Executive Summary / Key Takeaways

• Kronos Worldwide delivered a strong start to 2025, with significant year-over-year increases in net income and segment profit driven by higher volumes, improved pricing, and lower per-unit production costs.
• The recent acquisition of the remaining 50% interest in Louisiana Pigment Company (LPC) is a key strategic move expected to enhance KRO's North American market position, expand product offerings, and generate operational synergies.
• While macro uncertainty and potential tariff impacts temper the near-term demand outlook, particularly in North America, improved European demand (partly due to EU duties on Chinese imports) and low customer inventories offer potential upside.
• KRO's operational efficiency improvements, cost reduction initiatives, and backward integration (Norwegian mine) provide a competitive edge against rivals heavily reliant on external ore and facing higher energy costs.
• The company appears well-positioned from a liquidity standpoint to manage working capital needs, fund planned capital expenditures, and address upcoming debt maturities, supported by its revolving credit facility.

A Foundation in Pigments: Kronos Worldwide's Enduring Story

For over a century, Kronos Worldwide, Inc. (NYSE:KRO) has been a foundational player in the global chemicals landscape, specializing in the production and marketing of titanium dioxide (TiO2) pigments. These versatile white pigments are indispensable "quality of life" products, lending essential whiteness, brightness, opacity, and durability to a vast array of everyday items, from paints and plastics to paper, fibers, and specialty applications like cosmetics and pharmaceuticals. Operating production facilities strategically located across Europe and North America, KRO has built its business on serving diverse end markets, with approximately 45% of its sales volume directed towards European customers in the most recent quarter.

The TiO2 industry is inherently cyclical, with demand generally tracking global GDP growth over the long term (historically 2-3% annually). However, short-term fluctuations are common, often influenced by customer inventory levels and expectations around future pricing and availability. KRO's history reflects this cyclicality, navigating periods of both strong demand and profitability, such as the record-setting performance seen in 2011 and early 2012, and downturns like the reduced demand experienced in 2023. Through these cycles, KRO has honed its operational capabilities and strategic focus, emphasizing value-added products, technical support, and maintaining a global presence.

A key element of KRO's operational structure is its dual approach to production, utilizing both the chloride and sulfate processes. While the majority of its output serves the broader commodity pigment market where price and availability are paramount, KRO also produces specialty grades. The company's backward integration, specifically its ownership and operation of an ilmenite mine in Norway, provides a significant advantage, supplying 100% of the ore feedstock for its European sulfate process plants. This integration helps mitigate the impact of volatile third-party ore costs, a critical factor in TiO2 production expenses. While specific quantifiable cost advantages from this integration are not detailed, management notes its role in hedging against ore shortages and cost increases. KRO's technical expertise also allows for process improvements aimed at optimizing production, including purified grades, contributing to gross margin enhancement. The high capital cost and extended lead times (typically 2-5 years) required to build significant new TiO2 capacity, particularly for premium chloride grades which rely on proprietary technology, represent a substantial barrier to entry, supporting the long-term supply/demand balance narrative that management has historically emphasized.

Navigating the Competitive Currents

The global TiO2 market is dominated by a few large players, including Tronox (TROX), Chemours (CC), and Venator Materials (VNTR), alongside regional producers and Chinese competitors. KRO competes directly with these companies across various end markets. While the majority of KRO's production is in commodity grades, its competitive positioning is influenced by several factors.

Compared to vertically integrated players like Tronox, which benefit from lower raw material costs through in-house mining, KRO's reliance on third-party feedstock for a significant portion of its production can lead to higher per-unit costs. However, KRO's own ilmenite mine provides a degree of cost mitigation, particularly for its European sulfate operations. KRO differentiates itself through its established KRONOS brand, technical services, and customer relationships, which can command pricing power and foster loyalty, especially in traditional segments. This contrasts with competitors like Chemours, which emphasizes innovation in sustainable and high-performance pigments, potentially positioning them better in environmentally conscious markets. Venator, while having low-cost manufacturing in Europe, has faced financial challenges and operational inefficiencies.

