NLI Holdings Inc (NL) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the KII earnings call. At this time all participants are in a listen only mode and later we will conduct a question and answer session with instructions given at that time. If you should require assistance during the call, please approximately press zero and then star. This conference is being recorded. I would like to turn the conference over to our host, Mr. Larry Wigdor. Please go ahead, sir.

Hello and welcome to Kronos International fourth quarter earnings call. I'm Larry Wigdor, CEO, and I would like to introduce four of my colleagues at KII , [Olf Theon](ph) President of Manufacturing and Technology, Henry [Passan](ph) , President of Sales and Marketing, Joe [Moss](ph), VP of Worldwide Marketing, and Robert Hardy, our CFO.

Some of the statements made today will be forward looking in nature and some statements involve some 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. In addition, I would like to inform our audience that the company will file its first annual report on Form 10-K for the full year with the United States Securities and Exchange Commission on or before March 1st. It can be found on Kronos International's web site at www.nl-ind.com. Click on investor relations and then click on SEC filings.

Let me start with a quick overview of some of the information that is in today's earnings release. We reported net income in the fourth quarter of $3.5m compared with $41.2m in the fourth quarter of 2001. Excluding unusual items in the fourth quarter of 2001, we reported a net loss in the fourth quarter of 2001 of $0.5m. Net income for full year 2002 was $52.3m compared with net income for full-year 2001 of $113.7m. Excluding the unusual items in both periods, net income in full-year 2002 was $53.3m compared with $79.3m for full-year 2001.

Operating income of $11.8m was $1m lower than the fourth quarter of 2001, excluding $16.6m of out-of-period 2001 business interruption insurance proceeds recorded in the fourth quarter of 2001. Fourth quarter of 2002 operating income was lower than the prior year period due to higher costs offset in part by higher sales and production volumes. Fourth quarter 2002 operating income was 32% lower than the third quarter of 2002. Primarily due to seasonally lower sales volume, lower production volumes, and higher costs, partially offset by higher selling prices.

Operating income for full-year 2002 was $60m, compared with $123.8m for full-year 2001. The decrease from 2001 was due to lower average selling prices, partially offset by higher sales and higher production volumes. Operating income for full-year 2001 included $27.3m of 2001 business interruption insurance proceeds. The lower sales and production volumes of 2001 were, as you know, due in part to the [Leverkusen] fire.

Adjusting for unusual items, EBITDA increased from $1.7m to $18.9m in the current quarter as compared to the quarter of 2001. EBITDA in the fourth quarter of 2002 was computed using $7.1m of depreciation . Compared to third quarter 2002, EBITDA was $5.7m lower. Full-year 2002 EBITDA was $87.1m, a decrease of $60.8m from full-year 2001. Again, full-year 2001 EBITDA included $27.3m of 2001 business interruption proceeds.

Let me turn to price. Excluding the effects of foreign currency fluctuations, KII's average selling price during the fourth quarter of 2002 was slightly higher than the fourth quarter of 2001. And 2% higher than the third quarter of 2002. Compared with third quarter 2002, average selling price increased in the European and export markets. Average selling prices in December 2002 were slightly higher than the average for the fourth quarter 2002. December 2002 selling price were also 2% higher than September 2002 selling prices. Full- year 2002 average selling prices were 10% lower than full-year 2001.

Assuming demand remains at reasonable levels, we expect first quarter 2003 prices to continue to trend higher compared with the fourth quarter of 2002. As announced price increases, including the latest announcement in December of EUR150 per metric ton for Europe continued to be implemented.

Sales volumes in the fourth quarter of 2002 of 64,000 metrics tons was 8% higher than the fourth quarter of 2001. European and American volumes were up double digits while export volumes were down double digits compared with the fourth quarter of 2001. Compared with the third quarter of 2002, sales volume was seasonally down 14%, with decreases in all major markets. Sales volume for the full-year 2002 is up 12% compared with full-year 2001. We believe that the strong sales volume for 2002 was attributable in part, particularly early in the year, to customers continuing to restock inventory levels ahead of price increases. First quarter 2003 sales volume is expected to be higher than the fourth quarter of 2002.

