Tronox Incorporated Q1 2008 Earnings Call Transcript

| About: Tronox Inc. (TROX)

Tronox Incorporated (NYSEMKT:TRX)

Q1 2008 Earnings Call

April 30, 2008 10:00 am ET

Executives

Robert C. Gibney - Vice President, Corporate Affairs

Mary Mikkelson - Senior Vice President and Chief Financial Officer

Thomas W. Adams - Chairman and Chief Executive Officer

Analysts

Frank Mitsch - BB&T Capital Markets

Silke Kueck – JP Morgan

Unidentified Analyst – Banc of America

[Lawrence inaudible] – Lehman Brothers

David Troyer - Credit Suisse

Gregg Goodnight – UBS

[Robert Rosen – inaudible firm]

Jonathan Brolin – RLR Capital Partners

Al Alaimo - SCM Advisors

Unidentified

Operator

Welcome to the Tronox first quarter earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Robert Gibney, Vice President of Corporate Affairs.

Robert C. Gibney

Welcome to the Tronox first quarter 2008 investor conference call. With me today are Tom Adams, Chairman and Chief Executive Officer; Mary Mikkelson, Senior Vice President and Chief Financial Officer; and Debbie Schramm, Vice President, Communications.

Today’s call includes prepared slides that can be accessed from our website at tronox.com by selecting webcast and events, then first quarter earnings under the Investor Relations tab. Our comments today will contain forward-looking statements. Please note that actual results or events may differ materially from our expectations or projections. Information concerning some of the factors and risks that could cause material difference is identified in the Risk Factors section of the company’s 10-K and other SEC filings.

First on today’s agenda, Mary will review our financial and balance sheet items. I will then review the first quarter results followed by Tom, who will provide perspective on the quarter and highlight our progress on key strategic initiatives we have underway. We will then open the call up for your questions.

At this time, I would like to turn the call over to our CFO, Mary Mikkelson.

Mary Mikkelson

I know there are lots of questions surrounding compliance with our debt covenants, so let me start by saying we are in compliance with our financial covenants for the first quarter and we expect to remain in compliance with our covenants for the remainder of the year.

Due to the current economic environment, there are risks to achieving incompliance but as we will discuss in more details later we are actively working to mitigate these risks. Due to seasonal working capital needs during the first quarter we had to drop on our revolver throughout the quarter and ended the quarter with an outstanding balance on the revolver of $43 million. While we are closely managing our cash, we do expect to continue to have to utilize the revolver in varying amounts throughout the year.

During the first quarter of 2008, we used cash flows in our operating activities of $27 million principally due to changes in our working capital. This is primarily cyclical as we build inventory in preparation for the summer painting season and not inconsistent with prior years.

As you can see in the Cornerstone working capital chart on slide four, our working capital on a cash-to-cash basis increased compared to where we were at, at year-end, but it is consistent with the same period in the prior year. As you are aware the Euro and Aussie dollar continue to gain strength against the US dollar, which does have an impact on our working capital balances.

Referencing our Cornerstone working capital components of receivables, inventory and payables, our working capital is over $20 million higher at March 31, 2008 as a result of the current exchange rate compared to the rates in effect at the same period in 2007. We continue to work to reduce working capital every day and expect to achieve our year-end target for 2008.

Our SG&A expense in the first quarter was $27.6 million, a $7.4 million decrease compared to the first quarter of 2007 due primarily to lower compensation and benefit costs resulting from our restructuring and cost reduction initiative. We are continuing our efforts to reduce costs and are finalizing additional opportunities to further reduce our SG&A. As a result, we have updated our 2008 projection for SG&A expense to be in the range of $108 to $111 million. This reflects the continued focus on accelerating cost reduction programs during a difficult business environment.

Interest expense in the first quarter of 2008 was $12.3 million comparable with the prior year. We’ve updated our 2008 forecast for interest expense to be in the range of $46 to $50 million. This reduction from our previous forecast is due to two reasons. First, lower interest rates and second, the amendment fees that we incurred in the first quarter have been capitalized and will be amortized over the life of the credit facility, whereas our previous guidance had assumed these costs would be expensed in the first quarter.

We are managing our capital expenditures very closely and spent $8.3 million in the first quarter of 2008, well below our historical spend rate. This reflects our focus on extracting more from existing assets and actively managing our capital spend until a time when market conditions improve. We’ve updated our projected 2008 capital expenditures to be in the range of $48 to $51 million. We believe this amount will provide adequate maintenance capital for our operations to continue to run safely and efficiently.

Our depreciation and amortization in the first quarter was $28.5 million and we project full year 2008 D&A to be in the range of $115 to $117 million, an increase over our previous guidance resulting from an update in our forecast. Our effective tax rate for the quarter on continuing operations was 53%. Due to the NOLs we have in many jurisdictions and our projected taxable earnings, we are expecting a very nominal cash tax rate for the year.

Our financial reserves for environmental remediation at March 31, 2008 for all active and inactive sites totaled $181.8 million, a net decrease of $7 million from the prior quarter. We also had receivables for reimbursements of approximately $67.5 million at the end March.

