NLI Holdings Inc (NL) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the NL First Quarter Earnings Conference Call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If you should require assistance during today's call, please depress the zero, then star. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, President and CEO of NL, Mr. Lanny Martin. Please go ahead.

Thank you, and welcome, everyone. I have with me today Larry Wigdor, the CEO of our Kronos unit, and Robert Hardy, our CFO at NL.

As you know, some of the statements made today will be forward looking in nature, and such statements involve risks and uncertainties. Our SEC filings and press releases contain discussions of risks and uncertainties that may affect actual results, and actual results may be different than predicted today.

We'll start out with a quick overview of some of the information that is in today's earnings release. We reported earnings per share in the first quarter of 2002 of $0.13, which included a gain of $0.02 per share related to a litigation settlement with our former insurance carrier groups. As anticipated, first quarter earnings per share declined significantly from the prior-year period. This decline was primarily due to lower Ti02 selling prices.

First quarter 2002 operating income of $22 million was $30 million lower than the first quarter of 2001, primarily due to 15-percent lower average selling prices, excluding the effects of currency, partially offset by a nine-percent higher sales volume.

Excluding out-of-period business interruption insurance proceeds received in the fourth quarter of 2001, first quarter of 2002 operating income was $3 million higher than the fourth quarter on higher sales and production volumes, partially offset by lower Ti02 prices.

Operating margins declined from 23 percent in the first quarter of 2001 to 11 percent in the first quarter of 2002, reflecting the difficult pricing environment. Operating margins in the first quarter of 2002 were slightly higher than the fourth quarter of 2001, excluding out-of-period business interruption insurance proceeds.

Adjusting for unusual items, EBITDA decreased from $54 million in the first quarter of 2001 to $21 million in the current quarter. EBITDA in the first quarter of 2002 was computed using $8 million of depreciation and $9 million of net corporate expense. Excluding unusual items, 2002 EBITDA was comparable to the fourth quarter of 2001.

Excluding the effects of foreign currency fluctuations, Kronos' average selling price during the first quarter of 2002 was 15 percent lower than the first quarter of 2001 and was five percent lower than the fourth quarter of 2001. Kronos' average selling prices and billing currencies during the first quarter of 2002 were lower in all markets, as compared with the first quarter of 2001, with the largest decline in the European and export markets.

Compared with fourth quarter 2001, average selling prices decreased across all major markets. The rate of price declines slowed during the quarter, and average selling prices in March 2002 was less than one percent lower than the average for the first quarter of 2002. Average selling prices in the first quarter of 2002, including the effects of foreign currency fluctuations, were 18 percent lower in the first quarter of 2001 and six percent lower than the fourth quarter of 2001.

In the first quarter of 2002, the euro weakened five percent against the U.S. dollar, as compared with the comparable exchange rate in the first quarter of 2001. Sequentially, on average, the euro weakened three percent from the fourth quarter of 2001. Because of our cost structure, currency fluctuations do not specifically impact Kronos' bottom line.

Sales volume in the first quarter of 2002 of $112,000 metric tons was a record first quarter for Kronos and was nine percent higher than the first quarter of 2001, with European and North American volumes nine percent and 15 percent higher, respectively. Compared with the fourth quarter of 2001, sales volume was up 23 percent worldwide, with Europe and North America up 29 percent and 25 percent, respectively. We believe this increase in sales volume was primarily attributable to customers restocking inventory levels ahead of previously announced price increases. Sales volume in April continues to look strong as we head into the spring coating season.

Regarding our operating rates, due to the strong customer demand, we prudently increased our operating rates, as compared to the fourth quarter of 2001. We will continue to evaluate the various market indicators to keep an appropriate balance on inventory on hand to meet the needs of our customers.

Inventories decreased 6,000 metric tons during the first quarter and represent approximately two months' of sales. From an industry perspective, we believe producer inventory levels in the U.S. at the end of the quarter were about even with the end of 2001, while producer inventory levels in Europe declined over 15 percent during the quarter. As compared to March 31, 2001, producer inventories at March 31, 2002 were up slightly in the U.S. and down over five percent in Europe.

Capital expenditures in the first quarter were $5 million; corporate expense for the first quarter was $10 million, or $3 million higher than the prior year, primarily due to higher environmental expenses and legal expenses.

Interest expense in the first quarter of 2001 was $6.4 million, down nine percent from the first quarter of 2001. As you know, in March, we were deemed $25 million of our outstanding senior notes at par with cash on hand. The P&L benefit of this redemption will be reflected in future quarters. Furthermore, to optimize our capital structure and reduce our cost of debt without compromising financial flexibility, we are reviewing various refinancing options regarding these senior notes.

Cash from operations in the first quarter provided $13 million in cash. Operating cash flow was slightly higher for the first quarter of 2002, compared with 2001, due primarily to a reduction in working capital in 2002.

Turning to our share repurchase program, during the first quarter, we purchased 228,000 shares at an average cost of approximately $14 per share, for a total of about $3 million. At the end of the first quarter, approximately one million shares are available for purchase under the existing 2001 repurchase program.

Cash, restricted cash and restricted marketable debt securities at March 31, 2002 were $157 million, down $40 million from year-end 2001. Restricted cash and restricted marketable debt securities was $81 million at March 31, down $2 million from year-end 2001.

