natural rutile and modestly for titanium feedstocks, which more than offset a 2% decline in sales volumes. Selling prices for zircon and pig iron remained level compared to the prior quarter. Revenue from intercompany sales was $104 million in the quarter. External sales was $102 million, including $80 million from zircon and pig iron. Mineral Sands continues to sell 100% of its synthetic rutile feedstock to our own Pigment division on an intercompany basis. Zircon revenue increased 6% versus the prior year quarter, as sales volumes increased 15%, offset by selling prices declining 8%. Compared to the second quarter, zircon sales volume declined 11% and selling prices remained level quarter-to-quarter. Mineral Sands segment operating income of $8 million compares to operating income of $41 million in the year-ago quarter and $18 million in the prior quarter. Adjusted EBITDA was $71 million versus $95 million in the year-ago quarter and $81 million in the prior quarter. The adjusted EBITDA margin was 34% versus 39% in the prior year and 36% in the prior quarter. A reminder to you that the Mineral Sands segment adjusted EBITDA is calculated before the elimination of gross profit on sales to the Pigment segment that occurs in consolidation at the company level. In the third quarter, $13 million of Mineral Sands gross profit and $2 million related to Mineral Sands lower-of-cost or marketing activity was eliminated in consolidation, and $9 million of previously eliminated gross profit was reversed, for a net adjusted EBITDA reduction in consolidation of $6 million. Construction continues to progress at our KZN Sands Fairbreeze mine in South Africa. All government permits and authorizations have been received. The Fairbreeze mine, as you know, will supply feedstock to our slag furnaces at KZN and is expected to begin operations by the end of 2015 and be fully operational by 2016. In the interim, we are supplying slag -- we are supplying ilmenite into our KZN slag furnaces using stockpiles that we have developed in South Africa and in Australia. The major change when Fairbreeze actually begins to produce is not in our production of CP slag but rather in the new production of rutile and zircon. And we expect something in the order of 30,000 tons of rutile and 60,000 tons of zircon to be produced out of Fairbreeze when we get to the normal running rates. We have previously disclosed that the total CapEx for Fairbreeze will be $365 million approximately. More specifically, capital expenditures for the phase of the Fairbreeze mine that we are in now are estimated to be approximately $250 million. Approximately $80 million of this $250 million is expected to have been spent through the end of this year to 2014. The remaining $170 million is expected to be spent in 2015 and 2016. The second phase of the Fairbreeze mine project, which will involve an expansion of the on-site mineral separation plant, is planned for the 2018, 2019 period. And the related CapEx associated with that expansion are estimated to be $115 million. The $365 million CapEx total is for both phases of the Fairbreeze project and $115 million of it will not occur until the 2018-2019 period. Moving to our Pigment segment. Pigment segment revenue of $296 million was 1% lower than the $300 million in the prior year quarter, as volumes were level and selling prices declined by approximately 1%. Volume gains were achieved in North America but were offset by declines in Europe, Asia and Latin America. Selling prices were modestly lower in North America and Europe, essentially level in Asia and up modestly in Latin America versus the year-ago quarter. Compared to the seasonally stronger second quarter, sales volumes declined and selling prices remained level, marking the fourth consecutive sequential quarter of essentially stable pricing in the Pigment. At the end of the third quarter, finished pigment inventory was at normal seasonal levels, up from the second quarter and down from the first quarter. And our average plant utilization rate was strong in the mid-90% range. Pigment segment operating income of $39 million, increased by $64 million, versus the operating loss of $29 million in the year-ago quarter. Pigment adjusted EBITDA of $57 million increased by $60 million versus adjusted EBITDA of a negative $3 million in the prior year. And our pigment adjusted EBITDA margin reached 19%. On a sequential basis, adjusted EBITDA of $57 million improved for the seventh consecutive quarter, up from $37 million in the second quarter. The average feedstock cost reflected in the Pigment segment in the third quarter was $794 per metric ton, down from $834 per metric ton in the second quarter. And during the third quarter, 100% of feedstock purchases made by our Pigment operation were from our own Mineral Sands operation at an average cost of $758 per metric ton. As I mentioned earlier, lower feedstock selling prices we've seen over recent quarters contributed to greater margins in our Pigment business. And we expect this benefit to continue for 5 to 6 months, even after the feedstock prices are up. Thank you. Let me turn now the call over to Kathy Harper for review of our financial position. Kathy?

