Kronos Worldwide, Inc. (KRO) 2011 Q1 法說會逐字稿

Welcome to the Kronos Worldwide first-quarter 2011 year earnings call. My name is Michelle and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

I will now turn the call over to your host, [Janet Keckinzine], Director of Investor Relations for Kronos Worldwide. You may begin, Janet.

Thanks, Michelle. Good morning and welcome to the Kronos Worldwide 2011 first-quarter earnings call. With me this morning are Steve Watson, Chief Executive Officer, and Greg Swalwell, Chief Financial Officer. The earnings release that was issued this morning can be found on our website at kronosww.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 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 risks 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 statement. 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; Rob Graham, Executive Vice President; Kelly Luttmer, Vice President, Global Tax Director; John St. Wrba, Vice President and Treasurer; Brian Christian, Vice President, Strategic Business Development.

Our operating folks are out busy making and selling TiO2 products, but I believe special recognition is appropriate of our exceptional operating management team. I could spend our entire call giving recognition to a long list of individual operating managers, but I will single out four leaders who helped shepherd our business through the challenging days of 2008 and early 2009, and are now guiding the business to record heights.

Doug Weaver has experience and solid judgment necessary to trim the sales and hold the course to attain maximum performance out of our well-designed craft. Doug's broad knowledge of all aspects of our business has facilitated our ability to quickly assess the rapidly-changing industry dynamics and make timely decisions.

Dr. Ulfert Fiand managed the production and technology functions of the business through an incredible history of continuous increases in productive capacity and process improvements. Ulf has been the mentor of our exceptional group of technical professionals who will continue to serve our business very well far into the future.

Klemens Schluter's rise to the position of President, Global Manufacturing is filled with a strong history of very successful engineering and capital projects. Klemens' ability to instill a mindset to maximize our productive capacity, minimize the risk to disruptions in production, and maintain a cost structure that allows the Company to maximize its potential, and maintain its workforce even in challenging times, has been critical in the last couple of years.

Joe Maas, our President, Global Sales and Marketing, and his team, are often the face of our Company. Through the pain of 2008 and early 2009, now that the TiO2 industry has turned 180 degrees, Joe's team demonstrates every day that we view our customers as partners and highly value our long-term relationships. Even though our customers would rather not see the continuing TiO2 price increases and allocation of products in some cases, Joe and his team work hard to assure that their most critical needs are taken care of.

After Greg and I make a few additional remarks, we'll open this call up for questions.

I have often made the observation that I believe deserves repeating for our new stockholders. 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 the outlook for our business remains extraordinary.

As we have discussed previously, the current favorable position of the TiO2 industry did not come easily. After 20 years of higher costs and lower profit margins, followed by the severe economic downturn in 2008 and 2009 that forced significant TiO2 capacity to be permanently closed, we are experiencing a global shortage of TiO2 products. We believe the shortage will continue for several years, due to the constraints to adding new significant new production capacity, especially for TiO2 premium grade produced through the chloride process.

We also believe that higher sustainable profitability levels are still needed to recently justify major greenfield or brownfield expansions. It is appropriate to note that the mere announcement of a major capacity expansion will do little to relieve the shortage of TiO2 products. In addition to the extensive time for such announced expansion to become operational, several major expansions will be required to supply the current and growing worldwide demand for TiO2 products.

Kronos built the last major chloride TiO2 facility in the Western world, and is technically and financially prepared to add capacity whenever we determine such expansion is justified and in the best interest of our stockholders. As the realities of a lengthy TiO2 shortage have been made apparent, TiO2 customers' major concern has turned from price to assurance of supply. As I noted earlier, we view our customers as partners, and highly value our long-term relationships. As such, we make every effort to satisfy our customers' most critical needs, even so allocation of limited product supplies are currently necessary.

We believe Kronos is well-positioned to benefit from a prolonged positive pricing environment due to industry conditions. However, our raw material costs, particularly ore, will see increases in the next few years due to supply shortages, which resulted from many of the same reasons that brought about the TiO2 shortage -- a long period of low profit margins did not foster the investment in and development of more supplies that are now needed for an expanding TiO2 industry.

There is a strong tie between the ore producers and the TiO2 industry. The financial health of each is critical to the other. Without the expansion of ore supplies, the TiO2 industry cannot grow. And without that growth, the ore industry would stagnate. I believe both sides of these relationships understand this co-dependency. It is also my belief that increasing ore costs will remain in check so not to become a major factor in hindering profit margin expansion in the TiO2 industry. Without higher and sustainable profit margins, there will be no significant incentives for major TiO2 capacity expansion.

