Kronos Worldwide, Inc. (KRO) 2010 Q4 法說會逐字稿

Welcome to the Kronos Worldwide 2010 fourth quarter and year earnings conference call. (Operator Instructions)

I'll now turn the call over to your host, Janet Keckeisen Director of Investor Relations for Kronos Worldwide. You may begin, Janet.

Thanks, Thelma.

Good morning and welcome to the Kronos Worldwide 2010 fourth-quarter and year-end 2010 earnings conference call. With me this morning are Steve Watson Chief Executive Officer, and Greg Swalwell Chief Financial Officer. The earnings release issued this morning and our 2010 Form 10-K can be found on our website at Kronos www.kronostio2.com.

During the course of this conference call, we will make forward-looking statements. All statements relating to matters that are not historical facts are forward-looking statements that represent management's beliefs and assumptions based on currently available information. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it cannot give any assurances that these expectations will prove to be correct. Such statements, by their nature, involve substantial risk and uncertainties that could significantly impact expected results and actual future results could differ materially from those described in such forward-looking statements. We assume no obligation to update or revise any forward-looking statements. Please refer to the earnings release for a discussion of some of the factors that could cause actual results to differ materially. In an effort to provide investors with additional information regarding the Company's results of operations, we will refer to certain non-GAAP information. We ask that you refer to the earnings release for a reconciliation of this non-GAAP information to our GAAP financial statements.

I will now turn the call over to Steve.

Thank you, Janet, and welcome to everyone participating on this conference call. In addition to Janet, with me today are several members of our management team. Greg Swalwell, Executive Vice President and Chief Financial Officer, Kelly Luttmer, Vice President and Global Tax Director, John St. Wrba, Vice President and Treasurer, and Brian Christian, Vice President of Strategic Business Development.

I would also like to take a minute to note some other individuals in our operating management team. We are very proud to have the best operating management team in the TiO2 industry. Doug Weaver is a long-term key manager of our business, who has done it all. Doug is now Chairman of our Executive Management Committee. Dr Ulfert Fiand is a dyed-in-the-wool technology guy, who has managed the production side of the business through an incredible history of continuous increases in capacity and process improvement. Both brought the Lake Charles plant to life 20 years ago. He is now Vice Chairman of our Executive Management Committee. Klemens Schluter has been very strong on the engineering capital projects aspects, as he has assessed -- ascended his position as President of Global Manufacturing, where our production records are continuing to be broken weekly. Joe Moss, our President Global Sales and Marketing, has been there through all the cycles. Joe and his team broadly represent our business and demonstrate every day that we view our customers as partners and that we very highly value our long-term relationships. The really great thing for Kronos is that our talent is very broad and very deep.

After a few brief remarks by Greg and myself, we'll open this call up for questions. Those of you who already know us understand our style of management is from an owner's perspective. Our focus is to provide the highest total return to our stockholders through appreciation of the value of our stock and dividend distributions, while maintaining strong financial liquidity and strategic positions. Our perspective is a long-term view. I can report to our stockholders and those professionals who follow our Company that first, the state of our Company is excellent. Second, the outlook for our business is exceptional.

We did not reach this favorable position easily. It is, however, the silver lining of a very problematic history for the TiO2 industry. First, we saw a 20-year period of higher costs with profit margin squeeze. Second, the industry suffered blows in 2008 and 2009 that forced significant TiO2 capacity, including chloride process capacity, to be permanently closed. Our silver lining is in the form of a significant global shortage of TiO2 products that we believe will continue for several years.

We base our belief on hard facts. One, the industry barriers to entry are high for substantial new capacity additions, especially for high end TiO2 grade produced through the chloride process. Two, in addition to the Advanced Technology and equipment needed, a chloride facility takes a work force with a very high and specific level of knowledge, skill, and experience to effectively and efficiently operate the plant. Three, the current profitability levels still do not reasonably justify major green field or brown field capacity expansions, and even after that level is reached, we believe, to be sustainable, very significant lead times and costs have to be overcome. Number four, there are no effective substitutes for TiO2 in most applications. Five, demand for TiO2 is tied to economic growth and development, but also as a quality of life product, it correlates closely to the standard of living in a geographical area. TiO2 is not a zero sum product. Higher usage in rapidly expanding economies, like the Far East, does not mean lower usage and slower growth areas like North America and Europe. Economic growth and the rise of the standard of living in rapidly expanding areas create demand, which for the most part, is additive to the existing global demand. Number six, in the last year, TiO2 customers' major concern has turned from price to assurance of supply. It is reasonable to expect that these industry characteristics will result in higher profit margins and cash flow for an extended period of time.

