Kronos Worldwide, Inc. (KRO) 2011 Q3 法說會逐字稿

Welcome to the KRONOS Worldwide third-quarter 2011 earnings call. My name is Tahitia and I will be your operator for today's call.

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 Keckeisen, Vice President of Investor Relations for KRONOS Worldwide. You may begin, Janet.

Thanks. Good morning and welcome to the KRONOS Worldwide 2011 third-quarter earnings conference call. With me this morning is 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 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 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 and Greg, with me today are several members of our management team. Kelly Luttmer, Vice President, Global Tax Director; John St. Wrba, Vice President, Treasurer; Tim Hafer, Vice President, Controller; and Brian Christian, Vice President, Strategic Business Development.

I also wanted to give special recognition to our exceptional operating management team. The leaders of that team -- Doug Weaver, Dr. Ulfert Fiand, Klemens Schluter and Joe Maas -- have the knowledge and experience necessary to maximize the potential of the KRONOS business and react effectively to any challenges we encounter. Through the years, these leaders have also developed and managed the professionals who will serve our business very well into the future.

We are very proud of our organization which has been built with a focus on continuous improvement. As an example, our manufacturing and technical groups have an outstanding record of increasing production capacity and decreasing production costs, generally with minimal capital cost, and providing a level of superior service to our customers.

During the first nine months of 2011, we continued to experience strong global customer demand for TiO2 products. This allowed us to successfully implement further significant selling price increases. Our TiO2 segment profit for the nine months ended September 30, 2011, increased 233% over the same period in 2010 and represents a new record for KRONOS.

We believe the global shortage will continue for several years due to the constraints to adding significant new production capacity, especially for TiO2 premium grades produced through the chloride process. Major capacity additions, both brownfield and greenfield, require considerable investments of capital and time. It generally takes two to five years, depending on the project, from commencement of a significant capacity expansion until additional facilities are fully operational.

As we have discussed previously, the mere announcement of capacity expansions, such as those occurring in the last few months, will not affect the near-term production levels and will do little to relieve the longer-term shortage of TiO2 products. We expect the supply of TiO2 products to increase through various methods, but we believe the magnitude of such increases will not exceed the expected global demand for TiO2 products in the foreseeable future.

The increasing costs and availability of raw materials, in particular the global shortage of ore feedstocks, is also an impediment to capacity expansion. We anticipate the tightness in ore feedstock supplies will last for at least the next couple years. As we have previously discussed, an extended period of low-profit margin did not foster the investment in and development of ore supplies that are now needed for an expanding TiO2 industry.

The TiO2 industry cannot grow without the expansion of ore supplies and the ore industry needs the TiO2 industry to grow in capacity and profitability in order to justify its own expansion. We believe that increasing costs in ore will remain in check so not to become a major factor in hindering profit margin expansion in the TiO2 industry, which could in turn hinder TiO2 capacity expansion.

Although the ore supply situation is tight, we believe our long-standing relationships with our key suppliers will allow us to continue to have an assured supply of ore feedstocks. We are also partially hedged against ore shortages and cost increases due to our backward integration. We currently supply 100% of our European sulfate production ore feedstocks from our mines in Norway and sell additional ore production to third parties.

Our style of management is from and 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. In conclusion, we can confirm that we continue to believe the anticipated TiO2 industry conditions will result in higher profit margins and cash flow for several years.

Greg will now review our overall financial performance, after which we will open the call up for questions.

Thank you, Steve, and good morning to everyone on the call. We achieved record operating results in the third quarter and the first nine months of the year, primarily due to the favorable impact of the higher average selling prices for TiO2.

We reported operating income or segment profit, which is a term that we use in our earnings release, of $159.2 million for the third quarter of this year, up from the $58.9 million in the third quarter of last year. For the first nine months of 2011, our segment profit was $409.9 million as compared to $123.2 million last year.

Our average TiO2 selling prices in the third quarter of this year were up 41% as compared to the third quarter of last year, and our selling prices at the end of the third quarter were 10% higher as compared to the end of the second quarter of this year. For the first nine months of the year, our selling prices were up 37% on a year-over-year basis.