It is reasonable to expect that current TiO2 industry conditions will result in higher profit margins and cash flow for an extended period of time. We believe we have maintained sufficient liquidity to operate our facilities efficiently, invest in our businesses, and maintain the capability to seize opportunities that may materialize in the future. As we reviewed our liquidity and financial position earlier this year, we determined that it would be appropriate to pay a special dividend to our stockholders, especially given the period in 2009 and 2010 during which dividends had been suspended.

Greg will now review our overall financial performance, after which we'll open this call up for questions. Thank you.

Thank you, Steve, and good morning to everyone on the phone call. I'll start off by saying that we at management, we were pleased with the operating results we achieved in the first quarter of this year.

Led by the favorable impact of higher average selling prices for TiO2, we reported record operating income -- or segment profit, which is the term that we'd used in our earnings release -- of $104.2 million for the first quarter of this year. Our average TiO2 selling prices in the quarter were up 32% as compared to the first quarter of last year, and our selling prices at the end of the quarter were 9% higher as compared to the levels at the end of 2010.

As Steve mentioned, even with the increased profitability we achieved, we believe that profit margins are still currently at a level which do not reasonably justify greenfield or other major expansions of capacity. As a result, we anticipate our average selling prices will continue to increase significantly throughout the remainder of 2011.

We continued to operate our plants at near-full practical capacity utilization levels through the quarter. Our production volumes in the first quarter, which actually tied our previous record for production volumes for our first quarter, were up 7% from the first quarter of last year. With the increased availability of products through our higher production levels, our sales volumes in the quarter were up 2% from a year ago.

As we previously indicated, our ability to achieve any additional increases in our production capacity of any significance through debottlenecking projects is limited. With our current expectation that demand will remain strong in 2011, and that we will be able to sell everything we produce, we expect our sales and production volumes in 2011 will increase only slightly as compared to the levels in 2010.

On the cost side, and as expected, our raw material costs were up this quarter about $12.5 million, reflecting higher costs primarily for feedstock ore and petroleum coke. Our maintenance costs were also up slightly in the quarter, consistent with our higher production levels. Overall, we are currently expectations that our per-metric ton cost to producing TiO2 will increase 10% to 15% for all of 2011 as compared to calendar 2010 -- slightly higher than our previous expectations, due primarily to increases in our raw material costs.

EBITDA for the first quarter was $116 million, up from $33 million from the first quarter of last year. In late March of this year, we completed the redemption of EUR80 million principal amount of our 6.5% senior secured notes at the redemption price of 102.17% of the principal amount. And as a result, our results in the first quarter of 2011 included a $3.3 million charge, which is, on an after-tax basis, $2.2 million or about $0.04 per diluted share. That consisted of the call premium that we paid and the write-off of the unamortized deferred financing costs and the original issue discount associated with the notes that were redeemed.

We borrowed EUR80 million under our European revolving credit facility to fund substantially all of the redemptions. We expect that we'll have that revolving borrowing fully repaid sometime during the third quarter of this year. The bottom line net income for the first quarter was $60.3 million or $1.04 per diluted share compared to net income in the first quarter of last year of $42.8 million, or $0.87 per diluted share.

And as a reminder, our results in the first quarter of last year included the impact of the $35.2 million non-cash deferred income tax benefit, which is $0.72 per diluted share related to a favorable development in Germany. For the remainder of 2011, we expect our segment profit and net income will continue to be significantly higher as compared to 2010, as the favorable impacts of higher selling prices will more than offset the impact of our higher anticipated production costs.

Last week, we announced that our Board of Directors had approved a 2-for-1 stock split of our common stock to be affected in the form of a stock dividend. The record date for the split is the close of business on May 13. The additional shares are expected to be distributed one week later at the close of business on May 20. Since the split is not yet effective, all of the per-share amounts that we have talked about this morning are computed on a pre-split basis.

At this point, that's all of my prepared remarks and we can open up the lines for any questions.

(Operator Instructions). Sara Magers.

Good morning and congratulations on a great quarter. Contribution from pricing came in ahead of my expectations, but the mix was negative in the quarter. So was there a change in the amount of revenue that fell under, I guess, the price protection or contracted revenue? I guess, could you just help me understand this disconnect?

No, I mean, I don't -- in terms of the mix of our sales revenue that's under the contracts that generally have the 90-day pricing protection, there really hasn't been any significant change in the quarter in that regard, so.

And then could you -- I mean, in terms of the mix, I mean, what was unfavorable year-over-year? Just trying to understand that.

I guess I'm not sure what --?