Thanks, Tom. I'll review the Corporate and Other segment and then move to major line items on our financial statement. Revenue in Corporate and Other, which incorporates our electrolytic operations, was $31 million, as compared to $35 million in the year-ago quarter, down primarily as a result of lower sales volumes and selling prices for electrolytic manganese dioxide and lower prices for sodium chlorate. Corporate and Other loss from operations of $26 million in the quarter, which includes $6 million of the $10 million of total restructuring cost recorded in the quarter, compares to a $20 million loss from operations in the prior year quarter. Adjusted EBITDA in Corporate and Other was negative $22 million, which is principally related to corporate operations. Selling, general and administrative expenses for the company in the third quarter were $47 million versus $45 million in the prior year quarter. Interest and debt expense net was $34 million versus $32 million in the year-ago quarter. On September 30, 2014, gross consolidated debt was $2.4 billion and debt net of cash was $1,053 million. For the quarter, capital expenditures were $39 million. And depreciation, depletion and amortization was $68 million, down from prior year and Q2 as depletion at KwaZulu dropped back in line with average yield. Regarding the noncontrolling interest line, recall that this component of equity on our balance sheet represents the amount of Exxaro's 26% ownership of our South African entity as required by the country's Black Economic Empowerment legislation. Each quarter, we provide external revenue generated by our South African operations, which was $69 million in the third quarter. This should enable you after making you own assumption regarding profit margins, estimates, and noncontrolling interests. As part of our one Tronox initiative to merge our business operations into one integrated team and reduce operating cost, in September, we commenced cost reduction initiative that we expect to complete during the fourth quarter of this year. As a result of this initiative, we expect annual cost savings of approximately $25 million. And we expect to incur approximately $14 million in cash expenditures. We estimate that the pretax charge resulting from this initiative will be approximately $16 million, $10 million of this was recorded in the third quarter and we expect the remaining $6 million to be recorded in the fourth quarter. The initiative involves reduction in the company's workforce of approximately 80 employees as well as the elimination of approximately 65 contracted positions. The pretax charge consists of employee severance cost as well as outplacement services, legal, and other associated expenses. And finally, regarding our tax rate. In the third quarter, we recognized a $56 million Netherlands tax valuation allowance based on current application of tax accounting rules. With that, I thank you. I'll turn the call back to Tom.

Thank you, Kathy. So let me just summarize and then we can answer some questions. We think we delivered a strong third quarter performance that directly reflects our vertical integration and underscores our belief that we can consistently deliver a higher level of consolidated adjusted EBITDA per ton of pigment sold. Our adjusted EBITDA margin of 23% reached the highest level in the last 8 quarters. Our gross margin on sales of 16% improved from 11% last year and 12% in the prior quarter. We continue to pursue, as I mentioned earlier, our growth strategy and focus on unlocking superior value in both of our operating businesses and across several strategic options. And finally, for the 10th straight quarter, our board has declared a quarterly dividend of 25% -- excuse me, $0.25 per share. With that, I thank you. And we'll be pleased to take any questions that anyone has at this time.

[Operator Instructions] And our first question comes from the line of Hassan Ahmed from Alembic Global.

On the Pigment side of things, so, one question on Pigment and another question on the Mineral Sands side. On the Pigment side, there wasn't really much of a change on the inventory levels, maybe a tad bit up. But obviously, seasonally, Q3 is a bit weaker demand wise. So that should be expected. My question is that you talked about normal inventory levels for you guys in Pigment. Are you seeing similar things across the industry as well, both at the producer level and the consumer level?

Our visibility into our competitors inventory position is limited to whatever they say publicly. So I would have no better view into their inventory levels than you would. With respect to our customers, we actually -- we believe that the customer levels are normal to light. We have some indication from some of our customers that they're actually carrying less than normal inventory levels. But that's anecdotal, so I wouldn't necessarily describe that to the whole industry. But we have no indication whatever that our customers are carrying heavy inventories or excess inventories. And let me also point out with respect to our own inventory levels, I've mentioned that we had produced across the portfolio of Pigment production plants at mid-90s level, which is a very high level of production. And so a very slight increase in our inventory, given where the market is probably, it's not such a big deal [indiscernible] utilization was.