As a result of the global shortage of TiO2, we anticipate that our selling prices will continue to increase during the remainder of the year. We continue to operate our plants at near-full practical capacity utilization levels and our production volumes for the first nine months of the year were up 4% from the same period last year. Our year-to-date production volume of 409,000 metric tonnes was a new record for us.

As we have previously said, our ability to achieve additional increases in our production capacity through debottlenecking projects is limited. And our sales volumes for the first nine months of the year were comparable to our volumes in the first nine months of last year.

On the cost side of the equation, and as expected, our raw material costs were $17.3 million higher in the quarter and they were $47.9 million higher on a year-to-date basis, reflecting higher costs primarily for the feedstock ore and petroleum coke. Our maintenance costs were also up slightly consistent with our higher production levels.

Overall, we currently expect that our per metric tonne cost of TiO2 will increase from 10% to 15% for all of 2011 as compared to calendar 2010, consistent with our cost expectations that we reflected at the end of the first quarter of this year. Our EBITDA for the quarter was about $170 million, up from $68 million a year ago. On a year-to-date basis our EBITDA this year was about $443 million as compared to $151 million in the first nine months of last year.

Our interest expense for the quarter and year-to-date periods was lower, primarily due to the first-quarter redemption of EUR80 million principal amount of our senior secured notes that we completed in March 2011 and favorable interest rates on our borrowings that were outstanding under the revolver. At the end of September, we have no borrowings outstanding other than the senior secured notes.

During the third quarter this year, we also purchased in market transactions approximately EUR30 million principal amount of our senior notes for an aggregate cost that was slightly less than par value. In addition, during the month of October, we purchased in open market transactions an additional EUR10 million principal amount of our notes on similar terms.

Our net income for the third quarter was $85.9 million or $0.74 per diluted share. This compares to net income in the third quarter of last year of $32.1 million or $0.33 per diluted share. For the first nine months of the year net income was $235.2 million, $2.03 per diluted share, compared to $94.1 million, or $0.96 per diluted share, in the first nine months of last year.

And our year-to-date results for the first nine months of 2010 (technical difficulty) impact of the previously reported non-cash deferred income tax benefit of $35.2 million, which equates to $0.36 per diluted share, related to a favorable development in Germany. As we previously reported in May of this year, we implemented a 2-for-1 stock split and all of the per-share amounts that I have discussed this morning have been computed on this post-split basis.

For the remainder of the year, we expect our segment profit and net income will continue to be significantly higher as compared to 2010 as the favorable effect of our higher average selling prices will more than offset the impact of our higher anticipated production costs.

That concludes my prepared remarks, and at this point, we can open the call up for Q&A.

(Operator Instructions) David Begleiter, Deutsche Bank.

Hi, this is James Sheehan in for David Begleiter. Just want to talk about pricing a little bit. Could you sort of give your understanding of the way pricing when in October? You didn't fully implement the price increase that you had nominated in October. What was the reason for that?

And also, looking at the January pricing action, how is that being received by customers in light of the global economic slowdown?

I think the main point is that we expect prices to increase in the fourth quarter. Whether it's implemented in one-time or in phases, we expect prices to be substantially higher in the fourth quarter than they were in the third quarter.

So that means that you are going to continue to implement the full October price increase in 2012?

We will continue to increase our prices in the fourth quarter.

Okay. And where does your -- you had an estimate for 2011 ore costs, and I guess you may still be in the midst of negotiating 2012 ore costs, but do you have a sense for what the percentage increase might be in 2012?

No, we are still just in very preliminary discussions with the ore suppliers. We have not made any final decisions or definitive terms, and so were not able to give any quantification on what our ore or our overall production costs would be anticipated to increase in 2012. That said, we know the talk out in the market and we are expecting significant increases in ore costs in 2012.

Okay. And if you could just --

One other -- Brian Christian wanted to add a follow on.

Just to give a little bit more clarification on the pricing. Pricing is -- price increases are implemented in different phases depending on the kind of loose classification of customer. We have some customers that take price increases effective immediately based upon various different contracts with some of our larger customers. In some cases, there is varying degrees of price protection.