Due to maintenance stops which were extensive at our Germany and Belgium plants, we operate our plants at only 85% of capacity in the fourth quarter of 2002. Finished goods inventory, as is typical in the fourth quarter, increased by 4,000 tons. And represent between 1 ¾ and two months of sales. During the first quarter of 2003, we plan to operate our plants at near full capacity. KII's annual production capacity has been re-rated due to learning experience as well as capital investments to approximately 320,000 metric tons for 2003, up from 313,000 metric tons in 2002. For full-year 2002, finished goods inventories decreased by approximately 5%.

Turning now to capital expenditures, we spent $12m and $25m in the fourth quarter and full-year 2002 respectively, excluding 2001 Leverkusen fire damage costs which were fully reimbursed by insurance. We expect 2003 capital expenditures to be less than $ $30m.

Interest expense to third parties in the fourth quarter and full-year 2002 increased $7m and $12m respectively from the comparable prior year periods, primarily due to higher levels of outstanding third party debt. Interest expense to affiliates decreased $10m and $15m from the fourth quarter and full-year 2001 respectively. Due to the repayment of loans from affiliates in June 2002, using proceeds from our Euro 285m senior secured notes offering. Interest income from affiliates decreased $10m and $13m from the fourth quarter and full-year 2001, respectively. Due to the redemption and extinguishment of all notes receivable from affiliates in July 2002. KII's net corporate currency transaction gains and losses related primarily to its dollar denominated 11 ¾% second year senior Kronos Inc.. Which was repaid in June 2002 using a portion of the proceeds from the Euro bond offering.

Looking at the company's cash flow for the quarter. Overall cash increased $3m during the quarter, with cash flow from operating activities providing $17m in cash, offset by $12m of capital expenditures. Free cash flow for the fourth quarter was $4m. For the full year 2002, operating cash flow was $68m and free cash flow was $39m. In the fourth quarter, we repaid approximately Euro equivalent 2m on our European revolving credit facility. For the full-year 2002, we re repaid approximately Euro equivalent 14m. At December 31st, the outstanding balance on the revolving credit line was Euro equivalent 26m, which approximated $27m U.S. at an average yield cost of six and a half percent. The company's borrowing availability upped this credit facility was EUR52m or $54m at December 31st. We expect to draw on the line to fund working capital needs during the first half of 2003. The company did not make any cash dividend distributions to its parents during the fourth quarter of 2002.

Cash and restricted cash at December 31st, 2002, was $18m, up $4m from September 30th. Total debt was Euro or Euro equivalent $313m at December 31st , 2002. In U.S. dollar terms, based on the weakness of the U.S. dollar against the Euro or Euro-linked currency, the U.S. dollar equivalent was $326m at December 31st.

Turning to the equity section of our balance sheet. As of December 31st, 2002, common stockholders' equity was $77m, up $6m from September 30th. The increase is primarily due to favorable foreign currency translation adjustments of $6m and $3m of earnings. Offset in part by a minimum pension liability adjustment of $3m.

Let me close our fourth quarter conference call with some comments on our perspective for the first quarter of 2003. In general, we expect to start 2003 with higher selling prices as compared to last year, with prices trending upward, not downward. Prices continued to show gradual improvement. And assuming demand remains at reasonable levels, we expect first quarter 2003 prices will be higher than the fourth quarter of 2002. First quarter sales volumes should be above fourth quarter of 2002 levels substantially, while below the record first quarter 2002 volume of 79,000 metric tons. First quarter 2003 production volume should be higher than the fourth quarter production volume. And should also be above the 72,000 metric tones produced in the first quarter of 2002. Based on these fundamentals, we expect first quarter 2003 operating income to be higher than the fourth quarter of 2002, and also to be higher than the $14.3m operating income achieved in the first quarter of 2002.

This concludes my formal remarks regarding KII fourth quarter 2002 financial results. And I would now like to open this conference to questions.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press the 1 on your touch tone phone. You will hear a tone indicating you have been placed in queue, and you may remove yourself from queue at any time by pressing the pound key. you're using a speaker phone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press the 1 at this time .

And our first question comes from Oliver [Stueber](ph) with ING Investment Management. Please go ahead.

Good afternoon. I had actually two questions related to each other referring to the free cash flow of $39m. Does that include the dividend payments to the parent company, or were there no cash dividend payments to the parent company this year?