Although the reserve includes our estimated expenditures for the West Chicago site, as a reminder our receivables do not include approximately $28 million in anticipated future reimbursements due Tronox by the Department of Energy for work yet to be completed at the West Chicago site. It is expected that the DOE will continue to reimburse us 55% of our costs at this site.

As we continue to manage our cash flows for 2008, we have reduced our forecasted spend, and our current estimate for net cash spend on environmental projects in 2008 is in the range of $30 to $35 million, a $10 million reduction from our previous forecast.

Our environmental team continues to identify ways in which they can reduce remediation costs, while meeting the environmental clean up mandates for our various legacy sites. We continue to actively pursue mitigation strategies to ensure our obligated parties, insurance companies and government agency reimbursements are received to offset our remediation costs

At this time I will turn the call over to Robert for his review of the first quarter results.

Robert C. Gibney

Turning now to Slide 8, net sales for the first quarter were $349.1 million or $10 million higher than in the same period of 2007, mainly due to the impact of foreign exchange. Sales volumes were higher for both pigment and electrolytic but down for our heavy minerals operation in Western Australia.

Demand for our titanium dioxide continues to be strong in Asia-Pacific and Europe, helping to offset continued weakness in the North American market. Costs of sales on year-over-year basis were higher by $21.7 million, mainly due to foreign exchange and to a lesser extent shipping and handling and raw material cost increases. As a result, gross margin for the quarter was $25.5 million compared to $37.2 million in the 2007 first quarter.

During the quarter, our SG&A spend was $27.6 million, a reduction of $7.4 million in the prior year period. Land sales in Henderson, Nevada and Mobile, Alabama during the quarter provided a net gain totaling $5.3 million or $0.13 per share. Other income of $6.1 million includes the foreign currency transaction gain of $7 million, primarily related to intercompany loans. These gains were partially offset by lower TiO2 pricing compared to the prior year period and continued escalation of our input costs, including processed chemicals, freight and energy.

For the quarter, we reported a loss from continuing operations of $1.4 million or $0.03 per diluted common share compared with the loss of $9 million or $0.22 per diluted share in the same period of 2007. Excluding the gain on land sales, our adjusted first quarter loss from continuing operations would be $0.16 per share.

Looking at the first quarter bridge on Slide 9, you can see the favorable impacts of the land sales, SG&A reductions and foreign exchange, offset by lower year-over-year prices, higher input costs, and higher freight. While the Cornerstone bar shows a slight decrease on operating cash cost, the bridge represents only quarter-over-quarter savings. On a cumulative basis however, we have reduced our operating cash cost by over $40 million since the first quarter of 2007 through Project Cornerstone. The freight bar includes all outbound costs, including freight, warehousing and other export-related costs we incur when moving our TiO2 around the globe to meet customer and regional demand.

As you can see from this bridge the biggest challenge we face is the ever-increasing costs to our various inputs. Before moving on to our results by segment, let me walk you though three of the biggest components, processed chemicals, energy and freight and the actions we are taking for each.

For processed chemicals, which account for approximately one quarter of our cost to goods sold, prices in the first quarter continued to move higher. Caustic soda, sulfur and a wide variety of other processed chemicals saw increases. To date we’ve been successful in reducing our consumption of caustic soda and petroleum coke and are finding new sources of processed chemicals that improve yield or can be sourced at a lower price.

Through the first quarter, our cumulative project cornerstone savings for processed chemicals is $10 million. While the majority of our processed chemicals are moving higher, as the CMAI curve illustrates on the slide, chlorine prices have begun to decline and are projected to continue to move lower throughout 2008.

Moving now to freight, both inbound and outbound freight costs have continued to remain at historically high levels. While the Baltic Exchange showed a steep decline late last year, it has since rebounded and continues to have negative impacts on our largest cost component, titanium-bearing ore, which accounts for approximately one-third of our COGS. Although price for ore has been relatively stable, the fright component of our ore cost has moved much higher over the last year.

The action items we are taking to reduce our inbound and outbound freight costs include reducing the number of links and hand offs in the supply chain. We are also consolidating our warehouses into fewer and more strategically located facilities and we are moving our finished goods by rail and intermodal at lower cost.

To date we have been successful in Savannah for instance where we contracted a dedicated drayage and reduced our export transportation costs by over $200,000 per year. In addition, we have negotiated a favorable fixed shipping rate from one of our ore suppliers to the US. We are working with this carrier to add additional shipping lanes to this agreement.

Our logistics teams are working hard to fix rates and lock in spot prices when favorable. On average, we have locked in fixed rates for our outbound freight for the remainder of 2008. However, we continue to experience fuel surcharges in all three regions.

Looking now at energy, the current environment for our various energy components shows a 12% to 15% average increase 2007 to 2008. While we have been successful in US at hedging our forward natural gas usage in 2008, as the pie chart shows this is just one component of a complex energy usage portfolio.

The actions we are taking include hedging, utilizing fixed cost contracts where favorable and a reduction of usage. As you can see from the chart, approximately 50% of our global energy costs for 2008 aren’t fixed, including 55% of our US natural gas which is hedged for the year with an average price of $7.93 per MMBtu for the remainder of 2008. The key point I want to make on this slide is that our energy consumption is a basket of inputs with over half of our consumption outside of the United States.