In different markets of the world we have different periods of time where we implement those price increases faster than others. And then in some cases, distributors and agents are in a separate classification as well. So when looking at the quarterly results, you are going to see a little bit of noise in the analysis in terms of the actual implementation as that fluctuates throughout a quarter depending on those various classes of customers.

Okay. Very helpful, thank you. And then one question just on your mix. That metric has been unfavorable for the last three quarters or so; when would you expect mix to turn positive for you?

Mix is really just sort of a catchall for the things that aren't covered in the other three items that we list. So there can be a number of different factors involved in mix, and we can't predict when it's going to go positive or be negative.

Okay, thank you very much.

Trey Grooms, Stephens.

Good morning. I guess my questions kind of go to the commentary of your kind of outlook to continue to increase margins despite the higher costs. And so kind of looking at that, do you -- so you are basically saying that you think 4Q margins are going to be better than 3Q, is that an accurate read?

Yes.

Yes, absolutely.

Okay. And then also looking into 2012, I am assuming that that means that that would be the case there as well on a year-over-year basis. You are anticipating that at this point?

That is our expectation of going in. Obviously, the thing that you and many others are looking at is that ore costs we expect to go up very substantially, as we have been talking about for well over a year when we did the offering.

We have known that is coming. We are very close to our ore suppliers. We fully understand that they need to get their selling price and their profit margins up to a level that justifies the expansions that they are actually currently in the process of doing. There is significant expansion projects and development projects in the works.

The key to that is the two industries are tied very, very close together. They are delighted that the TiO2 industry is having a good ride up, because that way they can hook their wagon to TiO2 and it pulls them along. But they also fully understand that there has got to be capacity expansion in TiO2 to justify expanding ore supplies.

So we feel very good about not just our relationships, but about the understanding that if the costs of ore got out of hand it would choke down the potential of expanding TiO2 capacity, which is the self-fulfilling down cycle for the ore guys. They understand that and they have -- we do expect a significant increase.

But as we have mentioned we do believe those increases will stay in check in order to allow the TiO2 industry to continue to expand the profit margins, because we are still not at a level that I think very many people feel very comfortable about putting capacity. And the key is not the margin or the price at a given time, but the expectation of sustainable levels. As we have said, these are very long-term processes of putting in major capacity and it would be foolish to start a project without a good expectation that your profit margins are going to support that expansion.

Okay. That all makes sense and thank you for that. Also, kind of your thoughts, if you could, I know that we are kind of entering a seasonally slower period, at least for the coatings guys and paint guys.

Can you kind of give us a little bit of direction on kind of where you are thinking on as far as volumes looking into this 4Q, which, granted, is a seasonally slower period? But would you expect to see kind of a flattish volume scenario year over year, down, up? Can you give us a little bit of direction there on where you see it today?

Trey, since we are in the quarter, we really can't give a whole lot of specifics on expectations for the quarter. But as you said and it's totally correct, the fourth quarter is generally our lowest volume quarter just for seasonality purposes and we would expect to see that when we end up reporting our fourth-quarter results this year.

Okay. Okay. So we are not off the mark thinking that it's -- I know last year it was -- you didn't have a whole lot of seasonality it didn't seem, but we could probably expect to see that kind of return to a normal seasonal pattern this year?

We believe that is correct. Not only -- it's kind of a double type of a situation, because starting usually in the late fourth quarter inventories are starting to be built for what is in the Western world known as paint season, which starts getting cranked up around February on into March and then it runs for four or five months when it's seasonally abnormally high for the year.

Historically, in order to service customers, inventories are built, primarily from late fourth quarter into the first part of the first quarter, in order to have ample supplies for the big surge that happens at that time.

What we are seeing -- it's a little confusing out there, but what we are seeing doesn't concern us that anything abnormal is happening. Last year, effectively, there was a very flat paint season, as I am referring to it. So customers, especially in the paint and coatings industries, have run with very low inventories. We expect that they will probably use up some of their inventories going to the end of the year.

So in sum, we are not seeing anything that is alarming that demand is falling off any more than we would normally see in a regular seasonal adjustment. It's possible as we get to the end of the quarter that we may see some replenishing of inventories, because we do know that there is a tremendous number of customers that are running pretty low. Their tank is pretty low on inventory in their warehouses. So that will play out probably toward the end of the fourth quarter and maybe a little bit into January just to keep their plants running.

