Kronos(KRO) - 2024 Q2 - Quarterly Results

Executive Summary & Financial Highlights Kronos Worldwide, Inc. achieved a significant financial turnaround in Q2 and H1 2024, reversing prior year net losses due to higher sales, production, and lower costs Overall Financial Performance The company achieved net income in Q2 and H1 2024, reversing prior year losses, driven by higher income from operations, increased sales, and reduced production costs Net Income and EPS Performance (YoY) | Metric | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :-------------------- | :------ | :------ | :------ | :------ | | Net Income (Millions USD) | $19.5 | $(8.2) | $27.6 | $(23.4) | | EPS (per share) | $0.17 | $(0.07) | $0.24 | $(0.20) | - Net income increased in 2024 periods primarily due to higher income from operations, resulting from higher sales and production volumes and lower production costs (energy, raw materials), partially offset by lower average TiO2 selling prices[1] - Demand for products improved in all major markets in Q1 and Q2 2024, contributing to improved profitability[1] Net Sales Analysis Net sales increased by 13% in Q2 and H1 2024, driven by higher TiO2 sales volumes, offsetting lower average selling prices, with minor currency impact Net Sales and Volume Changes (YoY) | Metric | Q2 2024 | Q2 2023 | Change (YoY) | H1 2024 | H1 2023 | Change (YoY) | | :-------------------- | :------ | :------ | :----------- | :------ | :------ | :----------- | | Net Sales (Millions USD) | $500.5 | $443.2 | +13% | $979.3 | $869.5 | +13% | | TiO2 Sales Volumes (%) | 29% higher | - | +29% | 28% higher | - | +28% | | Average TiO2 Selling Prices (%) | 8% lower | - | -8% | 9% lower | - | -9% | - Changes in currency exchange rates (primarily the euro) increased net sales by approximately $2 million in Q2 2024 and $6 million in H1 2024[2] TiO2 Segment Performance The TiO2 segment returned to profitability in Q2 and H1 2024, driven by higher production volumes, improved capacity utilization, and lower costs, partially offset by specific charges TiO2 Segment Profit and Production Volumes (YoY) | Metric | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :-------------------- | :------ | :------ | :------ | :------ | | TiO2 Segment Profit (Millions USD) | $41.1 | $(2.3) | $64.5 | $(17.1) | | TiO2 Production Volumes (%) | 54% higher | - | +54% | 33% higher | - | +33% | | Capacity Utilization (H1) (%) | 93% | 70% | - | - | - Unabsorbed fixed production costs decreased significantly to $12 million in H1 2024 (incurred in Q1) from $54 million in H1 2023[3] - Segment profit in Q2 and H1 2024 includes a $2 million charge for workforce reductions and approximately $10 million in non-cash charges for accelerated depreciation related to the closure of a sulfate process line in Canada[3] EBITDA and Other Operational Items EBITDA grew substantially in Q2 and H1 2024, reflecting improved operational performance, including specific charges and gains like a deferred financing cost write-off EBITDA Performance (YoY) | Metric | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :-------------------- | :------ | :------ | :------ | :------ | | EBITDA (Millions USD) | $56.2 | $3.6 | $87.9 | $1.4 | - Currency exchange rates decreased segment profit by approximately $3 million in both Q2 and H1 2024 comparisons[4] - H1 2024 income from operations includes a $1.5 million charge for a write-off of deferred financing costs[4] - H1 2023 loss from operations included a $2.2 million insurance settlement gain and a $1.3 million settlement loss related to a UK pension plan termination[5] Strategic Initiatives and Capital Structure Kronos Worldwide acquired full ownership of Louisiana Pigment Company, adjusted its capital structure, and revised its dividend policy for financial flexibility Louisiana Pigment Company (LPC) Acquisition Kronos Worldwide acquired the remaining 50% interest in LPC for $185 million cash, making it a wholly-owned subsidiary to enhance growth and achieve synergies - Acquired the remaining 50% joint venture interest in Louisiana Pigment Company, L.P. (LPC), making it an indirect, wholly-owned subsidiary[6] - Acquisition cost: $185 million upfront cash payment (subject to working capital adjustments) and a potential earn-out payment of up to $15 million[6] - Financing: $132 million borrowed under the global revolving credit facility, with the remainder from cash on hand[6] - Strategic benefits include strengthening competitive footprint in North America, expanding product offerings, significant synergies (logistical cost optimization, commercial/overhead efficiencies), and opportunity to increase LPC's annual production capacity (currently 156,000 metric tons)[7] Financing Activities and Liquidity Management Kronos amended its Global Revolver, increasing borrowing capacity and extending maturity, and issued new notes to reduce revolver borrowings, supporting liquidity - Completed an amendment to the Global Revolver, increasing maximum borrowing to $300 million (from $225 million), extending maturity to 2029, and expanding the borrowing base to include LPC and its receivables/inventories[8] - Issued an additional €75 million principal amount of 9.50% Senior Secured Notes due 2029, generating net proceeds of approximately $90 million[8] - Proceeds from the Additional New Notes were used to pay down borrowings under the Global Revolver[8] Dividend Policy Update Effective Q3 2024, the company reduced its quarterly dividend to $0.05 per share to enhance financial flexibility and support strategic investments - Lowered