Net debt at the end of March 2002 was $61 million, up $17 million from the end of 2001. As of March 31, 2002, shareholders' equity was $376 million, down $11 million from year-end 2001. The change in equity was primarily a result of $6 million of earnings, offset by currency translation losses of $3 million, $10 million of dividends to shareholders, $3 million of treasury stock repurchases, and an adjustment to our available for-sale portfolio of securities of $1 million.

Turning now to our outlook, regarding that, as you all are aware, all major Ti02 producers announced price increases in February, between five percent and eight percent in markets around the world. We expect to realize some price improvement in the second quarter. The extent of this realization and our ability to raise prices further will depend on Ti02 market conditions and sustained economic growth worldwide. We expect demand for our product in the second quarter to be slightly better than the first quarter and significantly better than the second quarter of 2001. If global economic recovery is sustained, demand should be solid for the rest of the year.

We estimate second-quarter earnings per share will be in the range of $0.14 to $0.20, and that full-year earnings per share should range between $0.35 and $0.60, excluding unusual items.

We continue to have a positive long-term outlook for the Ti02 industry, and for NL, in particular. Even with our conservative short-term view, we believe that the long-term future growth in Ti02 consumption should continue to exceed the industry's capacity growth rate.

That concludes my formal remarks. I'd now like to open the call to any questions. Carol, if you could do that for us, please.

Thank you. Ladies and gentlemen, if you wish to ask a question, please depress the one on your touchtone phone. You will hear a tone indicating that you have been placed in queue, and you may remove yourself from queue at any time by depressing the pound key. If you are using a speakerphone, please pick up your handset before depressing the number. One moment for the first question.

And the first question comes from the line of with Goldman Sachs. Please go ahead.

Yeah, actually, this is . Good morning. The first question has to do with just the choice between paring down inventories further and ramping up production volumes or production rates. You had that choice in the first quarter. You did pare down inventories some, but you also ramped up your operating rates. Looking back, you know, would it have been possible for you to basically keep operating rates where they were and further bring down your inventories, because that has been a problem in the past?

Let me answer that. In principle, we're operating our plants under control and watching our inventories carefully in light of our anticipation of future demand. The surge in demand in March, in part, reflecting inventory restocking at the customer level, is the key to what brought our inventories down. We're comfortable today with our inventories around two months' sales. Because of the large range of grades that we have, including a number of specialized products, we typically run at least at 1-1/2 months' inventory and normally closer to two months. So we're comfortable. We've brought up our rate somewhat in view of the fact that the coating season is during the second quarter of the year, but we will continue to monitor closely our operating rates so that we keep our inventory at a level that we're satisfied with.

And what are your rates at right now?

Our rates are above 90 percent.

OK. And as regards to the price increases, which geographies are you seeing a higher probability of passing through?

Well, recognize that in each of the areas, there are, let's say, uniquenesses in the marketplace. And so we're seeing some immediate move in the export market where there isn't like a 90-day price protection that exists, for example, primarily in North America. We're seeing very little in North America at this time, but we expect to see it later in the quarter, and in Europe, we're beginning to see some price improvement at this time. But the larger customers typically have 90-day protection in Europe, as well.

OK, and in Europe, are you seeing the five to eight percent, or a portion of that?

In all cases, we anticipate at this point that we will achieve less than the full magnitude of the increase during the second quarter and perhaps, again, part of that during the third quarter.

OK, thank you.

Once again, ladies and gentlemen, if you wish to ask a question, please depress the one at this time. And we do have a question from the line of with CS First Boston. Please go ahead.

It's just kind of a follow-up on the operating rate question. Did you significantly increase your operating rates between, let's say, what you were running in the first two quarters versus March? And then you said you were running about 90 percent at this time. Could you give us some type of indication where your average operating rate was for the first quarter?

We're running in excess of 90 percent during the first quarter, and we'll do that in the second quarter as well. Recognize that we expect, as Mr. Martin indicated, demand to be even a little bit better in the second quarter relative to the first because of the seasonality of our business, but we're not pushing the plants to run full out.

OK. And I missed your capex number. Could you repeat that? And then does that include any of the plant reconstruction costs? If it does, could you strip that out?

Yeah, I think our actual expenditures or payments during the quarter were $5 million, of which almost one million was related to putting in new equipment in place of operating old equipment, which was part of the fire adjustment. But we still anticipate spending for the year in the range of $30 million. And, typically, the rate of our payments lagged during the first quarter.

OK. And just noticed that your corporate expense kind of ticked up. Is what we're seeing now for the first quarter, do you think that's kind of more a run rate for the year? And, if so, kind of what's going on in that line?

It's two items. It's environmental settlements and it's higher legal fees. And, you know, we don't expect environmental settlements to be at this level for the rest of the year, but it's always possible that a number of matters that we're working on today will come to a settlement, so it's possible it could, you know, stay at this level or be a different number. But we expect now it will be lower, and legal expenses will probably remain a little higher for the rest of the year.

All right. Thanks a lot.

And, gentlemen, there are no further questions. Please continue.

Well, thank you for joining our call today, and if you need any additional information, don't hesitate to call Robert Hardy, and he'll provide that information for you. And we thank you for joining us, and, Carol, if you could give the callback information, I'd appreciate it.

Certainly. Ladies and gentlemen, this conference will be available for replay after 2:00 PM today through Friday, May 3 at 11:59 PM. You may access the AT&T Teleconference Replay System at any time by dialing 1-800-475-6701 and entering the access code of 634401. Those numbers again are 1-800-475-6701, international participants, 320-365-3844, access code 634401. That does conclude our conference for today.

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