Tronox Holdings plc (TROX) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Tronox Limited First Quarter 2019 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 be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I it is now my pleasure to introduce, Senior Vice President of Investor Relations, Brennan Arndt.

Thank you, Andrew, and welcome everyone to first quarter 2019 conference call. On our call today are Jeff Quinn, Chairman, Chief Executive Officer; Jean-François Turgeon, Chief Operating Officer; John Romano, Chief Commercial Officer; and Tim Carlson, Chief Financial Officer. We will be using slides as we move through today's call. Those of you listening by Internet broadcast through our website should already have them. For those listening by telephone, if you haven't already done so, you can access them on our website at tronox.com. Moving to Slide 2, with a reminder that the comments made on this call, as well as the information provided both in our presentation and on our website include certain statements that are forward-looking and subject to various risks and uncertainties including, but not limited to the specific factors summarized in our SEC filings, including those under the heading entitled Risk Factors in our Annual Report on Form 10-K/A for the year ended December 31, 2018. This information represents our best judgment based on today's information. However, actual results may vary based on these risks and uncertainties. The Company undertakes no obligation to update or revise any forward-looking statements. During the conference call, we will refer to certain non-U.S. GAAP financial terms that we use in the management of our business and that we believe are useful to investors evaluating the Company's performance. 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. For the company’s guidance with respect to second quarter 2019 adjusted EBITDA, we are not able to provide without unreasonable effort the most directly comparable GAAP financial measure or a reconciliations of such GAAP financial measure, because certain items that impacts such measure are uncertain or out of our control or cannot be reasonably predicted. I also call your attention to an 8-K/A we filed on May 7 that presents 2018 pro forma financial statements assuming the Cristal transaction had closed on January 1, 2018. Moving to Slide 3, it's now my pleasure to turn the call over to Jeff Quinn. Jeff?

Thanks, Brennan. Good morning everyone and thanks you for joining us today. The first four months of this year have been marked by significant strategic accomplishments for Tronox. It has been a time of great challenge, and a time of great satisfaction. The most notable accomplishment of course was the closing of the Cristal acquisition which occurred on April 10. It was a transformational moment for our company. The new Tronox is now the world’s largest vertically integrated TiO2 producer with participation at every level of the titanium value chain, the second largest TiO2 pigment producer in the industry, the second largest mineral sands producer in the world, and the world’s second largest zircon producer. We are an enterprise with an unmatched global footprint consisting of nine pigment plants and eight mineral sands facilities on six continents. We have about 1.1 million tons of nameplate TiO2 pigment capacity; 87% of it being differentiated chloride technology featuring both high-pressure and low-pressure oxidization; and the remaining 13% being sulfate technology. We have a great assets and a strong market position in every corner of the world, but it is our extraordinary people that would differentiate us. We have a rich diversity of talent with deep operational, technical and industry expertise. The new Tronox is the most culturally and geographically diverse team in the industry and we have taken the first step to build a culturally based high performance organization. I can unequivocally state that we are now one Tronox. More than 100 members of our new global leadership team met two weeks ago to align on our new course and to move forward as one to implement our integration plans. Just to give you a feel for the diversity of our new company, at that meeting in one of the sessions, there were 23 different languages spoken at a table of eight to ten people. The energy at the leadership conference was high and our newly combined team was filled with enthusiasm. It was inspiring to hear numerous people make the same memoir which was that one we never know that two weeks ago leads with two different companies. We are now one and we are moving forward together. Though a major milestone for us, the Cristal transaction is that one in a series of transactions that has positioned us to create sustainable long-term value for our shareholders. As we committed a few weeks ago, when we announced the closing of the Cristal deal, the associated remedial transactions were completed on schedule with the divestiture of the 8120 paper laminate grade to Venator closing on April 26 and the sale of Cristal’s former North American TiO2 business to INEOS closing on May 1. As we also foreshadowed on the deal announcement call, we this week used a portion of the proceeds in the INEOS transaction to repurchase 14 million shares of our common stock directly from Exxaro at a price of $14.32 per share. The purchase price per share represents a 5% discount to the ten days dewrap as of the day Exxaro exercise its right to sell the shares as agreed in the mineral sands transaction completion agreement. While our stock price has moved against us a little in the days after that price was set, we are not in the business of day trading our own shares and believe that this use of proceeds was a value-accretive action for the long-term. With the completion of this sell, Exxaro now holds approximately 14.7 million shares representing approximately 9.9% of Tronox’s outstanding equity and as previously articulated by them, Exxaro intends to continue to orderly sell-down of its ownership in accordance with the terms of the mineral sands completion agreement. With the repurchase of these shares, we reduced our share count from approximately 163.3 million to approximately 149.3 million shares outstanding. As I have stated in our press release last night, we believe our combination with Cristal comes at a time when market conditions in feedstocks are favorable, market conditions in co-products, primarily zircon are favorable and pigment market dynamics are improving. We are in an advantage position to benefit from both zircon production and feedstock integration. While the timing of zircon’s shipments can be a little lumpy, and create some quarter-to-quarter noise, zircon continues to deliver significant profitability and margin enhancement. As an integrated producer in the current favorable feedstock market conditions, we also expect to drive significant and differentiating benefits relative to non-integrated pigment producers. We believe integration will be our differentiator. At our upcoming Investor Day, we will discuss this belief and share with you some of the analytics that show how historically this has been true and how we believe it will be true in the future allowing us to produce more consistent financial results throughout the cycle. Our transaction also comes at a time when global TiO2 pigment markets are improving. As John Romano will discuss in a few minutes, we believe markets in Europe and Asia are stabilizing, inventories are normalizing and the North American market is remaining resilient, all very good signs for the new Tronox due to our significant market position in each of those regions. In the first quarter, sequential and year-over-year revenue comparison reflected the transitioning pigment market conditions that improved as the quarter was completed. Our revenue comparison also reflected lower feedstock and zircon volumes due to the timing of shipments. Our adjusted EBITDA comparison reflected the financial impacts of actions taken as we prepare to move from a long to short position in feedstock following closing of the Cristal acquisition. We increased high-grade feedstock production and put that lower unit cost products into inventory, which will benefit margins in future quarters beginning with the second quarter. We also undertook preparatory maintenance at two facilities. But these actions had a negative financial impact in the first quarter that was reflected in our results. As Tim will discuss further, sometimes the short-term GAAP results do not reflect the economic benefits of certain longer-term-oriented actions. We are expecting strong second quarter results with adjusted EBITDA of $125 million to $135 million from legacy Tronox operations, plus what we do from the Cristal legacy business. Improved pigment market conditions, increased zircon shipments and the margin benefits of our pre-closing actions should all contribute to a substantial increase from the $80 million we reported in the first quarter. Our new organization structure is in place down three levels from the CEO and our complete operating structure will be implemented within the next 60 days. Jean-François operations team has been on location at all of the new sites around the world and have a handle on the status of the assets. He will share with you some of his initial observations in that regard during his remarks. John Romano’s new commercial team is often running to implement our commercial approach and philosophy across the globe. As you can appreciate until a month ago, Tronox and Cristal were still competitors and we were not privy to some of the commercial philosophy and approach of the legacy Cristal organization, but that has changed. We will employ a singular commercial philosophy across the globe to better serve a global customer base. The fact that we are now one, moving together forward is as important in the commercial area as any aspect of our company. Our integration work streams are well underway including applying our financial planning and analysis methodologies to the former Cristal operations. We intend to complete that process in time to provide a 2019 and 2020 forecast for the combined business at our Investor Day on May 30. In addition, our integrated business planning function has already began to use our proprietarily developed business optimization and linear programming capabilities to optimize the industry’s most complex and sophisticated business footprint. With the complexity comes some challenges of course, but even greater opportunities. Until the FPA and IBP processes were fully implemented, it may no sense to rush to try to provide a go-forward view of the integrated business. As I said previously, this work and planning will be completed in the next few weeks and we will present that forecast at the Investor Day. I now would like to turn the call over to John Romano, our Chief Commercial Officer and then Jean-François Turgeon our Chief Operating Officer. John will report on our commercial performance and the trends we are seeing in global markets. Jean-François will report our operating performance and outline how the actions taken in our operations will benefit our results in future quarters. John and Jean-François will also share their perspectives on the new Tronox in our first 30 days. John?

