KRO - NYSE

Janet Keckeisen – Vice President-Investor Relations Steven L. Watson – Vice Chairman and Chief Executive Officer Gregory M. Swalwell – Executive Vice President and Chief Financial Officer Robert D. Graham – Executive Vice President and General Counsel

David Begleiter – Deutsche Bank Securities Trey Grooms – Stephens Inc. Edward Yang – Oppenheimer & Co. Neal Miller – Fidelity Investments Gregg Goodnight – UBS Des Kilalea – RBC Capital Markets Sanjay Pamnani – Foundation Asset Management Robert Koort – Goldman Sachs

Good day, ladies and gentlemen, and welcome to the Kronos Worldwide Second Quarter 2012 Earnings Conference Call. My name is Derrick and I will be 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 would now like to turn the call over to your host, Ms. Janet Keckeisen, Vice President of Investor Relations for Kronos Worldwide. You may begin, Janet.

Thanks, Derrick. Good morning and welcome to the Kronos Worldwide 2012 second 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 facts are forward-looking statements that represent management’s beliefs and assumptions based on currently available information. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it cannot give any assurances that these expectations will prove to be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such forward-looking statements. We assume no obligation to update or revise any forward-looking statement. 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 and Chief Administrative Officer; Kelly Luttmer, Vice President, Global Tax Director; John St. Wrba, Vice President, Treasurer; Tim Hafer, Vice President, Controller; and Brian Christian, Vice President, Strategic Business Development. I also want to again give special recognition to our operating management team, including Doug Weaver, Dr. Ulfert Fiant, Klemens Schluter, Joe Maas, Ben Corona, and all the individuals working in technology, manufacturing, sales and marketing, who together make our team exceptional. Our operating and financial results for the second quarter of 2012 remained solid. As we had expected and previously reported, our production costs have increased significantly, driven primarily by substantially higher feedstock ore costs. Lower customer demand for our TiO2 products, particularly in Europe and certain export markets resulted in lower sales volumes in the second quarter and first six months of the year. Although, our average selling prices were significantly higher in the second quarter and first six months of 2012 as compared to the same periods in 2011, our segment profit declined for the quarter primarily as a result of the lower sales volume and higher production cost. The company’s average TiO2 selling prices at the end of the second quarter 2012 were comparable to the end of the first quarter of this year. We reduced our production volumes during the second quarter to approximately 86% of practical capacity utilization in order to align our production and inventory levels with current and anticipated near-term demand levels for our TiO2 products. We currently expect to operate our facilities at approximately 90% to 95% for all of 2012. While aggregate global demand for TiO2 products have decreased in line with the recent deterioration of global economic conditions, markets in North America and certain export markets continued to show relative strength. We expect demand for TiO2 products will increase as economic conditions improve in the various regions of the world, with chronic shortage conditions returning upon attaining aggregate global economic activity equivalent to approximately the 2011 levels. In the near-term, we expect to see intermittent periods of availability and shortage of TiO2 products. Prior to the recent slowdown in TiO2 demand, the shortage of ore feedstock existed, which in turn was an additional constraint for any significant new TiO2 production capacity. With the extraordinarily large increases in the price of ore feedstocks during 2011 and 2012, we believe most ore producers have profitability levels that financially justify development and expansion of additional ore supply, several of which are currently underway and expected to become available beginning late this year. With the continuing constraints, high capital cost, and extended time associated with adding significant new TiO2 production capacity, especially for the premium grades of TiO2 products produced through the chloride process, we believe increased and sustained TiO2 profit margins will be necessary to financially justify major expansions of TiO2 capacity. Given the long lead time involved with such expansions, we expect the shortage of TiO2 products that we’ll develop as economic conditions improve and demand levels increase will continue for a prolonged period. Greg, will now expand on some of the points I have touched on and review our overall financial performance after which we will open this call up for questions.