The free cash flow is defined -- this is Robert Hardy -- as operating cash flow less investing. A dividend to the parent company is in the financing section of our cash flow statement. Since the bond offering had taken place, there were no dividends paid up to Kronos Inc., the parent company of Kronos International.

Is there any plan to pay any more dividends to the parent in the coming year?

Pursuant to our indenture, the company is allowed to make dividend distributions, if it makes a 3 to 1 fixed charge ratio. And its current availability under its dividend basket is around $39m U.S. as of 12/ 31/02. I would say it is reasonable to expect KII -- as it looks at the need of its capital expenditure programs, its working capital needs -- if it has excess cash, then it is reasonable to assume it will make a prudent dividend, depending on the board's decision, sometime in 2003.

Okay. Thank you very much.

We have a question from Sven Olsen with Deutsche Banc London. Go ahead.

Good morning, gentlemen. I wanted to follow up on a couple of things on capacity. You indicated you're now at approximately 320,000 tons capacity. I remember at the time of the deal you expected to be able to take it within the next two years to 325 tons. Does that mean you're largely done with your expansion program? Or have you found additional ways of expanding your rated capacity?

As part of our capital expenditures in 2003, we will be able to get our capacity up further. And I expect to achieve at least the 325,000 ton figure that we've indicated previously.

Okay. So you think that that is within the current budget –

We will make the capital expenditures this year, and I would expect -- as I expect them to be successful -- next year we will be at least 325,000.

Great. On the inventory situation, I think of you're slightly under two months.

That's correct.

Is that on the light side given kind of the product range you have? Would you tend to be more conscious moving forward?

Normally at the end of the year, probably our inventory would be a little bit higher, typically. But we did have extensive maintenance turn-arounds during the fourth quarter. We're very comfortable at the level we're at. We will run our plants, as I've indicated, at close to full capacity in the first quarter. Because we're heading into our major demand season, which is the second quarter of the year.

So it's a little bit on the light side. But we're comfortable with it and we will probably build a little inventory in the first quarter.

Okay. And then just in terms of where you're seeing demand. Is there any -- Europe obviously economically seems to be weak. What is your sales force indicating, what sectors of this geographic region are you seeing demand from?

We saw demand moderate in the fourth quarter compared, obviously, to the third quarter, which it typically does. And I'm sure a part of that is due to the economic concerns that exist around the world. Demand still remains relatively good. But it would be an imprudent person who wouldn't be cautious in view of what's happening internationally and with the economic forecasts that we're seeing. But we've started the quarter out relatively well, and clearly we expect it to be up significantly from the fourth quarter .

Okay. And then has there been any impact -- this is my last question before I get off. Any impact from the strong Euro in terms of your ability to export or product coming into Europe?

Well, I don't think it's affected our ability to export. As we've indicated, we produce mostly in Europe as well. But we've been able to maintain our position, the export markets, which are relatively low. We've also had to look at the strength in Norwegian Krone, which has cost us a little bit but has not limited our ability to sell product.

Great. Thank you very much .

If there are any additional questions, please press the 1 at this time. And we have a question from Catherine [Lagenza](ph) with Citigroup. Please go ahead.

Hi. I wanted to -- in the trade press currently, I think some of your competitors are talking about price increases effective the 1st of February. And I wanted to get a sense of whether you're pushing through in a similar way. What are you expecting in Europe?

We announced a price increase in late December effective January 15th, which is probably what you're referring to. Certain competitors announced price increases February 1st. Typically, those price increases at the larger accounts take about 90 days to implement. At smaller or medium accounts, it occurs quicker. The increases that have been announced have only been partially successful in the past. And I'd expect there will be some success with this one . To a large extent, it depends how demand develops during the course of the coming months.

But we do believe prices, as I've indicated previously, will go up. And we're confident that if the economies begin to meet some of the annual forecasts, the price trend should be a good one.

Okay . Regarding the inventory situation for yourself, it's light. But the industry as a whole. How is that that positioned, because I think most of you are struggling to build any material inventory going into March this year. Is that still the case?

