Kronos Worldwide's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Kronos Worldwide, Inc. (KRO)

Q2 2012 Earnings Call

August 9, 2012 10:00 am ET

Executives

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

Analysts

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

Vivek Shah – Tellus Asset Management, LLC

Sanjay Pamnani – Foundation Asset Management

Presentation

Operator

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 will 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.

Janet Keckeisen

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.

Steven L. 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 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 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 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.

Read the rest of this transcript for free on seekingalpha.com