Tronox Holdings plc (TROX) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Tronox Limited Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Brennen Arndt, Vice President Investor Relations. Sir, you may begin.

Thank you, and welcome everybody to Tronox Limited's second quarter 2017 conference call and webcast. With me today are Peter Johnston, Chief Executive Officer; Tim Carlson, Senior Vice President and CFO; Jean-François Turgeon, President of TiO2; and Ed Flynn, President of Alkali. We'll be using slides as we move through the conference call today. 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. A reminder today 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 2016 Form 10-K. 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, free cash flow and adjusted earnings 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 non-cash unusual and non-recurring items. Free cash flow represents cash flow provided or used in operating activities less capital expenditures. Adjusted earnings per diluted share represent EPS adjusted for unusual or non-recurring items on a fully-diluted basis. Reconciliations are provided in our earnings release. It's now my pleasure to turn the call over to Peter Johnston. Peter?

Thank you, Brennen, and welcome everyone. As you saw in our pre-release last week, our second quarter performance was strong with revenue up 16% over the prior year, adjusted EBITDA of $140 million, adjusted earnings per share of $0.09, and free cash flow of $53 million. As this is my first earnings release I plan to take full responsibility for all the success and blame any failures on the past, but on the more serious note, I would also like to reflect the results from a great team effort and a talented bunch of employees. Our TiO2 business delivered very strong results with revenue growth of 26%, adjusted EBITDA of $123 million, and free cash flow of $67 million. TiO2 achieved an adjusted EBITDA margin of 29%, reflecting the benefits of our vertical integration with all our assets in full operation and the result of the extraordinary work by the global TiO2 team to reduce costs through the successful implementation of their operational excellence program. Alkali Chemicals also had a very good quarter delivering adjusted EBITDA of $41 million, and free cash flow of $31 million. Our cash generation performance further strengthened our balance sheet. We closed the quarter with $303 million of cash on hand and liquidity of $484 million. We’re making significant progress on our strategic developments. As we announced last week, we signed a definitive agreement to sell Alkali Chemicals for $1.325 billion in cash. We anticipate closing that transaction in the second half of the year, prior to our plant closing of the Cristal TiO2 acquisition. We also announced our intention to refinance a portion of our capital structure. We expect the refinancing will lower our overall cost of debt, extend the portfolio's weighted average years to maturity, improve our mix of secured and unsecured debt, achieve more favorable covenants and provide additional pay down flexibility. As we communicated to you when we announced the Cristal transaction last February, we expect net leverage of approximately 4.5 times trailing 12 months pro forma EBITDA before synergies at closing of the transaction, which is expected to occur by the first quarter of 2018. Post closing, we intend to continue to reduce net leverage using the substantial free cash flow that is expected and further enhanced by the EBITDA growth generated from the substantial synergies inherent in our combination. The last few quarters are very exciting ones for Tronox. We are confident that 2017 will continue to be a year of strong performance and more importantly that 2018 will be a transformational one for Tronox. Moving to Slide 4 for a review of the Tioxide second quarter performance. The TiO2 segment revenue of $421 million was 26% higher than the year ago quarter, driven by higher pigment selling prices and sales volumes, coupled with higher selling prices for all Titanium feedstock and co-products. Pigment sales of 306 million increased 25%, compared to the year ago quarter. Sales volumes increased 6% and average selling prices increased 18%. Pigment selling prices were higher in all regions. Titanium feedstock and co-product sales of $99 million increased 36%, compared to a year ago quarter driven by higher selling prices for all products, as well as higher feedstock shipments. Titanium slag selling prices increased 4% and sales volumes increased 144%. The ilmenite selling prices increased 20% and sales volumes were up 201%. Zircon selling prices increased 4%, while sales volumes were 11% lower, due to timing as a large shipment originally scheduled for the second quarter was shipped in the third quarter. Natural rutile selling prices