Turning now to our results by segment on Slide 13, pigment sales for the first quarter were $321.6 million versus $315.4 million from the prior year period, due to favorable foreign exchange, partially offset by lower pigment prices as compared to the first quarter of 2007 and lower heavy mineral sales volumes. As a reminder, our Tiwest heavy mineral sales are included in our pigment revenue line.

During the quarter, the Tiwest mining operation moved into a lower-grade ore section of the mine, which will lower the mine’s output of heavy mineral concentrate for the reminder of 2008. During the quarter, even with the Kwinana plant shutdown of less than one week, our five TiO2 production facilities performed as expected with operating rates in the low 90s.

The Kwinana outage was a direct result of a natural gas pipeline disruption and the effects of the typhoon that hit the west coast of Australia in January. The plant was able to recover from the outage quickly and has been running at capacity since.

Global pigment production volumes during the quarter were 146,400 metric tons compared with the 145,200 metric tons in the first quarter of 2007. Pricing sequentially moved higher by 2% in the fourth quarter due to foreign exchange and realized price increases. We were successful in varying degrees by region in our efforts to implement the October round of price increases. Our sales teams continue to push for additional increases and Tom will provide more color around our pricing initiatives later in his comments.

For the 2008 first quarter, pigment reported an operating loss of $3 million compared with an operating profit of $7.3 million from the prior year period. The decrease was due in large part to lower sales prices on year-over-year basis, increased freight and input costs, the impact of foreign exchange, and the Kwinana plant outage I referenced earlier.

Moving now to our electrolytic and other chemicals business, sales for the first quarter were $27.5 million compared to $23.7 million in 2007 period. The $3.8 million increase in sales was due to a combination of higher sales prices and volumes.

Electrolytic reported an operating profit for the quarter $1.7 million compared with an operating loss in the first quarter of 2007 of $600,000. While pricing and volumes were better, freight and energy costs did partially offset these gains.

Since we filed our anti-dumping petitions last August, we have had a number of favorable developments including the Department of Commerce’s preliminary determinations, which were effective March 26 of this year. These requires the importers of Australian and Chinese EMD to post bonds or cash deposits equal to 120.59% and 236.81% respectively of the entered value of the EMD imports. We are very pleased with the progress on this issue and believe it will end in a favorable outcome for this business moving forward.

Before turning the call back over to Tom, I would like to provide an update on our land sales initiatives. There is no doubt that the current real estate environment is a challenge. However, we continue to show progress in our efforts to monetize our stranded land assets. In this challenging market, we have successfully sold two parcels in the first quarter, with gross proceeds of $5.5 million. The two parcels were located in Henderson, Nevada and Mobile, Alabama.

The Henderson parcel was adjacent to 53-acre parcel, which we had under contract at the end of 2007, but had difficultly closing due to the credit market and the financing falling through at the last minute. We are continuing to work with the original developer on this parcel and in addition, we have a number of interested parties that are in the process of completing their due diligence efforts. We remain hopeful that we can close on this and other parcels we have in the various stages of sales process in 2008.

That completes the review of the first quarter results. And at this time, I would like to turn the call over to our Chairman and Chief Executive Officer, Tom Adams.

Thomas W. Adams

As Mary and Robert pointed out in the review of the quarter, we have made some progress since our last earnings call on further reductions in spend, on controllable items such as operating efficiencies, SG&A, capital expenditures and environmental spend. But we are not done.

While I am pleased to see these reductions combine with some price improvements, land sales and business development activities during the past quarter. Moving ahead, we will continue to be challenged as we are faced with an unprecedented time in the history of TiO2 industry.

Input costs continue to move higher, while demand in the US remains weak, which continues to put pressure on our margins. We cannot stand by and wait for input prices to ease or demand in the US to improve, rather we must continue to aggressively take the steps necessary to weather this storm and position Tronox for future profitability.

Let me now walk you through some of the key actions we are taking in the near-term. Project Cornerstone continues to exceed our expectations and to date has reduced our cumulative cash cost by $78 million since the project’s inception in July of 2006. Our employees continue to respond to the challenge and we increased our 2008 target today by $8 million, which brings the cumulative 2008 year-end target to $100 million.

We have over 280 active projects underway to reduce cost in a variety of ways from reducing our consumption of processed chemicals to efficiency improvements to increase yield or up times. Project Cornerstone will continue to be a major focus for our company moving forward and it’s critical to our ability to offset the continuing escalation of costs our company and the industry is facing.

In order for Tronox and the TiO2 industry to continue to reinvest in the TiO2 business we must be able to improve the industry margins by passing through increasing energy and processed chemical costs. Currently we estimate that none of the top producers are covering our cost of capital and very few are profitable. This simply is not sustainable long-term.

We are doing everything within our power to reduce cost, while enhancing our quality and safety and environmental standards at our global operations. But this is simply not enough to offset the high input cost impact to the business. And as a result pricing for our products must increase. With this said, we will continue to evaluate all options available to Tronox to improve TiO2 prices going forward.

I’ve asked our global sales teams to continue to engage our customers in a dialogue where they can work with us to implement price increases to help offset increasing input costs. To-date we have had varying degrees of success. For competitive reasons I will not be able to provide details on these increases, but I can tell you that we are placing a high priority on these initiatives.

