Kronos Worldwide, Inc. (KRO) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Kronos Worldwide First-Quarter 2012 Earnings Call. My name is Anne and I will by 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 Anne. Good morning and welcome to the Kronos Worldwide 2012 First-Quarter Earnings Call. With me this morning, are Steve Watson, Chief Executive Officer, and Gregg 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 to 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 Gregg, with me today are several members of our management team. Rob Graham, Executive Vice President; Kelly Luttmer, Vice President, Global Tax Director; John St. Wrba, Vice President, Treasurer; Tim Hafer, Vice President, Controller; and Bryan Christian, Vice President, Strategic Business Development. I also want to give special recognition to the leaders of our exceptional operating management team. Including Doug Weaver, Dr. Ulfert Fiand, Klemens Schluter, Joe Maas, and Ben Corona. Our Corporate and operating management teams are fully integrated, providing for a continuous flow of information and data both ways, which assists us in making informed and timely decisions.

Our operating and financial results for the first quarter of 2012 were excellent, and continued to be driven by customer demand and manufacturing efficiency. We set new records for the first quarter in both production and sales volume of our TiO2 products. Our TiO2 segment profit for the first quarter of 2012 of $212.9 million set a new record and was more than double our segment profit for the first quarter of 2011. We expect the overall global supply and demand balance for Ti02 products that we have experienced for the last three years will continue during the foreseeable future with intermittent periods of availability and shortage.

There are significant constraints to adding major new Ti02 production capacity, especially for premium grades of Ti02 products produced through closely held proprietary chloride technology. Major capacity additions both Brownfield and Greenfield require considerable investments of capital and time, as well as an expectation of sustainable profit margins necessary to financially justify the investments. An additional impediment to significant Ti02 capacity expansion has been the shortage and increased cost of raw materials, in particular, ore feed stock. An extended period of low profit margins did not foster the investment in and development of ore supplies that are now needed to materially expand Ti02 capacity. With the significant increases in the price of ore feed stock during 2011 and 2012, we believe most ore producers have reached profitability levels that financially justify development and expansion of additional ore supplies, several of which are currently underway and expected to become available beginning late this year.

We also believe that ore costs will stabilize and moderate as necessary so not to be an impediment to profit margin expansion in the Ti02 industry, which would in turn hinder Ti02 capacity expansion. With the increased ore feed stock costs, additional significant increases in the selling price of Ti02 products will be necessary to produce the sustainable profit margins necessary to financially justify most major Ti02 production capacity increases. We continue to believe the growing worldwide demand for high-quality Ti02 products will exceed supplies increases in the foreseeable future. We expect our 2012 sales volumes to continue at a higher rate as compared to 2011, and that our 2012 sales volumes will exceed our 2012 production volumes.

While the costs of our raw materials are expected to be increased significantly in 2012 compared to 2011, we believe our annual segment profit will increase due to higher average selling prices and sales volumes for our Ti02 products. Additionally, given our expectation that the global supply of Ti02 products will remain tight in the foreseeable future with intermittent periods of availability and shortage, we expect our profitability and cash flows to remain strong beyond 2012.

Greg will now expand on some of these points and review our overall financial performance, after which we will open this call up for questions.

Thank you, Steve and good morning to everyone. Steve mentioned, we achieved record operating results in the first quarter this year, primarily due to the favorable impact of higher average selling prices for Ti02. We reported operating income or segment profit which is the term that we use in our earnings release of $212.9 million for the first quarter of this year up from $104.2 million in the first quarter of last year. Our average selling prices in the first quarter were up 34% as compared to the first quarter of last year. And our average prices at the end of the first quarter of this year were comparable to where they were at the end of 2011. Customer demand rebounded from the softness we experienced in the fourth quarter of 2011, particularly in North American and export markets. Our sales volumes in the first quarter of 2012 were 130,000 metric tons, up 5% from the first quarter of last year and that sales volumes in the first quarter of this year represented a new record for us.