It would just be a mix based upon the grades. So we may have sold a bit more of a grade that had a lower sales number associated with it.

Okay. And for my follow-up, in terms of the reinvestment economics, I mean, what kind of parameters are you guys looking for? I mean, because when you talk about cost inflation, it seems like if it's a margin question, that would be a moving target. And if material prices keep moving up, then you may never ever get to that margin level where reinvestment looks appropriate. I guess, what are you guys looking for?

You have incredibly depressed all of our customers with that question. (laughter)

My apologies. (laughter)

Sorry, Joe, if you're listening, but -- you hit it right on the nail head. It's not about price; it's about margin. And we've said this before, that the margin profitability needed to look out over a five-year horizon before you even get production off of a greenfield plant. And that's the construction -- that's assuming everything goes well by the time you get up and you're actually producing good grades.

And a large sum of money, that -- you have to have a pretty good assurance -- I mean, a reasonable business person would need a pretty good assurance that the margins are going to stay at that level. So that in five years from now, you're actually getting your return that you thought you were going to get at the front of the five years.

So it's a very subjective element that goes into that. Now, that doesn't mean to say if somebody says, you know, it really looks good out there for the next 10 years or so, and we're just going to build a plant and bet on the comp. That can happen. There's no question that that can happen.

And I think when we get into the one point I made in the opening remarks is, I get the feeling as I talk to people that everybody is waiting for that first announcement -- that somebody is going to increase capacity, and then the shortage is all over; that it's all over and the prices are going to drop, and the profit margins are going to drop. That's kind of very unrealistic -- one is, the production won't come on for a very long time. And one or two plants just are not going to fill up the shortage that we're seeing now.

Plus the economy, we anticipate, is going to improve in the Western world, and no question the developing world is going to see a ramp-up in demand and usage of TiO2. So as we look out ourselves over the horizon, we say, well, we think that there's going to be significant capacity needed over the next 10 years, let's say, as all of these things come to pass.

So I think the idea that where do people subjectively decide to put money and commitment out there to build capacity is very subjective. Every producer is going to have a different view on that. We're very protective of our position and our returns to our stockholders. And I think we're very prudent on the way we look at things. We're not timid. We are ready. We'll put in a facility when we think that it's going to give our shareholders a bigger return, and we feel comfortable with what the future looks like.

We feel very comfortable now, but we just think it's premature. Another producer could come up with an entirely different view of that. We can only speak from our own view.

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

James Sheehan.

This is James Sheehan from Deutsche Bank. DuPont has increased their price for TiO2 in the US by $500 per metric ton and -- effective June 1. I was just wondering how that compares to your plans for price increases? And also, can you give us a little color on how the Q2 price increase is flowing through? Are you going to get 100% of it?

I'll start by answering your second question first. We're implementing 100% of all the price increases that we announced. As we talked before, some of our customers will get the price increase from day one of the effective date. Some of our other customers have up to 90-day price protection. So if there's an increase effective April 1, then some of those customers may not get it until July 1.

But other than the 90-day price protection timing for some of the customers, all of the increase -- all the price increase announcements that we have announced, we're implementing 100%. The most recent North American price increase we had in North America was $0.15 per pound. That was effective April 1, so as I indicated, it would become fully implemented by July 1.

The first part of your question -- there's a little bit of a misconception out there that we've got a homogeneous general commodity, that there's no difference between any grade sulfate chloride, anything. There is some truth to TiO2 kind of looks the same -- it looks like white powder. But it's very differentiated.

And I think each one of the producers out there have a very different customer base. So the pricing that's out there with customers -- there's a huge range of prices that customers currently pay from the top to the bottom of the ranges. And historically, there's always been a pretty big range and it's gotten bigger as the shortage has set in.

So from our standpoint, we're very proud of our technical side of our Company, our customer service, product development, the research. We have large teams of people that work directly with customers to develop the uses of TiO2 and improve their tinning strength, those types of things.

So we pride ourselves that we do have a large number of customers that are not the biggest users of TiO2, but they're very good profit margins, very long relationships. And their pricing will differ significantly from some of the large users that are a little more commodity-related, even though they're specific grades and that type of thing.

So I think when we're talking about matching prices of what one competitor did versus another competitor, we're mixing apples and oranges a lot. Because it really depends on what each individual customer or each individual consumer -- producer, what their customer base looks like, where are they with their pricing -- because there's a big variance between one producer versus another on what actually they're charging customers out there in the world. Are they in the export market? European market? Those type of things.

