Brennen Arndt - Vice President-Investor Relations Thomas J. Casey - Chairman & Chief Executive Officer Katherine Carolyn Harper - Chief Financial Officer & Senior Vice President Jean-François Turgeon - Executive Vice President Edward T. Flynn - Executive Vice President and President, Tronox Alkali.

Hassan I. Ahmed - Alembic Global Advisors LLC Edlain Rodriguez - UBS Securities LLC Roger Neil Spitz - Bank of America Merrill Lynch Derek Ching - Goldman Sachs & Co. Dustin Shapir - Oak Hill Advisors LP Trelford Owen Douglas - Robert W. Baird & Co., Inc. (Broker).

Good day, ladies and gentlemen, and welcome to the Tronox Limited Second Quarter 2016 Earnings 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. As a reminder, this conference call is being recorded.

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

Thank you and welcome, everyone, to Tronox Limited's second quarter 2016 conference call and webcast. With me today are Tom Casey, Chairman and CEO; and Kathy Harper, Senior Vice President and CFO. Joining us for the Q&A session will be Jean-François Turgeon, President of Tronox TiO2; and Ed Flynn, President of Tronox Alkali.

We will be using slides as we move through today's conference 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.

A reminder that our discussion today will include certain statements that are forward-looking and subject to various risks and uncertainties, including but not limited to the specific factors summarized in our 2015 Form 10-K and our quarterly report on Form 10-Q for the quarter ended March 31, 2016.

This information represents our best judgment based on today's information. However, actual results may vary based on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements. During the conference call, we will refer to certain non-U.S.

GAAP financial terms that we use in the management of our business, including EBITDA, adjusted EBITDA, free cash flow and adjusted earnings per diluted share. EBITDA represents net income before net interest expense, income tax and depreciation, depletion, and amortization expense.

Adjusted EBITDA represents EBITDA as further adjusted for non-cash unusual and non-recurring items. Free cash flow represents cash flow provided by or used in operating activities less capital expenditures. Adjusted earnings per diluted share represents EPS adjusted for unusual or non-recurring items on a fully-diluted basis.

A reconciliation is provided in our earnings release. I also want to note that the presentation format of our earnings release issued yesterday differs from prior period reports to reflect more fully the guidelines contained in the SEC compliance and disclosure interpretations document entitled Non-GAAP Financial Measures released on May 17, 2016.

It's now my pleasure to turn the call over to Tom Casey.

Tom?.

Thanks very much, Brennen, and thank all of you for joining us this morning. Our TiO2 business performed very well in the second quarter, reporting adjusted EBITDA of $59 million, which represents 168% improvement over our first quarter result.

We benefited from pigment selling price increases, healthy demand growth and continued strong operating cost performance. We think even better performance lies ahead for this business, but it is encouraging to see that the real inflection point we had in Q2.

Pigment selling prices increased sequentially, as I said, for the first time since 2012, and we expect to see another sequential improvement in the third quarter as announced price increases roll across our global customer base.

We continue to match pigment production volumes to our robust sales volumes and we're keeping inventory at below normal levels. But because demand was so strong in the quarter, we were able to decrease our inventory level slightly, while increasing our plant utilization rates into the mid-90% range.

We believe pigment inventories are normal or below normal, not only for us, but at both customer levels and other producer levels across the globe.

Second quarter also marked the halfway point of our three-year Operational Excellence program in TiO2 to generate more than $600 million of aggregate cash from cost and working capital reductions over the period 2015 to 2017. We are ahead of schedule in meeting our targets.

Cash generated from annual cost reductions totaled $220 million through the first half of 2016.

As a reminder, at the end of last year, we reported that 2015 initiatives had generated $90 million in 2015, and after an additional $3 million of cost to achieve those 2015 savings that ended up being paid in 2016, we preserved $87 million of these savings into this year, and captured them again in the first half of 2016.

In addition, we've also captured $43 million more in 2016. Cash delivered from working capital reductions totals $202 million through the first half of 2016. In 2015, $98 million was delivered and an additional $104 million was delivered in the first half of 2016.

In aggregate then, total Operational Excellence aggregate cash generation totaled $422 million through the first half of 2016. This is more than the full-year target for 2016, and we intend to achieve more in the second half. Our Alkali business increased sales volume 10% and revenue by 7% and continues to operate in a sold-out mode.

We experienced a number of one-off charges in the quarter that I'll talk about in a few minutes. And export prices in Asia experienced some pressure largely as a result of the slowdown in the Chinese commodity market. And again, I'll deal with that in a minute.

But both TiO2 business and the Alkali business ratified new multiyear labor contracts for our operations in South Africa and in Green River, Wyoming, respectively. The Alkali contract was a three-year contract and the TiO2 contract was a two-year contract, moving up from the one-year contracts that we've had over the last several years.

Both contracts were negotiated successfully and there were no work stoppages associated with either one of them. Our company's cash generation performance in the quarter, as I just discussed, continues to strengthen our balance sheet. We closed the quarter with $188 million of cash-on-hand and liquidity of $460 million.

And our board declared a quarterly dividend of $0.045 per share payable on September 1, 2016 to shareholders of record of the company's Class A and Class B ordinary shares at the close of business on August 17, 2016. So now, moving to our slides. If we could move to slide four, for those of you who are following.

Let's review the second quarter performance in TiO2. The sequential comparison reflects the momentum we are seeing in TiO2. Segment revenue of $333 million increased 17% versus the $285 million in the first quarter, again, driven by higher pigment sales as well as feedstock and co-product sale volume.

Pigment product sales of $244 million increased 13%, compared to $216 million in the first quarter as sales volumes increased 8% and selling prices increased 5%, 4% in local currency basis.