Thanks, Jeff. Moving to Slide 4, I will start with a look at our revenue performance in the first quarter versus the first quarter of 2018. Revenue of $390 million was 12% lower, primarily due to lower pigment sales volumes, the absence of $12 million of revenues booked in the year ago quarter from the Electrolytic business which was sold in September of 2018 and an unfavorable euro translation of $6 million. Revenue was 9% lower excluding the Electrolytic revenue in the year ago quarter. Pigment sales of $286 million compared to $333 million in the year-ago quarter. Sales volumes were 10% lower as customer destocking in Europe and Asia continued in the first quarter. As Jeff mentioned, the North American market remains resilient. Selling prices were 2% lower on a local currency basis and 5% lower on a U.S. dollar basis, as the euro translation was a $5 million - $6 million headwind on revenue. Titanium feedstock and co-products sales of $104 million increased 7% from $97 million in the year-ago quarter. Zircon was a primary driver with sales of $64 million, an increase of 5% as 17% higher selling prices were partially offset by 10% lower sales volumes due to the timing of shipments. Zircon, as you know, is a very attractive product for us that deliver significant profitability and margin enhancement to our business. As large portion of our Zircon is delivered in bulk shipments via ocean freight. The shipments are periodic and their timing can be subject to events out of our control such as port congestion and weather. As a result, zircon is a product that is better suited to track on a multi-quarter or full year basis rather than quarter-to-quarter. With that, let me share our outlook for zircon in the second quarter. Recall that shipment volumes in the fourth quarter last year were significantly higher than those of the first quarter. In the second quarter, we are expecting zircon shipment volumes to be up significantly to a level similar to those of the fourth quarter and therefore, one of the key drivers of the substantial increase in adjusted EBITDA we expect in the second quarter compared to the first quarter. Now moving to pig iron, demand remains stable especially for the foundry-grade material. Pig iron sales of $19 million were leveled to the year-ago quarter as 2% higher selling prices were offset by 2% lower sales volumes. Feedstock and other product sales of $21 million increased from $17 million in the year-ago quarter primarily driven by higher synthetic rutile and slag fines sales to Cristal in advance of the closing to validate the value of our vertical integration in the acquired operations. There were no ilmenite sales in the first quarter, compared to $5 million of sales in the year-ago quarter. We were not actively selling ilmenite in the market as we were preparing for increased internal requirements following the closing of the Cristal acquisition. Now that we’ve moved from a long position in feedstock to a short position, feedstock sales with the exception of CP slag are essentially going away. We will continue to separately report sales of TiO2 pigment and zircon and the feedstock and other products line will now include pig iron and other co-products including titanium tetrachloride and caustic which came with the Cristal acquisition. Now moving to Slide 5 for the sequential comparison versus the fourth quarter of last year. Revenue of $390 million decreased 9% from $429 million in the prior quarter as higher pigment sales volumes were more than offset by lower sales volumes for feedstock, zircon and pig iron due to the timing of shipments. Pigment sales of $286 million, increased 9% from $263 million in the prior quarter. Sales volumes increased 10% driven by the normal seasonal increase, coupled with positive momentum in European and Asian markets at the end of the quarter as destocking continued to run its course. Sales prices were 1% lower on a local currency basis and 2% lower on a U.S. dollar basis. The impact of the euro translation on pigment sales was negligible compared to the prior quarter. Titanium feedstock and co-products sales of $104 million decreased 37% from $166 million in the prior quarter, again due to the timing of shipments for CP slag, zircon and pig iron. Zircon sales of $64 million were 22% lower than the $82 million in the prior quarter, as 3% higher selling prices were more than offset by a 24% decline in sales volumes, due to shipment timing. Pig iron sales of $19 million decreased 24% from $25 million in the prior quarter on 24% lower sales volumes, also due to shipment timing, while selling prices were level to the prior quarter. Feedstock and other products sales of $21 million decreased 64% from $59 million in the prior quarter. There were no ilmenite sales in the current or prior quarter, and there were no CP slag sales in the current quarter as we prepared for the Cristal closing, compared to $29 million of sales in the prior quarter. Now moving to Slide 6, here is a look at our TiO2 pigment sales in 2018 for the combined new Tronox on a pro forma basis. The data show only sales of TiO2 pigment and do not include feedstock or co-products. As you can see in the new Tronox chart on the left side of the slide, it’s very clear that our combination results in a very balanced geographical pigment sales mix that enhances our global footprint with 21% of our sales in North America, 8% in Latin America, 30% of our sales in both Asia-Pacific and Europe and 11% in the Middle East and Africa. This geographical balance positions us well to grow with our customers as they grow anywhere in the world. Our global scales affords us greater opportunities to work with our customers on new product developments and quality improvements. We will also benefit from greater participation in higher growth emerging markets that complement our position in North America and we will now participate in specialty and ultra fine markets. One of the positive developments that we’ve identified since the close of the transaction is that the customer overlap between the two companies is much less significant than we originally anticipated. This will eliminate some of the potential risk associated with the price harmonization process that we will be working through in the coming months. As we’ve reported in recent conference calls, we continue to successfully work with our customers on unique win-win margin stability initiatives that provide a predictability of price and stability of supply that our customers are looking for and at the same time the margin stability that will allow us to consistently reinvest in our business throughout the cycle. Now that we’ve closed the transaction, and have the benefit of 30 days of insight into our combined commercial business, it’s clear that we have an opportunity to accelerate our work on this important initiative with our customers. And finally, we are looking forward to our Investor Day on May the 30th where we will share our path forward for the global commercial team. The primary commercial topics that we will discuss include: the commercial advantages that results from our unmatched global footprint; our TiO2 market outlook; and the perspectives on cycles; an update on our margin stability initiative and how it’s shaping our profitability; customer collaboration and how it’s driving growth faster than the market; our new products and technology pipeline; zircon and how our commercial approach adds further stability; and an overview of our newly acquired specialty products portfolio. We look forward to that discussion. And with that, I thank you. And I will now turn the call over to JF who will review of our operating performance and profitability in the quarter. JF? Jean-François Turgeon: Thank you , John, and good morning everyone. Moving to Slide 7, I am very pleased to speak with you today and report that our integration work is going very well across our global operations. We are now operating the world’s largest vertically integrated TiO2 production network. Our operation touch every level of the TiO2 value chain and our global footprint is unmatched in the industry with nine pigment pants and eight mineral sand facilities on six continents. Having control over our own feedstock is very important to us strategically over the long-term. It allows us to optimize our use of different feedstock grades to minimize waste and maximize value creation. We have moved from a long position in feedstock to a short position. We guaranteed demand from nine pigment plants, we are now able to run our mining and smelting operations at consistently high utilization rates which generates low costs. This low cost position generates strong cash flow with reduced volatility. As Jeff mentioned, the action we’ve taken in our operation in advance of moving from a long to short position in feedstock will benefit us in future quarters, starting with the second quarter of this year. We increased high-grade feedstock production and put the lower unit cost product into inventory. This lower cost inventory will benefit pigment margin in future quarters as the pigment made from that feedstock is sold. We also took some downtime on two plants to perform routine maintenance in advance of our combination. Our first quarter result reflect the financial impact of doing so. Tim will outline each impact when he reviews the adjusted EBITDA bridge with you later in our remarks. We will also now benefit from having both chloride and sulfate plants as we deploy our operating plant for ilmenite mining and high-grade feedstock production. And our enhanced global footprint, also enable us to better serve our customers worldwide by reducing the average distance to their facility and offer a more diverse suite of products for their specific need. I look forward to discussing the many benefits we derived from each of these advantages at our Investor Day in a few weeks. We will outline how we intend to lower our costs, improve our product quality, and generate cash using our advantage global footprint and integrated position. We will of course, take a more detailed look at the synergy and outline the program already on the way that we will deliver them. I can tell you, after one month of detailed review, our confidence in the delivery of those synergies has increased. We will update you on our option to maintain and increase our vertical integration with new mine, the Jazan smelter our strategic commercial arrangement. We will also share our long-term plans for transforming our operation by deploying new operation technology to further drive the cost down. I look forward to that discussion. With that, I thank you and I’ll turn the call over to Tim Carlson for a review of our financial position. Tim?