Competition from Chinese suppliers, often utilizing less stringent regulatory and environmental standards, primarily impacts the lower end of the sulfate market. These producers can offer lower-grade products at competitive prices, sometimes used as extenders or in less demanding applications. However, the quality and reliability of supply from these sources can be inconsistent. The European Commission's duties on Chinese TiO2 imports, enacted in mid-2024, have reportedly improved demand conditions for KRO in Europe, illustrating how trade policies can influence regional competitive dynamics.

KRO's strategic response to this competitive landscape involves leveraging its brand and technical expertise, optimizing its production processes (including the recent closure of the Canadian sulfate line to focus on purified grades), and pursuing strategic acquisitions like LPC to strengthen its position in key markets like North America. While facing vulnerabilities related to supply chain dependencies and the need for ongoing innovation to match competitors like Chemours, KRO's financial health and focus on operational efficiency provide a foundation for navigating these pressures.

A Strong Start to 2025: Performance and Operational Insights

Kronos Worldwide kicked off 2025 with a notable improvement in financial performance compared to the prior year. For the three months ended March 31, 2025, the company reported net income of $18.1 million, a significant increase from $8.1 million in the same period of 2024. This translated to net income per basic and diluted share of $0.16 in Q1 2025, up from $0.07 in Q1 2024.

The primary driver behind this enhanced profitability was a substantial increase in income from operations, which rose to $38.4 million in Q1 2025 from $19.5 million in Q1 2024. This operational improvement stemmed from a confluence of favorable factors:

• Higher Volumes: Sales volumes increased by 5% to 136 thousand metric tons in Q1 2025, reflecting stronger demand in North American and European markets, partially offset by softer export volumes. Production volumes saw an even larger increase, rising 18% to 143 thousand metric tons, as the company operated its facilities at 93% of practical capacity utilization, up from 87% in Q1 2024.
• Improved Pricing: Average TiO2 selling prices were 2% higher in Q1 2025 compared to the average prices in Q1 2024, contributing positively to revenue.
• Lower Per-Unit Production Costs: Despite higher volumes, cost of sales decreased by 6% to $383.0 million. This was primarily due to decreases in per metric ton production costs, notably for raw materials and utilities, and improved absorption of fixed costs resulting from the higher operating rates. This led to a significant improvement in gross margin as a percentage of net sales, rising to 22% in Q1 2025 from 15% in Q1 2024.

Net sales saw a modest 2% increase to $489.8 million, as the positive impacts of higher volumes and pricing were partially offset by changes in product mix and an estimated $11 million decrease due to unfavorable currency exchange rate movements, primarily related to the euro. Selling, general, and administrative expenses increased by 14% to $61.6 million, partly due to higher distribution costs associated with increased sales volumes and additional warehousing costs incurred in the U.S. as a mitigation strategy for anticipated tariffs.

Beyond operating performance, interest expense increased to $11.6 million in Q1 2025 from $9.2 million in Q1 2024, reflecting higher overall debt levels from transactions in the prior year. Income tax expense also rose commensurate with higher pre-tax earnings and the jurisdictional mix of income.

Working capital saw a significant increase in cash usage for operating activities, rising to $102.4 million used in Q1 2025 compared to $43.3 million used in Q1 2024. This was largely driven by higher net cash used for changes in inventories, receivables, payables, and accruals. Average days sales outstanding (DSO) increased slightly to 65 days at March 31, 2025, from 62 days at December 31, 2024, while average days sales in inventory (DSI) increased to 86 days from 82 days, reflecting higher inventory volumes. Capital expenditures increased to $12.0 million in Q1 2025, primarily for facility maintenance and improvement.

Outlook and Strategic Trajectory

Kronos Worldwide's outlook for the remainder of 2025 reflects a mix of cautious optimism and strategic execution. Management noted that while overall customer demand improved in the first quarter, the momentum slowed in the latter half due to uncertainty surrounding potential U.S. federal government tariffs and international responses. This uncertainty is expected to keep demand, particularly in North America, challenging until resolved. However, demand in Europe has seen improvement, partly attributed to the European Commission's duties on Chinese TiO2 imports.