Looking ahead, the second quarter will be a challenge due to the increasing costs associated with processed chemicals, energy and freight, and continued weak demand in the US. On the demand side for TiO2 Asia-Pacific continues to grow with impressive rates, with China and South Korea demand growing at double-digit rates. Europe, TiO2 demand is growing at approximately 4%. However, the strong Euro is attracting an unprecedented level of imports into this market, which is impacting our ability to implement price increases there.

In the US, demand is slightly negative versus last year, but inventory levels across the customer base appear to be low. And with the export market remaining strong we expect conditions to remain stable in the US. With the ongoing softness in the North American market we continue to manage the logistics of moving TiO2 into the higher-demand regions. We believe the TiO2 industry will recover before the US recessionary environment ends and this recovery will be swift as the low customer inventory levels will need to be increased to meet those improving conditions when they occur.

Given the current challenge in TiO2 business environment and resulting margin squeeze the industry finds itself in our priority remains to continue to push for higher TiO2 pricing, reduce costs even further and manage our cash. Given this challenge we will continue to focus on several key areas and initiatives, which I will outline in further detail.

On the cost side, we continue to see success in our Cornerstone cost reduction initiatives and as I mentioned earlier, have increased our 2008 targets to date with a new milestone of $100 million cumulative reductions by year-end. Adding additional projects to this initiative remains one of our top priorities and there are numerous initiatives underway in operations and SG&A to drive further changes.

Given our current business environment and priorities within the business, we’ve lowered our capital and net environmental legacy spending ranges for 2008. On the working capital side of our business, we continue to focus on reducing inventories and as we move into the second quarter paint season, we will be drawing down inventories. Receivables and payables remain a priority as we continue to work terms and evaluate other alternatives to provide further improvements in these areas.

The mitigation of environmental legacy liability remains a high priority also within the business. We continue to evaluate all options at our disposal to mitigate the impact of legacy costs on our business and implementation of our strategy.

Finally, we’ve completed the RTI agreement and Kwinana expansion arrangements and are continuing to evaluate other strategic options that will add shareholder value in the future. While I am pleased with the progress we have made on reducing our costs, driving further efficiency improvements and realizing some price increases, it is simply not enough.

We have to do more and we will. I appreciate the hard work of our employees and without a doubt that they understand the critical importance of what they do every day to improve our business going forward.

It is important to understand we have set new ranges and targets today with lower costs and spending. However, this is a dynamic process and we are continuing to evaluate other options and initiatives to further lower costs, which will be communicated in the future as appropriate.

I will now turn the call back over to Robert.

Robert C. Gibney

This concludes our prepared remarks. We can now open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Frank Mitsch - BB&T Capital Markets.

Frank Mitsch - BB&T Capital Markets

Tom, you are talking about TiO2 prices, you mentioned that prices were up 2%, sequentially from the fourth quarter, a combination of foreign exchange and real price increases. The fact that you mentioned foreign exchange, first, leads me to believe that the real price increases were up less than a percent, is that correct?

And can you talk about the real price increase or your real selling price absent foreign exchange as we stand here late April versus the average of the first quarter.

Thomas W. Adams

Yes, Frank. The foreign exchange impact was approximately half of the 2% increase in the TiO2 pricing. To give you an idea on the realized pricing, we don’t give specifics, per se, on dollar for ton type numbers. But I can, as I referenced in the call, because of the amount of imports that are flowing into Europe, that is limiting our progress and ability to implement further increases there, but we continue to evaluate it and push on a daily basis.

Asia is a very strong; there is no question the demand there continues to grow. And as I said, North America is stable, which does provide an environment for further potential increases going forward.

Frank Mitsch - BB&T Capital Markets

I know that you mentioned the October round of increases, and there have been in a couple since then, can you comment as to the pricing on April 30 that you’re realizing versus the average of the first quarter pricing?

Thomas W. Adams

Yes, Frank, we don’t provide guidance to that point other than providing the quarter-over-quarter increase that we talked about which is the 2% and then the FX adjustment bringing it down, from that prospective.

Frank Mitsch - BB&T Capital Markets

But the commentary from Robert regarding higher freight, energy, processed chemicals costs, what level of price increases do you need to realize to offset those costs?

Thomas W. Adams

Yes, Frank, it’s really not even a question of what do you need to input to offset the current. You have to look back over the last 18 to 24 months in this industry. And if you look at the margin deterioration that the TiO2 industry has seen as a whole, we have a lot of catch up to do.

That’s why we are continuing to aggressively push for price increases and we’re looking at all options on how we can pass through some of the increases that we’ve seen over the last 18 months and that we are seeing as we speak going forward. So without putting out specific guidance, we’re going to continue to need prices to increase to offset future increases but also just the past, based on the margins that are generated out of the TiO2 industry currently.

Frank Mitsch - BB&T Capital Markets

Given that inventory levels throughout the chain you believe are on the low side and that the recovery in this business will be swift and will be in advance of a recovery in general GDP. Is that a 2008 event you think, the recovery?