increased 8% and sales volumes increased 34%. Pig iron selling prices increased 38%, while sales volumes were 14% lower as a shipment moved from the second quarter to the third quarter. Compared sequentially to the first quarter, TiO2 segment revenue of $421 million increased 11%, driven by higher selling prices in both Pigment and feedstock and co-products, as well as higher sales volumes in pigment, titanium slag, and ilmenite. Pigment sales of $306 million were 12% higher than the first quarter as sales volumes increased 6% and selling prices increased 7%, 6% on a local currency basis. Selling prices were higher in all regions. Titanium feedstock and co-product sales of $99 million increased 8% from the first quarter. CP titanium slag sales were up 50% as selling prices increased 6%, and sales volumes increased 47%. Ilmenite selling prices improved 9% and sales volumes increased 55%. Zircon selling prices increased 4%, while sales volumes were 26% lower as the shipment moved from the second quarter to the third quarter. Natural rutile selling prices improved by 4%, while sales volumes increased 36%. Pig iron selling prices were 10% higher and sales volumes increased 2%. TiO2 segment adjusted EBITDA of $123 million was 116% higher than $57 million in the year ago quarter, driven by the strong top line growth we just reviewed and the benefit of higher production efficiency and strong cost performance. This adjusted EBITDA growth was achieved despite $11 million of foreign exchange headwinds coming primarily from the South African rand and to a lesser extent the Australian dollar. Compared sequentially to the first quarter, adjusted EBITDA of $123 million improved by 45% from $85 million, driven by the same factors as the year-on-year comparison. TiO2 achieved an adjusted EBITDA margin of 29% in the second quarter, which is as I said at the outset of my remarks is a clear indication of the benefits of vertical integration with all of our assets in full operation. This performance is also the result of the extraordinary work by the global TiO2 team to reduce costs through the successful implementation of their operational excellence program. The last time the business achieved a 30% adjusted EBITDA margin was in the third quarter of 2012. However that time pigment selling prices were 45% higher than they are today. Indeed a strong statement of the operating excellence of the TiO2 team. Last quarter, we committed to delivering a 30% margin by the fourth quarter, driven by sales and cost performance. We now fully expect to meet or exceed that commitment by the third quarter. TiO2 delivered free cash flow of $67 million in the second quarter as cash provided by operating activities was $86 million and capital expenditures were $19 million. Now moving to Alkali Chemicals in Slide 5. The Alkali Segment revenue of $201 million, compared to $205 million in the year ago quarter as sales volumes were level and selling prices were 1% lower. In the domestic market, selling prices increased 1%, while sales volumes were 6% lower due to timing and lower demand from container glass and detergent markets. In export markets, selling prices were level to the year ago quarter, while sales volumes increased 5%, driven by higher demand in the Asia-Pacific and Latin America regions. Compared sequentially to the first quarter, Alkali revenue of $201 million increased 5% as sales volumes increased 5% and selling prices increased 1%. In the domestic market, selling prices were 1% higher and sales volumes increased 5%. In export markets selling prices were also up 1%, while sales volumes increased 4%. Alkali adjusted EBITDA of $41 million increased from $25 million in the year ago quarter driven by higher production volumes and lower operating costs. The prior-year quarter including items totaling $9 million that did not occur in the current quarter. They were the move of our longwall mining machine, the transition from a shared services agreement to a Tronox system and a labor agreement contingency planning costs. Compared sequentially Alkali Segment adjusted EBITDA of $41 million improved from $38 million in the first quarter, driven by higher sales volumes and selling prices. Alkali delivered cash flow of $31 million in the quarter as cash provided by operating activities was $35 million and capital expenditures were $4 million. I will close my comments on Alkali with a heartfelt thank you. Alkali Chemicals has consistently delivered strong operational and financial performance over a very long period of time. The caliber of the Alkali workforce and their commitment to safe high-quality production are unmatched in the natural soda ash industry. I thank the leadership team and all Alkali employees for their contributions to Tronox. I’ll now turn the call over to Tim Carlson for a review of our financial position. Tim.