Greg Swalwell will now make a few initial comments, after which we will open this call up for questions. Thank you.

Thank you, Steve, and good morning, everyone.

The operating results that we achieved in the fourth quarter of this year were consistent with the trends that we saw during the first three quarters of the year, due primarily to the favorable impact of the higher selling prices for TiO2 that we achieved. We reported operating income, or segment profit, which is the term that we use in our earnings release, of $62.5 million in the fourth quarter of the year, and $185.8 million for the full year of 2010. Since the second half of 2009, we've implemented various increases in our TiO2 selling prices. Our average selling prices were up 22% in the fourth quarter of 2010, as compared to the fourth quarter of 2009, and our average prices were up 11% on a year-over-year basis. At the end of December of 2010, our prices were up sequentially 5% from the end of the third quarter, and they were up sequentially 22% from the level at the end of 2009. Even with the increased profitability that we achieved in 2010, we currently still believe that profit margins are significantly lower than what's necessary in order to reasonably justify any green field or other major expansions of TiO2 capacity. As a result, we anticipate further increases in our selling prices during 2011 and for the foreseeable future.

We also achieved new records for both sales and production volumes for Kronos Worldwide in total in 2010. Our operating results were at near-practical capacity utilization levels throughout the entire year. As we previously have discussed, our ability to achieve any additional increases in our production capacity through debottlenecking projects is really substantially limited, and with our current expectations that demand will remain strong in 2011 and that we will be able to sell everything that we produced, we expect that our sales and production volumes into 2011 will be up only by -- slightly by a few thousand metric tons compared to the levels that we achieved in 2010.

On the cost side, our per unit operating costs were lower in 2009 -- were lower in 2010 than in 2009 primarily because of the significantly higher production volumes that we had in 2010. Looking into 2011, we expect to have increases in raw material, energy, and freight costs, including more than normal inflationary increases in the costs of our feed stock ore and petroleum Coke. Overall, on a per metric ton cost basis, we're currently anticipating to see a cost increase ranging from 6% to 10% compared to 2011.

EBITDA for the quarter was $73 million and for the full year, it was $224 million. On the bottom line, net income, $36.4 million in the fourth quarter, 66% diluted share, and for the full year, net income was $130.6 million, or $2.59 a share. I should note that the full-year results include the favorable impact of the first quarter $35 million non-cash deferred income tax benefit related to a favorable development in Germany. For 2011, we expect that our segment profit and net income will be significantly higher than the levels we achieved in 2010, as the favorable effect of higher selling prices will more than offset the impact of our higher anticipated production and raw material costs.

At this point, this concludes our prepared remarks and we will turn it back to the operator to open up the lines for any questions.

(Operator Instructions) Our first question comes from Sarah Majors with Wells Fargo. Please proceed.

Good morning and congratulations on a nice quarter and year .I would actually like to spend some time talking about the sales volumes, sales production volumes in Q4. Now, I realize there's some seasonality in the product, but given the strong demand, I would have thought that you would have been selling all that you could produce, given that there's no real shelf life to the product and there's probably an expectation that prices will go up within the year, so could you help me understand why customers wouldn't be buying more now? Or is this something you guys did to build inventory going into the year?

This is Greg, Sarah. Good morning.

Good morning.

As we said, we're producing everything that we can sell and we are selling everything that we can produce. Now, that said, there will be quarter-to-quarter variances in terms of selling volume compared to our production volume. It's very typical for us to start to build inventory -- to produce more than we sell in the fourth quarter so that we can build up the inventory level to meet the, as you mentioned, the seasonality that happens in the spring and summer, particularly with the paint season. So, the fact that we produced more than we sold in the fourth quarter is not anything that's worrisome to us. As you said, with the expectations for demand being very strong in 2011, as well as the selling price expectations, the fact that we produce a little bit more than we filled in the fourth quarter is nothing we're concerned about, because we expect we would more than make up for it in the 2011.

