KRONOS Worldwide's CEO Discusses Q1 2012 Results - Earnings Call Transcript

KRONOS Worldwide, Inc. (KRO)

Q1 2012 Earnings Call

May 9, 2012, 10:00 a.m. ET

Executives

Janet Keckeisen - VP, IR

Steve Watson – CEO

Greg Swalwell - EVP and CFO

Rob Graham - EVP, General Counsel

Brian Christian - VP, Strategic Business Development

Analysts

Trey Grooms - Stephens Incorporated

Jim Schoen - Deutsche Bank Securities

Edward Yang – Oppenheimer & Co.

Gregg Goodnight – UBS

(Shelkey Cusack) – JPMorgan

Joe Altman – COMPOUND Capital Management

Presentation

Operator

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.

Janet Keckeisen

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.

Steve Watson

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.

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