Share volumes were higher – excuse me, sales volumes were higher in North America and in Asia Pacific and lower in Europe, the Middle East and Africa, and Latin America. Selling prices were higher in all regions. In the third quarter, we are, again, matching production to demand, as I said. And we will keep our inventories at or below normal levels.

Moving upstream in our integrated business, titanium feedstocks and co-product sales of $73 million increased 28%, compared to the $57 million in the first quarter, led by higher titanium slag and zircon sales volumes.

Zircon sales volumes increased 56%, including a shipment that was rescheduled from the first quarter to the second quarter, while selling prices were 10% lower than the prior quarter. In the second quarter, our first shipment of zircon was made from our new Fairbreeze mine.

We expect zircon sales volumes in 2016 to exceed those of 2015 by approximately 5% as we ramp up production to meet market demand. Rutile prime sales volumes and selling prices were level to the first quarter. Pig iron sales volumes increased 9%, while selling prices of pig iron remain level.

As the only fully-integrated supplier, we have the ability to choose the best economic alternative available to us with respect to feedstock production and consumption. For example, we decide affirmatively the degree to which we sell titanium slag in the marketplace or consume it in our own pigment production.

We intend to continue to manage our slag production so that all of our pigment feedstock demand is met from our own produced materials. This will generate cash as we reduce inventory and reduce operating expenses, while we keep the two slag smelters down, that are down now, we keep them down.

Of course, if market conditions warrant their restarting so that we can supply both ourselves and third parties, we can do so and we would do so. TiO2 operating income of $6 million compared – excuse me, improved from an operating loss of $36 million in the first quarter.

Adjusted EBITDA of $59 million, as I mentioned, has improved 168% from the $22 million in the first quarter, driven again by significant production cost reductions and the benefit of higher pigment production efficiency and plant utilization, further supported by higher sales volumes in both pigment, feedstocks and co-products, and finally, of course, higher pigment selling prices.

With cash provided by operating activities of $67 million and capital expenditures of $18 million, TiO2 delivered free cash flow of $49 million to the company in the second quarter. Also, again as I mentioned, we successfully negotiated a two-year bargaining agreement with our employees in South Africa.

Moving to the year-on-year comparisons, TiO2 segment revenue of $333 million was 19% lower than the $409 million, primarily the result of lower pigment selling prices and lower titanium slag sales volume.

Pigment product sales of $244 million declined 8% compared to the $266 million in a year-ago quarter as sales volumes increased 3% and average selling prices declined 11%, and the same number on a local currency basis.

Higher sales volumes were realized in North America and Asia Pacific, while sales volumes in EMEA and Latin America were lower than year-ago levels. Selling prices were lower in all regions.

Titanium feedstock and co-product sales of $73 million were 37% lower than the $116 million in the year-ago quarter, driven primarily by lower sales of titanium slag and pig iron, which we've already discussed and lower zircon selling prices.

Titanium slag sales volumes in the quarter were third of the level of those in the year-ago quarter and the selling prices are 23% lower which is why we have decided to reduce production of slag. Sales volumes for rutile prime increased 58%, while selling prices declined 14%.

Sales volumes in zircon increased 3% and selling prices were 16% lower than the year-ago quarter. Pig iron sales finally volume – sales volume declined 27% and selling prices were 24% lower. Pig iron is a by-product of making titanium slag in our furnaces in South Africa.

And when we closed two of our slag smelters last year, obviously, that reduced the pig iron production available to be sold. Pig iron selling prices are correlated to market pricing for iron ore and we all know that those prices are down as well.

TiO2 segment operating income of $6 million improved from an operating loss of $41 million in the year-ago quarter.

And the segment adjusted EBITDA of $59 million increased 64% from the $36 million in the year-ago quarter, again, as the significant production cost reductions achieved in our Operational Excellence program, favorable foreign exchange impact on production costs more than offset lower selling prices and the impact of feedstock production curtailments.

On the Alkali business, slide five, compared sequentially, Alkali revenue of $204 million increased 7% from the $190 million in the first quarter last year. Sales volumes increased 10%, driven by broad-based domestic and export demand growth. Domestic sales volumes increased 8% and export sales volumes increased 12%.

Selling prices were 2% lower as domestic selling prices declined 2% due to customer mix, while export selling prices were level to the prior quarter. With respect to the export pricing outlook, we anticipate that the pricing environment in Asia will remain stable through the rest of the year.

Chinese soda ash exporter costs were reduced as the price of commodity inputs like coal and salt declined and shipping rates softened as well. Many of these costs now appear to be stable or, in fact, may be rising.

Alkali segment operating income of $11 million declined from $20 million in the first quarter and adjusted EBITDA of $28 million declined from $35 million. The declines were driven by items in the second quarter that did not occur in the first quarter, totaling approximately $9 million.

These items were the move of our longwall mining machine; the primarily consulting costs to assist us in the transition from a shared services agreement with FMC, the business's prior owner, to the Tronox IT system; and the non-recurring costs incurred to negotiate and prepare contingency arrangements in connection with renegotiating our labor agreement.

As I said, these are non-recurring one-off costs that explain a good deal of the difference. Compared to the year-ago quarter, Alkali segment revenue of $204 million was 2% lower than the $208 million in the year-ago quarter as sales volumes and selling prices were both 1% lower.

In the domestic market, sales volumes increased 5% driven by continued strong demand growth particularly in flat glass and chemicals markets. Domestic selling prices were level as price increases in the low-single-digit percentage range, implemented in our annual contracts at the beginning of the year, were offset by customer mix in the quarter.

In export markets, sales volumes were 6% lower as a higher portion of our production was allocated to domestic markets to meet strong demand growth there. Selling prices in export markets declined 6% primarily due to lower prices in Asia.

Alkali segment operating income of $11 million decline from $25 million in the year-ago quarter and $20 million in the prior quarter.

