Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to The Chemours Company Q2 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Jonathan Lock, Senior Vice President and Chief Development Officer, you may begin your conference.
Hi. Good morning, everybody. Welcome to The Chemours Company's Q2 2022 earnings conference call. I'm joined today by Mark Newman, President and Chief Executive Officer, and Sameer Ralhan, Senior Vice President and Chief Financial Officer. Before we start, I'd like to remind you that comments made on this call, as well as in the supplemental information provided in our presentation and on our website, contain forward-looking statements that involve risks and uncertainties, including the impact of COVID-19 on our business and operations, and the other risks and uncertainties described in the documents Chemours has filed with the SEC. These forward-looking statements are not guarantees of future performance and are based on certain assumptions and expectations of future events that may not be realized. Actual results may differ, and Chemours undertakes no duty to update any forward-looking statements as a result of future developments or new information.
During the course of this call, management will refer to certain non-GAAP financial measures that we believe are useful to investors evaluating the company's performance. A reconciliation of non-GAAP terms and adjustments are included in our release and at the end of our presentation. As a reminder, our prepared remarks, a full transcript, and an audio recording, plus our earnings deck, have been posted to our website alongside our earnings release. This morning's call will focus purely on Q&A. With that, I'll turn the call over to our CEO, Mark Newman. Mark?
Thank you, Jonathan. I hope everyone is doing well, and I appreciate you joining us today. Our record-setting quarter demonstrates the strength of the structural growth we are pursuing and our ability to execute even in a challenging supply chain environment. Our four priorities remain improving the earnings power of TT through the cycle, driving secular growth in TSS and APM, managing and resolving legacy liabilities, and returning the majority of free cash flow that we generate to shareholders. We believe these four priorities will generate significant shareholder value over time. With that, Rob, let's open the line for Q&A.
At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Arun Viswanathan from RBC Capital Markets. Your line is open.
Great. Thanks for taking my question. Good morning. Hope you guys are well. I guess, you know, obviously some very strong performance here. Your pricing in TSS was above our expectations and similar to the last quarter. It sounds like that is persisting. Maybe could you just comment on that first?
Hey, good morning, everyone.
Good morning.
Yes. We had a record-setting quarter in our TSS business. Also established another new record in APM, which had a record quarter in our Q1 results. Candidly, when I look at our performance, you know, we have industry-leading businesses in all three segments, which all contributed in various ways to our results this quarter. Clearly, the market remains quite dynamic from a refrigerant perspective and, you know, we continue to see high demand, a very dynamic environment, in which, you know, we are obviously taking advantage of supply-demand dynamics in the market. Demand remains strong, as I said, in Q1, you know, with a number of institutional users, whether it's in the office space, hotel space, restaurant space, you know, coming back online in a post-COVID environment.
Demand remains strong and, you know, we're taking advantage of that. Clearly, as you saw in our TSS results, we also had volume growth and, you know, we continue to believe that we have a decade of growth ahead of us in this business, you know, as we see the transition from, you know, legacy refrigerants to low global warming refrigerants and our Opteon brand in particular. You know, very pleased with the structural growth we're seeing in our TSS and our APM businesses.
Arun Viswanathan, this is Sameer Ralhan. I just want to point one more thing to just what Mark Newman said is, as you look at the pricing across our businesses, especially in TSS and APM, we've, as we've talked in the past, there's a big focus around driving the value and use pricing as well. As you know, our products are essential in driving a lot of the secular trends and really enabling them. As we kind of look into that and the value that we deliver to our customers, there's a big focus on the value and use pricing as well, which you're seeing in the numbers now.
Great. Thanks, Sameer and Mark. I guess just for a quick follow-up, just on the cash flow uses, could you just remind us of your priorities now, what you'll be funding for the PFAS side as well as you know, potentially some capital return? Thanks.