We continue to operate our plants at near full practical capacity utilization levels, and our production volumes were also up about 5% on the quarter. The production volumes of 140,000 metric tons for the quarter were a new record for us as well. We currently expect to operate our facilities for the remainder of 2012 at production levels consistent with or slightly lower than the levels we achieved in 2011. On the cost side, and as we had discussed and expected, our raw material costs for the quarter were about $27 million higher reflecting higher costs primarily for feed stock ore and Coke. We expect further increases in our raw material costs during the remainder of the year.

Overall, we expect that the per metric ton cost of Ti02 that we produce in 2012 will be about 50% to 60% higher as compared to our per unit cost of Ti02 that we produced in 2011, largely driven by the higher cost of feed stock ore. However, it's important to keep in mind that our cost-to-sales per metric ton of Ti02 sold in the first quarter of this year is significantly lower as compared to what we expect that per unit metric ton of Ti02 sold for the remainder of the year at a substantial proportion of the Ti02 products we sold in the first quarter of this year were produced with lower-cost feed stock ore.

As Steve mentioned, we expect to implement additional TiO2 prices during the remainder of the year to offset these cost increases. EBITDA in the first quarter was about $224 million, up from about $115 million in the first quarter of last year. Our interest expense for the quarter was lower than the first quarter of last year, primarily due to lower debt levels that resulted from the March 2011 redemption of EUR80 million principal amount of our senior secured notes as well as an additional EUR40 million principal amount of our senior secured notes that we purchased in open market transactions in the second half of 2011.

With respect to the approximately EUR279 million principal amount of these senior notes that remain outstanding as of the end of March, we haven't commenced efforts to refinance those notes. We've engaged a financial advisor to assist us in these efforts. As the definitive terms of any such refinancing have not yet been determined, and while there's no assurance that we would be able to complete a refinancing on terms acceptable to us, we do believe that we will be able to refinance the remaining notes before their April 2013 maturity date.

Our net income for the first quarter of this year was $136.9 million or $1.18 per diluted share, up from $60.3 million or $0.52 per diluted share in the first quarter of last year. And as a reminder, in May of last year we implemented a two-for-one stock split and all of the per-share amounts that I've discussed this morning, including the EPS from the first quarter of last year, are computed on a post-split basis. For 2012, as Steve mentioned, we expect our segment profit and net income will be higher than 2011 as the favorable effects of higher selling prices and sales volumes will more than offset the impact of our higher anticipated production costs.

At this point I'll turn it back to Anne to open up the line for any questions.

(Operator Instructions). Trey Grooms with Stephens Incorporated.

Good morning. Couple questions. You pointed to the lower cost inventory that was built in the fourth quarter impacting the 1Q, could you give us a little more color? Can quantify what that impact was in the first quarter?

I think the quantification we did -- I'd go back to our guidance in terms of the 50% to 60% increase in our production costs that we expect for the Ti02 that we're producing this year as compared to last year. And when you look at the fact that substantially all of the products we sold in the first quarter this year were produced last year. I think that gives you the quantification I think you'd be looking for.

Okay. All right, is it safe to say that most of that inventory that was built the fourth quarter has been exhausted as you went through 1Q?

Yes, that's a very reasonable assumption to make.

Okay. And then if you look at on the same subject here, the 50% to 60% this year increase that you're expecting, can you talk about how should we look at that, that cost ramp as we kind of look across 2012?

Yes, the 50% to 60% is for all of 2012. So there is an average, so to speak, which is probably what the question that you're getting to in terms of the costs throughout the year. How that levels out on a quarter-by-quarter basis, we have to wait to see till we get throughout the year. I'd point out that as we've talked about before, our ore-- some of our ore contracts have annual pricing, some have semi annual pricing and some have quarterly pricing. So --

Okay, so -- but with that, the assumption would be that you might see little bit more intense ore costs as the year progresses? Is that kind of the way to think that?

