Kronos Worldwide, Inc. (KRO) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the KRONOS Worldwide fourth quarter and full year 2011 earnings call. My name is Ann and I will be your coordinator 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, Ann. Good morning, and welcome to the KRONOS Worldwide 2011 fourth quarter and full year 2011 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 related 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 statements. Please refer to the earnings release for a discussion of some of the factors that could cause actual results to differ materially. In an effort to provide investors with additional information regarding the Company's results of operations, we will refer to certain non-GAAP information. We ask that you refer to the earnings release for a reconciliation of this non-GAAP information to our GAAP financial statements.

I will now turn the call over to Steve.

Thank you, Janet, and welcome to everyone participating on this conference call. In addition to Janet and Greg, with me today are several members of our management team. Rob Graham, our Executive Vice President; 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 want to give special recognition to our exceptional operating management team. Leaders of that team, including Doug Weaver, Dr. Ulfert Fiand, Klemens Schluter, Joe Maas, and Ben Corona have the talent and experience necessary to maximize the potential of the KRONOS business. These gentlemen, and the teams they lead, have built an organization with a long history of continuous improvement. Special recognition goes to our manufacturing and technical groups, who have an outstanding record of increasing production efficiency and capacity, generally with minimal capital costs. In 2011, these groups again broke all previous production records by making 550,000 metric tons of TiO2.

Our operating and financial results for 2011 were exceptional, as we were able to increase prices throughout the year to more than offset increased costs. Even with our 2011 sales volume down 5%, our operating income of $556 million was triple that of 2010. During the first nine months of 2011, we experienced strong global customer demand for TiO2 products, which continued to outpace supply. Demand for TiO2 products slowed in the fourth quarter, which we attribute primarily to seasonality and destocking of customers' inventories, in some cases to lower than normal seasonal levels. Some customers had built inventories of Ti02 higher than normal during 2011, to assure adequate supply and avoid production disruptions during the highest Ti02 demands periods. We anticipate a similar pattern may develop in 2012, as we again enter the highest demand periods and assurance of adequate supply becomes critical for many customers.

Although our fourth quarter sales volume decreased 19% from the fourth quarter of 2010, we were still able to implement selling price increases. Our sales price at the end of the fourth quarter was 11% higher than the end of the third quarter, and 46% higher than the fourth quarter of 2010. Our production facilities were operated at full capacity throughout 2011, even during the fourth quarter when our sales volume declined. This allowed us to rebuild our inventory at 2011 cost, which will positively impact our financial results in 2012. The global shortage of titanium ore feed stocks and rising prices will result in a significant increase in 2012 production costs. But we expect to implement TiO2 price increases to offset these higher cost.

As we have previously discussed, an extended period of low profit margins did not foster the investment in and development of ore supplies that are now needed to expand the TiO2 industry. We believe that the ore prices now in effect are producing the profits necessary for the continued development and expansion of ore supplies. We also believe that ore costs will stabilize and moderate as necessary, so not to become a major factor in hindering profit margin expansion in the TiO2 industry, which could in turn hinder TiO2 capacity expansion necessary to consume the additional ore supplies. We are partially hedged against ore shortages and cost increases. We currently supply 100% of our European sulfate production ore feed stocks from our mines in Norway and sell additional ore production to third parties.

We continue to believe the global shortage of TiO2 will last for several years, due to the constraints and time required to adding significant new capacity, especially for TiO2 premium grades produced through the chloride process. We expect the supply of TiO2 products to increase through various methods over time, but we believe the magnitude of such increases will not consistently exceed the expected global demand for TiO2 products in the foreseeable future. In conclusion, we can confirm that we believe the current and anticipated TiO2 industry conditions will result in strong profits and cash flow for the foreseeable future. Greg will now expand on some of the points I've touched on and review our overall financial performance, after which we will open this call up for questions.

Thank you, Steve, and good morning to everyone on the call.

We achieved record operating results in the fourth quarter and for the full year of 2011, primarily due to the favorable impact of higher selling prices for our main product, TiO2. We reported operating income, or segment profit, which is the term that we use in our earnings release, of $145.9 million for the fourth quarter of this year, compared to $62.5 million in the fourth quarter of last year. For the full year of 2011, our segment profit was $555.8 million, up from $185.8 million for the full year of 2010. Our average selling prices in the fourth quarter were up 46% as compared to the fourth quarter of last year and, as Steve mentioned, our selling prices at the end of the fourth quarter were 11% higher as compared to where they were at the end of the third quarter of this year. For the full year, our selling prices were up 40% on a year over year basis.