Thanks, JF. Moving to Slide 8, let’s take a look at the major factors driving the EBITDA comparisons, including a more granular look at the preparatory actions that Jeff and JF mentioned. First bridge compares our first quarter 2019 adjusted EBITDA against that of the first quarter of 2018. Adjusted EBITDA of $80 million was 32% lower than the $117 million in the year ago quarter. Higher selling prices, particularly that for zircon contributed $3 million. Favorable foreign exchange and cost added $30 million, more than offsetting these gains with $13 million of lower earnings and a lower pigment and zircon sales volumes that John discussed, $11 million of unfavorable overhead absorption related to planned maintenance in South Africa. $30 million of higher product costs primarily increases in coke, electrodes, anthracite and labor, a $9 million royalty refund received in the year-ago quarter and $7 million of one-time SG&A costs associated with our re-domiciliation and some other initiatives. Moving to Slide 9 for the sequential comparisons. Adjusted EBITDA of $80 million was 33% lower than the $120 million in the prior quarter driven primarily by lower sales volumes for feedstock and zircon through the shipment timing which totaled $22 million. Unfavorable foreign exchange on costs of $7 million and higher pigment costs of $9 million related to planned maintenance undertaken in the fourth quarter of 2018 that reduced margins on pigment products sold in the first quarter. As Jeff mentioned, we have not yet fully realized the benefits of our vertical integration. We increased feedstock production net of built feedstock inventory and we will benefit from the low unit cost associated with that increased production. The deferred margin and the lower cost inventory were moved from our balance sheet to our income statement in the quarter in which the pigment made from that feedstock is sold. Typically, that’s in the next two to three quarters. This low-cost production will benefit margin in those quarters. Let me give you some perspective as to the potential future benefit of the actions that we have taken that muted our first quarter results. When we were long, we sold excess feedstock to third-parties. Given our pigment short position, we are building feedstock inventory at our pigment plants. Over the last three quarters, we have added 51,000 tons of feedstock and now have nearly 200,000 tons with an average deferred margin of $250 a ton. So there is $50 million of deferred feedstock margin on our balance sheet. $18 million of the $50 million was added in the first quarter of 2019. This benefit is another driver to the substantial increase in adjusted EBITDA we expect in the second quarter compared to the first quarter. At our Investor Day, among other topics, we will review our long-term financial plans, our capital allocation priorities, as well as a review of our tax attributes and how we intend to accelerate their usage. With that, I thank you. And I will now turn the call over to Jeff for closing comments. Jeff?