Trey, this is Rob Graham. I -- we do have ore price increases throughout the year. We do expect to see a moderation of those costs as the year progresses. We are in discussions with our ore producers pretty much on a very regular basis and we do anticipate -- while we do anticipate increases throughout the year, we to anticipate a moderation toward the end of the year.

A moderation in the amount of increases that are being implemented?

That's correct.

Okay. Got you. And then the last question, and I'll turn it over to somebody else. You guys' volume in the quarter was up 5%, far exceeding a lot of the public comps that are reporting volume kind of down, mid teens in the first quarter. And on the last call, you guys mentioned possibly going after share this year, is this kind of volume out performance? Do you feel like you've gained share in the quarter? Or is it a geographic mix? Or -- how do we think about the true up between you guys' volume and what we've seen in the rest of the industry?

Trey, this is Rob Graham again. It's a combination of a number of factors that you've mentioned. One of which is we sell based upon a combination of factors, one of which is our technical service. We look at -- we expand into markets that are strong. We went through a period where we believed that we had some advantages through our production capabilities and so we've explored particular opportunities to expand share in particular markets where markets are strong. We see strong and growing demand in North America, for example, some areas of northern Europe and in certain areas of the export markets as well. So we've gone after all of those and tried to be very strategic in the various opportunities through the quarter.

Okay. And I'm sorry, just a follow-up to that. On your geographic mix then, so would it be safe to say that it has shifted somewhat relative to what it has been in the past? Because I know historically you guys have been -- had your biggest exposure I believe to Europe, so has that geographic mix kind of shifted this year as you focus on these different markets?

I'm not sure that I would exactly phrase it that way. We think the long term and our market share in Europe is obviously one of our strongest markets. So there's not been an appreciable shift in the focus in particular areas, but we are pursuing more aggressively in areas of stronger demand and where we do think our products, the higher grade products -- in both sulfate in chloride products that we produce we have very high technical expertise and very high-quality. So those markets have held up a bit better, and we're pursuing those markets very aggressively.

Okay. Thanks. I'll jump back in queue.

(Operator Instructions) David Begleiter with Deutsche Bank.

Hello, this is Jim Sheehan sitting in for David. Good morning. Could you comment on the situation you're seeing in the Asia market? Is there still any destocking going on in that market or is that finished and what are your expectations for demand in Q2?

Asia is a very big, broad market when you talk about that. And our products, particularly -- and the way we look at this is, we go after the very high quality markets. So if you talk about China in particular there's been a lot of talk about the drop off of demand there. But again, we tend to sell to a fairly narrow market in that range. So, and we've continued to pursue those markets. Other areas of Asia are stronger and we've continued to look at those. Chinese producers are having the same problem, I believe that has affected the industry as a whole and the lack of ore supply. They also have lower quality sulfate production almost exclusively, which simply can't go in to many applications. So whether they are destocked fully at this point, I can't answer that particular question. But at the same time, we are seeing the markets that we're pursuing are the stronger markets in all of -- throughout Asia.

Okay. And could you also please comment on how much Ti02 demand into the coatings industry is currently being curtailed by Ti02 extender's and substitutes and so forth?

We don't really view the -- any -- we're not seeing an appreciable impact in our demand from the coatings industry trying to use extender's. These are things that have been around for a long time. They've always tried to use these things. But at the end of the day, there's really no effective substitute for Ti02, and the more extender's they use it negatively impacts the quality of the product. So this is -- at the end of the day, it's really nothing that we have any appreciable concern about in terms of the overall demand environment.

And just to follow up slightly on that, is that what -- we have not seen any real difference. Extender's have been used for many, many years, and some of the products have been on the market for 20, 30 years or so. There has not been any significant shift to trying to use more of those. Now there are many new announcements or several different new announcements of different extender's out on the market, but they have not had an appreciable change in the overall ability to substitute for Ti02, because Ti02 is a very high-quality product.