Thanks, Steve, and good morning to everyone on the call. We reported operating income or segment profit, which is the term that we use in our earnings release, of $114.2 million for the second quarter of this year, down from a $146.6 million in the second quarter of last year. Despite a quarter-over-quarter 24% increase in our average selling prices, our segment profit declined in the second quarter of this year due to higher raw material costs, and lower sales and production volumes. For the first half of the year, our segment profit increased from $258.8 million in the first six months of 2011 to $327.1 million in the first six months of this year, as the favorable impact of higher selling prices more than offset the negative impact of our higher production cost, the most of which impacted our second quarter as I’ll discuss here in a second, and lower sales and production volumes. As I mentioned, our average TiO2 selling prices in the second quarter were up 24% as compared to the second quarter of last year and for the first six months of this year, our prices were up 28%. Our average selling prices at the end of the second quarter were comparable to where they stood at the end of the first quarter of this year. Our sales volumes in the second quarter of this year were 123,000 metric tons, down about 16% from the second quarter of 2011 and our sales volumes in the first six months of this year were 253,000 metric tons, down about 7% from the first half of last year. The decrease was due to lower customer demand, as Steven mentioned, primarily in Europe and certain export markets. We’ve reduced our production volumes in the second quarter of this year in order to align our inventories with our current and anticipated demand levels, and our production volumes for the quarter at a 118,000 metric tons was 17% lower than the second quarter of last year. For the first half of the year, our production volumes were at 258,000 metric tons, down about 6% from the first half of last year. And as Steve mentioned, overall for all of calendar 2012, we expect to operate our facilities at about 90% to 95% of our practical capacity rates. On the costs side and as we had expected and talked about before, our raw material cost were significantly higher, up about $90 million in the quarter compared to the second quarter of last year and up about a $117 million on a year-to-date basis, reflecting higher cost primarily for feedstock ore and not so much for lesser extent petroleum coal coke. We expect our raw material costs will continue to be higher in the second half of 2012 as compared to the second half of last year. Overall, we continue to expect that our per metric ton cost of TiO2 that we will produce in this year will have increased about 50% to 60% as compared to our per metric ton unit cost production from 2011 largely driven by the higher feedstock ore cost. And it’s important to keep in mind that our cost of sales per metric ton of TiO2 that we sold in the first quarter this year was significantly lower as compared to our cost of sales per metric ton of TiO2 that we sold in the second quarter of this year, as the substantial portion of the TiO2 products that we sold in the first quarter this year had been produced last year with lower cost feedstock ore. EBITDA for the quarter was about $125 million, down from about a $158 million from the second quarter of last year. For the first half of this year, EBITDA was $348 million compared to $274 million in the first half of last year. In June of this year, we entered into a new $400 million term loan issued by Kronos Worldwide. We used a portion of the net proceeds of that term loan to redeem the remaining outstanding 6.5% Senior Secured Notes that were due April of next year that had been issued by our wholly-owned subsidiary, Kronos International in Europe. At that time, there was approximately $279 million principal amount of the Senior Notes outstanding. As a result of that redemption, we recognized an aggregate pretax charge in the second quarter of this year of $7.2 million related to the early extinguishment of its debt and on a net of tax per share basis that equates to about $0.04 per diluted share. During the first quarter of last year, we had redeemed €80 million principal amount of the Senior Notes, and our results in the first six months of 2011 include an aggregate first quarter charge of $3.3 million associated with the early extinguishment of bad debt, and that $3.3 million pretax charge equates on a net of tax basis to about $0.02 per diluted share. In June of this year, we also entered into a new $125 million North American revolving bank credit facility, and the full amount of that facility was available for borrowing at the end of June, at the end of the quarter. Interest expense for the quarter decreased $1.8 million down from $8.5 million in the second quarter of last year to $6.7 million in the second quarter of this year. And on a year-to-date basis, interest expense decreased about $5.1 million from $18.1 million in the first half of last year to about $13 million in the first half of this year. The decrease in the interest rate was due largely to the lower average debt levels associated with the 6.5% notes that we have redeemed in the first quarter of last year, as well as some open market purchases of the Senior Notes that we made in these third and fourth quarters of last year. Our net income for the second quarter was $64.5 million or $0.56 per diluted share. This compares to $89 million or $0.77 per diluted share that we reported in the second quarter of last year. For the first half of this year, our net income was $201.4 million or $1.74 per diluted share compared to $149.3 million or $1.29 per diluted share in the first half of 2011. And just remember that in May of last year, we implemented a two-for-one stock split and all of the per share amounts that I’ve talked about this morning are computed on a post-split basis including amounts that relates to before May of 2011. For the second half of 2012, we expect our segment profit and net income will be lower than the second half of last year, as the unfavorable effect of higher production costs and lower sales volumes were more than offset the favorable impact of the higher average selling prices. That’s all the remarks I had. and at this point, we can open up the earnings call to any questions.