Thanks, Tim. With the closing of the Cristal acquisition, our work truly begins. So we are up to that challenge. We are looking forward to our Investor Day at the end of the month. It is our first one ever. We will share with you our vision for creating premium shareholder value and we will outline our strategic priorities. Our mission with respect to the creation of shareholder value is to be the TiO2 equity offering of choice displaying greater stability and financial performance and cash generation across cycles by utilizing our vertical integration and our margin stabilizing commercial approach. Our goal is to deliver shareholder returns above our peers and first quartile performance versus a broader group of chemicals and materials companies on a sustained long-term basis. We believe a big three has developed in the TiO2 space and unlike the Basketball League version of the Big Three, we aren’t a group of house names. We are three companies or primes, each with their own unique capabilities and attributes. We look forward to discussing our strategy for competing head-to-head, toe-to-toe with comors and … Our successful strategy will be based upon five pillars, a competitive pigment cost position, our feedstock integration, our leading global footprint, our position as the TiO2 technology leader, and our unmatched people, culture and capabilities. We will outline how we are going to allocate capital among the priorities of creating an even stronger balance sheet, invest in value-creating organic projects, and returning capital to shareholders. As I told our leaders at the leadership get together two weeks ago, we are indeed moving forward together as one Tronox. And in fact, Forward Together was the theme of our leadership conference. But we are not only moving forward, we have a clear vision of what success looks like as defined by our shareholder value mission and goal I just stated. We have clarity as to how we are going to get there. Our vertical integration strategy is centered around the five pillars and we have a clearly defined set of values that would guide us. In a few weeks, you will see and hear the excitement of our global team for this new future and you will see the confidence and the clarity of purpose that will make it happen. So, later this month, we get to talk about all of this, we cannot wait. This is the opportunity for which we have waited and worked for over two years. With that, I thank you. And now we would like to open it up for your questions.

[Operator Instructions] And our first question comes from the line of Frank Mitsch with Fermium Research. Your line is now open.

Good morning, folks and congratulations again. Jeff, it sounded like you are purposely putting off how much you expect Cristal to add in 2Q and the full year until May 30. If that’s not true then help by all means please address it. But can you at least provide a sense of what Cristal will contribute or generate in terms of EBITDA during Q1 and where did it fall on the local price versus volume spectrum and interesting the economy has emerged between the western players between those that have taken volume hits and those that have not. So if you could give us a sense as though, where Cristal fell on that, that would be awesome?

Yes, Frank, really, we are still in the process of sort of analyzing the Cristal business and their performance during the first quarter. Certainly, the Cristal business as it was operated and managed in the first quarter will not be the same as the legacy Cristal business that we will operate – we are operating here in the second quarter of integrating into our – the global footprint. And as I mentioned, we really are in the midst of taking our FTNA process, our integrated business planning process and applying that to this new footprint. So, it really – although we’ve obviously published the pro forma numbers for 2018, as Brennan mentioned, it really is a bit premature to sort of talk about Cristal performance on a standalone basis.

Got you. And a question for JF. During your commentary, you expressed increased confidence, I guess, on the synergy side of things. Can you just step through what areas in particular are giving you some increased confidence with respect to the synergies? Jean-François Turgeon: Yes. Sure, Frank. Look, for example, you do due diligence and you assume some elements and in the last 30 days, we reviewed those assumptions versus some of the big pocket elements. One of them is supply chain and what we have seen is, on some of the major consumable, that we use in Tronox and Cristal – legacy Cristal were using and there was price difference that we didn’t thought were there. And obviously, that gave us a very good negotiating position with our supplier to argue that now we are a bigger user of this material and we obviously want the benefit that one of us had from the previous arrangement. So, that’s one example. The other one is, Jeff has mentioned in his comment that we have an IBP process. So we have work on the simulator that really look at all of the costs and the logistics and distribution and cost of production and value we get from our product. And we are using this tool to maximize the value and use of the different feedstock that we have and the distribution. And again, this is an area where we had synergy in millions of dollar in week one. So, we were very pleased with this and this program is working very well. And look, John and his team are working on the distribution of our products and there is quite a bit of warehouse that were the same for Cristal and Tronox and we are working on optimizing that and I can tell you I am an engineer. And in the first week, it was so nice to see some of our process engineers talking with their counterpart in Cristal and sharing the knowhow of the two businesses. And by doing that, identifying projects that they could start working right on. And so, that’s why I feel very confident that we will overdeliver on the synergy. And look, I was talking with some of my colleagues. I remember when we did the alkali deal. And after a month, we were very disappointed on the synergy. I can tell you that with this deal, it’s a complete different story. But I hope it help in putting a bit of color into that comment, Frank?