Thank you very much.

Edward Yang with Oppenheimer.

Hello, good morning. With the increase in the volume that you saw in the first quarter and expectation for better volumes throughout the year, do you expect to see price increases, new price increases start to get announce to offset some of that ore inflation you're seeing?

Yes.

Did you get all of the pricing that you announced for the January 1 implementation? And how much was that in the first quarter?

Yes. It's all customer specific in terms of the way we look at this. Many customers took the entire increase. And certain geographies you may or may not have gotten, and then certain customers have certain particular under contractual agreements have other provisions that affect their pricing.

Okay, the reason why I ask is on a calculated basis it looked like your pricing was down somewhat sequentially. But was that currency and mix et cetera?

Yes. It would be not correct to say that our pricing was down sequentially.

Okay, and you expect further increases going forward?

That's correct.

Absolutely.

Thank you.

Gregg Goodnight with UBS.

Good morning, gentlemen. Could you please help me understand your cash flow from operations a little bit more? I'm looking at the inventory cash flow reported in your 10-Q, and if I'm correct here it was $126 million use of cash. And I look at the differential between your sales volumes and production volumes of 10,000 metric tons which would be about if I calculate correct, about $35 million to $40 million. So I'm trying to understand the difference between that $35 million, $40 million versus what you guys presented in your 10-Q as use of cash as inventory. Could you please help me understand the differential there?

The use of cash with respect to the inventories is driven by a combination of factors. One, is our production volumes were strong for the quarter. Slightly exceeding our sales volumes. But the biggest impact is on the cost side. Where the higher cost ore that we started to experience in 2012, as that runs through our production cycle the per unit cost of our inventories is up significantly as compared to what it was at the end of the year. And there's also probably a little bit of an FX impact in that as well. But the biggest impact is on the per unit production cost side.

Okay. So then --

And then also that also equated over to the receivables because we had a significant use of cash when you look at accounts receivable, that's resulting from the strong sales volumes we had in the quarter as well as a very high average price that we achieved in the quarter.

Okay, so mainly on the ore side then?

With respect to inventories, that's correct.

Okay. The second question or the follow-up. Were there any mark-to-market impacts for either products or ore that contributed to the -- your performance, you're earnings performance in Q1?

No, no. We carry our inventories at the lower of cost or market and there were no write-downs of the inventory on the basis that market would be less than cost.

Okay. Thanks for your help.

Silke Kueck with JPMorgan.

Good morning, thanks for taking my question. Can you tell me what percentage of your Ti02 sales going to paint at markets and which percentage go someplace else? And whether the volume increases in the quarter were related to -- were in the paint at markets or they were someplace else?

Generally speaking, this is -- where you're going into -- in the first, second and third quarters you're in the paint season. So I don't have those specific percentages in front of me, but the coatings market is the strongest. That being said, one of our strongest areas in terms of percentage overall is more than the industry average is in high-grade plastics grades as well. But this would be the time in the quarter that's when you begin to see the coatings market begin to -- going into paint season they tend to be a higher percentage than perhaps through the rest of the year.

And so then, where the volume increase is then mostly on the paint side or the plastic sides or both?

there have been some increases on both. But the overall if you're going to see a little bit higher percentage, you're going to see a little bit of higher percentage in the first couple of quarters of the year you're going to see a higher percentage going toward coatings just because it tends to be a bit of a seasonal market. But we saw increases in both the plastics as well as the coatings [grade].

Okay. Thanks very much.

David Begleiter with Deutsche Bank.

Hello, this Jim Sheehan again. Just wondering if you could comment on the pricing environment, given that you have more inventories that are being sold this year that are carrying over from last year? And also because of your efficiency gains, you have a higher level of production. Do you think this has begun to effect pricing in the industry? Or how do you think the dynamics are playing out there?