Actually, on that point also, that was very intentional.

Okay.

We have many of our customers on allocation basis all ready, so if we wanted to, in December, we could have sold all of our inventory and everything that we could possibly produce, but it would have left us short going into the spring season, and as I mentioned in the opening remarks, we have long-term customer relationships and one of the things that we do is try to level out the allocations that are going to the customers; and the spring paint season, we're going into it with probably one of the lowest levels of inventory we've had for quite sometime.

So, that was an intentional, deliberate move, not to sell more product right at the end of the year. Two things, one is service our customers, two is we had already announced a $0.10 increase per pound for the first quarter and now we recently announced a $0.15 increase for the second quarter, so from a standpoint of, as I mentioned, long-term, in this case half a year, it made sense to build that inventory to service our customers and also reap the benefit of significantly higher price.

Okay, great. All right. I'll jump back in queue. Thank you very much.

Thank you.

Our next question comes from Trey Grooms with Stevens Inc. Please proceed.

Good morning, everyone.

Good morning.

First off, Greg, can you give us some thoughts on tax rate and where interest expense and CapEx could fall out in the year, in 2011, opposed to debt pay-down and the other things?

Yes, I'll address a couple of those and then with respect to taxes, I'll let our -- my esteemed tax director, Kelly Luttmer, answer that question. But, on CapEx, we're forecasting CapEx $58 million, so $55 million to $60 million for the year. When you look at where the CapEx that came in for the full year is $38 million, that was slightly lower than our expectations were going into the last half of the year, and that's really just primarily reflecting timing of when the expenditures come about. So, one reason that the $58 million has -- the $58 million for 2011 has some carry-over completion of projects that were started in 2010.

On the interest expense, we would expect to see a little bit -- we'll see some savings in the interest expense line, in part because of where we announced that we're calling EUR80 million of our senior secured notes that will be completed later this month, and that's basically at this point we're just going to initially just borrow under our European revolver, get the benefit of the lower interest rate on the revolver as compared to the coupon on the senior secured notes, and that over the long-term, makes sense, even with paying for the call premium. And, on the tax rate, Kelly?

Hi, Trey. I would expect the tax rate in 2011 to be around 31% or 32%, which is really consistent with the tax rate in 2010, if you take out the impact of the first quarter, $32 million benefit, and then we had a $1.7 million benefit in the fourth quarter for some tax rate adjustments, so that the tax rate will be very consistent, excluding those discreet and unusual items that we booked in 2010.

Okay, thank you for that. It's very helpful. And, okay, so you guys, you've recently announced, calling the -- part of your debt, also a special dividend. Looking out, you guys should be generating a considerable amount of free cash flow, which you also mentioned, can you update us on your thoughts towards use of cash at this point?

I can take that. Yes, this is Steve. On use of cash, it is -- it's a great position to be in, that we have significant cash, obviously, on hand. We expect a lot of cash generation to develop. We also have the cash from the stock offering in the fourth quarter. When we look at our sources, pretty significant sources, as we expect coming up over the next number of years. When we look at our uses of our cash; number one, we reinvest, as we always have, in our businesses. Even in the real lean time in 2009, we spent a fairly significant amount of money to keep our plants in good working order, so we use the term prudently invest in our operating facilities. That's mostly a code to our operating guys, which we only do things that are prudent rather than making them pretty.

So, we believe we have that, but we also believe that's a fairly small number in the magnitude of Greg just said, to keep them in tip-top condition and operating form. We also look at expansion. We would like to expand our TiO2 capacity. We've always wanted to increase our capacity, but we'll only do that if we think we can get a better return for our stockholders. Bigger is not better. We really want to improve the business and the operations and the cash flows rather than just acquiring for the sake of acquiring, but there are and have been and will be, we believe, assets moving around in the industry. We'll look at all of them.

