KRO - NYSE

Janet Keckeisen - VP, IR Steve Watson – CEO Greg Swalwell - EVP and CFO Rob Graham - EVP, General Counsel Brian Christian - VP, Strategic Business Development

Trey Grooms - Stephens Incorporated Jim Schoen - Deutsche Bank Securities Edward Yang – Oppenheimer & Co. Gregg Goodnight – UBS (Shelkey Cusack) – JPMorgan Joe Altman – COMPOUND Capital Management

Good day ladies and gentlemen and welcome to the KRONOS Worldwide first quarter 2012 earnings call. My name is Ann and I will be your operator for today’s call. (Operator Instructions). I will now turn the call over to Janet Keckeisen, Vice President of Investor Relations for KRONOS Worldwide. You may begin, Janet.

Thanks, Ann. Good morning and welcome to the KRONOS Worldwide 2012 first quarter 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 relating to matters that are not historical fact 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 operation, 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, Executive Vice President; Kelly Luttmer, Vice President, Global Tax Director; John St. Wrba, Vice President, Treasurer; Jim Hafer, Vice President, Controller; and Brian Christian, Vice President, Strategic Development I also want to give special recognition to the leaders of our exceptional operating management team, including Doug Weaver, Dr. Ulfert Fiant, Klemens Schluter, Joe Maas and Ben Corona. Our corporate and management operating 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 financial results for the first quarter of 2012 were excellent, and continue to be driven by customer demand and manufacturing efficiency. We set new records for the first quarter in both production and sales volumes of our TiO2 products. Our TiO2 segment profit for the first quarter 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 TiO2 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 TiO2 production capacity, especially for premium grades of TiO2 products produced through close-held, proprietary chloride technology. Major capacity additions, both brown field and green field, 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 TiO2 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 investment in, and development of, ore supplies that are now needed to materially expand TiO2 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 expansion of additional ore supply, 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 TiO2 industry, which would in turn hinder TiO2 capacity expansion. With the increased ore feed stock costs, additional significant increases in the selling price of TiO2 products will be necessary to produce the sustainable profit margins necessary to financially justify most major TiO2 production capacity increases. We continue to believe the growing worldwide demand for high-quality TiO2 products will exceed supply 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 material 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 TiO2 products. Additionally, given our expectation that the global supply of TiO2 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 that we achieved record operating results in the first quarter of this year, primarily due to the higher average selling prices for TiO2. 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 America 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 volume of 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 TiO2 that we produce in 2012 will be about 50 to 60% higher as compared to our per-unit cost of TiO2 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 of sales per metric ton of TiO2 sold in the first quarter of this year is significantly lower compared to what we expect that per-unit metric ton of TiO2 sold for the remainder of the year. A substantial portion of the TiO2 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 last year, primarily due to lower debt levels that resulted from the March 2011 redemption of €80 million principal amount of our senior secured notes, as well as an additional €40 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 €279 million principal amount of the senior notes that remain outstanding as of the end of March, we have commenced efforts to refinance those notes. We’ve engaged a financial advisor to assist us in these efforts. 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 $.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-than-anticipated production costs. At this point, I’ll turn it back to Ann to open up the lines for any questions.

(Operator instructions). And our first question comes from the line of Trey Grooms with Stephens Incorporated, please proceed.

Good morning.

Good morning.

A couple of questions. You know, you pointed to the lower-cost inventory that was built in the fourth quarter, you know, impacting the 1Q, could you give us a little more color – can you quantify kind of what that impact was in the first quarter?

I mean, I think the quantification we give I go back to our guidance in terms of the 50 to 60% increase in our production cost that we expect, you know, for the Ti2 that we’re producing this year compared to last year. And you know, when you look at the fact that it’s dancing all of the products that we filled in the first quarter this year that were produced last year, I think that gives you the quantification I think you’ll be looking for.

Okay, all right, is it safe to say that most of that inventory, you know, that was built in the fourth quarter has been exhausted – I guess, you know, as you went to 1Q?

Yes, that is a very reasonable assumption to make.

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

Yes, the 50 to 60% is for all of 2012, so it – there is an average, so to speak, which is probably what the question that you’re getting to in terms of the cost throughout the year. You know, how that levels out on a quarter by quarter basis, we have to wait and see until we get throughout the year – you know, I point out that as we talked about before, some of Orcon tracks have annual pricing, some have semi-annual pricing, and some have quarterly pricing. So…

Okay, so – but with that, you know, I guess the assumption would be that you might see a little bit more intense Ore costs as the year progresses, is that kind of the way that…

Trey, this is Rob Graham, I – we do have a ore price increases throughout the year, we do expect to see 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 do anticipate a moderation toward the end of the year.

And a moderation in the amount of increase is better being implemented?

That is correct.

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

Trey, this is Rob Graham again. I – it’s a combination of a number of factors that you’ve mentioned, one of which is, you know, we fell based on a combination of factors, one of which is our technical service. We look at – we expanded the markets that are strong. We went through a period where we believed that we had some advantages by – 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 certain areas of the export markets as well. So, we’ve gone after all of those and have been – tried to be very strategic in the various opportunities through the quarter.