We continue to operate our plants at full practical capacity utilization levels, with our production volumes up 5% from 2010. The production volume that we achieved of 550,000 metric tons for the full year was a new record for us. Thank you, Klemens, and your team. We currently expect to operate our facilities in 2012 at production levels consistent with our 2011 levels. Our sales volumes for 2011 were 5% less than 2010, due primarily to the customer destocking, most of which occurred in the fourth quarter. On the cost side of the equation, and as we have talked about before and as expected, our raw material costs were higher, up $27.2 million for the quarter and up $75.1 million for the year, as compared to where they were last year, reflecting higher costs primarily for feed stock ore and petroleum coke. In addition, our maintenance costs were also up slightly, which is consistent with the higher production levels.

Going into 2012, we expect that the trend of these higher raw material costs are going to continue, led by significant increases in our feed stock ore costs. Overall, we currently expect that our per metric ton of TiO2 that we will produce in 2012 will be between 50% to 60% higher as compared to our production costs in 2011, largely driven by higher feed stock ore costs. Our cost of sales per metric ton of TiO2 sold in 2012 is consequently expected to be significantly higher as compared to 2011, but only after we have sold the TiO2 products that we have on hand in our inventories at the end of 201,1 the cost of which is a significantly lower than our expected 2012 production costs. And as Steve mentioned, we expect to implement TiO2 price increases to offset these higher operating costs in 2012. EBITDA for the fourth quarter was $157 million, up from about $73 million last year; and for the full year, EBITDA was about $600 million, as compared to $224 million from last year.

Our interest expense for both the fourth quarter and full year of 2011 was lower than it was from the comparable periods in 2010, primarily due to lower debt levels. The lower debt levels came about in part from the March 2011 redemption of EUR80 million principal amount of our senior secured notes, as well as about EUR41 million principal amount of our senior secured notes that we repurchased in open market transactions during the third and fourth quarters at an aggregate cost slightly less than par value. Our net income for the fourth quarter of 2011 was $85.8 million, or $0.74 per diluted share. This is compared to $36.4 million, or $0.33 per diluted share, in the fourth quarter of last year. For the full year 2011, our net income was $321 million, or $2.77 per share, compared to net income of $130.6 million, or $1.29 per diluted share, last year. And please keep in mind that our 2010 results include our previously discussed first quarter non-cash of deferred income tax benefit of $35.2 million, which is $0.36 per share, related to a favorable development of some tax matters in Germany.

In addition, our income tax provision in 2011 includes a provision for US incremental taxes on earnings that were repatriated from our German subsidiary of $17.2 million, which was also $4 million in the fourth quarter, and those earnings were used to fund a portion of the senior secured notes that we repurchased in the third and fourth quarter. In May of 2011, we implemented a 2-for-1 stock split, and so all of the per-share amounts that I have referred to this morning have been computed on a post-split basis, including for periods prior to the effective date of the split. Overall for 2011, we expect that our segment profit and net income will be higher than 2011, as the favorable effect of higher selling prices and higher sales volumes will more than offset the impact of our higher anticipated production costs.

At this point, that's the end of my remarks, and we will open it up for questions.

Thank you. (Operator Instructions) We ask that you only ask one question, with one follow-up, please. And our first question comes from the line of David Begleiter with Deutsche Bank. Please proceed.

Good morning. Steve, what is your forecast for TiO2 industry volume growth in 2012 and your estimate of KRONOS' volume growth in 2012?

As you know, we don't give any guidance and so I'm not going to -- this is Greg. I'm not to go into any specifics about our volume growth in a quantitative manner. I will say from a qualitative perspective, we expect our volumes to be higher in 2012 as compared to 2011. And in part, we have -- we continued to run our plants full out, even through the fourth quarter when the volume -- our sales volumes were kind of soft. But overall, we expect a volumes to be higher in 2012 as compared to 2011.

And just a follow-up on pricing. What is your expectation for pricing year-over-year for TiO2 in 2012 versus 2011?