Completely so. Now carrying on that, sort of 90% plus operating rates in the like, and in line with that, we started seeing some sort of upward movement in titanium feedstock pricing. And as you always point out, obviously, higher operating rates, bode well obviously for the Mineral Sands side of the operations. My question to you is that in your mind, would you expect to see pricing sort of beginning to inflect upwards in Mineral Sands or for titanium feedstock through the course of 2015?

Yes.

You would. And final one on the Mineral Sands side. We had a big run up in zircon volumes in Q2. And then quarter-over-quarter, zircon volumes were down at 11%. So some choppiness there. How should we think about sort of the zircon market, be it on the volume side or the pricing side, through the course of end of this year and through 2015?

The volume -- zircon volumes globally,I think, are pretty strong. I mean, the quarter-to-quarter difference was more timing as the sales 55,000 tons to 50,000 tons, I think, approximately on both sides. So I don't consider that a significant indication of any new trend in the market. The prices right now are relatively solid, relatively flat. And as we have pointed out before that, that we thought that is -- the zircon inventories built up in the '12 and '13 period and are being worked down by our competitors. Our zircon inventories are basically down to where we want them to be, if not even a touch lower. But I think, other producers did develop inventories in 2012 and 2013 and those inventors are being worked down.

Our next question comes from the line of Edlain Rodriguez from UBS.

Just on the obvious question, Tom. I mean, what do you think it's been so challenging to get something done in terms of strategic options, either something small, medium or larger size? I mean as investors have been waiting for something to happen, I mean, what do you think it's been taking so long?

Because we try to be disciplined. I mean, we could have done a deal literally probably within 60 days of financing almost 2 years ago -- or 18 months ago. So there are transactions that are available to us. But we try to be disciplined about prices that we pay and that return on investment that we are expecting out of the opportunity and we're creating shareholder value. Remember that the part of the time period -- to be honest, our focus shifted a little bit. We started out thinking that this -- we would do this organic and inorganic growth in the TiO2 segment and that was pretty much of our exclusive focus. And we looked at both larger transactions and smaller transactions in the TiO2 market. As it became clear to us that the NOLs were going to be of the magnitude that they are, which actually finally became clear when the parties reached a settlement in December of 2013, whenever they reached the settlement. That became then a $10 billion item and so we kind of broadened our focus a little bit to look for opportunities to create value, where we could combine our tax deductions and also get a value increasing net income taxpayer that made sense operationally and strategically. So that's also part of the explanation.

Okay. And another question on pigment feedstock. I mean, you mentioned during the third quarter that 100% of the feedstock that was purchased from Mineral Sands were done at $758 per ton. That's higher than it was in the second quarter, which was, think, $714. What should we make of that? Does that mean all prices, all costs are going up? Or are those just reflecting cost from before?

No. I mean, we report the price that we -- let me take one step back. There is obviously a transfer price that has to be agreed between our Mineral Sands segment and our Pigment segment. That price is set to be market price less approximately 5% to reflect different credit risks and different sales and marketing expenses and other associated differences. So basically, when you see our number, what you should assume is market price for purchases in that quarter were 5% more than our number. And so if you see prices rising from quarter-to-quarter, that means market prices are rising. If you see it lowering, that means market prices are lowering. And when it -- I made this point in the opening statement. When Mineral Sands feedstock prices turn, that is when they start to increase, we will continue to benefit from the lower costs that immediately preceded the inflection point because we don't take the gross profit of Mineral Sands sales until we sell the pigment that is made from that Mineral Sands feedstock, which is normally 5 to 6 months after the sale of the Mineral Sands. So if you're somewhat in the pigment market in the feedstock prices turn, your prices are obviously going to turn up, your costs will turn up. Ours won't turn up for another 6 months, give or take.

Our next question comes from the line of Des Kilalea from RBC.