Thank you, Peter. I’ll begin with a review of corporate items and then move to our balance sheet and cash flow statements. Corporate loss from operations was $29 million, compared to a loss from operations of $10 million in the year ago quarter with the loss from operations of $35 million in the first quarter. The loss from operations in the second quarter included professional fees of $11 million, primarily related to the Cristal transaction and a process to market our Alkali business, as well as higher employee stock-based and other compensation costs of $5 million. Corporate adjusted EBITDA was a negative $24 million, compared to a negative $15 million in the year ago quarter to a negative $22 million in the prior quarter. Corporate cash used in operations was $44 million and capital expenditures were $1 million. Total selling, general, and administrative expenses were $69 million in the second quarter, compared to $51 million in the year ago quarter and $74 million in the current quarter. The SG&A expenses in the quarter included the $11 million of professional fees associated with our Cristal on Alkali activities, as well as higher employee stock-based and compensation costs of $7 million. Interest and debt expense of $46 million was level to a year ago quarter and the prior quarter. On June 30, 2017 gross consolidated debt was $3.05 billion and debt net of cash and cash equivalents was $2.7 billion. Liquidity was $484 million and cash and cash equivalents were $303 million. Our blended cost of debt was 5.7% in the second quarter and on June 30, 2017 49% of our total indebtedness was set at a fixed rate. Our expectation for cash interest for the full year continues to be in the $170 million to $180 million range. Capital expenditures were $24 million and depreciation, depletion, and amortization expense was $62 million. Capital expenditures for the full year are expected to be $150 million and depreciation, depletion, and amortization expense is expected to come in at approximately $245 million, both assuming a full year of Alkali. As Peter mentioned, we announced our intent to refinance a portion of our capital structure and expect to lower our overall cost of debt, extend the portfolio's weighted average years to maturity, and prove its mix of secured and unsecured debt and achieve more favorable covenants. We also expect the new debt will provide additional pay down flexibility as the combination of Tronox's and Cristal’s TiO2 business is expected to generate substantial additional free cash flow. We expect to complete the refinancing in mid-October. With that, I thank you and I’ll turn the call back to Peter.

Thanks Tim. We’ll close our remarks by sharing our perspectives on the balance of 2017 and the momentum we expect to tight into 2018. As we have said, we are confident that 2017 will continue to be a year of strong performance and that 2018 will be a transformational one for Tronox. While we have a number of strategic developments occurring in the second half of this year and the first quarter of next year, we will continue a laser-like focus on delivering strong operating results from our existing businesses. We see the momentum in our TiO2 business continuing across the balance of this year and into 2018 as we expect to benefit from additional pigment selling price increases, favorable market conditions in titanium feedstock and co-products, and the benefits of vertical integration with all our assets in full operation. As I said, we fully expect to deliver a 30% or greater adjusted EBITDA margin by the third quarter. We see that tightness in the global supply demand balance in pigment continuing and this includes taking into account Chinese producers. We believe that pigment inventories in aggregate remain at or below normal levels at customer and producer locations globally. We also believe pigment producers globally are running at high utilization rates. Again, this includes Chinese producers. The result is little untapped global capacity. As a result of these tight pigment market conditions, we are seeing tightening conditions in feedstock markets. This should provide cost pressure on non-integrated pigment producers who purchased feedstock. This in turn should provide further motivation for higher pigment selling prices that to a level in our view is still well below the pricing level that would justify an investment in a significant brownfield expansion or greenfield capacity. Tronox as a fully integrated producer will benefit from rising margins at both feedstock and pigment levels. We are also seeing tightening supply demand conditions in Zircon and expect to benefit from higher sales volumes and selling prices in the second half of this year. Regarding the strategic developments underway here’s a summary of the expected timeline for achieving the key milestones in this work. We anticipate one; completing the refinancing by mid-October; two, holding the shareholder vote on the Cristal acquisition also by mid-October; three, closing the sale of Alkali in the second half of this year; and four, closing on the Cristal acquisition by the end of the first quarter 2018. We are confident that we will achieve each of these milestones on their path to position Tronox as the global leader in TiO2. With that, I thank you all. We will now open the call for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Hassan Ahmed with Alembic Global. Your line is now open.