Yes, and this is Greg again. We don't provide, again, a quantification of our selling price increases expectations. We have never done that historically, and we are not intending to do that. But I will say, as we talked about in our remarks, we do expect the industry dynamic to continue to result in increased selling prices, in part to offset the effect of the higher production costs. And we expect those selling prices to be implemented all throughout 2012.

And just lastly, how close are your current ore contract to spot prices right now after all your negotiations?

This is Rob Graham. We don't comment specifically on individual components of raw material costs and in particular, ore prices as well.

Thank you very much.

Our next question comes from the line of Frank Mitsch with Wells Fargo Securities. Please proceed.

Good morning. This is Sabina Chatterjee in for Frank Mitsch.

It didn't sound like Frank.

Just a question on COGS. In the fourth quarter, it looks like the number was exceptionally low, down about 10% year-over-year, despite a 17% sales increase. So I realize volumes were down, but as a percent of sales I would've expected maybe flattish results as opposed to down about 5% -- 5 points, sequentially. So can you just help us bridge that gap? Was it related to mix or purchasing? Any details there would be helpful.

This is Greg. There's probably a number of factors. One, you probably have a little bit of an FX impact related to the production costs, as compared to where our sales are all denominated. And again, we -- with the high production volumes that we had, we were able to spread our fixed production costs over a much larger quantity of production; and so as that flowed through our cost of goods sale, we got the benefit of that. And the latter is probably more a contributing factor than the FX.

Okay. And then just some clarification. The 50% to 60% increase in production costs you mentioned, is that a blended average or does it exclude the portion for which you are self-sufficient?

The 50% to 60% is a blended average for all of our plants, and that would include the benefit that we have -- that we self-source our ilmenite for our European sulfide plants. So that is all blended in there.

Okay.

But as I mentioned, the 50% to 60% does not reflect the benefit that we will get, primarily in the first quarter, from the selling of the lower cost production of the finished goods that we had on hand at the end of the year. The 50% to 60% is from a production level, not from a sales cost of goods sold level.

Okay. Got it. So when do you expect to have exhausted that supply of lower cost 2011 or -- is it after Q1?

Well, someone here said, probably about 3 days from now. (Laughter) But, I can't directly answer that question, because directly answering that question would be giving you some insight into our volume expectations. But I would say generally, if you go back and look at the trend of our sales volume, the bulk of that is going to be in the first quarter.

Okay. Great. Thank you.

And our next question comes from Edward Yang with Oppenheimer. Please proceed.

Hello. Good morning. If I think about, as you know there's tremendous amount of debate about the sustainability of the current TiO2 cycle, but when I step back, it just all comes down to really two things, supply/demand. Maybe addressing the first issue in terms of supply, given some of the concerns there are about ore inflation and TiO2 margins, for example Huntsman had said that they expected their margins to get hurt by that this year. What's your expectation in terms of industry supply growth, given these concerns about profit margins? Understanding that again, you are guiding towards profits to be up year-over-year in 2012.

This is Rob Graham again.

The long-term trends in the industry, we believe, are well in place. Even with the ore costs increases that have been implemented by ore producers, there have not been and we do not expect Greenfield plant to be -- new chloride Greenfield plant to be at reinvestment levels, given the current pricing environment. The supply and demand, you know we can get a little bit lost in the short term trends, but as emerging markets continue to grow and as the rest of the world continues to want Western style products and services, we are going to continue to see the long-term trend grow and the demand for TiO2 continue to grow. We do think the supply imbalance will continue, the long-term shortage will continue over time. But in the fourth quarter, and historically in the first quarter, producers tend to rebuild their inventories as the year progresses, and the rest -- there is some seasonality there.

So to answer your question, even with the ore price increases we don't believe that new plant -- at reinvestment levels. We do think long-term shortage stays in place. And we also don't believe TiO2 input costs into most producer products are sufficient -- a sufficiently high cost element to restrict demand for the products.

On the supply side, it sounds like your expectation is that supply going to remain very constrained. Does that apply to Chinese producers as well? Are you talking about the overall TiO2 supply market?

Yes. It is a global market. The Chinese market is not a big factor in our business. They have typically had a low grade product that is not -- it's the low-grade sulfate product, which is primarily used domestically. So the exports from China have not been a significant factor, and we don't really see them getting this technology. And eventually, they probably will, at some point in time, but we actually don't see that being a significant impact in the long-term trends for the industry.