Alkali segment adjusted EBITDA of $28 million declined from a record of $50 million in the year-ago quarter as higher sales volumes were more than offset by the same items that occurred – that I described in the second quarter that did not occur in the year-ago quarter as well as by local export sales, higher inflation-driven operating costs and some unplanned maintenance in Wyoming.

Again, I mentioned that the labor union agreement with our employees was successfully negotiated without work stoppage and a new three-year contract has been ratified by our employees. With cash provided by operating activities of $21 million and CapEx of $4 million, Alkali delivered free cash flow of $17 million to us in the second quarter.

I'll now turn the call over to Kathy Harper for a review of our financial position.

Kathy?.

Thanks, Tom. I'll begin with a review of corporate and consolidated items, then move to our balance sheet and cash flow statement.

Corporate loss from operations was $9 million in the second quarter compared to a loss from operations of $34 million in the year-ago quarter, which included $21 million of professional fees incurred for the Alkali acquisition and a loss from operations of $13 million in the prior quarter.

Corporate-adjusted EBITDA was negative $16 million compared to adjusted EBITDA of negative $19 million in the year-ago quarter and adjusted EBITDA of negative $17 million in the prior quarter. Cash used in corporate operations was $20 million in the quarter.

Selling, general and administrative expenses in the second quarter were $50 million compared to $72 million in the year-ago quarter, which included the $21 million of professional fees incurred for the Alkali acquisition and $47 million in the prior quarter. Moving to the balance sheet.

Interest and debt expense of $46 million compares to $52 million in the year-ago quarter, which included an $8 million bridge financing fee related to the Alkali acquisition and $46 million in the prior quarter. On June 30, 2016, gross consolidated debt was $3.055 billion and debt net of cash and cash equivalents was $2.867 billion.

Liquidity is $460 million, including cash and cash equivalents on the balance sheet of $188 million as of June 30, 2016. Capital expenditures in the quarter were $22 million and depreciation, depletion and amortization was $60 million.

Regarding foreign exchange impacts on the income statement, our primary exposure to currency exchange rate is in South Africa, Australia and the Netherlands. The exposure is more prevalent in South Africa and Australia as the majority of revenues are earned in U.S. dollars, while expenses are primarily incurred in local currencies.

In 2015, and thus far in 2016, our cost structure in both countries has benefited from rand and Aussie dollar movements relative to the U.S. dollar. The foreign exchange risk in Europe is partially mitigated as the majority of revenues and expenses are in the same local currency creating a partial natural hedge.

In the second quarter, FX favorability impacted sales, cost of goods sold and adjusted EBITDA. The sales impact was $1 million. The cost of goods sold impact $21 million and the adjusted EBITDA impact was $19 million of favorability.

However, as you'll see in Tom's discussion of our Operational Excellence program, we've taken foreign exchange impact out when measuring our cash generation performance against our targets to challenge ourselves to deliver real incremental cash generation.

I'll now turn the call back to Tom for a progress report on our Operational Excellence program at its halfway point.

Tom?.

Thanks very much, Kathy. As I mentioned at the outset of these remarks, the second quarter marked the halfway point of our three-year Operational Excellence program in TiO2 to generate more than $1,600 million of aggregate cash flow from cost reductions and working capital reductions over that three-year period 2015 to 2017.

We have been and will continue to tie our progress on these metrics to our reported financial statements and provide the level of detail needed to measure real cash generation, cleanse the factors, such as inflation, non-cash LCM impact, and as Kathy said, the FX exchange impacts.

I've already summarized the details of the accomplishments of our performance over this period, but let's look at slide eight, which provides a specific bridge from first half of 2014 reported EBITDA to our first half 2016 reported EBITDA. Moving from left right across the slide.

First half 2015 EBITDA was $121 million and that's taken directly from our first half 2015 financial statement. Net non-cash LCM impacts totaled $76 million. And therefore, cash EBITDA was $197 million. The next three bars measure revenue impacts.

Selling price declines of $117 (sic) [$107] (22:07) million plus sales volume and product mix headwinds of $56 million totaled $163 million of top-line reductions. The FX impact on sales was negligible. After the impact of these revenue headwinds, TiO2 EBITDA would have been $34 million.

As Kathy mentioned, our cost structure has benefited from our operations in South Africa, Australia and the movement of their currencies relative to the U.S. dollar. The total benefit on our cost of goods was $46 million in the first half of 2016.

The next green bar isolates the $108 million cash generated from our Operating Excellence program in the first half of the year. We've separated the $108 million by its sources.

In the first half, TiO2 delivered an incremental cash cost reduction of $43 million from 2016 initiatives, plus $65 million of the cash cost reductions realized in 2016 came from the initiatives taken in 2015. That is cash from cost reductions that remained on the balance sheet at year-end 2015 that has now hit the income statement.

We've included the 2015 EBITDA bridge in this appendix of the slide – in the appendix of this slide deck for your use. Recall when we reported this bridge at year-end 2015, $68 million of the total $99 million of cash from cost reductions achieved in 2015 remained on the balance sheet.

$65 million of that $68 million has now hit the income statement in the first half of 2016. So, cash savings in the first half of 2016 included $33 million from labor and outside services, $11 million from maintenance, supply and rentals, $8 million from lower raw materials and $6 million from lower energy costs.

Separated from these savings is an inflation hit of $15 million shown in red. That is to say we must overcome that $15 million inflation first and then deliver the targeted cost reductions, which is what we did.

As to where the $108 million shows up on this 2016 financial statements, again, $68 million has hit the income statement, $65 million from last year and $3 million so far from this year, and $40 million remains on the balance sheet to be realized in future periods.

Moving to other cost impacts, the fixed cost absorption impact of bringing supply in line with demand was $49 million. Other miscellaneous items that occurred in the first half of this year, such as overhead allocations from corporate to the TiO2 segment that did not occur in the first half of 2015, total $18 million.