Very helpful. Thank you so much.

Thank you. And our next question comes from the line of Duffy Fischer with Barclays. Your line is now open.

Yes, good morning guys. First question, just, on the $80 million adjusted EBITDA for this quarter, can you break it down like you used to, how much of that was corporate versus how much was TiO2?

Yes, I can Duffy. One second. So 107 was TiO2 and 27 was corporate.

Okay. Thanks. And then, I’d take another stab at this. I mean, obviously, you guys know the numbers for volume and price in Q1 for Cristal and kind of runrate EBITDA. The issue is going to be if you don’t say anything today, everybody is going to assume the worst. You’ve given us historics from 2018. So, again, even if they are not exact, I would try to get some number out even if they are rough today.

Yes, Duffy, this is Brennan. I would say that, their first quarter results, I mean they are obviously, primarily a pigment business. They play modestly in the feedstock and other products business. But if you look at their regional pigment exposure, and you look across the first quarter, the biggest sensitivity obviously is to pigment volumes and price from the legacy Cristal chart. And it’s a clear reflection of their exposure or predominance in the Asian European markets that were soft and have been soft early in the quarter. But then are beginning to pick up. And as, John said, he feels very good about the minimal customer overlap and the opportunities for price harmonization.

Okay. And then, just last one, is that meeting you had with the 100 top people now in the company, what was the split? How many are historic Tronox versus how many are historic Cristal?

Yes, it was probably, Duffy, that meeting was probably 70:30 or something like that.

Okay.

So, most of the corporate folks are our legacy Tronox and then, as you get into the regions, obviously a much higher percentage of, sort of legacy Cristal. But it was a nice mix to all across the Globe and across various functions and various world regions.

Great. Thanks guys.

And our next question comes from the line of John McNulty with BMO Capital Markets. Your line is now open.

Yes, good morning. Thanks for taking my question. So, with regard to the $80 million, it sounds like hit from building up feedstock. I guess, first of all, are we thinking about that right, that all else being equal if you weren’t closing our Cristal that just wouldn’t have been there? And then, I guess, the second thing is it sounds like that was part of the build toward a $50 million build. So, I guess, how should we think about how that had sequenced in over the last couple of quarters as well?

Yes, so that’s – thanks for the question, that’s the deferred margin is actually been building over the last couple of quarters as we focus from going long to short. The $80 million was the builds in Q1 alone. So if we had not been focused on the Cristal transaction, just given the strong feedstock market, we would have sold that product and realized that margin in Q1 which would have obviously have increased our results. That deferred margin typically moves through our system on a two to three quarter delay depending on when the underlying pigment is actually manufactured and sold. So that benefit will help us in Q2 and in Q3 and it’s really a one-time normalizing benefit as we move from long to short and we continue to be short going forward.

Okay, okay. And I think that helps a bit. And then, with regard to the Jazan Smelter, I guess, can you give us your updated thoughts on that as to how you are thinking about the investment there? And the opportunities, as well? Jean-François Turgeon: So, John, it’s JF. Look, I just come back from Helsinki yesterday where we met with the Outotec which is the engineering company that has designed and guaranteed that that smelter will be in operation. We had working sessions with them. And look, the position financially for us hasn’t changed. And what I like about that position for Tronox is, the risk is not with us, but the reward if we can make that smelter work is with us. But the reality is, you know that we have agreed to $925 million to AMIC. So we have that smelter up and running. And if it does, well, and it successfully demonstrates that it can produce, then that smelter will become ours and it will create huge value for Tronox. In the unfortunate even that the smelter doesn’t successfully operate, that would be obviously an issue for Outotec and AMIC and Outotec will resolve that issue together and in the case of Tronox our $125 million will be guaranteed by the share of Tronox that cash is own. So, I see it as a non-risk project for Tronox and a very good chance to create value as a vertically integrated producer.

Got it. Okay. Thanks for the update. And then, just one last question, on the SG&A one-time shift, it sounded like, around the redomiciling. So, what was that about? And I guess, it sounds like there is nothing else to continue going forward. But I guess, what drove that? And why was it kind of included in the adjusted numbers in the first place if it’s kind of a one-timer?

It was legal cost for us to redomicile back to the UK which is probably a third of a cost. We talked about internally about adjusting that out of EBITDA. But we felt, given that it was core action that we are working we listed in. But there could be a basis for adjusting out $3 million of cost. And then we had some one-time cost for a couple of other smaller initiatives.

Okay. Fair enough. Thanks very much for the clarity.

Thank you. And our next question comes from the line of Jim Sheehan with SunTrust. Your line is now open.

Good morning. This is Pete Osterland on for Jim. Excluding any movement in the market price, can you estimate what the sequential impact on your average pigment prices will be in the second quarter, now that you’ll be including Cristal, will there be meaningful difference there?

Yes, this is John Romano. Look, don’t typically provide a lot of guidance on pricing. But what I can say is, Q1 to Q2, you should expect prices to be relatively flat globally.

Okay. And you mentioned TiO2 market condition is improving near the end of the quarter. Excluding the impact of the acquisition, do you expect that conditions have improved and therefore you will be able to return to positive year-over-year volume growth in the second quarter?

I think that’s definitely a possibility. When we think about our growth year-over-year from our forecasted sales even as a new company, we are somewhere in the 3% to 4% range, compared to 2018. So, our growth compared to 2018 will be positive.

Thank you.

Thank you. And our next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is now open.

This is actually Steve on for Vincent. I was just wondering if – with U.S.. China trade starting to make it playback into the headlines, if you could talk about if there is kind of any, if you see any changes and has the trade flows gone forward as a result of that? Thank you.

Well, I think, Steve, I think, obviously, the new tariffs will impact imports into the U.S. but - and create some slight opportunity for us. But in terms of anything we do into China, most of that production is from our new Chinese plant or from our Australian operation. So, we see it net-net been a slight positive.

Okay, thank you.