Aren't they grappling with higher ore prices as well?

Absolutely.

Okay. Just final question on the demand side, you touched on that a little bit, but maybe thinking drilling more into the near-term, clearly fourth quarter volumes down 19%, that's an aberration. You can't really extrapolate that. But in terms of the recovery from that, what are you seeing in terms of volume trends in the short term? And more importantly, when do you think that industry volumes will get sold out again?

Well, we don't comment specifically on volumes or volume -- current volumes. We have actually seen, and we're just heading into the high demand season for TiO2. But we are seeing -- it depends on the market. It's a global market. Some areas of Europe are doing particularly -- are doing reasonably well. North America is not just stabilizing, it is better than it has been. We are seeing a good market here in North America. Certain export markets are very strong right now. You know, we all saw the contraction in the markets yesterday based upon the Chinese announcement. But again, Southeast Asia and Asia is also a growing market. It's part of the emerging markets that we see.

So we have not seen anything to indicate that demand is not there and that this will not be -- demand is reasonable going into 2012. Again, that goes back to Greg's comments about our volume expectations, as well as what we think, in terms of our sales volumes for the year.

Ed, this is Brian Christian. Just to expand on that a little bit further. Rob is exactly right. TiO2 is a global product. The transportation costs are minimal. We can ship TiO2 anywhere in the world. And with the price increases that we've seen, those same transportation costs have become an even smaller percentage. So it's really given us a lot of flexibility on those ands. You're exactly right. There was what we would call a pause in the fourth quarter, due to some things that Greg and Rob have already walked you through, the tightening of China's fiscal policy, euro zone concerns back in the fourth quarter. Things have definitely started to improve in 2012. Greg mentioned that we do anticipate sales volumes to be higher in 2012.

And to answer specifically as to when we see the shortage conditions coming back into place, I couldn't give you an exact time. There is going to be general short-term fluctuations in the market, but we maintain the position that the overall long-term market dynamics have not changed and that we are still in a -- over a long period of time, a shortage condition, because we don't the supply coming -- new supply coming online anytime soon. And we see demand continuing to grow on a global basis, as global GDP continues to expand, specifically in the export markets. And as Rob mentioned, North America's recovering strong and there are parts of Europe that are stable as well, and looking positive there. So we still think that overall there is a shortage supply, but there's going to be fluctuations from quarter to quarter or month-to-month.

Okay. Thank you for the color.

And our next question comes from the line of Gregg Goodnight with UBS. Please proceed.

Good morning, all. Your production volume, 550,000 metric tons, is over your former stated capacity of 525,000. Are you going to restate your nominal capacity for 2012, and what would that be?

As I said, our volumes were very, very strong. And it wasn't -- it was really -- we didn't spend a lot of money to achieve this. It was more kind of an enhanced focus on operating efficiencies. Not that we didn't focus on that before. What our name plate is, yes, we had talked about it in the low 530s. From our perspective, I think we think we have set a new bar at 550,000, and would expect to continue to try to achieve -- at least achieve that 550,000 for 2012.

Do you have any specific debottlenecking projects on the slate that you're going to execute this year or next year?

We have a number of -- this is Rob Graham again. We have a number of projects that will increase efficiency and increase production, depending on the plant. Whether they are specific debottlenecking, that terminology -- we don't have anything major planned in the next year or so. But we have found that through various process technology improvements, and Steve referenced this in his opening remarks, we have been able to increase the efficiency and find production increases incremental at each of the plants without a significant capital investment. So we expect that trend to continue. It will not be probably at some of the rates that we have seen previously, but we've been able to run our plants consistently well over the last couple of years, and we continue to see process improvements and proprietary technology being applied to increase our production.

Okay. Thanks for that answer. A follow-up question, if I could. The ore prices for the synthetic retail seem to be going up faster than ilmenite. Could you comment, at least qualitatively, on the margins of the sulfate-based process versus chloride process. Do you look for those margins to maybe converge or come closer together in 2012?

This is Rob Graham again. You know we don't comment specifically on the different grades and different products that we have, in terms of the margin expectations. You are correct that ilmenite prices have not, for TiO2 content, has not risen as much as the various chloride grades. So there does tend to be a difference in that. However, again, we don't really go into specifics beyond that. But we do have a significant sulfate presence in Europe, and we also have some in Canada, out of North America as well. So that will actually help margins during the year.