Thomas W. Adams

Reading through a lot of the information that’s come out publicly over the last couple of weeks from some of the folks further down our supply chain and just reading the general press. It looks like potentially ‘08 is going to continue to be a soft market and soft GDP for the US.

I saw the preliminary GDP numbers came out this morning. From the prognoses, general consensus seems to be that 2008 is going to be a soft year on the GDP side. So as we think about moving forward and looking into late ‘08 into ‘09, potentially we can begin to see those increases.

Operator

Your next question comes from Silke Kueck – JP Morgan.

Silke Kueck – JP Morgan

What are the additional initiatives to take out the additional cost savings in Project Cornerstone? What is it that you’re actually doing that provides this saving?

Thomas W. Adams

Silke, when you break it down into components if you look at the operation side, this is a process that changes daily. As we said earlier having hundreds of projects in this portfolio of under the project management. We continue evaluate and generate new projects that come into that queue.

It could be around efficiencies. As Robert mentioned some of the successes we’ve had in caustic and energy usage, spreading those synergies across all of our facilities, sharing the benefits that one facility learns and we can share that across all of our value chain. But they continue to generate new projects on the efficiency and fixed cost reductions.

And on the SG&A we continue evaluate all of our options and looking at really a mandatory spend model on our SG&A, what’s critical on the SG&A, the services to the business and our plants, to continue to run the business in a very difficult business environment.

So, we’re evaluating a lot of different options in that area and as we have a very good track record you can see from the SG&A graph, where we have reduced our SG&A over 20% and we continue to evaluate other options, we will continue to drive those costs down.

Silke Kueck – JP Morgan

So, given that’s your plan, I could take like another $30 million in costs out this year and then try to compare this with the level of price increase you are trying to achieve versus the raw material cost inflation. When do you think the pigment business would return to profitable levels or like, let’s say like breakeven levels? Can you achieve that already in the second quarter or you thinking it would be more of a second half event?

Thomas W. Adams

Now as I talked about earlier, couple of questions there, but just to address Q1 to Q2, the cost increases that are occurring and when we saw those costs starting to increase like the freight and the processed chemicals late in Q1 which, due to FIFO accounting and will fall through into Q2, we know they are coming. The question becomes how successful can you be in continuing to pass those through in the form of TiO2 price increases.

But if you look at the profitability of our industry as whole, I don’t see that changing in a quarter, because you have gone through a period of 18 months where TiO2 margins as an industry have continued to come down as the industry has absorbed increasing input costs. So, the pricing change, we have seen in the past, it can change fairly quickly.

But it’s a difficult business environment, so that’s why when I talked earlier, from our standpoint, we have got to manage our business to continue to drive the costs down and continue to aggressively push the price increases and look at all options on how we can pass through those continued increasing input costs to the business. But given the slack demand in the US, I wouldn’t see that occurring before late ‘08.

Silke Kueck – JP Morgan

So then, that almost sounds, for maybe like, the next one or two quarters the business may look similar to what we’ve seen in the first quarter?

Thomas W. Adams

Well, I think as I said a few minutes ago we are expecting to see continued increasing on the cost side, so the question is how much can we offset with Cornerstone and how much can we offset with increasing TiO2 prices? But because of FIFO accounting as I said we are seeing increases at the end of Q1 that will flow into Q2. Meaning, we will have higher costs in Q2 than Q1.

Silke Kueck – JP Morgan

Regarding Slide 9, the EPS Bridge that you provide, as to the currency benefit of $0.07 does that include the FX gain that you realized from intercompany loans?

Mary Mikkelson

Yes it does. It’s the net of all FX impact on the quarter.

Silke Kueck – JP Morgan

So, it nets out, then, FX related cost increases.

Mary Mikkelson

Correct.

Operator

Your next question comes from [inaudible] – Banc of America.

Unidentified Analyst – Banc of America

On the intercompany loans, you mentioned that you had about a $7 million gain, is that right from foreign currency effect on your intercompany loans. Could you just give me a little bit detail on if there is any cash effect from those loans, any further details on what those loans represent?

Mary Mikkelson

Sure, it’s both FX gains on intercompany loans and translation gains related to the balance sheet, but there is no cash effect at this point in time. The cash effect comes through when those would be settled up. What they represent is where we have, one subsidiary that has is dollar denominated versus another one that may be Euro denominated. They have different functional currencies, so there is the FX as those are translated at the end of the quarter.

Unidentified Analyst – Banc of America

I’m just a little slow on the uptake on this one. So then intercompany loan between for example, European.

Mary Mikkelson

And a US subsidiary, so if a Europe subsidiary that’s Euro denominated has say a payable to a US subsidiary that is in, it’s a dollar denominated note, as the dollar weakens the payable on the Euro Europe subsidiary reduces. So, we have a translation gain at the end of the quarter.

Unidentified Analyst – Banc of America

Those don’t cancel out. I need to brush up my accounting there. I would have thought that cancelled out. You mentioned previously that the global titanium dioxide market, operating rates remain relatively healthy and that you believe that customer inventories are relatively low. So just to keep beating away at this, what do you think is the major impediment to the price increases and what needs to happen, more importantly, for this to be fixed?