So, I think there's a general -- obviously, there's a general big upsurge in pricing, but I think it's important for everybody to understand that there's a very significant difference between a company like ours -- which we believe produces a lot of value for customers through our product services, our customer services, and the technical side -- versus a producer that maybe has less grades and less breadth of the market, and maybe sells primarily through distributors and agents.

So some of those type of things, I think everybody needs to keep in mind that it is not a homogeneous market and it's quite the contrary, once you get inside the pricing environment and the customer/producer relationships.

Thank you. And just on ore costs, could you tell us what percent of your ore contracts are resetting this year and in 2012? And do you have any concerns about sourcing a sufficient amount of feedstocks this year?

In terms of sourcing, we don't have any concerns about sourcing the ore. As we've talked before, we have relationships with all of the major suppliers, that they're long-term, long-standing relationships; they've worked with us in the past in good times and in bad.

So in terms of getting the ore that we need to run our current production capacity, we don't have any concerns about getting the ore. Obviously, the cost is going to be a question, particularly into 2012. Generally, all of our ore contracts historically had an annual repricing. There was one small one that might have a six-month repricing, which is in 2011.

But going forward in terms of what happens in 2012, that will come about from our discussions with the ore suppliers. But based on things that we've heard in the industry, we're expecting that the ore suppliers are going to move away from annual pricing and come to some kind of more frequent repricing mechanism, whether it's three months or six months, we don't know. But overall, we have no concerns about the availability of ore.

Thank you very much.

Trey Grooms.

Good quarter. Okay. So you mentioned you're expecting costs to be -- now to be up 10% to 15%, and that's up from the 6% to 10% you'd previously expected. And you mentioned a few things there that's kind of behind that. But can you give us even some more color on specifically what is behind that and what's changed, just in the last couple of months, to cause you to increase that range?

Yes, I mean, we gave what I thought was actually a fairly high range in the 6% to 10%. And as we got through the quarter, and looking at our expectations for the rest of the year, including April results, we could see that overall for the year, we were bumping up towards the high end of that range, and thought it was appropriate to provide a little bit updated guidance in terms of the expectations for the cost increases.

Okay. So -- but behind that, do you have some estimates baked in or assumptions baked in for these costs to continue to increase throughout the year? I mean, the raw materials to continue to move up? Or is this kind of a static -- if they stay here, this is kind of where it would be? Can you give us some color there?

No, it -- I mean, to the extent that we see any of our costs increasing over the second quarter or the last half of the year, that is reflected in the 10% to 15% estimate.

Okay. Okay, perfect. Okay. And then, secondly, can you give us some type of idea on how to think about the vertical integration that you guys have with the sulfate production, and what kind of role that plays? Just so we're kind of thinking about the ore exposure correctly.

Sure. I mean, as you say, we have our mines in Norway and that provides 100% of our ore requirements for our European sulfate facility. So that provides us a little bit of a hedge or protection in terms of our ore costs compared to other producers that don't have any kind of an internal source for the ore.

In addition, we don't consume 100% of the production from the mine; we actually only internally consume about one-third of the productions, and the other two-thirds is sold out to in the market for other producers. So to the extent that ore costs are increasing in the marketplace, we would expect and do see increases in the selling price of the excess ilmenite production we have from our mines that's going to our third-party customers.

We had a little metric that we provided on the road show and it's for quantification. And this may help also answer your question, but based on our current production capacity, considering a [practical] capacity, we had a -- for every $0.01 per pound increase in the selling price, that equates to [additional] -- $12 million of additional EBITDA on and an annual basis. Obviously, with the 32% quarter-over-quarter increase in selling prices, our first quarter results reflect that leverage we have in terms of what the impact of selling price increases.

And that $0.01 per pound at current prices is slightly less than a 1% increase. If we had a $0.01 increase in the cost of our ore purchases, which is actually about a 4% increase -- though, it's not on the percentage basis, it's not apples to apples -- that would result in a decrease in our EBITDA on an annual basis of about $5 million. And that $5 million metric includes the effect of the favorable effect of selling the excess production from the mines to third-party customers at a higher selling price.

Okay, thanks, Greg. That's all helpful. I'll jump back in queue.

Trey, just so that you know that all of our facts are being checked, [Tim Hafer], our Vice President and Controller, entered the room when we started this call. So he's fact-checking everything we're saying, too.

And so far he hasn't given me a thumbs down, so that's good.

Okay. And just to be clear, the $12 million was off of a $0.01 change, so --?

Yes, the $0.01 per pound.

Okay. And all of those -- back from the road show, all of those metrics still hold true today, given where ore is and everything?

Yes.

Okay, great. Thanks.

[Roger Smith].