Yeah. You know, we continue to invest in our business for long-term growth, especially in TSS and APM. You know, in TSS, we just announced the investment in Corpus based on our projection of growth and the need for added capacity sort of beyond the 2025 timeframe based on our updated projections. We're investing for growth, for example, in APM around semicon, where we remain sold out. You just saw the CHIPS Act get passed, so we expect, you know, even more demand coming there. You know, these are high return growth projects. We're also investing, obviously, in run-and-maintain and sustainability as we, you know, move towards meeting our reduction of greenhouse gas target and fluorinated organic compounds. We're investing in the business for long-term creation of value and growth.
based on our cash generation, you know, we're also able to allocate and return the majority of our free cash flow to investors or to our shareholders. We're doing that through a stable dividend and a steady diet of stock repurchases. I'll ask Sameer to just comment on, you know, the level of stock repurchases year-to-date.
Thanks, Mark. Arun, as you've seen, we've made a pretty steady diet of share buybacks in the first half of the year. That's in line with what we have outlined at the beginning of the year. We'll expect to continue to do that. Meanwhile, as Mark said, we're investing in the growth, and we'll, you know, strengthen the free cash flow, provides us the ability to even chip away on the debt side. You've seen us, our commitment to get our debt down, gross debt down to $3.5 billion, and we continue to make progress on that side as well, while putting money in the escrow, as well, to continue to strengthen the balance sheet.
You know, again, the strength of the free cash flow provides us the ability to execute on all fronts.
Thanks.
Your next question comes from the line of Matthew DeYoe from Bank of America. Your line is open.
Hi, this is Rock Hoffman on for Matthew DeYoe. My first question is, the EPA has set a health advisory for GenX, which I think is the first consideration for GenX. Do you think that this is the first step to inclusion of GenX in any pending CERCLA decisions to be made later this year?
Yeah, we don't see a tie-in between the health advisory and CERCLA. Clearly, we see you know the normal process, as I understand it, is a health advisory precedes a MCL or a drinking water standard. You know clearly we are challenging the health advisory based on the science. You know in our view you know both the assessment from a toxicity perspective, assessment from an exposure perspective and you know the due process that should have been followed in something like this. We've decided to challenge this particular thing from a legal perspective. You know in the quarter, as you saw, you know we took a charge related to the connection between the health advisory and the consent order in the state of North Carolina.
We believe, you know, the science is flawed. We're challenging it on that basis, but given the context in our consent order, it gave rise to the charge in the quarter.
Got it. Thank you. Just a quick follow-up. Excuse me. If we look at something like the heat wave in Europe in 2Q, is that driving a lot of volume for your business? Is that something that's kind of responsive to weather in general?
It's a great question. Typically, when you have a really warm summer, it can extend the season in terms of, you know, either retrofits or upgrades or simply just replacement of refrigerants in existing equipment. Clearly, we see a long-term growth projection in refrigeration as a class given rising global temperatures. We also see obviously the transition to more sustainable refrigerants where we are a market leader. You know, the point that you're raising may not create, you know, an increased demand, although it will extend the season somewhat that we normally see. It really speaks to the long-term growth of refrigerants and our ability to deliver a decade, you know, of mid-single digit growth, high mid-single digit growth in this business.
Great. Thank you.
Your next question comes from the line of John McNulty from BMO Capital Markets. Your line is open.
Yeah. Good morning. Thanks for taking my question. Obviously some really chunky margins in the APM segment, given your shift toward, you know, more value, high-value kind of solutions. Was there anything unusual about this quarter's strength that maybe we shouldn't necessarily assume continues? I guess, you know, also in your prepared commentary, you kind of highlighted, look, you're in year one of a multi-year journey and transformation in this business. Can you give us maybe a little bit of a peek at year two and the type of actions that may continue as we look on the growth and on the margin side for the business?