Good morning, Peter.

Good morning.

Peter obviously impressive results and one of the themes obviously was the strength in TiO2 pricing and in the press release, as well as your prepared remarks you guys talked about strength across all regions, so just wanted you to, if you don't mind expand on that, you know where there some regions stronger than others, obviously there has been a decently large outage out in Europe, so was European pricing stronger than call it North American pricing and the like, and part and parcel with sort of, if there are divergences in pricing on a regional basis, did you guys for the course of the quarter also see any significant changes in trade flows?

Thank you for the question. No, matter of fact we have seen strong pricing across all regions. That’s been one of the great successes of the quarter and we also expect that to continue going forward. So there was very little difference in any regional perspective. And that underlines the earnings because the strength across the board and we expect that to continue.

Perfect. Now as a follow-up on the Alkali sales side of things, you know leading up to the sale announcement there seem to be some sort of press articles talking about maybe potentially a higher sort of price for the business. So just wanted, I know there is sensitivities around, talking about these things, so being fully cognizant of that, just wanted sort of an explanation around whether the timing of the close, the cash component associated with the deal and maybe potentially any anti-trust concerns led you to take this bid versus potentially a higher bid if there was one?

Thank you very much. I can make a few comments on your questions there. The genesis proposal, in our view, was the most compelling in its overall value. It was a coronation of factors, including price favorable contract terms, speed to closing, committed financing, and expected ease of regulatory approvals. I guess in aggregate these provided the highest level of certainty to Tronox. The board was unanimous also in its decision. Obviously the proceeds will be used to fund the majority portion of the cash consideration for the Cristal acquisition and as we have said this is expected in the first quarter of 2018. In the end it was the most compelling bid.

Very helpful. Thank you so much Peter.

Thank you. Our next question comes from the line of John Roberts of UBS Capital Markets. Your line is now open.

Thank you. Have you gotten any update on how Cristal’s business performed during the quarter?

Not specifically. We are in close discussions with Cristal and that will continue but we have to be careful with any further discussions because of the deal is simply not closed. Yes we are in discussions, but the performance is reasonable, but we have to wait until the proxy and the vote by shareholders before we can get into the more intense detail.

And then has Exxaro given you any insights into how they plan to exit timings, mechanism, et cetera?

No. We can only go on their public announcements, but we expect Exxaro will wait till after the proxy vote is taken and they have already declared that they will be selling down some of their equity and we expect the first tranche of that sale to be in the last quarter of 2017. That is the only detail we have at this stage. I can honestly say if you have got any queries about that any of those references should be directed directly to Exxaro.

Okay. Thank you.

Thank you. Our next question comes from the line of Roger Spitz of Bank of America Merrill Lynch. Your line is now open.

Thank you very much and good morning. Regarding your proposed refinancing, do you intend to call the [indiscernible] callable shortly at 1 or 1.5 about, or would you consider perhaps even redeeming the 7.5 currently at [indiscernible] as it is not called until March 2018?

We are currently looking at a number of different structures, the 2022 notes, the call premium on that are a little bit too expensive right now relative to the economics of the refinancing, given the strong cash flows that we anticipate from our TiO2 business. In 2018, we would expect to address that at some point in mid-year next year, but definitely the ABL, the term loan and our 2020s are currently in our mix in terms of what we are looking at.

And regarding the TiO2 pigment industry cycle, can you give us your input about far you are in the cycle from bottom to top?