And our next question comes from the line of Hassan Ahmed with Alembic Global. Your line is now open.

Good morning, Jeff. Good morning guys.

Hey, Hassan.

If you look – just trying to get a better sense, obviously in Q1 a bunch of one-offs that you guys identified, be it shipment timing, be it readying yourselves up for the whole Cristal acquisition and alike. So, in the Q4 to Q1 bridge you guys provided, you talked about a $22 million EBITDA hit from volumes the bulk of which I am assuming where some of the turnarounds you guys still look and obviously readying yourselves up for Cristal. And then, costs were $9 million higher, again, probably unit cost went up in this run up due to the Cristal acquisition. So, that’s $31 million bucks, right? I am assuming the bulk of that would come back. So on a recurring basis, you are at $111 million. Now if I bridge that to the Q2 guidance you guys have given, $125 million to $135 million or $14 million to $24 million upswing doesn’t really seem that significant with all the positives that you identified going into Q2, particularly with Q2 being seasonally quite strong. So, am I really missing something here? Or ask differently, what are you guys broadly factoring in, in terms of market conditions for Q2?

This is John Romano. So when we look at that $125 million to $135 million range, look, we are also factoring in the possibility that we could have some slippage in zircon shipments. So, it tends to happen regularly as we said, lot of these shipments are bulk shipments and we don’t have a lot of control over the port congestion. So, could there be upside to that? It’s possible. But there is some factor attached to a risk in the zircon shipments that we factored into that range.

Understood.

And Hassan, as we get it lighter in the last time when were together at the Investor Day we will obviously roll that $125 million to $135 million sort of into integrated forecast for the entire company. So, you will see the puts and takes there as we advance another few weeks into the quarter.

Understood. Understood.

We say shipment timing all the time and it is a bit frustrating on our side, as well. But there is not a lot we can do to control that. So, and we don’t normally provide guidance. So we kind of adjusted it to manage for that.

Fair enough. Fair enough. Now, moving on, you guys obviously were talking about zircon in the press release. The commentary around zircon and zircon being sort of a larger and larger part of overall EBITDA, you guys talked about. Clearly, zircon is quite exposed to the China market. So, with uncertainty around China, sort of demand growth, Chinese GDP growth and alike, what is it that you guys are seeing on the zircon supply/demand side of things that gives you so much sort of comfort or confidence that on a go-forward basis, fundamentals will continue to improve? Jean-François Turgeon: Hassan, it’s JF. The reason why we have that confidence on zircon comes from the supply side of the zircon equation. So, you are right that the growth of zircon’s market at the moment is kind of flat and even slightly going down. But the reality is, the zircon supply is also going down, because some of the big producer, their mine is going down and the availability of zircon is not there. And you all know, all along it takes to open a new mine and put new production into the market. So that’s why that market is really in a nice supply/demand balance.

If you think about where we were last year, we couldn’t keep up with demand. So, it’s one of the things when we talk about margin stability, quite frankly, zircon was kind of the stepping stone for us to migrate into TiO2. We’ve already been in that process. And to JF’s point, there is a fair amount of money that needs to go into the market in order to get new capacity out and where pricing is right now. There hasn’t been a lot of investment.

And I guess, the final point there, that we are picking up some incremental zircon capacity with the deal as a relative portion of revenue, it will be smaller, simply because it is not picking up the same volume. But also, as we get into our integrated business planning, planning and using our S&OP process for zircon as well will be part of the business planning that we will be doing.

Very helpful. Thanks so much guys.

Thank you. And our next question comes from the line of Roger Spitz with Bank of America. Your line is now open.

Thank you and good morning.

Good morning.

Do you believe that you and/or Cristal TiO2 pigment market share in Q1 2019?

Look, I can’t speak for Cristal, because we didn’t own them in 2019 Q1. But what I can say, as far as Tronox goes is, we’ve been working for an extended period of time trying to develop relationships with our customers, typically the ones that are growing faster than the market. And I think we’ve been very successful on that process and our margin stability initiatives, I would say, is a bit more tailored than some of those that are out there. So when we are competing in the market, I believe that our strategic larger customers find that our margin stability initiatives can be preferential to some of those that are out there. So, I think that’s about all I am going to say with regards to what we are doing on margin stability, but it is actually gaining traction for Tronox.

Got it. Secondly, could you – this is regards to AMIC, the design slagger, could you remind us please of the cost if you were to exercise the option to takeover that slagger in the future. If I recall, the last time you mentioned, I think it was Q1 2018, I believe you were telling that price was simply the assumption of AMIC’s debt which then you drag number threw out of 322. Could you update on that? And do you take the 322 and do you add the 125 loan that you had although you got some loan out obviously. But could you update on that please?

Hey, Roger. It’s Tim. You are spot on the consideration for the slagger would be the assumption of the debt, which is the 320 and it would be the additional 125 that we are contributing to get the slagger operational. So, given that consideration and given the upside that JF and team are working on, it could be north of $1 billion once that slagger is fully operational.

That’s – you are correct.

That $1 billion was asset value, okay.

Yes, yes. Right, right.

Okay, yes. Great. Thank you very much.

Thank you, Roger.

And our next question comes from the line of James Finnerty with Citi. Your line is now open.

Hi, good morning. Congratulations on all the progress.

Thanks, James.

Just on the Roger’s question on the margin stability initiative, just want to know, you are doing it, has Cristal been following a similar strategy or is that going to be something that will change for them going forward?

Yes, I think, as we got into it, James, we’ve clearly gotten a view now as to sort of some of the commercial approach and perspectives to Cristal had. And as I said in my comments, one of the great benefits of this will be moving forward with a single commercial perspective and approach and allow us to advance our initiatives. And as John said, accelerate the work we are doing on some of the margin stabilization initiatives with our large customers out there, especially the very large strategic customers. So, I think it’s all a positive and sort of the historic approach of Cristal is not really incredibly relevant as we move forward. But as we are adopting a one approach globally.