Just a question on the CP slag. If you're not selling the CP slag, does that mean that you will consume it internally and sell ilmenite to some other product? Or will you stockpile it? And if you do stockpile it, what impact might that have on costs?

We are presently stockpiling it. And I'm not totally sure the impact on costs. Kathy?

We actually not stockpiling slag, we're stockpiling rock so an immediate work in process. And clearly, it puts some working capital on the balance sheet. But being a producer, it's relatively -- it builds us some inventory as we do maintenance outages and furnace re-bricks and so forth. And so it's not a long-term cost strike for us. Additionally, a large proportion of our sales are internal because we consume the lion's share of our own production. So the excess that we would not have in marketplace is not going to move our working capital a dramatic amount.

So [indiscernible] the cost number doesn't directly affect costs. Other than -- we don't -- as Kathy said, we have -- we stockpile -- what I would say is stockpile slag in the form of these buttons. And we haven't milled them. So we have one more step before we would sell it out. So there is a little bit of a cost reduction there probably but not material.

So it's not sufficiently serious that you think about taking out one of the production units for early maintenance or something like that?

Not yet. And we don't -- and we think it's not going to be. We actually -- we are aware of that as a possibility. We know some of our colleagues in the industry have done, in fact, exactly that. We have a slightly different situation. Since we're not -- as Kathy pointed out, we're not dependent on third-party sales for 100% of our revenue or 100% of our demand for this product. But we can, if we decide it's appropriate. We're looking at prices carefully, obviously.

Our next question comes from the line of John Brennan from Sirios.

I just have a couple of follow-ups. On the feedstock cost side, you're -- with the purchase cost going up sequentially significantly, does that start to impact the margin on pigment in a couple of quarters? I'm just trying to tie that information with the guidance of continued margin improvement in the Pigment segment. And then I have two other follow-ups.

Obviously, costs -- feedstock costs are a significant component of our total pigment cost. And if they rise, then Pigment margins will decline, unless pigment prices increased by a commensurate amount. So yes.

But in the release, it said Pigment margins were going to be improving in the future. But it sounds like they're actually going to start to come down unless pricing goes up, I guess, [indiscernible].

Unless pricing goes up? Kathy?

Again, we eliminate the intercompany margin. And so if you look through all of it, we're going to continue to be profitable because it's the -- if you're focused only on the Pigment segment, you'll see a shift back into some of the Sand side. But if you look at the total company...

Only the prices don't go up in pigment.

Right. And so if you look at the total company, we're clearly going to continue to perform.

I understand that, okay. And then on inventory, you built $73 million in last 12 months, and you mentioned that Pigment was up a little bit sequentially but down versus the first quarter. So does that mean that there is some incremental inventory being built on the Mineral Sands side? And how does that relate to the stockpiling that you mentioned on the slag materials?

Yes, that's what that means. I mean, we -- I think we are up -- I think, quarter-on-quarter, we're up 9,000 tons or something, which against the 100- something thousand ton, totally sale volume normalized is 9%, obviously. The -- and then the slag that we are not consuming internally is, as we said to Des is being stockpiled. So that would increase inventory. That's really the only 2 elements that are adding to the inventory with any material impact.

Okay. And can you say what the FX benefit was in the quarter?

$5 million.

Okay. And then Pigment D&A was down sequentially about $7 million. What drove that?

Depreciation was down in Mineral Sands side actually, as some of the assets rolled off of purchase price adjustment. The D&A was largely down almost $19 million related to depletion in our northern operations as the yield fluctuates when we mine there.

Okay. But then Pigment dropped from 20, 29 to 22 sequentially?

We have Kevin Mahoney, our controller and Kathy Harper is now scurring through their various papers. Let us come back to that John, if we can.

Our next question comes from the line of John Roberts with UBS.

Tom, will we see any balance sheet effects from the NOLs as we go through year end or will everything remain in footnotes and not more likely than not to be utilized and therefore not booked anything to the balance sheet.

Obviously, we'll focus on that more sharply at the year end but it's my expectation now that we will not book it because that would be a more aggressive policy and particularly with respect to the actual quantum, that we will book. So I'd prefer to be more conservative rather, Kathy?