Therefore, our first-half 2016 reported adjusted EBITDA for TiO2 was $81 million, which also ties to our financial statements. Let me share our perspective on the balance of 2016, if I might. This is shown a little bit on page nine – excuse me, slide nine.

And as you've seen, our TiO2 business generated considerable momentum in the second quarter, benefiting from healthy demand growth, higher selling prices and strong operating cost performance. As I've said, we expect this healthy demand to continue in the second half.

We hear from time to time questions about the now apparent pattern of successful price increases. How much, how many, for how long, and so forth. Some of these questions are actually coming from people other than our customers.

And for some of those folks, the concern seems to be motivated by a fear that increases in China pigment exports in some, but not all of the last few months will expand and will materially affect on our global prices. So, let's talk about that.

We agree that sales usually soften somewhat in the quarters four and quarter one, compared to quarters two and three. But we think that given the state of supply in the market today, the impact of sales differences this year will be modest, if at all. First, the actual sales differences quarter-to-quarter are not huge.

From 2012 to the current year, to 2015, the sales decline from Q4 over Q3 has only averaged about 4%. This year, pigment inventory levels are below, and in our case, below normal seasonal levels. We, and I assume others, are in a position where we can absorb production into inventory without creating any price-affecting surplus.

And as the only fully integrated supplier in the TiO2 value chain, we have an advantaged look at the outlook for both pigment and feedstock, titanium feedstocks and co-products.

We believe that rising prices – excuse me, we believe that the most basic titanium feedstock, ilmenite, is experiencing rising prices and that these rising prices will create an upward pressure on prices for the products for which it is an input, whether it's higher-grade feedstock like slag or synthetic rutile or pigment.

We have seen ilmenite prices rise in the first half of this year, driven by reduced supply from Chinese ilmenite producers. Ilmenite is mined in China as a co-product of magnetite mining, which is part of the iron ore chain. Chinese miners typically get 1 ton of ilmenite for about 10 tons of magnetite.

Given depressed market prices for iron ore, a good portion of the magnetite mines in China have shut down, which obviously then limits the supply of the co-product ilmenite that can be delivered to pigment producers. Import data of ilmenite into China confirms this.

The supply tightness and rising prices for ilmenite in China has led to a series of pigment price increases in that country. Since the start of the year, we've seen at least seven pigment price increase announcements made by Chinese TiO2 producers.

And in July, we saw TiO2 domestic selling prices offered on a delivered basis that were 10% to 20% higher than the domestic prices offered at the start of this year. That's 2 times to 4 times higher than the price increases that global producers have seen so far this year.

In export markets, we saw July selling prices offered on a CIF basis that were 10% to 15% higher than the start of the year. Compounding the ilmenite cost pressures on Chinese pigment producers are the impact on TiO2 production arising from, among other things, environmental pressures.

Pigment production capacity in the country is expected to decline driven by government-forced closures that are driven again by enforcing environmental law compliance.

A major Chinese producer recently commented in the press that they expect that China's new Energy Conservation Law, which is to be enacted two months from now, could result in a 20%, which is over 400,000 tons, reduction in Chinese TiO2 capacity.

This major Chinese producer believes that several TiO2 producers will not be able to meet energy efficiency standards, which call for, basically, 1,100 kilograms of standard coal equivalent per ton of pigment produced. So, again, this is driven largely by an environmental concern on the part of the Chinese government.

The combined effect of inefficient, low-cost, environmentally-damaging plants closing and higher feedstock costs is creating supply tightness and rising prices in the country. And this will continue in both ilmenite and pigment, and it will affect both domestic and export market prices, we believe.

Moreover, as ilmenite is the primary feedstock for higher-grade production, such as slag and synthetic rutile, it will necessarily add cost pressures to producers of high-grade feedstock as well. We believe this should stimulate rising higher-grade feedstock selling prices as we move through the end of this year and into next year.

Typically, the turn in feedstock markets often lags the turn in pigment markets by two quarters or three quarters. But as I said, we are already seeing ilmenite prices increase not only in China, but elsewhere in the world.

Should this occur now, it will provide cost pressure on non-integrated pigment producers and provide further motivation for selling – excuse me, for pigment selling price increases in 2017. And we, on the other hand, will capture additional margin from the price increases in slag and synthetic rutile and in the price increases in pigment.

And therefore, our margins will be enhanced relative to our market. In our Alkali business, we expect 2016 to be another year of solid EBITDA and free cash flow. Moving to CapEx, in 2016, we're reaffirming the expectation for our CapEx to be in the $150 million to $160 million range.

We continue to focus on being efficient in our expenditures of capital and we remain confident in those limitations. From a cash flow perspective, considering our targets for cash generation from cost reductions, working capital reductions and capital spending, we expect to deliver another year of positive free cash flow at Tronox.

So, with that, I hope I've covered the issues that are of interest to you. And we'd be happy to open the call, operator, to answer any questions that people may have..

Thank you. And our first question comes from Hassan Ahmed from Alembic Global. Your line is now open..

Morning, Tom..

Morning, Hassan..

Tom, obviously, you guys as well as a bunch of participants in the industry had announced price hikes for Q2 and Q3.

Just wanted to get a sense – I know you've talked about sort of sequential percentage moves and the like, but could you just give a sense of what the price realizations actually look like in Q2, and early days in Q3, but where they're headed in Q3? I mean, is $75 to $80 a ton worth of realizations in Q2 kind of a fair guesstimate?.

I'm sorry, I didn't hear the part about what was – is what a fair estimate?.

$75 to $80 a ton, Q1 to Q2 in terms of incremental price. TiO2....

Higher. Higher than that..

Yeah. Higher than that.

So I mean, ballpark what are we looking at for Q2, what are the early signs for Q3?.