And then, separately, on your volumes, volumes declined 10% year-over-year and in the slide you attributed that to weaker demand in stocking. Was there any part of that that was related to the margin stability initiative? I know if compared to the years, it say that they lost market share as a result of …

No, I think, I think there is embedded in that number opportunities that were foregone that we could have taken to make that number better. So, in a way, yes, I mean, that number does reflect the results of our margin stabilization initiatives.

Okay, great. And, just going on to the volumes, just to clarify, differences between producers sulfate and chloride producers also would impact what happened to volumes during the most recent quarter, right, because sulfate forging have been going to the automotive industry, and alkali does is that sort of another factor think about?

Yes, quite frankly, I am not – I listen to the same colors you did and with regards to whether it’s sulfate or chloride, automotive or not, I think, the market, as we see it moving into Q1 as I said, we saw lot of movement on inventory and how that’s now started to adjust down and we believe that as we move into Q2, we are starting to see some positive uptick in demand both in Asia and in Europe. And as Jeff and I mentioned earlier, the North American market has remained relatively resilient and then you factor in – not exactly sure what tariffs are going to do, but to Jeff’s point, there is roughly 60,000 tons of TiO2 that are imported into the U.S. every year from China. So, with a 25% duty, I would expect that’s probably going to be an opportunity. And also in Asia Pacific, we are currently exporting to China out of our facilities in Australia and we have a facility in China now. So, post – pre-acquisition, our exposure to China was about 3%. Now it’s about 8%. So, it’s still a measured – not a significant portion of our business, but we are planning to grow that as well.

Great. Thank you. And just one last housekeeping question. Between this year end and first quarter debt increased, was that recurring to in terms of debt – which is on, what accounts to the debt increase?

No, at the end of March, we undertook an initiative to put some debt into South Africa and in order to leverage that asset base and those cash flows. It was just more of a timing issue, because the debt that we took out in South Africa, we are actually using to pay down term loan B. But that term loan B payments were a portion of that was actually made in April.

Got you. It’s just a is timing joins you. Great. Thank you so much.

Thank you. And our next question comes from the line of John Roberts with UBS. Your line is now open.

Hey guys. This is Josh Spector on for John. Just a question around the pro forma capacity on the TiO2 side. So, 1.1 million tons, just curious kind of right now or maybe, the market was better, what would you say the utilization rates on your circuit are? And what could they be in a better market environment without any investment?

So, if you think about our legacy Tronox capacity, we are running at capacity and have been. So, it’s a bit different when we think about the Cristal acquisition and the tons there. One of the plants that we have the biggest opportunity to expand through getting the utilization up is in fact the Yanbu facility. So, when we think of our synergies, that is a big portion of that knowing that that’s legacy Tronox technology. It’s a similar, actually it’s a carbon copy with regards to six oxidation lines, six chlorination lines, very much like Hamilton and we believe that there is a lot of opportunity with – not a tremendous amount of capital to get that asset up and running. So, that’s the one area where I think we’ve got the most upside. JF? Jean-François Turgeon: No, no, I agree with John and Josh. Look, at the moment, I would describe our operation being market-limited. We are not worried that we have the capacity to produce more if we need to and there is asset in the portfolio like Stallingborough in the UK that make a great quality product today that are running at low utilization rate and with some of the synergy that we talked about we have identified how we can help those assets produce more quite quickly. In the case of Yanbu, John and I have agreed that the priority is to focus on quality for Yanbu, because the quality today out of Yanbu, I would call it 20 years old quality of pigment and that makes sense, because that’s our technology from 20 years ago. And so, as I mentioned in previous call, it’s our strategy to quickly make small change that will allow to improve the quality of that asset very quickly.

And I think, I think, just to sum that up, I think when you look at the industry, there is a lot of discussion often about one of our major competitors about the core add capacity coming online and delays and risk associated with that and the cost and what not. And I think it’s clear that with this sort of hidden factory as JF has referred to at times, we own some of the lowest capital cost incremental core add capacity that can be brought on into the industry. And we will be thoughtful and prudent about doing that and focusing on letting that be driven by the market, but in the mean time working on the quality issues, so that we increase the realization from the capacity that we have utilized.

Yes, pre-acquisition, when you think about our five–year plan, we were going to be spending a tremendous amount of capital in order to keep up with the market growth. And as a new company, this low cost capability to expand over the five years is something that we are quite excited about.

And there is no reason and nothing we have seen that would prevent from us being able to bring the legacy Cristal operations up to same level of utilization that the legacy Tronox operations have operated for the last several years. So, I think that’s a pretty good quantifier of what that upside is, if we – if the market dynamics call for that increased production capacity.

Great, thanks. That’s helpful. And just around the price harmonization initiatives, I mean, you highlighted that there is some risks around that and I assume that initiative is basically bringing prices up to the circuit to the same level. If customer push back on that, are you prepared to walk away from volumes or am I maybe overthinking the risks around that?

I think, one comment and I’ll let John comment on his guarantee that we will always get the highest price. Now, I mean, obviously, that’s not what it is – I mean, it’s not, we wish we are always that case, but we are realistic about that. But that volume or that difference of what the magnitude of that price harmonization issue could be is, less than we thought it might be. And if you looked at the length of the time it took to get to the deal is done, at various times over that two year period, that delta may have been greater or it was greater. And as we – at the point when we close the transaction, that magnitude has been less. But in terms of harmonzing up or down to your price, that’s a case-by-case customer-by-customer, product-by-product issue that we had to work through with our customers and we are in the process of that and that will be ongoing. But really we will start in earnest sort of at the end of the quarter when most those pricing actions sort of happen in the normal course. John?