Well, and the other part of it is the settlement NOLs associated with the Anadarko litigations don't accrue to us until the spending happens. So they're not actually current today dollars that we could recognize until the spending happens. They -- when that happens is when they become realizable by us. So we couldn't recognize those until the spend.

There would be no receivable or anything like that in anticipation?

No.

We don't think so. We'll tell you at the year end, if we do something. But we don't think -- we don't anticipate it now.

The next question comes from the line of Hamed Khorsand from BWS Financial.

Could you just start off with just the overview -- of just the competitive nature of the business that you think you're going to face, given one of your larger competitors has been very active with a new plant earlier this year and now they just made an acquisition in China so they're becoming very aggressive in the marketplace as far as production goes for pigment?

I'm not totally sure what new plant you're talking about but...

Well, they started up a new plant in June, right? We're talking about Crystal. And now there's...

No. No. Stop, hold on. I don't know of any new plant that they started in June. So I don't -- so there is no new supply. Crystal had announced long time ago that they intended to build new slag furnaces. And they were scheduled I think originally for May and June or something, May and July, I don't know, but May or earlier. And neither one of them is currently operating. Neither one of them is contributing any supply into the market. So if that's what you're talking about, neither one of those 2 facilities actually made its schedule. And it's not -- they're not factors in the market. And recall we have 3 of the 4 people who -- 2 of the 3 people who designed almost all of the operating furnaces in the world presently work for us. And so we're very familiar with slag furnaces, how to design them, how to construct them, what it is going to take to get them into operation, the speed at which they will begin to produce commercially significant amounts. So we're pretty familiar with and we think we have a high level of confidence about the impact of that initiative and the timing of it, more importantly. The other question was something about Crystal, but I don't remember it, to be honest. What was the second element of Crystal?

Yes. So they're making -- they just acquired a plant in China. So they're becoming very aggressive as far as what they're trying to do from a production standpoint. So I'm just trying to gauge what it means to you, guys, from a competitive...

Well, I mean, obviously, no production means nothing to us competitively. What they're doing in China -- I mean, we are familiar with the plants in China. I think this agreement is with Henan Billions facility if I'm not mistaken and Henan Billions is a good company. They are a significant player in China. It's not a big production facility and I don't think it's going to have any impact on us, to be perfectly honest.

Okay. And what I'm trying to lead to this with is, going to Q4, which is seasonally weak or like you said, how that change your production schedule, given that you're probably going to try some managed inventory going into Q1? Or how you are going to go about that just so you get the contracts when they come back in the Q1 period?

How are we're going to manage production, is that what you're asking?

Yes.

The same way we always do in the fourth quarter. We'll probably -- we'll just continue -- we'll continue to run the plants. We build a little bit of inventory in the fourth and the first because we know that the demand will spike up in the second and the third. So every year we don't try to extract every last drop of productivity out of every plant. But we don't materially slow down. We build inventory and hold it for 1 or 2 quarters to deal with the spring selling season.

Next we have a follow-up from Edlain Rodriguez from UBS.

I mean, just a follow-up on the operating rates. I mean, you said, your's is in the mid-90%. I mean, that's much higher than the industry average. Are you being aggressive on market share? Or is it on pricing? Its like, why is your operating rate is so much higher than the industry as a whole?

Well again, I mean, look at our pricing, we said -- we talked about pricing and pricing I think was flat basically and it's been flat for 4 quarters. So we do not -- our volumes increase because our selling is more effective. We are combined with our -- with some very, very strong customers that we value very highly. Those customers themselves are growing larger than their markets. And so if we can provide them with simply the same share of their purchases as we have in the past, we will grow at a rate faster than the market. And we have invested time and money and energy into being good suppliers to these particular customers. With respect to the utilization rates in -- so the bottom line is we're not leading on pricing. You can see that from our disclosure about prices have been flat essentially for 4 quarters. We are not -- we operate the pigment plants at levels that sometimes, they're higher, sometimes they're lower. It kind of depends on when maintenance schedules fall and how -- just how the plant is operating, how supplies are and we're not trying to run them at all out nor are we trying to slow them down. So it's just -- it was an unusually high average utilization rate in the quarter, I agree. And when asked what I think the normal full utilization rate is, I say low 90s. We are a couple of percentage points higher than that. But that's not -- it's not a sign of anything in particular. Operator, are there any others callers in the queue?