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

I’m not sure that I would exactly phrase it that way – we think the long – you know, the long term, and our market share in Europe is obviously one of our strongest markets. So there’s not then an appreciable shift in the focus in particular areas, but we are pursuing more aggressively in areas that are stronger demand and where we do think our products – the higher grade products – you know, in both sulfate and 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 cue.

Ladies and Gentlemen, the company asks that you please limit your questions to one with one follow-up. And our next question comes from the line of David Begleiter with Deutsche Bank Securities, please proceed.

Hi, this is Jim Schoen sitting in for David, good morning.

Good morning.

Could you comment on the situation you’re seeing in the Asian market, is there still any de-stocking 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 in the way that 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, and we continue to pursue those markets. Other areas of Asia are stronger and we continue to look at those. Do I – Chinese producers are having the same problem I believe that have affected the industry as a whole in the lack of ore supply. They also have lower quality sulfate production almost exclusively which simply can’t go into many applications. So, whether they are de-stocked fully at this point, I can’t answer that particular question, but at the same time we’re seeing the markets that we’re pursuing are the stronger markets in all – in throughout Asia.

Okay, and could you also please comment on how much of Ti2 you demand into the coatings industry – is currently being coat tailed by TiO2 extenders and substitutes and so forth?

We don’t really view, you know, the – we’re not seeing appreciable impact in our demand from the coatings industry trying to use extenders – I mean, these are things that have been around for a long time, they’ve always have tried to use these things, but at the end of the day there really is no effective substitute for TiO2, and the more extenders 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.

Just to follow-up slightly on that, is that what – we have not seen any real difference. Extenders 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, many – there are many new announcements, or several different new announcements of different extenders out on the market, but they have not had an appreciable change in the overall ability to substitute for TiO2 because TiO2 is a very high-quality product.

Thank you very much.

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

Hi. This is Jim Schoen again. I was 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 your efficiency gains, you have a higher level of production, do you think this is begun to affect pricing in the industry or how do you think the dynamics are playing out there?

We believe that pricing, based upon the supply demand dynamic over the long term, the pricing is on a long-term trend upward and we also believe that while there is 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 there. But there’s overall demand growing in – worldwide demand for high-quality TiO2 in growth markets. That is not going to change. So we do believe that pricing increases are consistent, both with what our customers are telling us as well as what third-party industry sources are telling us. We’re on an upwards trajectory here and they will continue through for the foreseeable future.

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

Just to add on to 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 short inch, like we had quite a bit last year, and then we’re going to have periods of – especially in the fourth quarter and part of the first quarter when the normal paint season, that norma heavy buying season, as inventories build and those usually get totally sold off during the paint season. And as we saw last year, we ended up with a pretty severe shortage of material 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 that – because they hear about Europe, we sell predominately in North Europe where the economies truly are very strong compared to South Europe and North America is strong also. But I think the – 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 any place 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’s clearly the future of growth, none of that ends up reducing the amount of TiO2 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, in the near term, meaning several years that going to satisfy this overall global demand. So, as Rob and Gregg just pointed out, our expectation barring some total worldwide depression, not just recession, I think we’ve already been in that for several years, is that that supply/demand balance is going to shift more and more toward a shortage of supply on a consistent basis rather than this intermittent coming in and out. 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, or certain end products, especially for the lower margin type of users, not predominantly used for 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 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 is a good example, there seasons are kind of upside down, because they’re southern hemisphere. We’re starting to see that global marketplace level out the seasons, so we don’t believe that that will continue on into the future indefinitely. So, we do see that backdrop that we mentioned several times. But we look at it from an annual basis, then we also look at it by multiyear basis and make our decisions on what would we do. And as Greg just pointed out, it’s the profit margins because the ore cost 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 TiO2 product. Without that we doubt very much that anyone would be looking at putting major capacity expansions in. And once that decisions made, you have a number of years before that capacity 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 reference where the demand expansions occurring. I was just wondering if you could provide some addition color on what particular export markets did you see strengthen in Q1?

Well, I think you 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 in the Middle and Near East that are also strong as well. So, you know, 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.

Well, there’s a couple of things that I think we ought to at least clarify in terms of, you know, Rockwood is a [inaudible] producer and you know, we were the last company to build a – the state-of-the-art proprietary fluoride plant in the Northern hemisphere. So and Western hemisphere. So when you really talk about the Hunstman 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 a four or five-year period of time and it’s probably, for a state-of-the-art plant, it’s you know, a billion dollars or north of that in terms of a production plant. So I'm not sure if that answers your question, but they’re similar assets and really, something that we wouldn’t comment further on.

And the billion dollars, that Rob mentioned, that – I mean, that’s not the all-in cost as well. I mean, there could be additional costs for infrastructure. Plus, when you look – I mean, just the working capital investment that would be required, you know, given the current level of pricing in the industry for your sales as well as on the cost side for your inventory.