We believe that pricing based upon the supply demand dynamics over the long-term, that pricing is on a ling term trend upward. And we also believe that while there was a fair amount of destocking in the fourth quarter and the first quarter, we believe that this trend is still firmly in place and will continue going forward. Part of that, there are a number of dynamics that we've already talked about and talked about on the call regarding ore suppliers and their level of profitability and the constraints. But there's overall demand growing in -- worldwide demand for high-quality Ti02 in growth markets. That is not going to change. And so we do believe that price increases are consistent both with what our customers are telling us as well what third-party industry sources are telling us. We're on an upward trajectory here, and they will continue through for the foreseeable future.

I think it goes back to what Steve mentioned, is that when we look at the long-term dynamics of the industry, we just believe that there has to be an expectation of sustained profitability in order for there to be any appreciable material increase in the industry capacity, which is going to be needed to meet the long-term demand need. And the industry needs to have that expectation of sustained profitability, and in order to achieve that they have -- there's just going to need to be to be additional selling price increases on the part of the producers in order to (technical difficulty) result in that reasonable expectation for sustained profitability.

Okay.

Just to add onto what Rob and Greg mentioned and when I made the opening statement, is that I totally agree with the dynamics over the long-term meaning foreseeable future of several years. Is that the supply/demand balance is very close. And we're going to have periods where we've got a shortage, like we had quite a bit last year. And then we're going to have periods, especially in the fourth quarter and part of the first quarter when the normal paint season, the normal heavy buying season that inventory fills, and those usually get totally sold off during the paint season and as we had saw last year we ended up with a pretty severe shortage of materials during that period of time. And as Greg and Rob just pointed out, this is a global marketplace.

And I think sometimes people miss the point, because they hear about Europe. We sell predominantly in North Europe where the economies truly are very strong compared to south Europe. And North America is strong also, but I think one thing that sometimes people miss is that this is a very global marketplace. This is a product that could be made any place and shipped anyplace in the world very easily, and at a very low cost. So, as we expanded some of the things we focused on over this last year especially are those expanding marketplaces in the Far East, the Middle East, South America where the economies are growing, the usage is going up, and it is clearly the future of growth. None of that ends up reducing the amount of Ti02 that's used in the Western world. Western Europe, North America, predominantly. It's not a zero sum type of an equation.

So as we look at it, there just is not capacity that's going to come in the near term meaning several years that's going to satisfy this overall global demand. So as Rob and Greg just pointed out, our expectation, barring some total worldwide depression, not just recession, I think we're already been in that for several years. Is that, that supply/demand balance is going to shift more and more towards a shortage of supply on a consistent basis rather than this intermittent coming in and out where there's -- right now there's probably ample supply for most users, at least at this point. As we move through the paint season, we expect that, that amount of volume is going to be sold off and there likely will be shortages, at least in certain areas and or certain end products and especially for the lower margin type of users. And that predominantly is the big users like paint. If you can sell your product to a higher margin account, chances are that's where you will sell it to.

So I think when we look at it from our viewpoint, because we look at it on a long-term basis, we're very satisfied with the market dynamics that we see for a long period of time because we understand how long it will take for any capacity to come in to fill the shortage that is bound to continually get tighter and tighter over the next few years. So when we look at -- from quarter to quarter as Rob pointed out, some things are somewhat seasonal, the paint industry for sure in the northern hemisphere, Europe and North America. That is a stronger buying period than the other quarters. But as we're seeing these economies, especially South America as a good example, their seasons are kind of upside down because they're in the southern hemisphere. We're starting to see that global marketplace level out these seasons so we don't believe that, that will continue on into the future indefinitely.

So we do see that backdrop that we've mentioned several times, but we look at it from an annual basis and then we also look at it by multi year basis to make our decisions on what would we do. And as Greg just had pointed out, if the profit margins because the ore costs went up higher than the profit or the sales prices went up, margins didn't necessarily get squeezed, but they're not to that point where we believe it's financially justified to put in major capacity expansions. That's the backdrop of Greg's comment and of why we believe very strongly we're going to see much more significant price increases for Ti02 products. Without that, we doubt very much that anyone would be looking at putting major capacity expansions in. And once that decision is made, you have a number of years before that capacity that you could come on.