I can't speak for anyone else, obviously. I think it's hard to put a full grasp on inventory because it's not only what the producer has, it's what the customer has. And we clearly now that at the beginning of 2002, customers began to build inventory. And I believe their inventories are reasonably adequate .

It's hard to measure what the producers have in total inventory, although there are some figures put out. I would probably use the word "moderate", not "light ."

And finally, the maintenance that you did in Q4. Is that what you had planned to do -- maintenance for 2003, or is that for the 2002 period?

Well, for the most part, it was 2002. Although we did bring some things in that were scheduled for early 2003. A large part of it was planned. What we experienced, however, when we have an extended downturn for plant maintenance, normally other things crop up. And we did have some unplanned things happen in both Leverkusen and Belgium. So that our maintenance was extensive. Our plants are in super shape right now. For the first six weeks of this year, I'm very pleased. And we would expect to have a very good quarterly production assuming nothing adverse happens in the coming six weeks.

Great. Thank you .

And we have a question from Lee Wang with JP Morgan.

Can you comment on your gross margins getting lower during the fourth quarter? Can you elaborate a little more?

Well, the margins reduced primarily because of the fact that we had such extensive maintenance during the quarter, plus we produced a lot less. So that is by far the biggest because our selling prices actually trended upwards.

Okay, great. Thank you.

And once again, if you have a question or a comment, please press the 1 at this time . We have a question from Michael [Nicoll](ph) with Newton Investment Management. Please go ahead.

A follow-up, actually. If you could give a bit more color on that question you were asked earlier about FX exposure. Could you give color in terms of your cost basis denominated in Europe in Euros. And TiO2 prices probably have more of a linkage to a dollar base? Could you give a bit of color –

Well, Robert will comment on the first aspect of your question, which is to give you color on the FX. But let me very briefly touch -- most of our sales are in Euros at KII.

So when you said through price increases, they're in, basically.

Most of our sales from KII are in Euros and they're sold in Euros.

Okay. Thanks a lot.

Robert, do you want to –

Yes. As far as the cost structure, I think the best way to evaluate it as we look at it internally is the majority of KII's cost structure is also Euro or Euro linked. However, the feed stock for the chloride plants is a U.S. dollar purchase. Which tends to offset, in terms of dollar for dollar, export sales that are denominated in the U.S. dollar as well. So we have somewhat of a -- when we look at our profit and loss statement, it's somewhat of a natural hedge position.

However, as Larry alluded to earlier, when you look at our Norwegian operation, which is a relatively significant portion of the business for KII, the Norwegian Kroner has moved almost 30% last year. And to the extent those export sales are in U.S. dollar, those cut our margins a little bit as the cost structure was in Norwegian Krone. But we're trying to manage that process. And for the most part don't have a significant exposure on our profit and loss statement. Remember, the statements that we remember to the market, those are all in -- under U.S. GAAP in U.S. dollars. So the line items get translated. All the separate components of the profit and loss statement get translated into the U.S. dollar using average rates for the quarter. That means you may see some volatility in the sales line or the cost structure line, but when you get down to the operating income, EBITDA calculations. There is a lot of pressure with our natural hedge position offsetting one another, therefore not creating a significant impact on the profitability of the company

Putting aside the Norwegian Kroner difference. The Euro-dollar exchange rate wouldn't have impacted on your EBITDA had it stayed the same?

That would be a reasonable statement. Directionally the way that we look at it is, a stronger Euro is helpful to Kronos International overall. In other words, if you say which direction -- a stronger Euro means that we translate our margins at basically higher U.S. dollar profitability. Because the majority of our revenue stream is in Euro or Euro-linked currencies.

Great. Thanks a lot .

Mr. Wigdor, there are no further questions at this time.

I would like to thank everybody for joining us and I look forward to talking to you at the end of the first quarter, and now you'll get some instructions relative to the replay of our conference. Thank you and good-bye.

Thank you. Ladies and gentlemen, this conference will be available for replay after 130 p.m. eastern time today to midnight eastern time on Thursday, February 20th. You may access the AT&T executive play back service at any time by dialing 1-800-475-6701 and entering the access code of 673-888. International participants, please dial 320- 365- 3844. Those numbers again are 1-800- 1-800-475-6701 and international internationally 320- 365-3844 with an access code of 673,888. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.