Yeah. I mean we think that it’s reasonable and that’s our expectation right now that there will be some pickup of demand in the second half of the year as compared to the first half of the year. For example, we’ve seen some economic data that would suggest that Europe, which as we’ve said was relatively weak in the first half, but there are some expectations that demand should pick up there in Europe in the second half of the year, particularly in Northern Europe where you look at our sales in Northern Europe compared to Southern Europe, we felt like about five times as much product in the Northern Europe versus Southern Europe. So that’s one reason why we think that there are some expectations of demand in the second half of the year should be a little bit better. And where we end up in that 90% to 95% range is really going to be a function of just what is the extent that we have demand for the product in the second half of the year, as well as some of our expectations as we get to the end of the year as to what the first half of 2013 would be?

With respect to our finished goods inventory, if you look sequentially the end of the first quarter to the second quarter, our finished goods levels are going down. We would much rather have cash in the banks, and inventory on the balance sheet as part of our working capital. So, one of the reasons we could reduce the production in the second quarter was to try to drive those inventory levels down. And we would have an expectation of trying to continue to drive those inventory levels down in the second half of the year?

Yeah. I’m not sure we would be expected to see a significant from second quarter to third quarter.

In slight fluctuations that – but not...

I mean one reason we gave the guidance is because as you know, we were implementing a series of price increases throughout most of 2011. so where we started at 2012 was in a significantly higher level of work we started at the beginning of 2011. So the expectation about our selling prices in the second half of the year are largely driven in part by what happens to our price curve during all throughout 2011.

Okay.

Well, as the finance guy, I would like to have no inventories. But then my sales and marketing people tell me that just not possible.

And Derrick, before you take the next question, I want to just circle back and make hopefully a clarification or a point that I’d like to couple the prior questioners to just keep in mind. There were couple questions about that 50% to 60% increase in our per unit metric ton production cost. And I think based on the question; you all may have been trying to look at our reported results on a quarter-by-quarter basis, looking at the cost of goods sold providing by our sales volume, which obviously makes perfect sense. I just want to point out that with our big international presence, you need to keep FX in mind, so if you’re trying to compare like cost of goods sold per metric ton at TiO2 that we sold in the second quarter of 2011, looking at that same metric cost of goods sold per metric ton at TiO2 that we sold in the second quarter of this year. There is a FX impact primarily with the respect to the US dollar versus the euro, because of that our euro production cost and the US dollar basis are much lower this year compared to last year. So, if you’re trying to do that metric, and you are maybe like I’m not coming up to that 50% to 60%, my guess is that FX is probably going to be a big explanation for maybe some what you were. Thank you, Derrick.

Rob, you want to take that ore.

: what I can tell you is that there is more ore availability in the marketplace, and as we’ve said based upon – our expectation based on our mix of contracts, we do expect the overall cost of the products produced to go 54% to 60%, and that is a large percentage of that cost increase year-over-year is ore mix. As one of the previous questioners noted there is significantly more synthetic rutile and rutile availability, which was in very tight supply over the last couple of years, and with cutbacks in production by other producers in the TiO2 industry, there is some additional availability of high-grade chloride feedstock. So I think that answers the first part of your question. The other two parts, Greg, I’ll turn it over to you on that.

Your next question is from the line of (inaudible) from Tellus Asset Management.

Good morning. Can you talk about the working capital changes during the quarter and for the six months, and also just briefly talk about the liquidity going forward?