We obviously built the last greenfield site in North America and Europe. It's been quite a while ago, but we were the last ones. That's premature to move down that road. Brownfield expansions are possible. That's more longer term also. As just mentioned, we'll manage our debt, but at the end of the day, as we mentioned in our Press Release, when we declared the special dividend, when we look out realistically at what do we need for liquidity, and for all of these type of things that are just explained, if we feel like we have an excess, we'll do one of two things. We'll either pay down some of our debt and in the case that we just mentioned, it's really a good hedge on our revolving credit, because we can keep that debt there, pay it down with cash, re-borrow it, or we'll pay dividends out to our stockholders. That's, that's our goal with excess cash that we generate, so from the standpoint of what are we going to use, we have all of these things in our mind as we make those decisions, but we're, we're really not of the mindset just to hoard cash for the sake of hoarding cash either.

Right, okay. Well, thank you for that. And when you mentioned, expansions, would like to expand, but you're more referring to potential assets that could move around, not I guess shorter term as opposed to any type of capacity increases from a Brownfield or Greenfield, did I understand that correctly?

Yes, we, we truly believe that our view of the future is incredibly good, as I think we've said, and I think most people that follow this industry can definitely see, but at the same time, it's an incredible big cost and long-term to start down a Greenfield, or even in this case, a Brownfield site. So, we believe it's way premature to -- for anybody to start down that road. A lot of things can happen out in the world that affect the Global economy. That's all stocks, not just ours, and companies. But from a standpoint of assets moving around, we have always looked at every asset and every business and TiO2 that has been on the market or even thought about being on the market over the years that we've been involved with this industry, and we'll continue to do that.

We looked very hard during the Tronox bankruptcy days -- even in the bleakest days of 2009, we were still looking hard at that because the valuation potential was incredibly low. The creditors also saw that it was incredibly low and managed to put forth a planned restructuring, and that plan was subsequently, I guess for the last time, restructured, the restructuring in December of last year, which, which put it over the top as far as a restructuring versus breaking up into an asset sale.

No question, assets on the market that are good assets would be more desirable than building a facility, because they produce now versus 4 or 5 years down the road from now, so that is something we look at, but, again, our template is very different than most companies. We are not going to buy something unless we're convinced that it's going to improve the return to our stockholders. I'm -- not just short-term, but on a long-term basis, so we are actively -- always look at that, but you are right on your analysis that it's premature for major expansions, but moving assets around in the industry, it doesn't change the capacity or shortage situation at all.

Okay, thank you. And so you guys recently announced, so the January price increase, I think $0.10 or so, and then another in April, a $0.15 increase or so. Can you give us a little bit of color on how we think about how those things typically flow through? In other words, I presume you have some customers that are on fixed price contracts for some time. Is that 90 days, or -- just to get an idea on how much of that can really be -- should we expect to see flow through immediately and how much would be somewhat delayed?

Trey, this is Greg. I'll answer the question. I would ask, we can see that there's several other people in the queue and so I would ask after I answer this question, if we could let some of the other people ask their questions.

But, in terms of your question about the implementation of the price increases, there are some customers, particularly our larger customers, where they essentially have a 90-day price increase protection, so they are going to be the last to have a selling price increase. Our spot customers, there is no price protection, and so they would be -- that's -- the selling price to them would be implemented at the very beginning. So, it's basically over a 90-day period, as the implementation goes into effect, so if something were effective starting April 1, 2011, then that would happen to the spot customers and it would be fully implemented 90 days later, with the laddering being with the customers that had the 90-day price protection.

Our next question comes from David Begleiter with Deutsche Bank. Please proceed.

Thank you. Good morning. Steve, you mentioned that prices and margins are still not high enough to justify the Brownfield, Greenfield expansions. What are the margins and prices you need in your view to see some Brownfield and Greenfield expansions occur both for you and the industry?

More. (Laughter).That's a difficult question. It's a nice straightforward question, and you would think there would be a nice straightforward answer, but there's not. A lot of matters come into the, into play there. The first step is, and you've already got it, is that it's not about price of the product, it's about the margin that you have, but not only do you get to a point, and everybody's going to have a different view of what an acceptable return on investment is, but there's some significant uncertainties when you start down the road. As we mentioned, when we're selling our stock, the size of a plant that we would build 150,000 metric ton likely is the smallest. You're probably talking a billion dollars. You're talking four years probably for us, maybe four years for DuPont, probably longer for anybody else, just because of the skill level and the in-house talent.