Are East European TiO2 prices materially higher than West European TiO2 prices for similar grades? And if so, what -- does Kronos have a greater focus on East Europe than perhaps some of your main European TiO2 competitors?

I don't think in terms of overall, generally, I don't think East Europe, there's that significant of a difference.

No big difference. Okay. Also, in the Chinese sulfate capacity, you feel like there's a lot of Chinese sulfate capacity that's shut down but could be turned back on, given current price level environment?

(multiple speakers) I'll start. Yes. The Chinese production or the ability for them to bring production online is one of the main questions that we've had since we've had the road show.

A lot of aspects -- it's somewhat of a complicated matrix. No question China can put a lot of capacity online quickly. They basically have all sulfate. They do have one or two very small chloride processing units that are not functioning great; they're not producing high quality. There's a lot of reasons for that, for why they emphasize sulfate. One is it's a lot less technology-driven. It's a batch process. You can use lower quality ores, which even now, is a problem.

There's been, through the ore shortage, some producers have not received the ore in order to keep their plants running full stream, and China is one of those areas that are having an ore problem.

As we -- it gets into the bigger question of how is China going to smother this industry and drive it into the dirt, I think, to sum up the question. We think that it's going to be a real long time before they get to the point where they're producing high grade sulfate grade, and probably even a longer time before they're able to, one, procure technology and the expertise that goes with it. Technology does nothing unless you have the skilled workforce to run it at both the front end and the back end, the production and the finishing.

Their other problems over in China is that the chloride process is very sensitive to things like power outages. If you have an unplanned power outage at a chloride plant, it's a disaster. You freeze up everything; it's just a major disaster. Sulfate -- you lose one batch, you clean it up and away you go.

So the idea that they'll switch to chloride, I don't -- personally, I don't believe that's going to be a major play. Production of sulfate, yes, I think that as they have available ore, they will increase their sulfate production. But at the same time, we expect the Chinese uses and demand for TiO2 of any grade to go up very substantially, which means there needs to be a lot more productive facilities both in China and worldwide.

Currently, most of the high-grade chloride process grades are imported into China. And they're imported because the products that are being made are being shipped back to the Western world and they're concerned about quality. And you can't switch one grade out, especially sulfate, for chloride grade very easily. And there is a question about quality.

So China will get wherever China ends up being. We're not just talking China. We're talking all the Far East. We're talking India; we're talking Vietnam; we're talking Korea -- all of these economies are growing at rapid rates and their usages will go up significantly. And they're all driven with having more industrial base inside their -- in their countries.

So my own belief is that at some point in the future, China and other Far East countries will have production facilities that will be producing good grades of sulfate and will have chloride facilities producing good grades of chloride. We just happen to think that it's a long ways off before they get to that point, or that they affect the global supply/demand balance.

Thank you very much for that.

Bob Koort.

You characterized, I guess, the relationship between the ore suppliers and yourselves as one that would allow for some pricing but maybe not extreme levels that would impair the industry's ability to continue chugging along on the profit path. So I'm just curious with your ilmenite mines in Norway, can you give us some suggestion on how much you're getting price -- how high the prices are going up there to your customers?

We don't break out revenues from the mine. I think if you look at Kronos in total, it's 3% or 4% of our total revenue, so it is not a significant amount.

I would just point out that the TiO2 content of the ilmenite is lower compared to other sources of feedstock. And so when you're looking at increases that in ore costs that we might be incurring for our chloride process, we would not be expecting to achieve the same percentage increases in the selling price of the excess production that we have from the mine.

Directionally, they're going to go in the same direction upward, but percentage-wise, it's probably not going to be as great a percentage as maybe other sources that have a higher content.

For our own internal uses in our sulfate production, the ore over the years, we've developed a very robust co-product, by-product businesses out of what would have been, in the past, waste product that you had to dispose of someplace. So, through the years on a technical side of our business, we've turned that waste into actually profitable products. So for us, the mine works very well, because it's a very good feed for our sulfate production and other sulfate production, that the two-thirds that are sold are basically used in sulfate plants by competitors.

But we have the added, I think, advantage that we have figured out how to reduce our costs by turning the waste and the co-products that produce good profits for us. So that advantage -- when we're selling out to third parties, some of them have, some of them don't, as robust [as] co-products, and have to go through additional processes, which add cost to the original ore. So I think what Greg just said is correct -- that it's not a perfect apples to apples, but directionally, I think in the same relative ranges, we can expect that they're going to track each other.