Hey, John. Thanks for the question. You know, when you think of where APM came from a little over a year ago, it's become a real contributor to the total earnings of the company. We're very excited about where we go from here and the ability to sustain, you know, double-digit margins going forward. You know, what we've said historically about APM is it has very high operating leverage. Clearly, you know, we're sold out on many product lines, so we are having, you know, really great demand and as a result, really great mix, you know, with the business. I wouldn't point to anything unusual in the quarter.
I think if you look on a full year basis, you know, our guide would still be, you know, in the low 20s% EBITDA margins on sort of, you know, a more modest, you know, volume print in, you know, with normal seasonality. Clearly, you know, the journey continues in transforming and accelerating this business, and we're really proud of what the team's accomplished. I'm not ready. We're not ready at this point to sort of change the margin profile. Sameer, do you have anything else?
Nothing. Mark, you laid out pretty well. John, as you know, this is a business that in which we have the most operating leverage. As you look at the volume, as it came in the Q2, and especially in the first half, that drove the margin. As we move into the second half with some of the plant turnarounds coming and some of the seasonality that typically comes in the Q4, I think overall for the full year, you'll still see us in the low 20s%. That's the target that we have as Mark outlined.
Got it. Fair enough. On the TSS segment, you know, the pricing was obviously really strong, up 39%, almost 40%. You know, was this largely the Opteon side really kicking in, or can you speak to the HFC side, or was it both? Like, I guess, how should we think about the dynamics that drove kind of that really high level of pricing?
Yeah, I'd say you know, I would say it's both. We're seeing really good demand, strong demand for our refrigerants. Clearly, as you know, a lot of the install base today is based on a legacy refrigerant platform. But we're also seeing, you know, increased strength of adoption and speed of adoption of Opteon, which you would expect, you know, as base refrigerant prices are higher. I mean, that's basically how the quota mechanism works. You know, John, maybe with that, you know, we felt it was time, you know, to add some incremental capacity at our Corpus facility. You know, it is, you know, in our view, the lowest cost facility in the world.
You know, as we project out the adoption beyond 25, we thought it was the right time, you know, to add some incremental capacity there, to that facility. You know, again, this speaks to the thesis of refrigeration as a whole is a growing class, product class. Obviously within that, the transfer to low global warming refrigerants is really, you know, benefiting our business, and we wanna be ready to support our customers in that regard.
Got it. Thanks very much for the color.
Your next question comes from the line of Mike Leithead from Barclays. Your line is open.
Great. Thanks. Good morning, guys. First one, just on the Fayetteville environmental remediation charge in 2Q. Can you just help us with what the cash spend related to that was in 2Q, and just how we should think about related cash spend over the next 12 months there?
Yeah, Mike, this is Sameer I'll take this one. Essentially, when you look at the charge, right, overall, if you just zoom up and look at the overall spend of the Fayetteville site, roughly $250 million will be spent over the next three years from a free cash flow perspective. Big chunk of that, frankly, is the construction of the wall. As you know, that $250 million is subject to the 50% recovery from DuPont and Corteva as per the MOU agreement that we have with them. Beyond that, you know, the remaining $260 million is really a long spend. That's really maintenance, monitoring, and operations of the offsite and onsite operations over the next 20 years.
There's a very slow burn on that one. As we kind of laid that out, that's roughly $16 million per year amongst all of us, and half of that is recoverable from DuPont and Corteva per MOU. Roughly $8 million a year. It's really the upfront, the construction of the wall, but beyond that, these are pretty small numbers.
Got it. Makes sense. Secondly, for TiO2, you obviously talked about ore constraints through the Q4. I guess if we just take a step back, bigger picture in a world where we're probably a bit constrained in ore. Can you just talk about your comfort and your availability and sourcing for ore over the next, say, few years for Chemours?
Yeah. You know, we continue to look for opportunities to strengthen our ore sourcing. Clearly, we're the largest commercial buyer of ilmenite, so you know, we do have a significant market presence. You know, we work with all the strategic ore suppliers. We also work with some of the more junior miners in the space. You know, we're sitting here today, our view is the ore constraints will relieve in Q4, consistent with our prior outlook. Again, we remain confident that you know, through a whole host of market mechanisms, we can bring on more ore supply.