But, you also -- you got to have a pretty good expectation that you're going to retain those margins for a long period of time, because you're starting out four years before you get any production and a lot of things happen along the way. So you have to anticipate what do you have, what's your cash flow is going to be, what's the economy really look like, and your sense of assurance that you're really going to be holding whatever -- whoever's profit margin desire is, whatever that level of return is, that it really is going to be there on the long-term. So, we're reluctant. I'm not intentionally -- I guess maybe I am intentionally avoiding the percentage, because there is no magic percentage.

There's a lot of subjectivity that goes into that, and I think in the near term, I think everybody in the industry -- there's not that many players in the industry, so everybody knows that there's a potential of some assets maybe moving around ownership, and I think everybody would want to wait and see where those assets actually land before they would start a project. To us, that's the prudent, sensible thing to do, so the question that you gave is an incredibly good question, but I think the answer to it is pretty subjective.

Understood. Switching to Ore costs, Steve, can you comment on what you are seeing on your Ore contracts? They rolling off this year, how much they are, and what percent of your contracts did you roll off this year on the Ore side?

Okay. One -- I'm going to let Greg answer that, but one comment that I want to make on this is that the guy I mentioned at the beginning, Doug Weaver that's been around forever, we have lived and died with the Ore guys a long, long time. Our wagons are hooked firmly together. That 20 years that we talk about that we were out in the wilderness with low profit margin, well, that just ratcheted down to the ore guys and no question, their profit margins are much like ours, that they just don't justify a lot of expansion. There's projects in the works now, which are going to be needed for any type of expansion on TiO2, but they are very tied to the TiO2 industry.

We, in particular, value those relationships very highly. There's been give and take all through the years. They understand a healthy TiO2 industry is imperative to their business, and we understand a healthy ore industry is imperative to our business. But let me ask Greg to specifically address your question.

Yes, let me just comment on a couple of things. We have disclosed our overall 6% to 10% per metric ton increase in our cost expectation for 2011. We -- do not disclose, for many reasons, a lot of details about our different ore contracts. We have disclosed that we have one contract where the pricing goes through 2011, so, but as Steve had mentioned, we understand that our ore suppliers need some increased profitability in order to justify their expansion, which is going to be necessary to have any kind of significant Brownfield or Greenfield expansion of capacity in the TiO2 industry. So, we do -- we are going to have Ore cost increases in 2011, and because we understand that our ore suppliers need to have some additional margin, we also expect to see increases, not just in 2011, but probably for the next few years.

But, one thing I think that's important to keep in mind with respect to Kronos is that we do have our Ilmenite mines in Norway that provides us 100% of our feed stock ore requirements for our European Sulfate producers. So that -- everything else being the same comparing us to our competitors, we -- that does provide us a competitive advantage because we're not having to go out in the third party market in order to provide 100% of our feed stock requirements.

Another favorable impact to the mine is that we don't consume 100% of the production from the mine. In fact, we only consume about one third of the production from the mine. And the other two-thirds of the production from the mine is sold to third parties, in most respects, to some of our competitors, so to the extent that we are having to pay more for our third party ore cost in the open market because the world market price of ore is going up, then you can assume that we will likewise be charging a higher selling price to our customers that take off the excess production from our Ilmenite mine in Norway, which again provides us a little bit of a hedge on our third party Ore costs.

Last question, Steve and Greg, how much more Chinese Sulfate do you think your customers can use this year versus last year?

That gets into probably a little longer answer, but let me just try to condense it a little bit. I'm expecting we'll get some more China questions, because that's the big boogie man out there from a lot of people's standpoint, but the Chinese, in a simple form, China will get there. China will produce high grade Sulfate someday and China will produce high grade Chloride someday. Also, China will consume internally an immense amount of product someday, probably sooner than first to happen, but the idea that there's a Sulfate plant starts up this week in China does not mean that, that Sulfate is usable in most applications, especially in the western world.

The grade, the quality, those type of things are very critical to the vast majority of customers. It's not interchangeable that easily, so at the current time, we hear a lot about the Sulfate production, the increase in capacity, and there's a lot of plants. There's probably 60, 80 plants. It depends on who's counting, and they will probably keep going up, but the idea that they could be transplanted easily into, in our particular case, our customer base, which we believe that generally our customer base, we strive to get to more exacting. We try to get as far away from pure commodity that can just be dumped into anything as we can. Now, no question, we sell into a general commodity market, but I think the short answer to China is that in the near term, and probably further than the near term, we just don't think there's going to be a lot of substitution into most applications.