But nothing -- it does feel like we are getting back to the normal seasonality in cycles at this point.

Okay. Thanks a lot. And then a couple for Greg. So where could we -- the tax rate was obviously quite a bit higher in the quarter, but kind of looking at the fourth quarter and beyond, should we expect that to get back to kind of the mid-30s% kind of range?

Trey, this is Kelly. I would actually expect -- for 2012 I would expect our rate to be more on the normal, the 35 -- around the 35% rate. For the full year 2011, I would expect our full-year rate to approximate what our Q3 year-to-date rate was, so somewhere 37.5% to 38% on a full-year basis for 2011.

Okay. That is helpful. I have got a few more, but I will jump back in queue and let some other guys in. Thanks.

(Operator Instructions) Frank Mitsch, KRONOS.

Not 100% sure that the name of the company is correct but --

We were going to call our HR person down here.

Good to be aboard and I am looking forward to participating in the compensation program you guys have.

Hey, I just had a question regarding the sequential change in results. Obviously, sales were up about $10 million sequentially and you had volumes off, but price was up, I don't know, call it, $45 million plus or minus foreign exchange. But the gross profit was up about $14 million.

So where is the delta there in terms of the $30 million or so between what you gained in price and then between what you increased in terms of gross profit?

I am not sure I followed all the number that you were throwing out. Obviously, we have had some continuation of higher production costs.

Was it actually --

I don't think it's $30 million. I am sorry, I wasn't following all your numbers.

All right, Greg. Price was up about $45 million or so, plus or minus foreign exchange sequentially? Does that make sense?

We don't calculate the number that way so we are -- how do you get the $45 million?

There is about a 10% price increase sequentially, something like that?

Well, that is from the end of the second quarter into the third quarter so that doesn't necessarily equate to an average price. So if you were doing the -- that could be part of your --

All right. Well, let me just get at it another way. Did your raw material costs per ton of TiO2 significantly increase during the quarter, more so than it did in the second quarter? Or was there anything else in COGS that had an impact on earnings?

I don't that it would have increased that significantly from the second to the third quarter, no.

All right, terrific. I will work off-line with you guys on that, because I was just trying to understand why the pricing to be up so much but yet the gross profit was only up about $14 million.

Yes, okay. Call us back.

All right, thank you.

Joe Stauff, Susquehanna. We are going to go ahead and move on to the next question.

Mr. Yang, your line is open.

Okay, I didn't hear my being introduced but all right.

Going back to a couple points made earlier in the call, just on your guidance for margin increases. Someone asked earlier would your margins be up from third quarter to fourth quarter and you said yes. But did you mean that sequentially or did you mean that year over year? Because typically it seems like your volumes are down about 10% to 15% sequentially, so usually your margins sequentially are lower.

Well, I think I probably made that statement, so I believe what I am saying is that per unit the profit margin on that, or margin, not on an aggregate basis.

Okay, got it.

The aggregate basis is going to be dependent upon the volume and obviously we won't know that until we get through the quarter. We are not trying to push volume out there in any shape, because as I mentioned I believe we are into a little bit more of a normal pattern than we have been the last couple years.

So we normally start building inventory in fourth quarter; we expect our volumes to be lower, but that will play out toward the end of the quarter. It's a very unusual situation this year than it has ever been in the history because in January and February customers will be facing another very significant price increase. That could change their buying pattern to some extent to try to buy ahead of the next price increase, and we just won't know that until the end of the quarter.

If that happens, we will be judicious in how much we actually sell. We don't want customers just building inventory to beat the next price increase, but as I mentioned, a lot of customers we believe are running very well on the inventory and they really may need to buy at the end of this quarter.

So it's basically customer by customer. We don't want them to build inventory just because of the price, but we do want to make sure they have ample supply to keep operating. So to answer your question, directly as I did at the front end, we are talking on a dollar-margin basis rather than aggregate in that statement.