You know, as I said in Q1, the world is not short of titanium-bearing ores, but clearly, you know, we need more mining to be brought online, and we're confident given the market dynamics and given our presence in the market, that that's very achievable.
Great. Thanks.
Your next question comes from the line of Josh Spector from UBS. Your line is open.
Yeah. Hey, guys. Thanks for taking my question. Just going back to TSS and focusing on the volume side, at least versus our estimates, that's where there was some of the bigger surprise. Curious if you could comment on the 15% growth, you know, where you saw the biggest opportunity there by market, especially given automotive down year-over-year. That's a pretty impressive number. How do you think the second half develops at this point? Was there some earlier sell-in or anything else you kinda note that you're seeing in the second half that may be similar or different? Thanks.
Yeah. I'd say, you know, the second half, we've reminded folks all year, you know, is subject to normal seasonality. You'd normally see, you know, a lot of demand in Q1 and Q2, as I said earlier, with a hot summer that could make, you know, Q3 marginally better. Clearly, you know, we expect normal seasonality in the second half where it would be weaker. On auto, which you mentioned, you know, we see auto consistent with IHS forecasts being up slightly year-over-year. I think IHS is, you know, around 3% or 4%. You know, our full year is based on that outlook. You know, the auto industry remains very challenged from a supply chain perspective, so that's baked into our numbers.
The big driver of volume for us is really the transition on the stationary side. You know, as I said in Q1, you know, we've signed up with you know major OEMs of stationary equipment from chillers to cooling equipment for supermarkets to air conditioning. You know, that adoption is going quite well. Clearly, with both F-Gas in Europe and now AIM in the U.S., you know, OEMs have you know two very large markets to serve that are moving to low global warming. It's really on that basis that you know we're seeing this kind of growth. Again, that kind of growth is implied in the investment we're making at Corpus, you know, where we see a decade of growth related to this transition.
Thanks. Just on the cost side, where you guys talk about higher raw material costs in the second half, is that in some of your back-integrated products, or is that some purchase products? I'm curious if you could comment on how you see second half transpiring. Is there another step-up we should be considering into 2023, or is it more transient than that?
Hey, Josh, it's Sameer. Let me just take that one, and Mark will jump in. Essentially, when you look at the cost side, you know, into the second half, yes, some of it is just really things moving through the inventory, be it through our own manufacturing or some of the components that we purchase from other places. That dynamic you're gonna see, frankly, in both the TSS and APM side as well, where the supply chains tend to be a little longer, right? As we've kind of told in the past, in the polymers, materials can sit through the inventory as they go through different components, almost six months or more, right?
You're gonna see some of the stuff on the raw material inflation side that happened early in the year kind of really channeling through the system and showing up in the second half. That's a dynamic for both the segments.
Okay, thank you.
Your next question comes from the line of Vincent Andrews from Morgan Stanley. Your line is open.
Hi, guys. This is
being sold through APA contracts currently. You've talked about that kind of being at the right level in the past. My question is that kind of given the uncertain macro outlook, is there any desire to possibly increase that proportion, or, is that still your target for now?
No. Clearly, you know, as we've said in the past, you know, we have what we consider to be our best book of contracted business. You know, we target a level of about 70%. You know, that allows us, you know, in a tight market like we've been experiencing, you know, the ability to ensure we can meet all of our customer needs. I'm really proud of our TT team and how they've, you know, achieved very high rates of delivery to promise in the upper 90s, to be honest, despite, you know, some of the ore challenges we've had this year. You know, going forward, I would expect that number to, you know, remain around the target.