Okay. Thanks for your answers.

And our next question comes from the line of Bryan Cross with UBS. Please proceed.

Hello, and thanks for taking my question. Can you give us a flavor in terms of what percentage of the ore that you need to purchase is negotiated on a quarterly basis versus semiannual basis? And then, my second question is along the same lines. I noticed your Exxaro contract will expire at the end of December, 2012. What are your plans to secure ore after that? Thanks.

Well, we have -- we don't specifically comment on the differences between quarterly; semiannual or annual pricing. We have had a relationship and a contract with Exxaro. We have not -- we tend to negotiate those contracts and look at our requirements towards the second half of the year, so I can't really specifically comment on our expectations with respect to Exxaro beyond the current year. We have had a relationship with them, and we would expect that we -- that relationship to continue, if we desire it to.

Thank you.

And next question comes from the line of David Begleiter with Deutsche Bank. Please proceed.

Thank you. On volumes, in the past, in 2010, your volumes on -- your sales volumes pretty much equaled your production volumes in 2011. Because of the weak Q4, your sales volumes fell well below your production volumes. Would you expect, then, 2012, in order to equalize these levels, that sales volumes would exceed pressure volumes by the same -- by that roughly 45,000 tons which it fell short of in 2011?

We do expect -- again, I can't comment specifically on volume expectations and total volume expectations. But clearly, if we're running plants at full capacity, we expect our sales volumes to meet or exceed those volumes.

If you just take that argument forward, if you do -- that would imply volumes of up about 16% year-over-year, in order to get back to perhaps year end 2010 inventory levels. If you produce at 550,000, adding that 45,000 of excess year-end inventory. That's up 16% year-over-year. Whom do you expect to gain share from? Because Dupont' s forecasting volume growth of roughly 0% to 2% in TiO2, and the paint producers are making headway in reducing TiO2 usage. Do you expect to gain share in 2012? Is that a fair characterization?

I think -- that is definitely part of the answer. I think that there's a component to it, but we certainly believe in the long-term dynamics of a shortage existing and that there is going to be demand out there that we can achieve and fulfill without taking market share. We continue to believe that the long-term demand for TiO2 is going to be an excess of supply, so we can grow volumes without taking market share. But absolutely taking market share is also a good thing as well, and we think that there is some opportunities in certain markets to do that. And we see the market as a very -- I totally lost my train of thought. I apologize.

Let me just expand on one thing Brian was talking about. Particularly in the export and emerging markets, as this demand grows and the consumers in those markets want higher quality products, the demand does increase. And again, the market share, you know, the overall pie becomes bigger, so we can grow and grow in those volumes without necessarily taking market share. But our hope and expectation is always that we grow market share as well.

I remembered where I was going with that. I apologize for that. In 2011, we also -- remember that in the high demand part of the year, in the second and third quarter, we were in a position where we were completely sold out and turning away orders. And we feel with the inventory build we had in the fourth quarter, we will be a position this year to be able to meet that excess demand in those peak markets, and that should also contribute to the higher volumes in 2012.

Brian, is it fair to assume that, that 45,000 tons of volumes, which exceeded sales in 2011, you'll equalize that, or normalize that by year-end 2012? Is that the goal?

Our goals are always extremely high, and I don't think I can comment on what an absolute target would be.

Thank you very much.

And our next question comes from the line of Cheryl Van Winkle with Independence United Capital. Please proceed.

Yes, hello. First question is, when you say that you're going to be up 50% to 60% per ton of TiO2 in 2012, once you are finished with the 2011 inventories, are you referring to total cost of sales per ton of TiO2 or some more narrow set of costs, like raw materials or --?

No, the 50% to 60% is total fixed variable, total production cost per metric ton of TiO2 produced.

And is there a difference between production cost and cost of sales per ton? Is there some other factor in there between those two? I'm just trying to --

As the inventory that we produce in 2012 is sold, that production cost per ton would be reflected in our cost of goods sold.

Okay. So that would be everything. It would include maintenance costs. It would include --

Exactly. That's correct.

Okay. And then secondly, did you say what your net debt was at year-end?

$350 million, approximately. There is only $360 million outstanding on the KII note. So subtract cash balance of what -- was it 80?

So 350 minus 80, so about 240.