We have had four to five quarters now of price increases, but from what I consider a very low base, so I think we are certainly no way near the top, but we expect without the spikes in the - hope fully in this upward trend that our expectation of prices will remain firm for the next several quarters going forward. Beyond that it’s too hard to see, but I think we’re into that positive upward trend without the potential to have a severe spike. So, we're very confident in the market where it’s heading without the extremes of the past.

Thanks and lastly in Alkali in Q2, did your volumes benefit from an unplanned outage of a nearby competitor and what are you seeing in regards to forward pricing, any impact on Generis Turkish capacity start-ups?

I will hand that over to Ed Flynn.

We did not see any benefit as a result of competitors operations. It’s too early to tell what will happen in 2018 pricing. We - and domestically, we increased price $6 a ton. It’s pretty early in the contract season for us to begin to have those domestic negotiations. On the export side, a similar Latin America with their annual contracts. What we have seen in the Asian side, pricing was again up in the second quarter and we estimate that pricing will probably remain at that level for the rest of the year and we also as reported in the press saw the increased pricing in Asia $5 a ton. So we think that bodes well for Asia prices.

Thank you very much.

Thank you. Our next question comes from the line of James Finnerty of Citi. Your line is now open.

Thank you. Just with regard to the timing of the refinancing, would it happen post the close of the sale of Alkali?

Tim.

Yes, the Alkali transaction right now is expected to close some time here in the second half. We’re looking to kick off our refinancing process shortly after Labor Day with the hopes of completing it before mid-October, and also there might be some overlapping there, there might not be some overlapping there just giving the time to the Alkali transaction.

And in terms of changing the mix of your secured versus unsecured, would it be to increase the amount of secured or decrease the amount of secured versus current split?

Yes we are currently looking at a lot of our different options. One of the things that we're looking at is given the strength of our future cash flows we want to make sure that we’ve got the flexibility, the pay down debt as appropriate. We’re talking with our banks right now and we will make a decision on that in the next couple of weeks.

Okay, thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Jon Evans of SG Capital. Your line is now open.

Can you just talk a little bit on the refinancing side from the standpoint of, I mean you should generate a lot of free cash flow next year if the cycle stays intact and what I'm hoping to understand is from a debt to EBITDA coverage, where is the goal or where do you guys want to get to and then would you start giving back money to shareholders either through a dividend or buying back stock or can you just talk a little bit about that?

I would be happy to Jon, it’s a bit too early, as we’ve talked about just given the strength of [indiscernible] and Cristal's business, we plan on being at that 4.5 times level when we close at some point in Q1. The business does generate a significant amount of cash as I mentioned and that’s one of the reasons we’re looking at changing the mix of our debt such that we will be paying some debt down. Long-term, we’d love to try to be in the two to three time level rage ratio and then what we do with our capital allocation at that point in time, you know we will make a decision as a company.

Okay great. And then you talked about the 30% margin Peter that you guys would be there exceeded in the third quarter, and I guess just, if pricing continues, the cycle continues, do you think you can do another seasonality of the business, but do you think you can do a 30 or greater percent for the full year in 2018?

It obviously very much depends on the business cycle, but I have been very impressed with the TiO2 team performance in the operational excellence program produced several quarters of row increasing margins, and we expect that to continue and implemented some very strong disciplines on cost control throughout the business, also we expect that to continue. The business is aligned to continue with that discipline, so that we really focus on margin in this benign environment. There will be no relaxation on that at all. So, I think yes we are fairly positive we can continue with an upward trend in 2018.

And then the last question I have for you is on pricing trends for the industry, you know in the past the industry is captured somewhere about 50% maybe 60% of kind of the realizing the pricing that’s been put out, as the market continues to tighten do you see that percentage of capture starting to go up or accelerate because it seems like everybody is pricing leased on a sequential basis is accelerating?