Clearly, it will modulate depending on, you know, demand from contracted customers and demand, you know, in the spot market. You know, I think our view is this is a really prudent level going forward, and I don't see any fundamental change. To the point you mentioned about, you know, seeing, you know, some potential weakness, you know, clearly this is a strength for the franchise as we go. I, you know, if we see any further weakening, we're seeing some weakness today in parts of Europe and in APAC, especially in China. To have this strong book of business as, you know, if you see any global macro weakening from here is a really great thing.
The team, you know, is very focused on, you know, how we modulate the circuit to optimize the needs of the market going forward with this contract book of business in place. It's a great franchise, and, you know, we're really proud of what we've built here.
Got it. I guess, just as, I guess, a little follow-up. I mean, some coatings players have kinda talked about, you know, destocking opportunities, you know, both for retailers as well as within their own inventories on the TiO2 side, which kind of, I guess, seems to run opposite to what you and other TiO2 producers have been talking about over the past few quarters. Could you give us a little update on, you know, how you guys are thinking about the channel inventory situation right now?
Yeah. You know, we've also read, you know, some of the comments around destocking. I would say particularly in EU and Asia. Clearly, you know, the way we supply our customers is, you know, they don't have an incentive to build massive inventory given our commitment to supply and the pricing certainty that they enjoy. Our assessment is inventories are still relatively low. They may be better than they were at the beginning of the year. The consumer, as we look at the data around U.S. consumer, remains relatively strong, even though they may be spending a little bit more money on travel at the moment.
you know, net-net, we feel really good about, you know, the strength of our contracts and the relationships that we have with a large number of strategic users of our pigment, both in the coatings segment and in the laminate space.
Got it. Thank you.
Again, if you would like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from the line of Laurence Alexander from Jefferies. Your line is open.
Hi, good morning. This is Kevin Estok on for Laurence. I know you guys touched a little bit on your end markets, but I guess I was wondering specifically maybe where you see the greatest changes happening, currently, and you know, as recessionary risk rise, I mean, which ones do you see maybe deteriorating the most? Obviously the recovery in China has been sort of tepid with the re-openings. I'm just curious what you're seeing there as well and how it's impacting demand.
Listen, you know, we read all the same global macro data that you guys read and, you know, obviously we've seen the recent print on U.S. GDP. I'd say in our business, most of the weakness we've seen to date has been in Europe and parts of Asia, specifically China. You know, I'd say beyond that, not much more to report at this point. Clearly on APM, you know, we remain sold out in several product lines. We've seen some fade in some of the less strategic parts of our business, you know, around consumer coatings, for example. We've been able to reuse that capacity, you know, for higher value applications in use. In TSS, you know, we've seen a very robust first half. We expect normal seasonality in the second half.
I would say in TT, we also expect, you know, more normal seasonality as we go into Q3 and Q4. You know, I'd say, you know, the team has done a really nice job through, you know, the expansion we saw coming out of COVID, and I expect the team to do a great job as we go into the back half of the year, even if there are some changes from a global macro perspective. Sameer, I don't know if you have any other thoughts.
No, I think Mark just said it right. It's really around Europe and Asia in pockets, frankly. I mean, the APM and TSS businesses continue to execute well, great, and we see tremendous opportunities, and we're really watching the macro like everybody else, as you said.
Thank you.
Great. Thank you.
There are no further questions at this time. Mr. Mark Newman, I turn the call back over to you for some closing remarks.
Well, listen, thank you all for your interest and continuous support at Chemours. You know, I'm immensely proud of what the team has accomplished, especially in the last year as I look across our three businesses, how we've met the challenges on the ore side, for example, in TT, but also the long-term growth that we're seeing in TSS and APM and, you know, we've talked a lot about this to you in our investor meetings and, you know, we're delivering against that commitment to drive growth in those two businesses. We're immensely excited about the future and where we can take the business from here, and look forward to meeting with you in the coming weeks as we get out on the road. Take care.
This concludes today's conference call. Thank you for your participation. You may now disconnect.