Right.

Okay. I missed the second reason, somebody was asking about why fourth quarter cost of sales seemed low, or low relative to what one might have expected. You gave two reasons, and I missed the second one.

The second, which was the primary factor, was because we continued to run the plants all-out and achieve the exceptional production volumes. The fixed cost got spread over a larger volume, and so therefore the fixed cost per metric ton of TiO2 that was sold, that flowed into cost of goods sold, was lower.

Okay. Great. Thank you.

And our next question comes from the line of Trey Grooms with Stephens Incorporated. Please proceed.

Hello. Good morning.

Good morning.

Quick questions. First off, the inventory levels are obviously running higher at the manufacturing level for the industry kind of coming out of the fourth quarter. But just kind of broadly speaking, could you talk about what the inventory levels look like throughout the channel, like at the buyer level? We know they were very short for quite some time. But how does that look now, relative to kind of how it has been? If you could just give us some broad color on that, please.

This is Rob Graham. We don't specifically comment on -- and really can't give you a view into buyer inventory levels. As mentioned earlier, there is a seasonal build. And granted, it was lower than normal in fourth quarter. And there is some build of inventory, typically as customers come back in the first quarter. But the seasonal trends, as we have kind of explained -- it appears that certain markets are really pretty good right now as well, and there is some weakness in certain other markets that are well-publicized. But the overall trends -- we don't see anything out of the ordinary in terms of a typical year developing right now.

Okay. That's very helpful. Thank you. And then, looking at your comments on the ore industry, you expect ore costs increases to moderate at some point. What are you seeing in the ore industry, I guess, that leads you to believe that these costs will moderate at some point down the line? And are there any -- I guess could you just talk about the fundamental differences in the ore industry that will make it I guess more difficult for them to increase prices relative to the TiO2 industry, as we kind of look out longer-term? Because it does sound like you expect the TiO2 industry supply demand dynamics to remain very favorable for the foreseeable future. Just trying to get a feel for the differences there. Thank you.

Trey, this is Brian. A few things to comment on there, as it relates to ore. As Steve mentioned in his opening remarks, the ore industry has hitched its wagon, for lack of a better explanation, to the TiO2 industry, and they been able to achieve some very significant price increases. Hence, Greg's comments on our costs increasing. And we believe that the profit margins that they have been able to achieve at this point have allowed them to reach reinvestment levels, hence why you're seeing so many projects being announced and coming online here in the relative short-term, over the next couple of years. So that's why we think that, as the new supply comes online, that is probably one of the biggest data point as to why we think that we are reaching a point of stabilization in the ore prices.

And to answer your follow-up question as to why that's different than what we see in the TiO2 industry, I think we would get more into a high level conversation about their barriers to entry. I think there is higher barriers to entry in TiO2 than there are in ore. TiO2 bearing feed stock is extremely abundant in the world. It's all over the place. Yes, there is a high amount of capital required, but we think it is probably relative, while still a high barrier to entry, relative to the TiO2 industry, it is not as high to go in and create new supply in the marketplace. And at these margins, I think you'll see a lot of people who are interested in developing new ore bodies.

The biggest thing that differentiates us on the TiO2 side is the proprietary technology that only a few of the producers have to create new chloride-based plants. And as you know, and as seen from a lot of the recent press articles, that it's very highly darted. All of the major players defend that aggressively. And we feel that, that's probably one of the largest things that is going to create that separation that you were referring to in your question.

Okay. And just on that, do you have any sense of timing of when this additional capacity in the ore industry could come about?

I think we would generalize that by saying in the next couple of years, I think, is probably a fair estimate. Obviously, when you're talking about bringing on a new ore body, there is a lot of potential for variance in that. So I think that's probably about as specific as we would like to comment on.

Okay. That's fair. And then, just to make sure I heard things correctly. The cost per unit, with your guidance, increase of 50% to 60%, just to make sure I understand. It does reflect being vertically integrated with most of your ilmenite needs, but does it reflect the impact from being long ore or selling ore to third parties?