Thomas W. Adams

Right, if you look at, as you mentioned, the fundamentals in the industry, the utilization and inventory levels, I think if you think about the US and the softening demand we have seen there with being down last year and then first quarter it’s like it’s still down.

There is no question there is product moving out of the US into Europe. And we can see it through the export data. So I think it comes back to that same dynamic is, what is our ability to, as an industry, negotiate increases that allow pass through of increasing input costs to the customer and that really is what it comes down to.

Unidentified Analyst – Banc of America

Just because it’s such consolidated business, are you saying then that it’s basically could it be that US subsidiaries of global players that are competing with Europeans subsidiaries at the same companies on pricing?

Thomas W. Adams

I would hope that would not be the case, no.

Unidentified Analyst – Banc of America

And then for demand trends for titanium dioxide, of Europe, in particular Western Europe, are you seeing any change in trends on the horizon in terms of demand weakness?

Thomas W. Adams

Well, as far as Europe goes it still has very healthy demand growth rates in relation to what we have seen historically in Europe. It seems very well balanced. The only issue that we see in the near term in Europe is the fact that you are seeing exports coming out of the US into the Europe market, which makes it more challenging there to implement price increases.

Unidentified Analyst – Banc of America

So then you’re not seeing any real weakness out of, for example, the UK on the housing side.

Thomas W. Adams

Well, now you’re getting specific. When I look at macro numbers I tend to look at her on European regional basis. Sure there are going to be spots within the European sector where you are going to see some impact but overall you’ve got to look at the total demand in Europe which continues to be strong.

Operator

Your next question comes from [Lawrence inaudible] – Lehman Brothers.

[Lawrence inaudible] – Lehman Brothers

Moving back to the FX gain on the intercompany loans, the $7 million. I appreciate your disclosure, your color. What I am concerned about is it’s such a sizable gain relative to past quarters, can you help us out on why it’s so sizable and why we haven’t seen similar sized gains given the strengthening of global currencies versus the US dollar, say at the end of ‘07?

Mary Mikkelson

The increase is compared to the previous quarter. There actually was an increase in the Euro exchange rate in the first quarter compared to end of the year of almost 8% whereas Q3 to Q4 it was a lower percentage increase, so that is part of it.

And then part of it does relate to just how some of our intercompany balances, what those are at the end of any given quarter. And as we talked about during 2007 we are currently involved in restructuring some of our European legal entities as we talked about the structure that was in place at the time we came out from the IPO, was not the ideal structure for us. So we are in the process of reorganizing some of those legal entities and that has affected some of the intercompany balances as well.

[Lawrence inaudible] – Lehman Brothers

Given its non-cash in nature, did you consider stripping it out of your adjusted EBITDA calculation?

Mary Mikkelson

Under the definition of our adjusted EBITDA with the banks that is not one of our carve out items, we’ve had it go in the opposite way during various times in 2006 and 2007, but it’s not one of the items that was defined as an adjustment.

[Lawrence inaudible] – Lehman Brothers

And what was your AR securitization facility balance at March 31?

Mary Mikkelson

It’s roughly comparable to what we were at the end of the year, upper 50s.

[Lawrence inaudible] – Lehman Brothers

Obviously, you drew down on your revolver given the seasonal working capital build, what’s your outlook in terms of where you see revolver borrowings outstanding at the end of the year. I know there is lots of variable and lots of uncertainties for that.

Mary Mikkelson

Well, there certainly are and we don’t provide the specifics regarding our expected cash flows, but we do expect to continue borrowing against the revolver in varying amounts throughout the year. It just depends upon some of the pricing increases as Tom has talked about, it depends upon achieving some our other initiatives in cost reduction and initiatives in the land sales to impact all of those.

Operator

Your next question comes from David Troyer - Credit Suisse.

David Troyer - Credit Suisse

First on the caustic soda consumption, one of the processed chemical that has been impacting you, what is your annual consumption of caustic soda and if you could break it down by major region that would helpful?

Thomas W. Adams

Yes, on the caustic soda, it tends to be in the 25,000 to 30,000 ton level. We don’t provide breakouts for competitive reasons by region or facility. But as I said that has been one of our more successful Cornerstone programs, which is continuing to reduce that consumption.

David Troyer - Credit Suisse

Yes, but would it be fair to take the 25 and 30 and pro-rate it against the capacity in each of the regions?

Thomas W. Adams

Yes, on the chloride facilities that’s a quick and easy way to do it, it’ll put you in the ballpark.

David Troyer - Credit Suisse

And then on freight, is the increase in rates predominately due to their higher fuel costs or is it also due to tight supply type higher operating rates on the freight?

Thomas W. Adams

Yes, it varies by inbound and outbound. But on the outbound side, we have coming into here we’ve contracted one-year period rates, so I think we are in good shape there. However, with that said in all three regions of the world, yes, we are getting hit with fuel surcharges. So just because you had a contracted rate does not mean that you don’t get fuel surcharges passed through to you.

On the inbound side, which is on the ore side, yes, there is no question that is definitely and you can look at the Baltic Supermax dry rate and the supply and demand issues there that are driving the costs. Now we have been successful in locking or contracting in on some of that to protect ourselves there. But no question, though, the worldwide supply and demand issues, because that is driven by iron ore and coal. Now TiO2 is only 1% of that Supermax type usage, it’s really driven by the iron ore and coal usage.