Thank you very much.

Our next question comes from Edward Yang with Oppenheimer. Please proceed.

Hi, good morning. Steve, you've characterized the current outlook a number of times today as exceptional, and with that in mind, how does the current environment compare to the industry's last solid days in the 1980s in terms of margin and inflation adjusted pricing?

Well, let me -- having been here in the Company during the last big upsurge, we had actually bought the Company that included Kronos in 1986, so we saw the big surge-up from our naive standpoint as being investors in a Company. It had several other businesses in it, too. It looked like up, up forever, but then we all clearly saw what happened. There was a lot of facilities came online, including our Lake Charles facility, and then we hit a recession. And then we lived for 20 years just getting beat up on margins.

So, I think from the standpoint of -- you would have to index where we are in comparison to the prices at that time. We believe, one, that there's very significant ability to raise prices over the next couple of years at least, and probably longer, and a much bigger ability to grow margins. A very, very big difference between what we saw 20 years ago, a little over 20 years ago, and what we're seeing now is there is no significant capacity looming on the horizon, so there's not even any hope that there's going to be a shortage, especially on high-end Sulfate and Chloride pigments.

So, we believe that is -- it's a shortage that cuts two ways. We want to satisfy our customers, but they are going -- there's not enough product to go around, so I think the biggest difference that we see is the longevity of this shortage has some real legs and we believe that it will be protracted primarily because we just don't see the capacity. At that time, the reinvestment levels were much lower than they are now, from a price standpoint. The cost of the capital, even the length of time, the regulatory environments most places are much different than they are now. So I think that's the biggest thing, but from a standpoint of the actual matrix of profits and where they would be, Greg, do you have anything to add to that?

Yes, if you look back at the late 1980s, you were probably seeing the Kronos gross profit margins of around 50% and EBITDA margins in 45% range, something like that.

And how long did those margins last before they started declining?

Well, the early 1990s. And again, as Steve mentioned, part of that was the capacity coming online, plus the recession. And I also note when I'm asked this question, if you look at the -- something else to distinguish now versus then is now there are fewer players in the industry than there were in the late 1980s, and our view is the industry as a whole is probably more financially disciplined than it was back then.

Sure, and I share your belief in that as well. In terms of -- sounds like on the supply side you're pretty sanguine, and I agree with you on that. What about demand? The economy is constructive right now, but you are raising prices quite aggressively and there is an elasticity curve for every product out there, probably including TiO2, so what levels would you see some reaction in terms of demand destruction in terms of prices, and which end markets should we be monitoring most closely? Will we see any sort of demand fluctuation in Plastics or Coatings or which end markets would be a leading indicator in terms of some reaction to pricing?

I'll let Greg answer this, but let me make a couple of quick comments about that very point, elasticity, is that there -- as I've said, there are no effective substitutes. There are extender's. There are some things that could be used as somewhat substitutes, but they don't come up nearly to the grade as the shortage intensifies, I expect that to increase usage. If I'm out there with a shop and my product, I have the choice of making the product at a somewhat lower quality or not making the product at all, we're going to see some move to lower quality. Again, as the shortage intensifies. So, there is some of that, that eats in.

From a standpoint of elasticity, I think Joe Moss, our President of Sales and Marketing, one of his primary examples are that from a paint standpoint, coatings are the biggest user of TiO2, biggest input cost that they have going into a can of paint that is sitting on the shelves of a hardware store. When we started this probably 3, 4 months ago, a can of paint, $30 to $40 range, there's about $2 of TiO2 in that can of paint. You double the price, now there's $4 of TiO2 in the can, is that going to make a difference of buying paint, going from that $2 change when you're buying a $40 can of paint? And, we personally don't think there will.

From Coatings and Plastics, the input percentage on most products are significantly lower percentage of what goes into whatever the product is, so no question, customers would like to not have the increase, but the ability for them to absorb it either through cost reductions, their own price increases, much like the TiO2 industry, we had to tighten our belt really hard in that 20-year period to stay profitable and well profitable. So, we think that there is -- and the other thing that we made the point on is that we think that a methodical -- we were asked a lot of times, why don't you just double the price and you can get it. Well, yes, we could get the price right now if we doubled it, but we believe it would create great disruption in the customer base, a lot of consolidation for some of our long-term best customers, may be clear out of business, so a process by which everybody understands the pricing is going to increase significantly over the next couple, three, years, but in a reasonably methodical fashion, we believe that it can be absorbed and that realistically, we're not going to hit the wall on too high of a price over the next couple, three, years.