This is Greg. You are correct. The 50% to 60% does reflect, on the cost side, does reflect the benefit we have of being vertically integrated with our ilmenite mines in Norway supplying 100% of our European sulfate. But what that does not reflect is the benefit we would get everything else being the same, because we don't consume 100% of that ore. As you mentioned, it's only about one-third of that production that we consume internally, and the other two-thirds of the ore that we produce we sell into the third -- in the open market. And with the market price of feed stock ore going up, it's reasonable to assume that the selling prices for that excess production to our customers would be going up as well. That benefit is not inherent in the 50% to 60%. That 50% to 60% is only on a -- looking at a cost side.

Is there any way for us to ballpark what the impact might be, looking into '12, or you know if not, maybe even looking backwards into '11 kind of what impact that but could have been?

No, we don't go into specifics with respect to the revenues from our mine. I would just say that if you're looking at the market price for what's happening in the feed stock ore, I would just say keep in mind that because the TiO2 content of the ilmenite that we produce is lower as compared to feed stock for a chloride plant, for example, directionally the selling prices would be going up with the market price of ore. But the magnitude of the increase would not be as much as you might see with the increase in the market price for chloride feed stock, again because the TiO2 content of our ilmenite is lower.

Okay. Thanks a lot for answering my questions, and good luck.

And our next question comes from the line of Graham Morris with Contrarian Capital. Please proceed.

Hello. I had a question on fourth quarter production. It grew by 5%. How much of that was just the capacity utilization going up to full capacity and how much of that was debottlenecking?

(Multiple Speakers) We don't actually look at it that way, but I think -- we are pausing here because we don't look at it that way. It's a combination of factors. There is a continuous process of trying to improve production efficiencies throughout each of the plants. And we get -- we've just been able to move things here and there at each of the plants. And since we operate them pretty much the same way in each case, when we find something in one plant, we can adopt it and implement it at another plant, which enhances the ability and sort of leverages the knowledge base that we've got.

Okay. Great. Thank you.

And our next question comes from the line of Gregg Goodnight with UBS. Please proceed.

Hello. You mentioned that some parts of Europe were doing well. I'm just curious as to your view of European demand. Do you expect it to be flat year-over-year? Is there some weakness there that perhaps you could have volumes -- sales volumes down in Europe, or what is your view that is baked into your overall view?

Well, this is Rob again. We don't look at Europe as a unitary market. So when we talk about it, you know, northern Europe, there are certain economies that have been strong and continue to be strong throughout there, where we see the issues are really very much in the marketplace. And as those tend to get resolved, then we -- it's the southern tier of Europe that is weak. If they get the fiscal house in order and if some of the other issues get resolved, we expect those areas to improve and we hope that they will improve over the course of the year. And even in that area, some of those markets have actually been stronger than we've expected, because business goes on and people still demand the product. You've got Eastern Europe, which has been a bit weaker. But generally speaking, the Northern European economies and the Nordic areas have been -- are good markets and continue to be good markets and have been very strong.

Okay. One final question, if I could. TZMI has reported 2011 global production at 5.3 million metric tons. And if I have my capacity number correct, that is equivalent to about 88% global operating rates. Does that sound right to you guys?

There's no way for us to know.

We don't know.

Okay. The market's acting like it's that tight. But, who knows? Okay. Thanks, gentlemen.

I think one of the biggest things that we can add to that is it's tough to -- when you're trying to go off a nameplate capacity, that's a really tough initial step in your analysis, because a lot of times people don't produce anywhere close to the nameplate. And then in some years, KRONOS, we were able to exceed our nameplate capacity by a fairly significant amount, due to our proprietary technology and our expert management team. So I think that puts a lot of noise in your analysis.

(Operator Instructions) And our next question comes from the line of Stephanie Renegar with JPMorgan. Please proceed.

Hello. Thank you very much for taking my question. Just a very quick one on the bonds. You've been taking these down via open market purchases and a redemption. Just wondering your thoughts on doing a Euro versus a dollar issue, as well as taking out the bonds immediately with another set of bonds or with cash versus a credit facility. Just methods of refinancing, considering they are coming due in April of next year.

I don't think our guidance has changed on that since the last call or since we filed the K. We certainly intend to refinance the KII bonds prior to their maturity. The vehicle and the geographic area where we do that is still open, at this point. We haven't made any decisions on whether they are Euro or US denominated, and in what type of financing instrument.

All right. Thank you very much.

Ladies and gentlemen, there being no further questions in the queue, this concludes today's question-and-answer session. We thank you for your participation in today's conference, and this concludes the presentation and you may now disconnect. Have a good day.