Robert C. Gibney

We have seen some tightness in finding berthing space in the Gulf Coast region and Savannah, we had to ship some containers out to the West Coast, and that’s just evidence of the huge amount of exports going out of the US because of the weak dollar.

David Troyer - Credit Suisse

Mary said AR was comparable to what it was at the end of the fourth quarter, high 50s, what is the AR securitization availability at the end of the first quarter, do you know?

Mary Mikkelson

The total program size is $100 million.

David Troyer - Credit Suisse

Do you think all of that would be available based on the borrowing base for the majority of it?

Mary Mikkelson

Well it’s not a borrowing base calculation. It’s based upon specific, the program size is $100 million and then it’s based upon at this point in time receivables from the Americas, and what we have outstanding. So that is the maximum that’s available related to our America receivables at this point in time.

David Troyer - Credit Suisse

So you think $40 plus is available?

Mary Mikkelson

It’s available assuming we had increased sales and increased receivables, yes.

David Troyer - Credit Suisse

And then the revolver availability, have the LCs changed materially since the end of fourth quarter where they were at the mid 60s.

Mary Mikkelson

Not materially, I think at the end of the year, it was 68, 69. Right now, they are right at 70 million.

David Troyer - Credit Suisse

Tom on the adjustment to the environmental, the net environmental spending in 2008, is that due to a timing difference? Might there be catch-up spending that needs to occur in 2009 or with that beyond?

Thomas W. Adams

Environmental spend just like in our capital programs, we continue to manage that in line with the business priorities and the business environment. One of things our groups do is they continue to find more efficient ways to manage the projects, but if you look at the environmental spend, we are managing that down to the business environment.

So, you could have some of that that would move into next year, yes. But it tends to be more inline with your total program and most of these projects under consent orders and decrees and we’re working through a process of spending x dollars so whether you spend it in four years or five years just depends on how quickly the project moves forward.

Operator

Your next question comes from Gregg Goodnight - UBS.

Gregg Goodnight - UBS

Do you have a view as to global capacity expansions last year and this year? It seems like demand is about at a trend line so if capacity additions weren’t excessive, it seems like global operating rates ought to be tightening up a bit?

Thomas W. Adams

Yes, Gregg if you look at it from that standpoint on the global capacity expansions, there aren’t, to our knowledge, significant expansions that are, that have been announced, out of brownfield and obviously greenfield would be way out, there is only one greenfield that’s announced and that’s DuPont’s, it would be fairly far out on the curve.

I believe Huntsman had previously announced an expansion in their UK facility, it’s a chloride facility there and so potentially that will be coming on this year. What we’ve seen really on the more the Chinese side is actually some decreases due to the high sulfur prices and continued move of enforcing environmental regs there.

So to answer your question a lot of that is going to depend on the demand from that perspective. But if you look at the reinvestment economics at this stage on the TiO2 industry, given the margin generation capability and the high sulfur prices which are hitting the sulfate producers. It’s going to be difficult for folks to substantiate further increases.

Gregg Goodnight - UBS

So qualitatively things at least on a global supply demand basis should be tightening up a bit.

Thomas W. Adams

Depending upon what the demand for TiO2 does driven by the US predominately.

Gregg Goodnight - UBS

Electrolytic chemicals seem to be generally positive, could you give me some more colors on the drivers of this and would you think that the level of operating income you saw in Q1 would be sustained this year?

Thomas W. Adams

The electrolytic group has done a phenomenal job, given very little capital infusion they’ve been very creative in working in two areas. One is further driving their cost side, but working on the top-line, which increased for example, in our chlorate business, increasing the productive capability of that facility it is to be able to produce and sell more chlorate.

On the EMD side, the anti dumping suit, we have been very successful in, which we will start to see the benefits of that in volumes almost immediately, as those companies are already having to post bonds or cash based on the preliminary findings that we’ve already received. So we are going to continue see volume impacts this year and then as you move later this year and the next year, early next, pricing impacts.

So, to answer your question, yes, it is sustainable and they do have plans to continue to grow on the revenue side of their business. It’s a profitable business and they will continue improve in profitability.

Operator

Your next question comes from [Robert Rosen – inaudible firm].

[Robert Rosen – inaudible firm]

It seems that you’ve dealt strongly with the covenant issues not being a problem this year and you see a industry recovery at some point. Can you tell us why still the Board and management are unable to if wanting to buy shares in the company?

Thomas W. Adams

There is no question from the perspective of the Officers of the Board that we feel the stock is significantly undervalued. But under our company policy Officers and Directors can only buy during the 30-day window after our earnings release. But they can’t buy if they are in possession of material non-public information.

The only exception to that is if you have a 10b5-1 plan, which is why I have been able to each quarter and will continue to because I have that plan in place and it was put in place last year. Currently, and through external counsel have passed this through, our Officers and Directors still who are in possession of material non-public information and will not be allowed to purchase stock in that 30-day window we have after the earnings release today.

[Robert Rosen – inaudible firm]

So that’s material non-public information relating to potential extraordinarily like transactions?