Okay. Thank you Steve. Second, John mentioned that -- this question came up last quarter as well just on mix that it's sort of a catchall, but I would like to understand what that means because you are talking about revenues. What else is there besides pricing, volume, and currency? Would mix include things like customer discounts or what would be in that bucket?

It wouldn't be customer discounts. There aren't any customer discounts. It can be changes in volume sales to one customer at one price versus selling to another customer. So there is an actual mix of customer mix, there is an actual product mix in there; how much you are selling of a particular product that may have a different price and volumes associated with that. I mean those are the obvious changes.

Okay, okay.

I think geography would also be a piece of it depending on what part of the world where are selling the product in.

Okay. And finally, just what are you seeing in terms of China? One of your competitors talked about pause in demand expected in the fourth quarter for China. And more broadly speaking, are you seeing any evidence of destocking anywhere along the chain? A lot of chemical companies, not just in TiO2, saw some customer destocking in the third quarter.

From a Chinese standpoint, we don't sell a lot of material into China and what we do probably goes in through distributors. We are not seeing a lot of impact of exports out of China. It may be a little bit higher, but again it's not anything that is material in our view so that there is no impact there.

Destocking, I don't know what our customers' inventory levels are. I guess there could be some destocking but there could be restocking towards the end of the year or January as they gear up for the paint season. I think it's hard to gauge month-to-month or quarter-to-quarter changes in inventory levels at our customers.

So you haven't seen any abnormal ordering patterns on your side?

No, I think the destocking -- any destocking that we have seen, and like John said, I think John is right, it's hard to categorize whether it's a true destocking. But I think we would characterize it as normal seasonal volume for the quarter and the time of year that we are in. I think this is the normal pattern of what customers do. They probably destock a little bit at the end of the year.

With the announced price increases out there, I think the industry has changed and realizes that the price increases are coming on a more regular basis now. That could have some impact on behavior versus in comparison to last year when I think that they were still getting used to the price increases and maybe some people were trying to buy ahead. So maybe that is why we didn't see as much of the seasonal downturn last year.

But I do think there has been a little destocking going on and as Steve alluded to, at some point we anticipate that there will be restocking. Whether that is at the end of the fourth quarter or spills over into the first quarter I think we will have to wait and see. But like he also said, we don't see anything that is alarming at this point in time.

Your initial question regarding China, we are hearing reports and our guys out in the field are hearing reports that there has been a -- we believe there has been somewhat of a tick-up in exports out of China. But as we have noted many times before, things coming out of China generally are at the low end of the spectrum. Virtually all of it's sulfate grades. There is some that are better than others, but for the most part, those are going into lower exacting formulations in the marketplace.

We are not seeing a significant increase, but we just hear periodic reports here and there. The China usage, the same type of reports. They import their higher quality, especially the chloride grades, and from the reports that we are getting from the field that doesn't appear to be slowing. That appears to be, if anything, probably growing in some stages.

It's very difficult to get exacting information on what is coming and going from China, so we have kind of used the hands-on empirical period data out there. We are just not seeing that slowing, especially in the part of the markets that we play in. We are not seeing it manifest itself, but we do hear some of these reports that there is a little bit of shifting going on there.

Okay, that is helpful. Thank you.

(Operator Instructions) Stuart Pulvirent, Merlin Securities.

Good morning. Most of these questions have been answered, but I don't know if we have talked about on the customer side obviously coming at them with price increases deserved -- toward that deserved always will get some kind of push back. Do you see -- they will say they can pass this along to the consumer, but it seems that if paint demand really isn't humming along even that high and we still have a residential housing up-turn, hopefully, in the future, that you are going to continue to have this sort of tightness around TiO2.

So other than maybe substituting some of the Chinese product, have you seen anything else out of your customers and are they sort of confident they can pass along price increases?

I think we have -- as we have looked at this from a very broad basis a year ago when we were selling stock and making presentations, I am very happy to say that we totally blew the price curve. It has been a lot steeper up than we were even mentioning and what was speculation there. This last year has been pretty phenomenal.

We went through the period of customers just saying what are you doing. You guys can't increase prices this much and of course they [kept] and everybody has increased prices.