Yes. Our next question is from Amer Tiwana from CRT Capital.

My question is sort of taking a step back and looking at the pigment industry. The cycle sort of taking a little bit longer to come back. I'm just trying to understand whether it's because of the demand side of the equation or whether it's the supply driven phenomena?

I think -- I mean, all of us will have their own view, but I think, this is pretty straightforward, to be honest, which probably implies that I'm missing something. But I believe this is all about inventory mismanagement, all up and down the supply chain. I mean, volumes now and they have been for several, several years actually have been strong. We sell essentially most everything, if not all, of what we make. And I think, our competitors across the industry are also producing at relatively high volumes. They're selling what they produce, generally speaking, and prices are generally flat. And so you wouldn't say that this is -- I wouldn't say this is a supply problem. But what I think has happened is, we first misestimated the development of inventory at our customers and we continue to produce when they were working down their inventories -- their excess inventories of pigment. So when they stopped to slow down their buying, we -- it took us a while to slow down our production. And therefore, we build inventories. And so in '12 and maybe even into '13 we were working down our inventories. When we were -- when we started working down our inventories, the way we did that is we reduced our plant utilization rates. And when we reduce the plant utilization rates, you also reduce purchases of all the input, particularly feedstock. The problem with that as of -- we can calibrate down from 90% to 80% to 70% and hit the lowest point, I think, we got was into the 60s. But our slag furnace or synthetic rutile kiln were one of those facilities, it's either on or it's off. And so it's producing slag even if we're not buying slag, if the producers decide that they don't want to shut down the entire facility. Finally, Iluka has shut down 4 of its SR kilns. We have Tinto, I think has shut down at least 2 of its slag production facilities. And so eventually people did begin to shut down their slag production and SR production. And that meant that inventories could work down, which is where we are now. In the meantime, because there were surplus inventories of high-grade feedstocks, prices declined. And therefore, a pigment operator, who has suddenly now working plant utilization rates at 90% plus inventories are back down to normal levels, you would expect them to raise price. But in fact, what they were experiencing was dramatic and material feedstock declines, price declines, which meant their costs declined, which meant their margins increased even without a price increase. And I think, that's where the pigment people are now -- where producer are today. If and when the feedstock prices turn the corner and they begin to rise, then I think, that will be a cost increase to the pigment operators who have not raised price in 8 quarters or something. And I think that our -- their response to that will largely -- will probably be to seek price increases to absorb cost increases. So I think, that's how I interpret why pigment prices haven't risen, even though all of these historical preconditions for price rises have been met.

[Operator Instructions] And our next question comes from the line of James Finnerty with Citigroup.

On the M&A front, you mentioned it's been 18 months since you raised the financing initially. As we move into 2015, has anything changed in terms of what you're looking to do on the strategic front, whether it be looking to be vertically integrated in TiO2? Would you ever step outside of that to buy assets that are in the U.S. that aren't necessarily directly related to TiO2? Is there a possibility of that?

Yes. Well, I mean, the reality is if we buy TiO2 assets, we will I think, achieve some strategic gains in the TiO2 market, but we will not use the NOLs to any significant degree. So if we want to use the NOLs in the transaction, then we probably have to step outside of the TiO2. We would prefer to be closer to our core competency, our expertise, which would mean we would look more closely at chemicals businesses than far afield businesses. But the reality is, there could be great value far afield. We would be more hesitant to go there because obviously, our knowledge will be less. But it's not inconceivable that we might go a little bit outside of chemicals even. But we're certainly looking at presently opportunities outside of TiO2.

And this concludes our Q&A session for today's conference. I would now like to turn the call back over to Tom Casey for closing comments.

All right. Thank you very much everybody. We appreciate your attention, your interest in our company. So we look forward to talking to you in a quarter. Thank you.

Ladies and gentlemen, thank you for joining today's conference. This does conclude today's program. You may all disconnect, and have a wonderful day.