Yes, look, I mean, it’s – I made that comment, because when we looked at – or we had an anticipation of what the overlap was going to be prior to having clear visibility into all the customers. We knew that there will be overlap with the big accounts. But there was an expectation that there might be more overlap in the small and medium accounts globally and there wasn’t, I mean, if you think of our customer base pre-acquisition, and post-acquisition, it’s up 113%. So, we had a lot of new customers. Part of that has to do with Cristal’s strength in the plastics market and then they’ve got a stronger position in the paper market. So I think we’ve got a balanced portfolio and I don’t believe that the comments that I made associated with risk on price harmonization. It’s not a significant risk and it was lower than what we expected.

Okay. Very helpful. Thanks guys.

And our next question comes from the line of Rob Dugger with Morgan Stanley. Your line is now open.

Hi guys. Thank you for taking my call and congratulations on closing the transaction. So, I was wondering if you could provide any guidance and when we may expect Exxaro to sell their remaining shares to Tronox? And is there a date that it must be completed by?

There is not a date. Exxaro has announced that they’ll sell the remaining shares just in an orderly fashion. We’ve agreed with them as part of our completion agreement that they will sell at certain point in time that will actually allow us to preserve our NOLs. When they actually sell, it will be up to them. But I am guessing, later in the year.

Okay. Thank you.

And our next question comes from the line of Fritz Lou [Ph] with Alliance. Your line is now open.

Hi, good morning. Could you tell me, so, adjusting for all the cash transactions and share buyback, the South African debt, et cetera, what is your net debt at the moment?

Currently, we’ve got – and again, I am going to quote it as of today, we’ve got the $3.2 billion of debt. We’ve got about $440 million of cash on our balance sheet today post the Cristal transaction and paying the Term loan B and in addition to that, we’ve got about $350 million of liquidity in our ABL. So, the overall liquidity is right around $800 million.

Okay. And that also takes into account the share buyback, right?

Correct.

Okay. And then, have you guys given leverage? Can you remind me what leverage target you have kind of when all that’s said is done?

Yes, well, two targets around leverage. One is two to three times net and then we’d also like to bring our gross debt down to $2.5 billion over the next couple of years.

Okay. Thank you very much.

And Fritz, one of the things we’ll talk about a lot at the Investor Day at the end of the month is sort of the allocation of capital between, that delevering the rich menu of organic objects that we see and also the potential additional return of capital to shareholders. We will talk about that quite a bit.

Appreciate it. Thank you gentlemen.

Thank you. And our next question comes from the line of Brian Lalli with Barclays. Your line is now open.

Hey guys. Good morning. How are you?

Good morning.

Good morning. Just, actually, a quick follow-up to the previous question. I found the pro forma columns that you presented in April around the closing of the Cristal transaction, particularly helpful. Has anything changed from those as we think about it other than a further quarter ending cash balance as we sort of looked at our model over the next quarter and what the adjustments should be?

You know, Brian, very similar.

Okay. So, still paying off the $100 million of term loan and repaying the ABL, all that stuff is consistent?

Yes, that’s all been done actually.

Got it. Yes, that’s – so, to that 440 answered to the previous question, got it.

Exactly.

Got it. And then, to confirm, the remaining shares from Exxaro is the 14.7 million and then the 7.2 million related to the 26% interest in the South African subsidiaries. Are those the two, I guess, open items, if you will, from a shareholder standpoint at this point?

Yes, that’s right. Those two bundles are a little bit different. The 14.7, they can sell those consistent with the mineral sands completion agreement that has the timeframes there in a way to protect the NOLs. And then on the flipping rights for the 7.2, that’s something that we have the affirmative right now to either take up for cash or to actually issue the shares at the time that that flipping can be exercised, which at the latest would be 2022.

Got it. Okay, really helpful. And then, last one for me and you appreciate that maybe this one that on what you can say, but from a cash outflow standpoint, is there any update or what should we be looking at in terms of the discussions with Venator around that break fee, the $75 million related to the agreement that you guys had? Is there a datapoint that we should be looking at dates, et cetera, that’d be helpful? Thanks for the time.

Thanks. No, I think, we got - the Venator have made their position clear on that and we’ve made our position clear and we have a bit of disagreement. So, that will work its way through a process. And their resolution and really that’s a very small sort of incidental thing going on that’s really not in any way – in our sort of main focus in terms of moving forward with this business and delivering the synergies and getting about the business and creating value with this new equipment.

Sure, totally. I just want to know if there were any dates maybe keeping on. But I appreciate the color. See you at the end of the month. Thanks.

And our next question comes from the line of Karl Blunden with Goldman Sachs. Your line is now open.

Hi, good morning guys and thanks for taking all the time today. I was interested in your comment on the big three global tier-2 producers. And then, outside of that, specifically, you have a few smaller producers. Do you see room for some consolidation among the smaller players going forward?

I think there is. I think our transaction and the sort of the fall-off from that in terms of the European Union and the FTC have created, sort of, I think a clear perspective on what could be navigated there. But yes, there is some room for that and at our Investor Day, we are going to do a comparison of ourselves versus industry peers and especially those two other companies and really look at what the capabilities are, what the footprints are, what the financial attributes will be at all points in the cycle and really try to lay out a pretty robust transparent view of how we compete with those guys. And we look forward to that, because we think each of the company has very unique attributes and we think vertical integration and our technology portfolio is our attributes that will allow us to stand out. So we look forward to talking about that.

Great. Thanks very much.

Thank you. And I am showing no further questions at this time. So with that, I will turn the call back over to Chairman and CEO, Jeff Quinn for closing remarks.

Well, listen, thanks very much for your time today. Obviously, it’s been an exciting time for us. We are busy. A lot of things going on. We really are pleased with the acquisition being closed finally and getting about the business of creating value. We are pleased with what we’ve found and the opportunities that will be presented here. Always some challenges. Always some things that you learn, but net-net, a very positive perspective as we enter day 30. We look forward to seeing everyone in New York here at end of the month. We also look forward to talking with you in early August to talk about the second quarter results which will have almost a full quarter of the new company footprint in it. So, have a good day. And we look forward to seeing you all here in New York we hope in a few weeks. Thanks very much.

Ladies and gentlemen, thank you for participation in today’s conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.