When we look at our customer base, there is no question there is a wide, wide range of input of TiO2 into their products. Coatings, and plastics probably second, are the biggest users of TiO2 and probably the biggest percentage of their input costs. Then it goes down very quickly after that to where TiO2 is just not a big percentage of input costs.

So the idea that customers can either pass it through or absorb it or make up the difference on their margins in a different way is very real. It's not a huge deal. No question the coatings and plastics industry it's a bigger hit, but the examples we have given in the past, an extra dollar a gallon on a can of paint, yes, it's big. But a dollar a gallon on the paint is not going to -- we do not believe is going to destroy their demand.

And that is something that we have always been very conscious of. We don't want to disrupt the customer base. We don't want to create consolidation and we don't want to destroy demand downstream, but my own personal feeling is we are not even remotely close to that type of a phenomenon happening.

The customers have accepted that -- they squeezed prices for a long period of time and they understand that their prices have to go up, and more importantly, the margins. Now that the ore prices are going up those margins have to keep increasing.

Many of our customers -- nobody likes price increases but I think, for the most parts, our customer base -- we have communicated with them openly all along and I think they fully understand that it's going to continue for quite some time in order to, basically, get them out of a shortage situation on one of their key raw materials. Nobody likes it, but I think for the most part that consumers, downstream customers they understand, they understand the need for it. They would prefer -- a lot of our customers won't like this statement, but I think they would prefer a higher price than a lack of availability.

No, I agree and there is a wide range of product you can buy in the market too. You could spend $15 a gallon or -- I just saw somebody has got some specialty paint that is almost $100.

That $15, that is a 10-coat coverage on the wall and some of our customers it's one-coat coverage. It all has to do with the TiO2 content, but if you dumb down the TiO2 content, your paint is not going to cover very well.

Right. I won't do that. So if you had -- just to follow it up, one little more. If you had a nice ramp in volume, because you had existing home sales went up more and people are paying more, and people have delayed this. Two weeks ago the world was coming to an end. Now, of course, everybody is thinking things are going to be better.

But if you had that, what is going to happen? Because it doesn't seem -- I am just looking at some of the producers, it doesn't seem like anyone can really push a whole lot more production on TiO2. To accommodate a -- if you had a 7% volume year in the US and Europe or 5%, can you meet that?

I think we agree with what you are saying is that any increase in demand that would come about from whatever sector is just going to exasperate the existing shortage.

John, the other point on that is that the housing industry is a -- I think it's considered to have a lot bigger impact than in actuality it does. It's really not the biggest driver, home starts and new housing and that type of thing. As we have seen, housing starts and build outs have been really low the last couple years, but a lot of paint gets sold for housing.

If nothing else, when foreclosures happen and that type of thing about the first thing they do is they spiff up the house and they go paint it again. So we have seen -- there is no question there has been a little bit of erratic demand inside just the peer, our residential painting industry, and that gives our customers a real fit because it has been out of sync. The seasons have been kind of mixed up the last couple years.

But for the most part, we are not seeing that dramatic of a drop-off because housing is low. We do expect that if housing picks up, new housing starts that there will be more demand -- your very point. And we do think that that will drive things even harder, but not to a magnitude that it's going to create a major additional shortage.

It will put tightness in it. The bottom end of the market will likely suffer the lack of availability more often, but we see that as basically the scenario that is being played out.

Great. Well, thanks for those explanations.

Danielle Ward, JPMorgan.

I just have one question on your outstanding high-yield notes. Have you had any thoughts that you can share with us on further potential repurchases or even a refi at some stage? That is all I have for now.

As we said, we did take advantage of some trading in the market and purchased the EUR40 million cumulatively, and we are going to continue to monitor that. We have the ability to force a call of redemption similar to the EUR80 million that we did earlier in the year.

But I think our view is, given some of the unsettled nature of the European credit markets, we are going to continue to monitor that. And if the opportunity arises where we can buy additional notes at less than the redemption price or even less than par value, which is what we have done to date, we expect we will take advantage of that.

The notes become due in 2013 and our expectation is that whatever principal is left on those notes sometime during 2012 we will probably be doing some kind of a refinancing. What that looks like and where that is placed are decisions we have not yet made.