Look, we haven't announced exactly. But I would say, over – around or over, slightly over 5% Q2 over Q1 and Q3 over Q2 is going to be around the same. And we haven't announced yet for Q4, Tronox has obviously and yet – we have not yet, but as for Q2 and Q3, I would use those kind of numbers..

Got it. Now, moving on to the Alkali business. As I take a look at the EBITDA margins, Q2 2015 around 24%, Q1 2016 around 18.4%, and then Q2 2016 13.5%, right? So, clearly some volatility there. You talked about some sort of cost deflation.

I would imagine that the cost curve sort of relative to the last few quarters flattened out a bit as this cost deflation occurred. Just wanted to get a sense of – you guys are obviously the lower-cost producers. You are at the bottom left of the cost curve.

I mean, if sort of input cost remain where they are right now, what sort of sustainable EBITDA margin levels should we be thinking about as far as your Alkali business goes?.

Okay. Let me – I want to reiterate the point I made in the main presentation, Hassan, about the Q2 had a substantial number of one-offs, non-recurring – the longwall mine move, that's a big deal, costs us probably $4.5 million.

The transition off of the transition services agreement that FMC was providing us in IT to our own system involved some consulting costs, some people. That transition has now happened. Those people are now – consultants are now gone. There was some hardware there, too, but that's all obviously bought.

When you prepare for labor negotiations in an environment where 650 of your employees are basically going to be covered by the negotiations, you have to build some contingencies. So, we hired some specific people in to handle the negotiations with us and to advise on strategy. We brought in supplies. We built contingency stocks.

We did those kind of things. All of that labor costs – labor and associated costs that were done with respect to the negotiations are now done, obviously. We negotiated the contract successfully. All of those one-offs amounted to probably 4 point to 5 points of margin, and so that will immediately go back.

So, when you think about quarterly margin, I would add that, the 5 points to that, that stuff all costs us..

So, call it, easily in the high-teens, maybe close to 20% sustainable EBITDA margin?.

I think – yeah. I mean, look – I mean, Ed is sitting across the table from me and I keep mouthing 20%-plus and he keeps mouthing high-teens. So, let's split the difference and say, about 20%..

Understood. Very helpful, Tom. Thank you so much..

Okay, Hassan..

Thank you. And our next question comes from Edlain Rodriguez from UBS. Your line is open..

Thank you. Good morning, guys..

Good morning..

Quick question (37:20). I mean, when you look at TiO2, volumes have been much stronger than normal when we're looking at significant – much higher than GDP and so forth.

One, are you seeing a lot of – I mean, I guess, I'm not sure if you can tell – are you seeing a lot of restocking going on? And how will that impact volumes in 2017? And could that put some pressure on price and (37:46) from going high?.

I think that Q1 and Q4, which had demand growth rates in the 7%ish, 8% range probably had some restocking in it. But I think if you look at the paint and the plastics businesses, they're doing very well. They're selling lots of gallons. Housing, which is a significant market for them, is doing well. Stocks are up. Sales are up.

So, I'm not claiming that there is a new normal of 5% or 7% growth rates as we saw a couple of quarters ago, but I also think that growth is strong, and I think it's going to stay strong through the year. We now believe that we are going to sell essentially every ton we can make in pigment as well as in Alkali.

And as I mentioned in the quarter – in the second quarter, we were running our plants at mid-90% utilization rates and our inventory levels went down. So, we think that we'll continue to produce strongly in the third quarter and sell everything we make. We don't think we'll build inventories in the third quarter at all.

We think in the fourth and first quarters that demand – as I said, demand usually softens on those quarters, but it's not going to be a significant impact on price, and we think going into 2017 demand stays strong and price continues to rise.

We do not expect to see price increases at the level that we saw in 2010 that would be – we think those were caused by artificial forces of government stimulus programs and things like that. But we still are at price levels that are not producing adequate returns for us, and we think demand is strong across the world.

As I said, we think China supply is actually going to shrink as a percentage of global sales over the next of couple of years. So, we think that the pigment business is inflected in the second quarter, is heading up and is very strong..

Okay. Thank you. And one quick one on zircon. I guess the prices have been moving up a little bit. I think yourself and others are trying to increase price by $60 a ton or so.

Can you give us some status on that and also just overall supply and demand balance there that crude oil producers should (40:18) get that price increase?.

We think that – we've seen price increase announcements. We have negotiated, I believe, all of our third quarter price delivery agreements, and as I mentioned, I thought that there was a decline in the – no, I didn't think. There was a decline in zircon prices in the second quarter. We didn't see that for the third quarter contract. So....

Okay. Thank you very much..

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

Thank you, and good morning.

I know you don't report this way, but can you speak to whether the TiO2 pigment business itself was EBITDA positive in Q2 2016, and what about Q1 2016?.

You're right, we don't speak to that. And the reason that we don't is we operate the business as the segment, because through the vertical integration of feedstocks into the pigment operation, in order to report the way you've just asked, we'd have to make some assumptions about feedstock costs. So, we just don't do that.

You know what – we run our business as a segment. I want to know does the pigment segment, as a whole, make money. That's what JF and the team work towards as their goal. So, the answer is no, basically. Sorry..

Are you – I understand.

Are you seeing, on your merchant slag and natural rutile sales, customers ordering well ahead of their run rate on their annual contractual commitments, as we've heard other mineral sands producers comment recently?.

I think we've pretty much changed our model of merchants. So, we don't have very many merchant sales in the slag business. We have none in the synthetic rutile business. And we don't have any natural rutile sales into the pigment market. We have some into the welding market and other non-pigment market.

So, we're running our slag production to feed ourselves. We had some slag in inventory that we sold in the second quarter, we might sell a little bit more as the year goes on depending on the price.

