Kronos Worldwide, Inc.

Reported Q2 2012 segment profit of $114.2 million versus $146.6 million in Q2 2011. Q2 average TiO2 selling prices were up 24% year over year, but sales volume was 123,000 metric tons, down about 16%, and production volume was 118,000 metric tons, down 17%. EBITDA was about $125 million versus about $158 million a year ago. Net income was $64.5 million, or $0.56 per diluted share, versus $89.0 million, or $0.77 per diluted share in Q2 2011. For the first half, segment profit was $327.1 million versus $258.8 million, EBITDA was $348 million versus $274 million, and net income was $201.4 million, or $1.74 per diluted share, versus $149.3 million, or $1.29 per diluted share. Management said raw material costs were up about $90 million in the quarter and about $117 million year to date, and expects per metric ton TiO2 production cost for 2012 to be up about 50% to 60% versus 2011. Forward-looking comments: the company expects to operate facilities at about 90% to 95% of practical capacity for all of 2012, expects raw material costs to remain higher in the second half, and said second-half 2012 segment profit and net income should be lower than the second half of 2011 despite higher average selling prices.

Steve Watson said the quarter was solid but was hit by lower customer demand, especially in Europe and some export markets, and by materially higher ore feedstock costs. He emphasized that the company intentionally cut production to about 86% of practical capacity to reduce inventory and align supply with demand, while still expecting demand to improve in the second half as Europe and inventory restocking improve. His tone was constructive and long-term focused, arguing that TiO2 shortages should return as global activity recovers and that meaningful new capacity will remain constrained by high capital costs and long lead times.

Greg Swalwell quantified the quarter and explained the moving pieces: segment profit of $114.2 million, EBITDA of about $125 million, and net income of $64.5 million, with raw material costs up about $90 million in the quarter and $117 million year to date. He noted average selling prices were up 24% in Q2 and 28% year to date, while sales volume fell to 123,000 metric tons and production to 118,000 metric tons. He also discussed financing: a new $400 million term loan, redemption of about $279 million of 6.5% senior notes, a $7.2 million pretax extinguishment charge, and a new $125 million North American revolver with no borrowings at quarter-end. He said interest expense fell to $6.7 million from $8.5 million a year ago in Q2, and reiterated that 2012 unit production cost should be up 50% to 60% versus 2011.

Analysts focused on how much costs might rise into Q3, whether operating rates would recover, and how to reconcile the 50% to 60% unit-cost increase with inventory and sales trends. Management said the low-cost inventory from 2011 was largely consumed in Q1, so the 2012 production-cost guidance applies to tons produced this year, not to the income statement one-for-one; they also said they do not expect a large step-up from Q2 to Q3, just normal quarterly fluctuations. On demand and pricing, management said inventories at customers appear low and there should be some restocking late in the year, with demand improvement especially in Europe and prices likely to stabilize or even tick up in late Q3/early Q4. Questions on special dividends were met with a statement that excess cash distributions remain under consideration, but no decision was given.