Okay, that is helpful. Thank you.

(inaudible) Analytics.

I just had a couple of questions; actually most of them have been answered. But if I may, I just wanted to know in terms of the volumes, you said in your Q2 report as well as in your Q3 report that sales volumes were kind of affected by some shipping delays and some kind of a timing issue which probably should now get rectified in Q4.

Now considering that Q4 is in a seasonally weaker period, how do you see this aspect playing out in Q4? Are we going to see some kind of volume, sales volume increase on account of this timing thing or is it going to pull ahead further?

I think what we said was it's just -- when you look at our volumes, whether they are up a few thousand tonnes or down a few thousand tonnes on a quarter or year-to-date basis, that is pretty much consistent with our expectations is that we just don't think that our volumes are to change that much. In part because of we were pretty much tapped out on our production volume.

So when you look at our year-to-date volumes and they are down 1,000 tones -- 1,000 or 2,000 metric tonnes, that is really nothing of any concern to us. How that washes through in the fourth quarter is not something we are really that concerned about.

You are right on the point that we describe in our filings that in a lot of the foreign jurisdictions, there is a longer process because you got to ship it further. This stuff ships very easy, low-cost shipping, but the time lags sometimes happen and then also the credit. A lot of the regions that we sell into we actually require financial assurance put up; sometimes actually they have to pay in advance before the ship even starts.

So some of the paperwork and mechanics can flow from quarter to quarter. There is no real way to tell until the very end of the quarter of how much was effectively, we thought was sold in the quarter flops over into the first week or two of the next quarter. That happens every single quarter to more or less extent just depending on those variables that we don't have total control over.

But it's usually a very short period. We are talking two to three weeks usually from one quarter to the beginning of the next quarter.

Trey Grooms, Stephens.

Hey, guys. Just a couple more. Can you update us on use of cash? I mean you guys are going to be generating a lot of free cash. You have obviously taken advantage of some of the debt markets here, and you kind of alluded that you could do that again going forward. But can you give us a little bit more color on kind of maybe even a longer-term kind of thought on uses of cash here over the next few years?

Well, that is a good question. It's a great, great issue to have in front of us. What are we to do with this big pile of cash?

But as we said, we are very shareholder minded. Price of the stock is one thing. We intend to continue distributions to our shareholders and that is our intent. Obviously, every quarter the Board of Directors makes the decision on dividends.

But we do believe that a good place to use some of the cash is in buying back some of these notes if we can get them at the right price, take down our debt. We can easily put in additional revolving type credit that we think, at least for the foreseeable future, would likely be a more suitable form of debt that you just use as a cushion of your cash flows coming in and going out.

But from a standpoint of CapEx, we have some projects that we are doing. They are not huge dollar amounts, but they are things that have incredibly quick paybacks so we will spend some on that. It's virtually impossible to determine what is going on as far as any available capacity that may come out in the industry.

We have always thought that there is going to be some shifting of assets happening. There will probably be more appetite to that now that the industry is doing as well. If somebody wanted to be out of the industry, sell at the peak, they still probably got a couple three years to go to get to the peak, but if they are thinking that way they may start. So we keep our eyes open on that all time.

But it's a nice problem to have is where are we going to put the excess cash that comes out. But that is pretty well it.

Okay and I have got one more question and I am not sure how much visibility you really have into this, but just wanted to get your opinion on -- you mentioned that your customers, a lot of them their tanks are kind of low, inventory kind of low right now. Just kind of looking forward, just with that in mind, just generally speaking, how much inventory can your customers really handle? Is that something that they can really buy up a lot of and when the time comes, or is it something that they can -- they just can't really physically handle a great deal of the TiO2 inventory?

I mean that really depends on the customer. We know that some of our large slurry customers have limits on how much they can store because it has got to be on rail lines and so they can only store so much. If you are talking about in powder form that is going to be subject to each customer's warehousing capabilities. So we don't know.

We would -- the big restriction would be on whether or not we have got the material to sell to them and whether we would want to do it all in that period of time. So that is probably a bigger restriction.