Okay. And you mentioned that your customer as a supplier, you can look different than some of your competitors depending on the grade you're selling and to what applications. And I guess the same issue might apply to some of your ore feedstocks and the contract durations. I think you mentioned there's an evolution from annual contracts to maybe three or six-month contracts. Does that imply at some point there will be a step change increase for you and your costs? Or are there enough different raw material ore contracts that feather in over time that it will be more of a steady-state climb in raw material costs?

That's pretty well putting ourselves in the position of the decision-makers at ore producers. But I think with our relationships and our understanding and their knowledge of that in order -- the only reason that they would increase their ore supply is that they think they can sustain their profit margins over the long-term. Because it's very costly endeavor to develop ore bodies and increase their productive capacity.

So we believe that it will be a pretty major approach -- not that different from what we are doing with increasing our prices for the final TiO2 product. Obviously, we don't get to make that decision, because that's the other side of the table. But it would be -- just like -- I think we made the statements at a road show, could we double our prices and get it? Yes. Today we could just double our prices and we could get it. It might not be the same customers that we have; we could cause some disruption downstream.

And as I said, we're in it for the long haul. We're looking at our customers, the stability that they have, and we like the customer bases that are out there that we supply to. The ore producers are in very much the same boat. We talk about suffering for 20 years but it's nothing compared to the suffering they had for 20 years. They had to curtail a lot of production for long periods of time.

But I think they're going to be cautious in both increasing capacity and increasing prices to the point that they kill the golden goose that takes the ore. And the TiO2 industry, if they crank up prices too fast and depress the profit margin of TiO2, well, then there's not going to be any incentive left to build more TiO2 capacity, and they stagnate.

I think everybody understands, because there's not very many players out there in the ore business. There's only four or five -- three majors and a couple of others that are pretty big. So we're not talking about a big massive number of ore producers that feed into the TiO2 industry. And I think the pain and suffering that they had were lessons that we assumed were well-learned. So we expect it to be a pretty measured approach, but that's our assumption. Obviously, we can't control it.

Terrific. Thank you.

Edward Yang.

Good morning and I also want to extend my congratulations to you on a terrific quarter, although it doesn't look like your stock is getting rewarded for it this morning.

On the pricing side, I think the earlier questioner had it wrong -- the DuPont price increase this morning was just in Eastern Europe and the Middle East, but still a pretty significant price increase. You also had a rest-of-the-world price increase a couple of days ago, about $0.14 or so. Should we anticipate North America and Europe price increases to follow?

If you go back and look to when we historically have had price increases over the last two or three quarters, it look like we had one implemented every three months for each of the major regions. We evaluate this on an ongoing basis. And whenever we believe it's time and appropriate, we have additional price increases that come out. But other than that, there's not a whole lot we can say at this point.

I think it's an important thing on the price increase announcements also is that it's not like we've got a list price and this is it. As I mentioned in an earlier question, our customer base is a very broad range of users and a very broad range of grades and prices that we get from our TiO2.

Some of the prices are far in excess of what the lower end of the range is and that's because they're very specific. They take a lot of extra work, a lot of technology goes into it, a lot of working with the customer. So when these price increases get more of a basically a heads up to a lot of our customers of what's coming -- because a lot of -- especially, our bigger customers, we're on -- we have a contractual basis that we've got a quarter -- basically three-month's lead-time before we implement it.

It gives them a better shot at figuring out how they can absorb the cost, either internally through efficiencies or can they pass costs through. It gives them a better avenue in which to deal with it rather than just -- oh, here one day, all of a sudden the price goes up a lot. It's hard to deal with.

It's the same thing as we see with the ore producers. They've been very good in our communications of giving us a kind of an idea of what our costs are going to look like ahead of time, so that we can put that into our thinking caps.

So we're -- it's important thing to note is that when we put out our price increases, we call it the minimum price increase also. So if the market is such that, in some cases, we end up increasing the prices much more. Generally, we're implementing pretty well a full price increase that we have. There's always exceptions a little bit one way or the other. And then there's some markets that we see that are opportunistic, that we can take part of our product that's allocated to those markets and get much higher returns. So I think that's a -- the price increase announcement, again, are not, like, here's the price for everybody and it's across the board, and it's the same industry-wide, and same customer-wide. Quite the contrary.

It's -- mostly it's a heads up of this is directionally where our heads are, as we're going in. And it's basically for our long-term customers -- it's a 90-day lead-time of giving them an idea of what they're going to be dealing with.

That's very helpful. And Steve, it sounded like you're pretty sanguine on the supply side and on the China issue as well.

On the demand side, you mentioned last call and this call as well, that basically you could raise prices by double and customers could probably take that. But are you getting any push-back -- can you give us some qualitative comments on how much push-back you are getting from customers? What the elasticity of TiO2 demand is? And where do we see some risk of demand disruption as prices go higher?