That’s a difficult question to predict the market in that sense. In previous cycles, the markets obviously had some excessive peaks because of the supply demand curve gets out of [indiscernible]. This time we’re seeing much more discipline in the industry. There is limited new capacity and frankly we don't want to see price spikes, we would rather see a slow, but steady improvement over time. So it’s going to be an interesting phase to watch, but so far the industry for the first time has been much more disciplined and we would like that to continue and we will continue on that trend, I guess it’s the slow and steady improvement rather than the roller coaster. And if we do a slow and steady improvement over a period of time, I think we will reap the margin.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Anurag Kapur with Wells Fargo. Your line is now open.

Hi, I was wondering if you could just give a brief summary of where things are and where you see things in China with producers there in terms of pricing environment, and then secondly if you could also talk about the regulatory hurdles to overcome and where those are perhaps most pronounced, whether it is in Australia or North America?

Jean-François, could you take the first question? Jean-François Turgeon: Yes for sure Brennen. Look about China; I think that it’s clear that what we have seen is the trend that has started in 2016 with 13 price increase or pigment as continue in 2017. Yes it is true, that it is a global market and the Chinese has export more of [indiscernible] but the export price has significantly increased in package now above the price that we are selling our pigment, and then we have no reason to see that trend to change. So I think that we compete with Chinese in the global market, but we are well positioned to be able to compete with them more importantly because of the increase feedstock prices that they have to incur to operate, and the fact that the government has put environmental law or a rule that now needs to be followed by the Chinese, so we compete on a more even level. So, we are not worried about China, in fact we think that we could benefit from those price increase that the Chinese are pushing at the moment.

Thanks John. Jean-François Turgeon: Peter maybe you want to talk on the regulatory.

Yes thanks JF. On the regulatory environment clearly we’re working closely and cooperatively with the FTC and other regulatory agencies around the world to obtain all the approvals for the transaction. We’re providing them with all the information, documents and data that they typically request in any form, merger investigation. And I guess as we have previously stated we anticipate obtaining all approvals and closing the transaction by the end of the first quarter 2018, but this date is rarely our best estimate for obtaining all the necessary clearances, but we can never be certain when or if all the conditions to the transaction will be satisfied or that the transaction will be completed in that time. It is just our best estimate and we’re hopeful to stick to that schedule.

Okay. And at this point is there anything further you can see in terms of potential further divestitures that might maybe required or in any particular geography?

No there is no planned further divestitures in any of the geography or in any geography?

Thank you.

Thank you. [Operator Instructions] Our next question will come from the line of Gary Allen of [indiscernible]. Your line is now open.

Thank you. Quick question, I mean your core business seems to be the titanium dioxide, but you have got a specialty chemicals division in Nevada, can you please comment on how that is being doing over the year and the future of it? Andreson?

I will pass it over to JF to comment. Jean-François Turgeon: Thank you Peter and thank you Gary for your question. Look we have put in place in Anderson the same best practice that we have put in our titanium business to try to minimize cost improved margin control capital, and I think we’re doing very well with that business. It’s just that the size of this business is a bit too small for the overall trauma. So when we mentioned that at some point we may sell some of the non-core assets look that could be an option for us to sell our business in Anderson, but you could imagine with all the strategic elements that are going on at the moment we thought this is a business that generates cash for us and doing well, so we keep running as well, and at the right time we will decide what to do with it.

Okay, thank you.

Thank you. Our next question will come from the line of [indiscernible] of Standard Bank. Your line is now open.

Thank you. I am just trying to reconcile your adjusted EBITDA of $140 million to your free cash flows is 53, considering that your CapEx was so low. So, I understand that you spent 11 or you had $11 million of foreign exchange headwinds, can you please explain to us of the 11 million professional fees and marketing expenses for Oklahoma if that was expense through your or rather was paid in cash for the quarter?

I will pass it over to Tim.

So the $11 million of professional fees that were paid during the quarter were all - about three quarters of that was cash, the rest of it was accruals. The other items that are impacting the adjustment are shared compensation of about $8 million, as well as some pension adjustments.

Thank you.

Thank you. Our next question comes from the line of Jon Evans of SG Capital. Your line is now open.