Despite the near-term demand caution, management expects improved operating results to continue during 2025, contingent upon maintaining current demand levels. They plan to operate production facilities near 2024 levels, adjusting rates based on demand. Raw material, energy, and other input costs are generally trending lower, although energy costs in Europe remain volatile. These costs are expected to moderate further in 2025. The company anticipates shipping and warehousing costs to normalize as TiO2 and titanium ore were ultimately exempted from the announced U.S. tariffs, allowing for the sale of elevated U.S. inventory built as a mitigation strategy.

A central element of KRO's strategic trajectory is the integration of the Louisiana Pigment Company (LPC) acquisition, completed in July 2024. This move is expected to positively impact 2025 earnings by expanding product offerings, increasing sales in North America, and realizing synergies across commercial, overhead, and supply chain functions. While soft demand and competitive pressures may temper this impact, the full integration of LPC's production capacity is a key focus.

From a liquidity standpoint, KRO believes it is well-positioned to meet its short-term (next 12 months) and long-term (next five years) obligations. The company intends to repay the $75 million Senior Secured Notes due in September 2025 using cash from operations or borrowings from its Global Revolver, which had approximately $300 million in borrowing availability (less outstanding amounts) at the end of Q1 2025. Cash on hand is expected to improve as U.S. inventory levels are reduced. Planned capital expenditures for 2025 are approximately $55 million, focused on maintaining and improving existing facilities, though projects could be delayed based on market conditions. Management's historical philosophy of returning excess cash to shareholders through dividends and potential share repurchases remains a consideration, balanced against working capital needs and strategic investments.

Risks and Considerations

Investing in Kronos Worldwide involves exposure to several key risks inherent in the TiO2 industry and the broader macroeconomic environment. The cyclical nature of the business means that demand and profitability are highly sensitive to global and regional economic conditions, including GDP growth, consumer confidence, and geopolitical events. Unexpected shifts in customer inventory levels, influenced by market expectations, can also lead to volatility in sales volumes.

Changes in raw material costs, particularly for titanium-containing feedstocks and energy, represent a significant operational risk. While costs are currently moderating, volatility, especially in European energy markets, persists. The availability of raw materials is also a factor, although KRO's backward integration provides some buffer.

Competitive pressures are constant, stemming from other major global producers and lower-cost suppliers, particularly from China. While KRO differentiates on quality and service, intense price competition can erode margins. The potential for unexpected industry capacity expansion, though historically constrained by high costs and lead times, remains a long-term risk to the supply/demand balance.

Geopolitical factors, including the introduction or changes in tariffs and trade barriers, can directly impact KRO's operations and markets, as evidenced by the recent U.S. tariff uncertainty and the impact of EU duties on Chinese imports. Currency exchange rate fluctuations, given KRO's significant non-U.S. operations, can also materially affect reported financial results.

Operational risks include potential interruptions at manufacturing facilities due to labor disputes, maintenance issues, or external events. The successful integration of the LPC acquisition and the realization of expected synergies also carry execution risk. Finally, the company is subject to various environmental regulations and potential litigation, which could result in significant costs or liabilities.

Conclusion

Kronos Worldwide's first quarter 2025 results signal a positive turn, demonstrating the company's ability to capitalize on improved demand conditions and operational efficiencies. The strategic acquisition of LPC is poised to strengthen its North American footprint and contribute to future earnings through synergies and expanded market reach. While the near-term landscape is clouded by macroeconomic uncertainty and potential trade-related volatility, particularly in North America, the underlying dynamics of the global TiO2 market – characterized by high barriers to entry for new capacity and an expected long-term demand growth trajectory – provide a supportive backdrop.

The company's focus on cost reduction, operational optimization, and leveraging its integrated supply chain positions it to navigate input cost volatility and competitive pressures. With a seemingly solid liquidity profile to manage near-term obligations and fund strategic investments, KRO appears focused on executing its plan to enhance profitability and deliver value to shareholders. The key for investors will be monitoring the trajectory of global demand recovery, the successful integration of LPC, and the company's ability to maintain pricing discipline in a competitive environment, all of which will shape the unfolding narrative for Kronos Worldwide.