Yeah. I mean on the working capital, obviously if you look at our inventory, you can just look at the recorded amount of the inventories in our balance sheet, and Steve kind of alluded to this point earlier, because our production costs are significantly higher this year compared to last year, I mean even with flat, even quantities of inventories at all levels, raw material costs, finished goods (inaudible), you would still be seeing the recorded amount of our inventory increasing using the working capital just because of the higher cost. Similarly, if you’re looking over a several quarter period, and looking at our receivables, because our selling price has been going up significantly throughout most of 2011, you’re going to see an increase in the recorded amount of our receivables obviously another use of working capital even if the underlying metric ton sold were to be flat over that period. so but in terms of liquidity, we knew last year that the feedstock, we were expecting the increase in feedstock ore cost, that’s one reason why we were working to increase the selling prices, because we knew that among other things we needed to have working, better cash generated to help fund those working capital requirements. As mentioned earlier, we refinanced the most, really only significant portion of debt that we had outstanding then that was – at that time was due next year that’s been refinanced on a much longer-term basis. We put a North American $125 million revolving working capital facility in place, there is currently nothing outstanding on that. Our best case is we would never have to use that, but that does provide us some dry powder, in case time-to-time we want maybe take advantage of some favorable ore purchase or something like that. So from our liquidity standpoint, we’re very comfortable where we sit today.

Okay. There was a plan to increase the size of the European revolver, are you still thinking, because right now as I understand it’s fully utilized the European revolver?

Yeah, subsequent of the quarter-end, we did reduce the outstanding balance on that. So we did not paid-off, but we’ve reduced it by €25 million. And we are currently in discussions with the banks about renewing the facility, first of all and then also increasing, if we think it’s highly likely we will increase the amount of the facility from €80 million to €120 million. I mean still it’s been €80 million since we put it in place back in 2002 and obviously our working capital needs have grown something. So, we think increasing it makes sense. I think we’re doing it within the existing bank group, and hopefully we’ll have it done perhaps by the end of August or mid-September.

Okay, thank you.

Well, there is some noise in that analysis from our perspective, because we are virtually fully integrated on the sulfate side having our own mine in Norway, which feeds a 100% of the feedstock for our European plants and then obviously we have a much smaller SB plant in North America where we’ve sourced that ore from third-party. So a significant majority of our feedstock on the SB side comes from our mine. So obviously, our margins on a Kronos Worldwide basis would be higher on our SB product versus the industry as a whole because we are capturing some profit at our mine in Norway. But I think the question stands more towards the industry as opposed to Kronos specifically. And as Rob was alluding to, in China, there have been some short-term fluctuations in the market with Chinese product being more readily available and having an indirect impact on our business. As that product goes to a lot of the lower end markets and then make some other product available and increases the competition levels up in the realm where we like to deal in the higher quality grades for both SP and CP. However, we think those fluctuations are really just been a short-term impact. And long-term, we’re still bullish on the fact that the shortage situation is going to come back, in 2011, it wasn’t like the worldwide economy was all that strong. We would only need to get back to those levels and we would have an extreme shortage again. So I think from an industry standpoint, there has been some kind of merging of margins on CP and SP, and maybe a little bit higher for us because the vertical integration on the SP side, but going forward, we would expect it to go back to a more normalized basis.

And let me add one everything Brian said is that, absolutely accurate. But one thing there are differences in quality – significant differences in quality between the sulfate we produce and a lot of the sulfate you are seeing on the marketplace right now. So the quality is also a significant factor and that is – once you are getting and seeing in terms of some of the very low pricing is not really the same product or the same quality of Kronos sulfate grade which is a very high quality grade as well as we have certain sulfate grades out of our North American plant that are food grades and very highly specialized products as well. So you really have to look at the entire package of what you’re actually selling into the marketplace, which is a much higher quality product coming out of Kronos.

At this time, I’m showing no further questions in queue. I would like to turn the call back over to Kronos Worldwide for any closing remarks.

Thanks for listening today and we’ll talk to you in three months.