Thanks for all the detail. One more question on demand. You commented that in Q1 you saw particular strength in North America and you called out export markets. I imagine that these are the Far East, and Middle East and South America as you just referenced where the demand expansion is occurring. I was just wondering if you could provide some additional color on what particular X markets -- what particular export markets did you see strength in Q1?

Well I think you actually outlined most of them in your question. We have seen strength in South America. Asia outside of China has been strong. We see some areas in Africa and the middle and near East that are also strong as well. So, it -- there's a lot of talk about certain areas of weakness, but there are a lot of areas in the emerging economies that are strong and that's where we're pursuing right now.

Okay. Thank you very much.

Joe Altman with Compound Capital Management.

Hello guys. I saw in Bloomberg at the beginning of the month that Huntsman was not planning on bidding for the Rockwood assets. They thought that those assets would trade probably somewhere North of 7 times Rockwood's trailing 12 EBITDA. Would you guys contrast sort of your business with those assets that are being sold? And how should we think about the replacement costs of the assets that you guys have? I know it would take a long time to build those, but what kind of costs would be involved if somebody wanted to replicate the production capacity that somebody like KRONOS has?

Well, there's a couple of things that I think we ought to at least clarify in terms of -- Rockwood is a sulfate producer and we were the last Company to build the state-of-the-art proprietary chloride plant in the northern hemisphere so -- or in the Western Hemisphere. So when you really talk about the Huntsman assets or the Rockwood assets, I'm not sure that there's really a similarity between what we would refer to as an investment that we would make in terms of additional capacity. Because those assets are just different than what we would be investing in. We've talked about this previously. The cost of replacement is a four or five year period of time and it's probably for a state-of-the-art plant, it's $1 billion or north of that in terms of a production plant. So I'm not sure if that answers your question, but it's -- they're very dissimilar assets, and really something that we wouldn't comment further on.

And that $1 billion that Rob mentioned, that's not the all-in cost as well. There could be additional costs for infrastructure, plus when you look -- just the working capital investment that would be required given the current level of pricing in the industry for your sales as well as on the cost side for your inventory.

And there is one other point we should probably make is that given a constraint ore supply because of our European sulfate facilities are all supplied by our own mine. You've also got the consideration of even if you acquire an existing asset of securing ore supplies for that asset going forward. Which we don't have in our business.

When you mentioned $1 billion. What kind of production for the $1 billion, how much Ti02 do you think you'd be able to produce?

About 150,000 metric tons.

Got you. So about $1 billion for 150,000 metric tons.

And these are very, very rough estimates. As Greg said, it's really probably well north of that, but these are just very rough numbers we're talking about.

Got it. Thanks.

Trey Grooms with Stephens Incorporated.

Hello guys, just one follow-up here. You're expecting prices to increase further, but can you talk about -- now that we're kind of well into May, can you talk about how the April 1 price increases that were announced -- how those are going along thus far? Thank you.

We never comment specifically about particularly when we are in a quarter about the price increases are being implemented. I'll just go back and say that we do expect to achieve additional price increases throughout the remainder of the year.

Okay. Well, what about volume? Could you -- I know trends for 1Q were obviously very strong, has -- one of the things that has been driving some of the paint strength, at least in North America and maybe some other areas is weather. Can you talk about just kind of volume trends since the end of the quarter as we look through April?

We're very early into the second quarter, Trey. We really can't tell you that there's any trend developing at this point. Other than the fact that we're in paint season. Europe starts a bit later than North America does. But I can't really -- we can't really say that there's any trend developing at this point.

Okay. Thanks a lot.

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. This concludes the presentation. And you may now disconnect. Have a good day.