Now, we can only speak for ourselves, obviously. Competitors will do whatever they do, and there's a shortage of product, so if you want to charge twice as much for your product, you're probably going to find a buyer for it in the short run. So, I think our general feeling is that there is a lot of elasticity to the price that the customers have to buy, and using that example of paint as a really big user in their input, I think it puts it into context. Will people go into Home Depot and buy a can of Behr paint because it costs $1 or $2 more, or will they say no, that's too high a price. It's one example that's real life that we think has some merit.

Greg, do you have--

No, I think Steve has explained it very well. I think I would just add that we believe that our customers understand that in order to get any significant additional capacity in the industry, that there has to be -- that the producers have to have the margins to justify that and that as long as we can prudently implement the price increases so that the customers, as Steve indicated, have the ability to anticipate and to plan and react, we think that the next two or three years, as Steve mentioned, implementing rounds of price increases can be achieved.

Well, thank you for that thoughtful answer. Thank you.

Thank you.

Our next question comes from Frank Mitsch with BB&T Capital Markets. Please proceed.

Good morning, and nice end to the year. I wanted to ask the cash question a little differently. Should investors expect Kronos to carry relatively large cash balance until there's some finality with respect to the Tronox assets? Or the fact that they are out of bankruptcy now, does that mean that, that ship has sailed?

Yes and no. Yes to the first one. We, we clearly have a significant cash balance now and we anticipate generating very significant cash flows going forward. We do believe that there's some very significant uses of cash out there, potential acquisition of facilities that come on the market, and not just Tronox. I know the focus is on Tronox, but there are other assets in the world, in the western world, that may come available.

No question, the financing market is there. You can finance to a great extent what you would acquire. We do not ever want to over leverage this business, so we will hold a good mix of equity and debt on any type of acquisition we have. So we're -- but in the short run, we believe that carrying fairly significant cash puts us in a very opportune position. One reason we raised money in the fall was we believed that there was potentials that were coming up very, very quickly and we wanted to be in the position to move very, very quickly. Those potentials got deferred. They are not gone, so we may have been a little early, which we allowed the shareholders get in probably a little lower than if we sold the stock a little later, but that was a business decision that we made.

Okay. Would you anticipate that 18, 24 months from now the Tronox assets are still independent or part of -- if not Kronos, then someone else?

We have talked to an incredible number of people about those assets and where they are going to end up being, and probably the person in our side of the world that knows the most about Tronox is Brian Christian, and he's here with me today. And, I'll let him give a little update on where Tronox situation exists right now.

Thanks, Steve. Yes, Frank, as you mentioned Tronox did just recently emerge from bankruptcy and as that situation played out, the company -- new Tronox is now owned by the pre-positioned debt holders for the most part, the unsecured note holders and trade payables people, so basically the ownership structure of Tronox has already changed hands from the preposition equity to the preposition debt holders. And, we are still of the same mindset that we think that they are not necessarily long-term holders of Tronox, which really begs the question of what's your definition of long-term, with the appreciation in the stock price that Tronox has seen just recently from emergence. Maybe that will incentivize some of these holders to hold on to the assets for a while, but we don't think that in the extreme long term that the current owners of the Tronox assets will continue to be the owners for a very long-term.

So, we do expect that there will be some opportunity down the road, given antitrust issues and various other things that come into play. It's not a foregone conclusion that Tronox will -- when those assets change hands, will go from one company to just another owner. There's always the opportunity that the assets could be broken up and split up amongst a host of different owners, and that can create a trickle-down effect of putting some other assets in the industry into play, so I think to summarize, Steve is exactly right, that the point for us to be in the best position to move quickly and take advantage of any opportunities that come into play, we do need to have our ducks in a row and that involved issuing equity and having the cash on the balance sheet so that with the ability to take on additional leverage, we have all the tools in our tool chest to go out and do whatever is right for the Company at that point in time. With that being said, obviously, we can't control that, other than just being ready for when any of those opportunities arise, so that's what we've done to this point.