Just to follow-ups. Can you talk a little bit about inventory levels at customers any kind of insights that you have, do you feel like there has been any kind of pre-buying since you’ve had this steady increase in pricing?

I will pass it over to JF. Jean-François Turgeon: Jon, thank you for the question. That’s obviously something that we follow very closely and our view and I think Peter mentioned it in the text is that, we are below or at level of inventory. Certainly in our case, we are well below the inventory that we would like to have with - of pigment and the inventory of our customer that we’re able to track and with discussions with them, we know that they are also at low level. So, we feel very comfortable that at the moment there is not a situation, which is similar to what had happened in 2011 and 2012 when we were at the peak of the cycle. And I think that we have mentioned that you - our intention is to align our production with the demand that we see and that certainly how it has been operating in the last year.

Okay. And then you guys have got some great incremental sequentially, you had those two furnaces come one etcetera, where those furnaces or the furnaces that you have run full out in Q3 or will they start to come down?

JF. Jean-François Turgeon: Thank you, Peter. I think that we have mentioned that with the Cristal deal that should close in Q1 will obviously move from the position of being long on the feedstock side to a position where we will be short on the feedstock side, and that’s one of the synergy value of the deal with Cristal. It will allow us to run our mineral business full out at either level of the cycle. So, obviously at the moment, we’re in an up cycle, but that’s the beauty of that Cristal acquisition. It will allow us to always maintain our furnace at full production. And those like to run and that’s the intention in Q3 and Q4 to run those furnace at full capacity.

Got it. And then just a last question, you alluded to kind of your advantage because you are integrated on the old side et cetera it sounds like the cycle at least in the ore piece is starting to turn and it turned later behind pricing in TiO2, how do you foresee that kind of ore pricing going forward, do you think it’s higher than TiO2 prices just in general or can you give us any inside into that because it seems like that's very critical for how pricing of the TiO2 is going to go forward in 2018?

JF. Jean-François Turgeon: Jon, we mentioned when the TiO2 priced turned that it is normal that normally nine months to six months after you would start to see the feedstock price move up and we have seen that and if you look at the people who supply the feedstock industry they have talked about a significantly increase. Ilmenite if the product that has the most increase recently and in order to make high-grade feedstock you need to use ilmenite. So it is expected that the high-grade feedstock will continue to increase. We have announced about 4% increase at the moment, but we expect that to continue and with strong pigment demand we had seen the inventory of feedstock being significantly reduced and it makes sense that people start to restart their mind and smelter to try to meet the demand and we expect price to move to justify that restart. So, I think that we should see some benefit of being a fully integrated producer and that’s why we will benefit from the margin on the pigment, but also the margin on the feedstock and that’s why we’re confident that TiO2 pigment price will need to continue to increase because this will be necessary to absorb the additional cost for the feedstock increase.

Great, thanks for the answer. I appreciate it.

Thank you. [Operator Instructions] Our next question comes from the line of Edlain Rodriguez of UBS. Your line is now open.

Thank you. I mean just one quick one. Given that we enter in the seasonally slower demand period for TiO2, let’s say in Q4 and Q1 of next year, I mean do you think TiO2 prices can go up during the seasonally slow demand period?

We agree with you. Good question. We agree with you. This is traditionally a slower price environment in Q4 in Q1. However, we are not seeing any resistance in the market. We think the market will continue to improve but may be at a slower pace than the previous two quarters, but there is limited new capacity, the demand is still solid in all their markets. So, we believe the underlying fundamentals are still very sound.

Yes, thank you.

Thank you. And I’m showing no further questions at this time. I would like to turn the conference back over to Peter Johnston for closing remarks.

Thank you everyone for your questions. I just like to sum up and say, look we had a very strong quarter, the business is in good shape, the management is focused, the fundamentals of the market are sound and continue to improve, and we can and will work hard to improve our margins and hopefully see you - look forward to talking to you all in the next quarter. Thanks very much.

Ladies and gentlemen thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.