Well, it's always a good question. When you're seeing things go up at a rapid rate. the base line of everything is, we're in a shortage. There's not enough product to go around right now, is what that means. Some customers and some users of TiO2 are not producing product today because they can't get TiO2.

So that's what we mean by shortage, is it isn't just that, oh, it's tight, so prices go up; literally, we're -- even our long-term, very best customers, we're having to allocate certain grades to because there's just not enough to go around. And that's where I mentioned at the very beginning, Joe Maas and his team are very diligent in trying to cover all the critical needs of our long-term customers and our base and our -- basically our partners.

We're watchful too. Customers know what's going to happen. Because in all likelihood, prices are going to continue to go up. So we watch very closely that somebody isn't double and triple-ordering now to build up a big inventory, which would reduce the amount of TiO2 we've got to allocate to all the customers. So we have to watch that closely, too. If I'm in a customer situation, I'm going to try to buy everything I can as quick as I can, and get myself a warehouse and store this stuff.

So we have to watch that, too, because we're in for the long haul. We like our customer base. We want to service them. And the only way we can do it is to sit back and reasonably, rationally, allocate out what we have. Because we have limited production. We're pretty well maxed out. Klemens and Ulf and the guys out there in production, they're kicking those old factories hard. We're breaking internal records all the time. I commend them for the action of our operating guys and the people running our plants. We're producing everything we possibly can at record rates. And a lot of internal records are being broken.

So we're in a position where we have a limited amount of product and we're making everything we can, and it's not enough to service all of our customers. So that's kind of the situation we're in.

Okay. That's all the questions I have. Thank you.

[Claire Jesser].

I wonder if you could comment on the likely effect of Dow's [Evoke] product? They are certainly advertising this as something that can reduce the demand for TiO2 among paint producers. Any thoughts from your side?

Our customers have been using extenders, as we'll call it, for a long period of time, when possible. At the end of the day, there's no effective substitute for TiO2 in our view in terms of its properties, its chemical properties. You can increase the use of these extenders to reduce the TiO2 content of the product such as in paint, but then very quickly, in our view, that starts to adversely affect the quality of the product if they start reducing the TiO2 content.

So, I mean, at the end of the day, we -- there's extenders that are already out there. We don't see the [Evoke] as having any significant impact over all on the TiO2 demand in particular, given the shortage. You are in a shortage, and so it's possible you might see customers using some more of these extenders just because the product is not available.

Just from another comment. From our market intelligence, we believe that the [Evoke] product is limited primarily to interior latex paint. It doesn't go into plastics, it doesn't go into inks. So it's limited to a fairly narrow band of TiO2 products.

Okay. Great. Thank you very much.

One other point on that. This is a -- along with China and ore, probably one of our most asked question is what's going to wipe out TiO2 and replace it? And as Greg just said, there is no substitute for the quality. It's all the refractive rating, the whiteness, brightness, capacity, durability, ultraviolet degradation, thermal and chemical resilience -- it's got an incredible long list of traits and characteristics.

It's -- I actually view these extenders and type of things as good for the TiO2 industry. Without something, either a lower grade TiO2 being produced, sulfate from China or wherever it comes from, for these type of things like ROPAQUE, that means some customers can't make their products at any quality.

I mean, their quality may drop off, but if I'm sitting out there making a product, you're faced with, do I lower the quality of the coating or something like that, that goes into the product, or do I quit making my product, and basically go out of business? Well, chances are there's going to be a significant lowering of quality in some sectors of the market where it's least sensitive. And to me, that means it keeps the TiO2 industry, the growth of TiO2 industry, very vigorous because as soon as there is some more supply, they're going to start buying TiO2 again.

The other -- so that -- I really see it as probably a complementary and something that actually helps the TiO2 get over this shortage period, that will be replaced by TiO2. That's where the increased production is first going to go, is to raise the quality of those customers that are making their product at a lower quality. They're going to buy up. It also means that those that can get the TiO2 are willing to pay a premium for the higher quality.

So I don't see what is out there and what Greg and John St. Wrba just said, I agree with totally, but I've got a little different view on it, because I actually see the ability for all customers who continue to make their product in some form, even a lesser quality, as a good thing. And right now, it's -- I see that as a good thing.

The other thing is, I don't think Dow and others are working so vigorously to develop these type of products to sell them at some low discounted price. I think they see, hey, we can sell this stuff at a lot higher price than we used to sell it because of the shortage of TiO2.