All right. Terrific. And then lastly, Dow Chemical's been making a lot of comments with respect to its Ropaque product as they -- as something that can replace part of TiO2 in a can of paint. Do you guys view that as a significant threat or not necessarily?

We -- I could -- I was thinking of an answer of old Toni Home Permanents when they went out with new and improved back about 30, 40 years ago, well before most of the people in the room and on the call can remember. They didn't change one single thing about it, but they put new and improved on the package and it sold great. We -- as I mentioned earlier, our customers, and we have very close technical working relationships with many of our customers -- they're using extender's, Calcium Carbonate, Kaolin clays and other type of extender's, probably to the maximum extent they already can. There just is not a replacement, isn't a substitute for all the qualities that TiO2 crystals have, the high refractive rating being the top one, but the whole list of qualities.

We don't see Ropaque --one, we don't believe it's much different than it used to be, but we also don't see it as making major in roads, especially again on the high-end usage of TiO2. The misconception that all TiO2 is exactly the same is quite wrong. It is the applications are very, very different. The qualities, the finishing of the products, of the TiO2 particles, are critical. It will sell and it will fill a void, and as I mentioned, as the shortage intensifies, which it likely will over the next couple years, anything and everything that somebody can use to fill the gap, they will try to use. We do think there's a decreasing quality of a lot of products in the process, but to sum it up, we do not see that as a significant threat to the TiO2 products and industry. It does have a role to play. It's probably a positive role because it does stretch what product our there can go further, which means more customer base are able to continue to make their product, but to sum it up, we don't see that as a significant threat to the current or foreseeable TiO2 markets.

Thank you.

Our next question comes from Danielle Ward with JPMorgan. Please proceed.

Hi. One question on your notes remaining outstanding, you've obviously called $18 million [user fees]. Do you have any plans to term out maturity of this any further? Are you comfortable with being fully drawn on the revolver?

This is John St. Wrba We're comfortable being fully drawn on the revolver at this point. I think given what our cash expectations are for Kronos International in 2011, we will begin to repay that EUR80 million draw fairly quickly. The reason we're not using cash is that most of our excess cash is in the United States, in US dollars, and if we wanted to use that cash, we would have to purchase Euro, and we subject ourselves to currency fluctuations, which can be significant, as you might imagine, with the US dollar, Euro exchange rate, so we may give up a little spread early on, but we think we'll be able to repay the debt fairly quickly.

With respect to I guess your other question was extending the note, or revamping the notes for a longer term? Is that what I heard?

Yes.

We're we continually look at the markets for those notes. Obviously, we're reducing our indebtedness and KII. We can refinance the notes today if we want to. We would lock into a higher interest rate on the notes today than what we have presently, so, we'll -- as you know, the notes don't come due until April 2013, so we're going to continue to look at the fixed income markets, the banking markets, and make a decision at some point prior to maturity of the notes. But, at some point, we'll do something, but we don't have a timetable for that.

Okay, thank you.

Our next question comes from the line of Sarah Majors representing Wells Fargo. You may proceed.

Thanks for taking my follow-up question. I just had a couple of things I wanted to clarify from past questions. On the flow through of pricing, Greg was talking about the larger contracted customers with the price of the 90-day lag and such. Can you give us a sense on the mix of the contracted customers versus the spot?

It's about 60% are the spot, and the 40% would be the customers with the price protection.

Okay, great, all right. And then to ask -- on the 6% to 10% cost per metric ton inflation you guys expect in 2011, could you talk about that a little bit more? I don't know if you got any kind of inflation for Ilmenite in there. I assume most of that is based on the Chloride or inflation expected. Does that take into consideration any expected raw material increases or contract increases in the back half of 2011?

Yes. That's an overall for the Company; the 6% to 10% is the overall for the Company in total. We do have third party ore purchases for the Sulfate that we produce for our North -- in North America up in our Canadian facility. That's contemplated in that 6% to 10% range. That also has our expectations for any cost increase that might come about throughout the year, and that 6% to 10% is on an annualized basis.

Okay, great. All right. Thank you very much, and good luck in the quarter.

Thank you.

Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you all for attending. You may all disconnect and enjoy the rest of your day.