quarterly dividend to $0.05 per share, effective beginning in the third quarter of 2024[7] - The dividend reduction provides flexibility to absorb increased debt service costs, manage working capital, reduce leverage, and support strategic capital investment opportunities[7] Non-GAAP Financial Measures Explanation Kronos Worldwide provides non-GAAP financial measures, Segment Profit and EBITDA, to offer additional insights into TiO2 operations performance and management's assessment Definition of Segment Profit Segment profit is a non-GAAP measure used by management to evaluate TiO2 operations, defined as net income before income tax expense and certain general corporate items - Segment profit is used by management to assess the performance of the Company's TiO2 operations[11] - Defined as net income before income tax expense and certain general corporate items (corporate expense and components of other income/expense except trade interest income)[11] Definition of EBITDA EBITDA is a non-GAAP measure used by management to assess TiO2 operations, calculated as net income before interest expense, income taxes, and depreciation and amortization - EBITDA is used by management to assess the performance of the Company's TiO2 operations[11] - Defined as net income before interest expense, income taxes and depreciation and amortization expense[11] Condensed Consolidated Financial Information This section presents condensed consolidated financial statements, including operations, segment profit, and EBITDA reconciliations, detailing financial performance and key drivers Condensed Consolidated Statements of Operations The condensed consolidated statements show significant improvements in gross margin, income from operations, and net income for Q2 and H1 2024, driven by increased TiO2 sales and production Condensed Consolidated Statements of Operations (Millions USD, except per share and metric ton data) | Metric | Q2 2023 | Q2 2024 | H1 2023 | H1 2024 | | :------------------------------------------------ | :------ | :------ | :------ | :------ | | Net sales | $443.2 | $500.5 | $869.5 | $979.3 | | Cost of sales | 399.1 | 400.3 | 794.6 | 807.6 | | Gross margin | 44.1 | 100.2 | 74.9 | 171.7 | | Selling, general and administrative expense | 50.1 | 57.9 | 103.3 | 112.1 | | Income (loss) from operations | (6.7) | 35.9 | (25.0) | 55.4 | | Net income (loss) | $(8.2) | $19.5 | $(23.4) | $27.6 | | Net income (loss) per basic and diluted share (per share) | $(0.07) | $0.17 | $(0.20) | $0.24 | | TiO2 Sales volumes (thousands metric tons) | 104 | 134 | 206 | 264 | | TiO2 Production volumes (thousands metric tons) | 89 | 137 | 194 | 258 | Reconciliation of Segment Profit (Loss) This reconciliation demonstrates segment profit (loss) calculation from income (loss) from operations, adjusting for trade interest income and corporate expense, showing a strong return to profitability Reconciliation of Income (Loss) from Operations to Segment Profit (Loss) (Millions USD) | Metric | Q2 2023 | Q2 2024 | H1 2023 | H1 2024 | | :-------------------------- | :------ | :------ | :------ | :------ | | Income (loss) from operations | $(6.7) | $35.9 | $(25.0) | $55.4 | | Adjustments: | | | | | | Trade interest income | 0.4 | 1.5 | 0.7 | 1.9 | | Corporate expense | 4.0 | 3.7 | 7.2 | 7.2 | | Segment profit (loss) | $(2.3) | $41.1 | $(17.1) | $64.5 | Reconciliation of Net Income (Loss) to EBITDA The reconciliation of net income (loss) to EBITDA illustrates improved core operating profitability by adding back non-cash and non-operating expenses like depreciation, interest, and taxes Reconciliation of Net Income (Loss) to EBITDA (Millions USD) | Metric | Q2 2023 | Q2 2024 | H1 2023 | H1 2024 | | :-------------------------- | :------ | :------ | :------ | :------ | | Net income (loss) | $(8.2) | $19.5 | $(23.4) | $27.6 | | Adjustments: | | | | | | Depreciation expense | 11.6 | 18.4 | 24.5 | 29.3 | | Interest expense | 4.3 | 9.8 | 8.5 | 19.0 | | Income tax expense (benefit) | $(4.1) | $8.5 | $(11.0) | $12.0 | | EBITDA | $3.6 | $56.2 | $(1.4) | $87.9 | Impact of Percentage Change in Net Sales This table details factors contributing to the 13% net sales increase for Q2 and H1 2024, showing higher TiO2 sales volumes as the primary driver, partially offset by lower pricing and mix Impact of Percentage Change in Net Sales | Factor | Q2 2024 vs 2023 (%) | H1 2024 vs 2023 (%) | | :-------------------------- | :-------------- | :-------------- | | TiO2 sales volumes | 29 % | 28 % | | TiO2 product pricing | (8) % | (9) % | | TiO2 product mix/other | (8) % | (7) % | | Changes in currency exchange rates | - % | 1 % | | Total | 13 % | 13 % | Forward-Looking Statements and Risk Factors This section highlights substantial risks and uncertainties for Kronos Worldwide's forward-looking statements, where actual results may differ due to market dynamics, operational challenges, and economic changes - Future results are subject to substantial risks and uncertainties, including supply and demand for products, ability to realize cost savings and integrate acquisitions (LPC)[9][10] - Risks include dependence on market sectors, business cyclicality, changes in raw material and operating costs, and availability of raw materials[10] - Global economic and political conditions, operating interruptions, technology-related disruptions, competitive factors, and fluctuations in currency exchange rates and interest rates are significant risks[10] - Other factors include liquidity, tax matters, environmental regulations, government laws, and potential litigation[10]