Titanium dioxide producers have been rocking the Street. After PolyOne (NYSE: POL) numbers that beat the Street estimates, Kronos Worldwide's (NYSE: KRO) second-quarter bottom line has jumped more than fourfold to $89 million, as higher prices for the white pigment boosted revenue.
Investors, however, dumped the stock, sending it down by nearly 8%. Is something seriously wrong with Kronos? Let us find out.
The numbers
Kronos' revenue for the quarter surged 41% from the year-ago quarter to $537.5 million. The primary driving factor was the higher TiO2 selling prices, which went up by a significant 39% from last year's level. Positive currency exchange rates further contributed around $33 million to sales in the quarter. Pigment production volumes were also 6% higher in the second quarter.
Higher TiO2 prices helped offset higher raw material costs, as a result of which Kronos' operating income shot up from $41.9 million in the year-ago quarter to $143.3 million.
Robust top-line growth boosted Kronos' net income to $89 million from $19.3 million in the year-ago period. Hence, EPS shot up from $0.20 to $0.77 this quarter.
The Dallas-based company's total debt-to-equity ratio has improved significantly from 152.1% to 60.4%. Higher equity, primarily because of a 2-for-1 stock split, accounted for the lower ratio. Long-term debt also reduced marginally, by 4% to $509.4 million. The company's interest coverage ratio stands high at 16.9 times, while the unlevered FCF has also risen from $26.5 million to $71.3 million year on year. This suggests that the company is in a comfortable position to service debt obligations.
Titanium benefit
TiO2 has been in huge demand, and the supply remains tight. This has prompted companies like Kronos to hike pigment prices consistently, thus raking in moola while passing on higher costs to their primary customers like paint companies.
Kronos has recently announced a fresh price hike for all TiO2 products effective from September on top of earlier hikes announced in the months of May and June. Other players such as DuPont (NYSE: DD) and Huntsman (NYSE: HUN), too, have announced similar hikes recently.
Market participants are expecting a further rise in TiO2 prices. Clearly, higher prices will continue to reflect positively on Kronos' forthcoming quarterly numbers.
While demand for TiO2 is expected to go up further, Kronos has not announced anything on the expansion front yet. Kronos believes its current profit margins are not sufficient to take up capacity expansions. DuPont, however, has already proceeded with a 350 kiloton capacity expansion plan. Huntsman also expects higher margins to enable it to expand capacity in the next few years. Moreover, these companies are also increasing their foothold in emerging markets, again something Kronos has not been very aggressive with. With the bottom line growing, we can just hope for Kronos to come up with such plans soon.
The Foolish bottom line
With such robust numbers and profitability growth expected to continue beyond 2011, it seems investors were just booking profits amid the overall economy fears. As of now, things look fine for the company in the near term.