But we're not a good – we're not the best source of the dynamics in the slag market anymore, because now we're holding a very disciplined position with respect to slag sales at current market prices, because we know we can consume it ourselves and we're happy to do that..

Okay.

Lastly, any view of where your net leverage might end up at the end of this year in December?.

I mean, it will be down. We picked up – I think we reported that we bought some bonds in the first quarter. We have the capacity to buy more if we want to. We can prepay with – on the term loan. So, I think that it will be – we said we'll be free cash flow positive in the year.

But we will be down from today, but this will not be the year of big incremental reductions. The next few years we think are going to be significantly greater reductions in the debt than 2016..

Thank you very much..

Yeah. Thank you..

Thank you. And our next question comes from Karl Blunden from Goldman Sachs. Your line is now open..

Hey. Good morning, guys. This is Derek Ching on for Karl..

Good morning, Derek..

The first question I had was on – yes, good morning – was on TiO2. But for your volumes this quarter, you obviously saw a nice pickup in North America, Asia.

But why didn't we see the same sequential pickup in Europe and LatAm?.

Let me ask JF that. JF is here.

JF?.

Yeah. What happened is you know that in Europe we have our smaller pigment plant and we had a shutdown schedule in Q2, and it took a little bit longer than expected. So, we basically didn't had the material available, that's why..

Got it. Okay. And then just switching over to the Alkali....

I'm sorry. Go ahead. Yeah. Go ahead..

Yeah. Switching over to the Alkali business. I know you said you experienced some inflation on the OpEx side.

So, what are the main drivers there and how should we think about whether that continues going forward?.

Ed?.

I think you're referring to, when we talked about the quarter-over-quarter maintenance issues, we had some issues related to one of our hoists that a job that started in the fourth quarter and then continued longer than we wanted, and that job was completed in the second quarter.

There's a little of work that – tune up work that we need to do in this month and then that would be behind us. And then, we had some more quality issues only related to our Sesqui plant, which is a unique process. It's the only Sesqui process in North America and maybe one in China.

And so, the magnesium levels were higher, didn't affect quality or output, but affected our efficiency. So, we've worked past that and that should be behind us for the rest of the year..

That's very helpful. That's it for me. Thanks..

Okay..

Thank you. And our next question comes from Dustin Shapir from Oak Hill. Your line is open..

Hi..

Hi..

So, excluding the $9 million of non-recurring expenses for your soda ash EBITDA, EBITDA was still down in roughly around $13 million, pushed (46:25) back at around $4 million of that from the loss in revenue, what exactly explains that other $9 million and how much of that is going to reappear in the third quarter?.

I'm sorry. Just to make sure I understand.

You're calculating the difference, a year-ago number?.

Yeah. 2Q – exactly, I'm calculating a $13 million – I'm backing out that $9 million of non....

Okay. Okay..

...non-recurring expense. There's the delta of $13 million and I'm assuming, okay, well, revenue is down by $4 million, let's assume 100% for – just make that assumption, there's another $9 million of additional expenses or cash cost this quarter..

Some of that was as – well, Ed, why don't you take the gentleman through that..

Yeah. I mean, we talked about the non-recurring $9 million. I just spoke about the unscheduled maintenance items..

Okay..

Okay? So, that's the piece of it. Price is a big piece of it, particularly export price quarter-over-quarter, right? So, 2015 to 2016. And then, the other – the final piece is just year-over-year cost changes, that all net out; payroll increases, favorable energy, inflation-adjusted items..

And how much of that is from higher freight cost?.

There is some higher freight cost in our netback on our ANSAC. So, that would show up a little bit in our price – our netback price. So, our return on the export business..

Got it. Okay. So, of that $9 million, thinking about the third quarter, how much – I mean, it sounds like there are some (48:20).

So, how much of that should be in the third quarter?.

I would think the price will continue to be there in the third quarter. Right? We expect....

I'm just talking about cash, costs or expenses..

I'm looking at some data. The year-on-year cost changes and payroll inflation netted against some energy price increases is about $4 million..

Excellent. Very helpful. So, we should – thank you very much, sir..

There were some mix changes in there, but that can vary quarter-to-quarter. And the – I'm looking now. We have a new set of – you want to do that? Can you explain that? Look, I think a lot of this – I mean, there's a lot of mix, there's some volume we talked about. There's some price we talked about. There was some mix we talked about.

There's couple of one – $9 million in one-offs as you pointed out. But I would say $4 million year-on-year cost changes were about payroll inflation, and that's some net – net of some benefit in energy. So, think of it that way maybe..

And was that payroll inflation, was that during the first quarter or was there step-change in the second quarter?.

One of the things that we're seeing out there is that there's some significant hiring going on out at the Alkali business in Green River. I think we normally would hire about 40 or 45 people in that business just from attrition.

There's about 1,000 employees in the business unit, there's about – normal averages were 40, 45ish, and we had some turnover as a result of retirements, and people – anytime there's a acquisition, there are some people who will move out just because they don't like the uncertainty leading up to the union negotiation.

There was some retirements as people thought that pensions would be on the table. And so, those things tend every once in – when you have the combination of an acquisition and a renegotiated contract, retirements will spike up. And I think instead of 40 to 45, we probably had 80, 85 this year.

So, some of that payroll is about those new people filling jobs and moving to Green River and all that sort of stuff. We expect that the attrition rate will tend back towards normal levels now that the acquisition is behind us, the labor contract renewal is behind us. And so, I would expect that some of that will come off..

Excellent. Thank you..

Yeah..

Thank you. And our next question comes from Owen Douglas from Robert W. Baird. Your line is open..

Hi. Good morning, guys. Wanted to ask a little bit about working capital second half of the year. What are your thoughts in terms of how that's going to play out? You mentioned in the fourth quarter, you guys are going to be prepared to help maintain kind of price discipline in the industry by potentially taking off inventory..

