Tronox pursuing strategic options to ensure covenant compliance in 2009, improve margins

By Jennifer Lanning Drey

Portland, Ore., July 30 - Tronox Inc. is exploring opportunities to refinance its debt and will continue to work with its lender group to gain additional credit agreement amendments, should they be needed in the future, Mary Mikkelson, Tronox's chief financial officer, said during the company's second-quarter earnings conference call held Wednesday.

During the second quarter, Tronox received lender approval for an amendment to its senior secured credit facility that revised the leverage ratio financial covenant through the end of 2008.

However, during Wednesday's call, Mikkelson cautioned, "Due to uncertainties and the global outlook, we are unable to predict with a reasonable level of certainty if we will be able to achieve our financial covenants in the first half of 2009.

"We are continuing to push for price increases while finding ways to further reduce our costs, manage our cash flow and reduce debt in an effort to improve our leverage ratio."

Tronox has hired Rothschild, Inc. to further assist in evaluating strategic opportunities for the business, Tronox's chief executive officer Thomas W. Adams said later in the call.

"We are evaluating all strategic options available to the company, including but not limited to the mitigation of our environmental liabilities and capital restructuring," Adams said.

With a cautionary tone prevailing throughout Wednesday's call, Tronox's management warned listeners multiple times that there can be no assurances that the company will be successful in its search for strategic alternatives or avoid defaulting under its credit facility in the future.

Revolver borrowings up to $69 million

Tronox ended the second quarter with total debt of $540.1 million, which included $69 million outstanding under its $250 million revolving credit facility. Cash and cash equivalents at June 30 were $23.3 million, resulting in net debt of $516.8 million.

Mikkelson said the company's use of the revolver during the quarter resulted from the cost of goods sold during the period.

"While we are closely managing our cash, we do expect to continue to utilize the revolver in varying amounts throughout the balance of the year," she said.

The company used cash flow in operating activities of $11 million during the period, which was principally due to the lower operating results, she said.

Tronox completed two property sales during the second quarter for net proceeds of $12 million. The company used $3.2 million of the net proceeds to reduce outstanding debt under its senior credit facility prior to June 30. The other $8.8 million was applied to the company's debt balance in July and, therefore, is not reflected in the second-quarter numbers.

Price increases, production hurt earnings

During the second quarter, Tronox's earnings were negatively affected by significant increases in process chemical, energy and transportation costs, coupled with unplanned production difficulties at the company's titanium dioxide plants in Germany and Australia.

The combination was also the cause of Tronox's need for bank covenant waivers, Mikkelson said.

The company reported a preliminary loss from continuing operations of $29.9 million for the second quarter, compared with a loss from continuing operations of $20.0 million in the second quarter of 2007.

Tronox also posted a second-quarter non-cash impairment charge of $13.5 million related to goodwill and a restructuring charge of $4.2 million.

"This has been the most challenging business environment our company and the TiO2 industry have faced, and we must be prepared to take actions to preserve the long-term viability of this business should conditions worsen in the months ahead," Adams said.

Accordingly, price increases will be crucial to eventual margin improvements, and the company will be working to implement price increases totaling between 11% and 13% during the coming months, he said.

"We will continue to push for every penny of price improvements and cost reductions in order to improve our margins," Adams said.

Tronox management declined to take questions following their formal remarks.

Tronox is an Oklahoma City-based producer and marketer of titanium dioxide pigment.

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