Thomas W. Adams

Well, I can’t, Rob give specifics on what it is related to, because it is non-public information. But based on the legal review it is material to the business and therefore we felt and the legal counsel felt that the Officers and Directors could not trade on the stock at this time.

Operator

Your next question comes as follow-up from Silke Kueck – JP Morgan.

Silke Kueck – JP Morgan

And what you said is the possibility of the electrolytic business is in effect sustainable? Do you think you can generate $1.5 million on that order of operating profits for the next few quarters?

Thomas W. Adams

Yes, based on what we’re seeing, we should be able to continue that and then as you think about moving into the later portion of the year and specifically in next year as we start to realize the price benefit from the anti dumping work that we’ve done and then you’ll continue to see increases there.

Silke Kueck – JP Morgan

The corporate expenses, I know that also swings around a little, but, is like a $1 million the right run rate or should be more like $4 million, how do we think about that? Somewhere in your press release you lay out your operating income by the pigment business and the electrolytic business and then there is a line of corporate expenses?

Mary Mikkelson

Well, it can vary from quarter-to-quarter, it’s more of looking at total SG&A, that’s a function principally, of our SG&A and assuming that we continue to reduce our SG&A as we’ve lain out. It should be less than prior year unless there is some unusual cost that happens to hit us in a particular quarter.

Silke Kueck – JP Morgan

So how do we think about it, because when I look from like the fourth to the first quarter on a second basis and to see what changed, the loss in the pigment business is little bit higher but the electrolytic business really swung from a loss to a profit, and corporate is something like $1 million expense and ‘06 to ‘07 was maybe like a ‘04 to ‘05 earn expense in the quarter. So, it is meaningful.

Mary Mikkelson

Well, but it can vary based upon unusual items that are not allocated out to the other segments, the corporate expenses SG&A that’s not allocated to the other segments.

Silke Kueck – JP Morgan

So that means that it’s unpredictable, so you can’t tell whether $1 million is a good run rate whether too low?

Mary Mikkelson

Well, what I can say is we don’t look at the corporate segment by itself and try to predict it. What we look at and what we’ve provided guidance on is our SG&A. And we are projecting our SG&A to continue to be lower this year. So I would use that as your basis comparing to prior year.

Operator

Your next question comes from Jonathan Brolin – RLR Capital Partners.

Jonathan Brolin – RLR Capital Partners

Taking into account the adjusted EBITDA that you announced today, the incremental cost savings and the cash outlay reduction which you identified and your expectations for the balance of the year, do you feel comfortable that you have the flexibility to be able to do the things you need to do to right the business?

Thomas W. Adams

Jonathan, if you look at what we talked about today given the change in the covenant provisions that we had at the beginning of the year, given the things that we continue to do around pushing on the pricing side, but continuing to manage our business and manage our controllable expenses going forward.

As I said earlier, we’ve come out with new basically ranges today which are lowered on numerous categories and as I said earlier we will continue to manage our costs in line with that business environment so that we can impact what we can control and we will continue to look at all alternatives on passing through increases on the TiO2 pricing side.

Operator

Your next question comes from Al Alaimo - SCM Advisors.

Al Alaimo - SCM Advisors

For the increase in other income from the intercompany loan you had why does it go through income again, it just doesn’t seem to make sense?

Mary Mikkelson

The biggest piece of it is a foreign exchange gain related to a change in the Euro versus the US exchange rate and based upon the financing between our subsidiary so, if a Euro denominated subsidiary has a, for instance, a payable to a US denominated subsidiary, the Europe subsidiary has to translate its balance because all their books are maintained the Euro functional currency.

And that translation comes through in the other income line. The intercompany gains and losses do net out but on the US set of books there is no translation so that’s why the question earlier of thinking it would net out because of the translation, that part of it doesn’t net but the intercompany balances, receivables/payables, do net out.

Al Alaimo - SCM Advisors

So, what accounting pronouncement is this under?

Mary Mikkelson

Its FAS 50-something 54 or 57, I am sorry; I don’t remember the specific one.

Al Alaimo - SCM Advisors

And your auditor signed off on that?

Mary Mikkelson

Yes.

Operator

Your final question is a follow-up from [Lawrence inaudible] – Lehman Brothers.

[Lawrence inaudible] – Lehman Brothers

Regarding your revolver availability, obviously it’s a $250 revolver and you have $43 million outstanding and you have roughly $70 million of LCs does that imply that you have roughly $187 million actually available to you without busting a covenant because I know last quarter you only had $50 million actually available given the covenants, so I just wanted to make that clear.

Mary Mikkelson

Well, it’s based on, you have to take the revolver less the LCs gives you the total amount available, but yes, you still have to factor in the leverage ratios so at the end of March the maximum leverage ratio was 4.45 times, our trailing 12-month EBITDA was $137.1 million. So that would tell you here’s what the total availability is and you just can’t exceed $180 million, which is the $250 less the $70 on the LCs.

And just as a follow up to the previous question the specific FAS on the FX is FAS 52.

Robert C. Gibney

That completes our call for the day. Just a reminder, a replay of the call will be available for one week on our website, it can be accessed at tronox.com. Thank you all for you time and interest in Tronox and this concludes our call.

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