This is Kathy Harper. Good morning. The second half working capital, we're continuing to drive the discipline. As JF had mentioned or Tom had mentioned, we will continue to manage finished goods inventory on the pigment end. And so, we may see a bit more increase just on the finished goods pigment. Everything else, we're managing very closely.

As a fully integrated business, we can drive feedstock and raw materials down. We can manage MRO and everything else. So, we do expect to continue to see some benefit net-net overall in inventory, but not finished goods for pigment because that's the piece we are already below normal seasonal levels. We've matched the production with demand.

And so, we may see a slight increase just to give a little operating room for the operating guys who are running very tightly right now. But everything else we'll continue to manage very carefully. I mean, we closed the quarter, I think, with $560 million in inventory or something like that.

And obviously, by year-end, you see the cyclicality in accounts receivable. And so, receivables spike up given the second and third quarters and will come back down as well. So, on the whole, we'll still be fairly well-disciplined. You'll see some puts and takes, but we'll continue to manage the working capital down..

Okay. Thanks. That's pretty helpful there. And I just want to go to a comment, I think, that was made earlier in the call, the conversation around starting to see a little bit of a tightening in the titanium feedstocks market.

Can you give us a sense for what are you seeing or sort of expecting for the next couple of quarters in terms of price movements, whether we're talking about rutile, ilmenite, just anything would be helpful there..

We have already begun to see ilmenite prices rising significantly in China, probably, 50% from the low to current prices. And we think that they are – we see that they are also rising outside of China in other markets, but not by so much.

As we said, that will then drive, we believe, all of the higher-quality feedstocks; slag, synthetic rutile, that are refined, that are derived from ilmenite, because obviously the input factor is increasing. So, they're going to have to increase their prices to make up for that.

Natural rutile is not dependent as directly on the price of ilmenite as slag is. But when you slow down production of ilmenite, you normally slow down production of natural rutile as well. And so, we think that that will tighten. So, our view on feedstocks is that ilmenite is already rising around the world in terms of price.

Slag and synthetic rutile will rise over the next – if not by the end of this year, then early in 2017 as feedstocks get worked down. And then natural rutile will also rise. So, all feedstocks, in our view, price will rise from these levels through the next year, for certain, into 2017..

Okay.

So, you're saying that you expect to see quarter-on-quarter – or we should expect to see some quarter-on-quarter price gains in your TiO2 segment?.

What I'm saying is....

Due to the raw materials?.

Again, we don't sell slag or synthetic rutile into the third-party market. So, what happens in price there is not – as I said earlier, I think, we're not as good a guide to what's happening in the slag price market or the synthetic rutile price market as some other feedstock vendors might be, because we are consuming all of our production internally.

We will sell, again, in the third-party market if and when prices rise there to levels that we find attractive and we expect that that will happen towards the end of this year or early in 2017. So, again, I don't know that – from a timing point of view, I don't know that it's going to be directly impactful on Q3. Might take a little longer.

Normally, feedstock prices lag, pigment prices increases by two quarters to three quarters. And again, we are consuming ours. And so, we're not selling a whole lot into the third-party market. Remember that we control our own raw material costs at the pigment level, whereas others don't.

And so, for us, it's a different economic trend – analysis, different calculation than the others have..

Okay. Great. Thanks a lot, guys..

Yeah..

Thank you. And our next question comes from Tarek Hamid from JPMorgan. Your line is now open..

Good morning, folks. This is Nate (56:22) on for Tarek..

Good morning..

So, I just had a quick question on the 400,000 ton capacity reduction in China.

Is that nameplate capacity?.

That's a very good question..

Well, no. It's based on actual production out of China. And look, that 20%, it won't be net, because obviously there will be new projects going on. But there's a lot of plants that have been shut down and they will never reopen.

So the forecast for the next five years, which is very different than what happened in the last five years, is that there will be no growth of production out of China. And I think that's the big difference versus what happened in 2011 when the price peaked.

And at that time, there was a series of expansion announced in China, and they grew significantly..

In terms of data, in 2015, I think the nameplate capacity for all Chinese producers was about 2.5 million tons, maybe – about 2.5 million tons. Actual production in 2015 was about 1.75 million tons. So, there was a 750,000 ton difference between nameplate capacity and actual capacity in China.

And as JF said, we think that Chinese nameplate capacity is coming down as the result of the smaller plants being closed by government pressure on environmental compliance on price. They couldn't afford to cover their cash costs. And now, this new electricity law is going to force more production.

So, if 20% of actual production gets closed, which is what one of the big vendors talked about, then that's going to be another 350,000 tons on actual production. It will be more on nameplate production. So, it's a significant potential difference in production.

And most of that, I think – well, I don't know about most, but obviously if they're reducing their total output, their presence in the global export market is reduced at the same time, which means that as the global market grows, China supply is less and less small – less and less significant, then it's going to be less impactful on global prices.

But it's important when you think about China nameplate, as I said, 750,000 ton difference between nameplate and actual. That's a significant down utilization..

Okay. Great. Thanks..

Yeah. But I think, Tom, it's fair to say that even when pigment price peak in the $3,000, the Chinese were not able to use that nameplate capacity. So, I think it's a cultural difference that there is....

I never talk about cultural differences..

Okay. Fair enough. But they like to state high nameplate capacity..

Okay. Great..

Anyway....

Yeah. Well, thank you. I appreciate the commentary. So, it sounds like you said over the next five years you expect this to come out.

Do you have any idea sort of how we should expect that pacing to kind of occur?.

Well, I mean, it's happening now at the smaller end level.

I mean, what is – the dynamic that's going on right now in that market, I think, is some of the bigger operators, Billions and Lomon and Blue Star and some of the – a couple of the others, were building expansions in their plants in 2013, 2014, 2015, and probably most of them that were going to come on have come on.