So I think it would be not realistic to believe that the prices are going to stay stationary with the extenders and the other type of products that are put in, in place of TiO2. I think those prices are going to probably spike up probably close to what the TiO2 prices are doing.

Thanks. Just as a point of record, I don't think that Dow is marketing this as a replacement for TiO2. This is as a factor to reduce the usage.

Yes. No, it's just the questions usually are, is this going to replace TiO2?

That wasn't my question. My question was, do you think that it might depress a little bit the demand or at least help with some of the shortages? But I think I got the answer.

Okay.

Thank you.

Stephanie Renegar.

I'm Stephanie Renegar with JPMorgan. I just had a couple of questions that were credit-specific, if I may.

Just on your plans, I guess, for the 2013 bonds. I saw that you had called some of those about a month ago and you're planning on repaying the revolver. Still, it looks like a lot of your maturities are relatively short. And I just wanted to know your plans for refinancing. Are you waiting for something like a credit ratings upgrade?

And just also, what sort of debt load do you feel comfortable having at international, particularly given your view that the supply of TiO2 is going to remain tight? However, it's a volatile world. And it seemed like that you were operating with quite a bit of leverage, particularly during the crisis.

Yes, I guess -- we only have one maturity and that's the [K&I] bonds in April of 2013. I expect that -- we're watching the credit markets continuously. A year ago, we couldn't refinance at a lower rate than the 6.5% coupon, so why refinance into something higher. It's probably still that way right now.

So we're not eager to refinance the bonds at a higher rate. We think we've got some flexibility in the credit markets in various ways to refinance that, along with retiring some of the debt along the way.

So we'll continue to monitor the credit markets and find a way that we think adds shareholder value when we look to refinance or repay those bonds. So -- and obviously, debt levels are contingent upon your EBITDA when you're measuring what your debt level is. And obviously, our EBITDA number is going up, so the debt level at [KII] looks a lot more reasonable than it did, say, two years ago. We're comfortable with the debt level at KII right now. Obviously, we have the ability to refinance it at the whole organization, which would then make the refinancing even more attractive, if we chose to go that route.

So we're comfortable with the debt level but we think it makes sense perhaps to continue to repay some of the bonds, call some of the bonds as our cash permits, or as we have a way to arbitrage the interest like we're doing now. We basically have a 400 basis point spread between the borrowing on our revolver and the KII notes. And we expect to repay that borrowing under the European revolver certainly by the end of the year, if not sooner. So, for the time being, we're just going to watch the credit markets and see what opportunities come up to refinance in a very attractive way.

Okay. That's very clear. Thank you.

Gregg Goodnight.

I appreciate your detailed answers to the questions. I'm learning a lot this morning. In terms of restarts of capacity that was idled during the recent downturn, do you see any of that happening? Or is it going to be like the Savannah plant, where a lot of that capacity was permanently taken out and not capable of restarting?

We think that the capacity that went out in the 2008/2009 timeframe like Savannah is permanently out. It's our understanding with Savannah that they cannibalized that plant to the extent that there was equipment that could be used in some of the other facilities. They've taken that. The Savannah facility is an environmental disaster, putting it nicely.

Another plant that was shut down, I think it's now a parking lot. So, all in all, we don't see any of those facilities coming back online.

Okay. The second question, if I could -- the incremental capacity -- this industry seems notable that in a situation that's this tight, that there would be a lot of incremental capacity announcements. And I don't see those out there. It's an industry that traditionally has had the capacity creep.

My specific question is, do you see any notable chunks of incremental capacity being added by the major producers, like in North America or Europe, despite the fact that not much of this is out there in the press?

I mean, if you look historically at Kronos and some of the other major producers over the last 10 years, I mean, we all went through what we call our debottlenecking projects, where we through capital expenditures tried to process improvements.

As you indicated, we got additional capacity out of our plants and the competitors did the same thing as well. And I think what we -- in our -- what we view is that all the easy things have been done. All the not-so-easy things have been done. And what you have left -- there's just not a lot left in terms of debottlenecking projects that can get any kind of significant additional capacity out, absent some kind of a brownfield expansion where somebody might add a new line.

That's not to say that, you know -- there still is some. I mean, we're getting a little bit. But what we're getting now is clearly much less in magnitude than what historically we were able to achieve over the last five to 10 years. And our view is, for the most part, most of the other competitors are in the same situation.

Okay. Excellent. I had a couple more questions. I know the call is running long, so let's -- if I can handle those offline, that would be great.

That's great. Thank you. I think -- actually, we're going to make Gregg be our last call, because it's coming up at 10 o'clock Central Time. So I'll turn it back to the Operator.

Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for your participation and you may now disconnect. Have a great day.