Yes, I think we are just -- taking John's comment there, as I mentioned earlier, is that we pride ourselves on having very good relationships with our customers and looking after their interests. We watch closely that one customer is not basically hoarding inventory and then we run out to supply some of our other customers.

A lot of these relationships go back very, very long period of time, so our strong desire is to supply whatever the customer needs. We have been off and on through the last couple years on allocation, where they just order so much but they can't get all of it. They have to either find some more or stretch what they have got.

But the ability for customers I think, ours and other producers' customers, to basically build big inventories is really limited by availability of the product. There is just not product out there to build huge inventories. In our case in particular, we don't want them to do that to be jeopardizing another customer at having the supply that they actually need.

All right. Well, thank you very much for all the insight and good luck going forward.

Thank you.

(inaudible) Analytics.

I am sorry my line got disrupted in between, but I just had one quick question. You talked about 2012, the ore cost significantly increases which probably you are going to see. So considering that you have had substantial pricing gains in 2011, do you think it would be feasible looking at it from this -- at this point that you get a significant amount of price increases in 2012 as well to cover up these cost increases?

Yes, I think it's very feasible. I think that at a very high level in short I think we have seen a shortage here in 2011. We expect the demand will grow at a faster pace than the supply of TiO2 will on an industry-wide basis and I think that, as Steve alluded to earlier, we don't think we are anywhere close to creating any demand destruction on a pricing level.

We think that the ultimate end user can accept the price increases as they flow down the chain, so we would expect that we will be able to pass along our ore costs. Now having said that, we haven't finished those negotiations and we don't know exactly what those numbers are, but we think that the overall dynamics of the industry allow for the shortage to continue into 2012 and we should be able to pass along those costs.

Okay, so just as a follow-up on this. Given the current issues around the US growth as well as European credit issues, do you think you are actually seeing new kind of pushback from the end users in the paints and coatings side? I mean, I would expect there to be some bit of pushback in terms of accepting price increases. So I mean is there no kind of issue there?

Basically, we are dealing with -- the volume levels are not affecting the price levels. The prices have been -- each quarter sequentially have been very significant increases and we expect that to continue on into next year. And decreasing price does not increase volume on an aggregate basis. The volume is whatever it's going to be.

It's not as price sensitive. Back years ago, price was the driving common denominator for everything, but in the last year, and we expect going into the next number of years, price of the TiO2 product is not going to drive the volumes. The demand is based on the need of the customers and what their downstream needs are.

A very big factor on this, as we have mentioned, is this is a very, very global market. TiO2 products are used worldwide. It's an easy product to ship, low cost to ship. It packs very easily. So again, depending on where the demand is strongest, you may ship more product into some of the non-western, non-European, non-US regions so you can adjust where the demand is.

No question, in the US the economy, especially if you read the papers a lot, I guess we are in a huge depression but we are not seeing that. We are just not seeing that the economy in US or Europe, and especially the rest of the world, is as bad as the headlines are in the newspapers and on TV. We are not seeing that.

Is it bad? Yes, it's bad. But it's not so terrible and we have seen that. We feel like we are very close to actually what happens out there in the real world economies and the demand has been very strong in the last year, two years when it sounds like the economies are just failing. So we see a huge disconnect between the news and what is reality out there.

But as the demand decreases, it doesn't mean a price decrease; it just means a shifting of where you sell your product. There is plenty of markets in the world and that is why we talk about global demand so much is that we can easily, from our company, as most producers can, service virtually any place in the world fairly easily and at fairly low cost. So we are -- it's not a specific region at all.

We do feel the pain, in US especially and Europe to some extent, but it's not as bad as the -- we don't think it's as bad as what the news out there is. But the key is that you can shift regions very easily.

Okay, great. Thanks for the clarification.

Andrew Lipman, T.A. McKay and Co.

Thanks for taking my call. I was wondering -- this is Tom McKay for Andy Lipman. I was wondering if you have any thoughts or comments on the recently announced transaction between Tronox and Exxaro.

I think our position would be that we are not going to comment on that transaction -- any questions you have about it I think you should direct them towards Tronox -- other than to say Exxaro was one of our ore suppliers and we don't feel that the transaction is going to negatively impact our relations with Exxaro on the ore side.

Okay, thanks.

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