And I think new expansions have probably slowed down because of the price in the market. Smaller vendors in China are going out of business. They're going out, because they couldn't afford to cover their cash costs at historical prices, because of environmental regulations being enforced.

And they will continue to go out of business because of this new electricity law enforcement that I mentioned was talked about in the press. That law doesn't go into effect, I don't think, until October. So, we haven't even seen the effect of that.

And as I quoted the article that said, one of the biggest producers in China thinks that that law will have the effect of reducing 20% of production capacity. If that's true, that's on top of what we're already seeing.

If ilmenite prices, as we discussed, continue to rise and I think I said that ilmenite prices are already up in China, 50% from the bottom, and import – and trade data shows that imports of ilmenite into China are increasing, which also confirms that ilmenite availability in China is decreasing, that's also going to drive price, which will drive cost for these guys and then that will put more pressure on them.

Some of them will go out of business, unable to handle the increased costs, and many of them will raise price in order to be able to absorb the increased ilmenite cost. So, we think that's now steady. I don't know that it's going to be a precipitous cliff-like change any month. I just think it's going to be a steady improvement in the market.

It has been going on and it will continue to go on for a while..

All right. Thanks. And then, I guess, just on the ilmenite pricing, is there sort of a benchmark price where it really becomes problematic for them to operate that we should think about or is there....

It depends on what the pigment price is, right? I mean, any time – I mean, ilmenite is a significant cost component for their process. They are almost entirely sulfate producers, right? So, they need 2.5ish tons of ilmenite to make a ton of pigment.

And if the price for that element goes up 50%, if it goes up from below $100 to $120ish now, and we think it's going to go higher than that for a good while longer, that's a lot of incremental cost when your prices are where the Chinese were setting their prices.

So, we said already that China domestic pigment presence have already gone up by, I think, 10% to 20% just over the last six months. And we think they're going to continue to go up, because ilmenite prices are going to go up – continue to go up..

Thank you..

And supply is being reduced through all these closures. So, that will help us in the global market as well as in the domestic Chinese market..

Thank you..

We think. I'm sure....

Thank you..

I'm sorry. Go ahead..

Thank you. And we do have a follow-up question from Roger Spitz from Bank of America Merrill Lynch. Your line is now open..

Thank you for taking the follow-up.

So, first, what is your current view of what Fairbreeze can contribute in EBITDA on a full run rate basis and which quarter or half year do you expect that would get to that full run rate production basis?.

We think that – JF, make sure I'm getting this right, that there will be about 30,000 tons – 25,000 incremental tons of rutile that are available at maximum on an annual basis coming out of Fairbreeze. About 55,000 tons of zircon on an annual basis coming out of Fairbreeze. Now, we then will sell that into the market or consume it.

We'll consume some of the natural rutile. We don't sell – as I said earlier, we don't sell that into the market, the pigment market. We sell some of it into the welding market. On zircon, we think that prices will remain where they are and demand will go up. I think I said that we expect zircon sales can be 5% up.

So, it will be an incremental benefit to our EBITDA and revenue, because in both cases that's high-margin business – high-margin sales for us. But we think that, as I said, the first zircon out of Fairbreeze we sold in the second quarter and we will continue to increase the amount of those sales out of Fairbreeze that we get now going forward.

It's commissioned. It's in service. It's producing pretty much at full rate. And we'll start to see benefit from that now moving forward into the future. It will probably take us a year, maybe, to ramp from where we are now all the way up..

And the current Q that will get posted later today on page 40 has the description of the capacity for Fairbreeze. So that way you've got it in our documents as well..

Did it actually agree with what I said..

Pretty close..

25,000 tons and 55,000 tons (1:05:32). Perfect. All right..

It's out there, in our disclosures..

I think it's important to say that we adjust our production to market demand, and that's how we operate. And we don't want to build inventory. So at the moment, I think we mentioned – Tom, you mentioned in Q1 that we had the start up of Fairbreeze ahead of time and ahead of schedule and below budget. Those were all good news.

But we're not basically using all the capacity that we have in Fairbreeze at the moment. But going forward, as the market grow, we will, and that would help obviously our financial performance..

Yeah. Actually, if I could just take a minute, I know that we're going to get off this call soon, because the market's open. But we are very, very focused on matching production to supply. As we've mentioned here over the last several quarters, we think it increases the efficiency of our use of capital. It frees up unnecessary capital.

And we're doing that not only at the pigment level. We're selling every ton we make, and our inventory levels are low – or not, lower than normal. We're also doing it, as JF said, at the feedstock level. So, we're running slag production, two furnaces out of four.

And we will turn those other furnaces back on next year when inventories have been worked down and demand increases. We're doing that at Fairbreeze and at the Namakwa mines, where we produce material that is closer to what we need at the smelters and then that's in turn determined by what we need at the pigment manufacturing plants.

And that also extends the life of these assets, because we're now very – if we reduce the tonnage that we pull out of Fairbreeze, then we will extend the life of Fairbreeze. And that's a further contribution to capital efficiency, because it postpones when we have to replace those facilities.

So, we're very – all of what we do in operational excellence is about matching supply and demand, controlling inventories, being efficient with capital, freeing up unnecessary cash, and you'll see that everywhere at all the layers of our operation.

And JF has done a good job, and the team on the TiO2 business has done a very good job, I think, of doing that. And Kathy and the finance team, of course, is looking over their shoulder continuously. And now, Ed has to get with this program. He's already done a big very good job at Green River. That's a very efficient operation.

But now he's just embarrassed, because we talked about JF so much. He wants a little bit of the credit..

So, anyway, I think, operator, that is I think good for us. We appreciate your time, as always, and your interest in Tronox, and I wish you a good day and a good rest of the summer. Bye-bye..

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