Q3 2019 Earnings Call
Welcome to the <unk> company third quarter earnings call.
At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question answer session to ask your question. During this session you will need to press star one on your telephone.
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I would now like to turn the conference over to your Speaker today, Jonathan Walke, Vice President corporate developments in Investor Relations.
Thank you.
Please go ahead Sir.
I'm joined today by Mark Vergnano, President and Chief Executive Officer.
Mark Newman Senior Vice President and Chief operating Officer, and Samir Rohani, Senior Vice President and Chief Financial Officer.
Before we start I'd like to remind you that the comments made on this call. That's why was the supplemental information provided in our presentation and on our website contain forward looking statements that involve risks and uncertainties, including those described in the documents can Morse as filed with the FCC.
These forward looking statements are not guarantees of future performance in our based on certain assumptions and expectations of future events that may not be realized actual results may differ and Kamada 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 this presentation.
Now I'll turn the call over to our CEO , Mark Vergnano, who will review the highlights from the quarter Mark.
Thanks, Jonathan Good morning, everyone and thank you for joining us today.
Starting on chart three as you all saw in our press release from a few weeks ago. It's Sparks has been appointed president of our fuel product segment reporting to Mark Newman.
It's started his career with Dupont 25 years ago at our new Johnsonville site.
As held positions of increasing global responsibility at Dupont and cores, including sales operations technology as well as corporate strategy in capital planning.
Most recently Ed served as president of chemical solutions, and he will retain responsibility for that business. In this newly expanded role we're very lucky to have such a talented leader ready to step up and lead our floor products business.
We see tremendous opportunity for improvement across the segment and I believe and has the right mix of operating commercial experience to drive didn't need to change I look forward to edmark working together to take our business performance to the next level over the coming years again, Ed My Sincerest congratulations.
Moving to our third quarter results in highlights from the quarter on the next chart results in the quarter reflect a weaker macro and continued sluggishness across many of our core markets.
Asia has been notably weak with the ongoing U.S., China dispute clearly affecting competence across the entire region.
Well the global environment has proven challenging we have been focusing on execution and managing the elements of the business within our control.
In the face of these market conditions, our team delivered growth in Opteon for mobile applications and it our high grade Fluoropolymer lines.
In titanium technologies, we increased volume through our flex channel M. continual leverage this channel to help us to continue to regain share moving forward.
We also announced the launch of a new T. out two great for Inc.'s under the tide pure select brand a key milestone as we entered the lucrative specialty tea go to market.
In addition to finding new sources of growth, we're working to simplify our portfolio to enable focus on the best long term value creation opportunities.
So this ended in September we announced the shutdown of our medical means and maximize business a non core portion of our chemical solutions segment.
We anticipate the shutdown of the asset to be complete by December .
Finally, we published our second annual corporate responsibility commitment report in September .
I'm going to take you through the work we're doing here in more detail on the next chart, but please if you haven't already have a look at the report in its entirety on our website.
So turning to chart five last year, we published our first corporate responsibility commitment embodied in a set of 10 ambitious goals, which we aim to achieve by 2030.
These goals cover our commitment to our planet, our people and a future proof sustainable portfolio.
This report was a unique statement in the chemical sector and we believe it sets us apart from our peers.
This September we published our second annual CRC report with transparent metrics to track progress that we've made.
We have made significant progress at our sites through the products, we sell and within our own workforce.
For example, we recently installed a new combined cycle heat and power system at our new Johnsonville site, which will reduce our greenhouse gas emissions by 145000 tons of CEO to equivalent per year.
It's a lower cost lower footprint solution that is a great example of how we can make investments that benefit the bottom line and the planet.
From a product perspective, we estimate that opteon are low global warming refrigerant technology will eliminate 325 million tons of C. O two equivalent on a global basis by 2025.
This is equivalent to offsetting the C O two emissions of 11.5 million cars over the next six years.
That's the power of sustainable chemistry, and that's the reason why we are working so hard to accelerate the adoption of this great technology worldwide.
Finally, we continue to work towards building a more balanced global team with 50% of positions filled by women and 20% of all U.S. positions filled by ethnically diverse employees.
As I said in our last call, we will benefit tremendously from the diverse points of view, we bring to address problems in our business and in the world more broadly.
To be clear, we don't have all the answers yet our CRC goals are not check the box exercises that business as usual will allow us to achieve.
However, I know that our collective energy can create the change necessary to make our 2030 objectives a reality.
It is this work at our tireless dedication to it that helps make us a new kind of chemistry company.
With that I'll turn things over to submit our to go over our financial results for the quarter I'll be back at the end of the call to provide some thoughts at our priorities heading into next year.
Thanks, Mark let's move to chart number six.
Sales of $1.4 billion were flat relative to the second quarter and $200 million below sales in the third quarter of Tony 18.
Nor volumes of type or pigment drove the decline as soft global demand continued pass the midpoint of the year.
GAAP net income was $76 million and adjusted net income was $98 million.
GAAP EPS of 46 cents per share and adjusted EPS of 59 cents per share were in line with lower earnings in the quarter.
We recognized $34 million of restructuring and asset related charges in the third quarter.
These charges were primarily tied to the shutdown of our methylamines and metal Mike business and cost savings initiatives.
Adjusted EBITDA of $248 million was impacted by lower margins across the two main segments.
Titanium technologies margins continue to be impacted by low volumes and fixed costs under absorption across the circuit.
Total products margins decline as illegal imports affected sales of high margin RPM blends based upfront and efficacy what a sales.
Mark will provide more detail here when he discusses photo product segment results.
On the second quarter call I indicated that free cash flow had turned positive in June .
We carried that momentum into Q3.
Free cash flow for the third quarter was $160 million that is driven by cash flow from operations of $288 million and capex spend of $128 billion.
Turning to page third quarter, adjusted EBITDA was $248 million.
$187 million from the same period a year ago.
Lower volumes principally in our titanium technologies segment negatively affected results on you get a year basis.
In total volume was a 100 million dollar had been in the quarter.
Lower prices accounted for an additional $55 million I've had been through a combination of lower global refrigerated prices lower pass through pricing in southern chemical solutions product lines, and some mix and channel adjustments in our titanium technology segment.
Cost another was a 27 million dollar had been in the quarter on a year over year basis.
This is primarily due to lower africa's quarter sales and fixed cost under absorption.
Operational headwinds in the quarter were offset by the benefits from the ramp up off Opteon production at Corpus Christi site.
Mike Newman will give you more detailed about this when he covers the segment results.
Moving ahead to the liquidity section on chart eight we continue to believe in the strength of our balance sheet, even as you move through a period of lower earnings.
We ended the quarter with nearly $700 million of cash up from $630 million at the end of the second quarter.
Cash flow from operations was $288 million in the quarter, reflecting increased volumes from titanium technologies on a sequential basis.
Capex was a 128 million dollar use of cash and we returned $41 million to shareholders, we a dividend in the quarter.
Our net debt at the end of the third quarter stood at approximately $3.5 billion and that resulted in net leverage off approximately 3.1 times on a trailing 12 month basis.
I'll now turn things over to Mark Newman, our Chief operating officer to discuss segment performance.
Thanks, Amir moving ahead to the next chart headwinds from illegal imports continue to weigh on results in floor products, we're accelerating our corrective actions from a regulatory environmental trade in public awareness perspective.
While there have been a number of high profile seizures of illegal refrigerants in 2019, we have not yet reached a tipping point, where we believe illegal activity is fully under control.
That being said, we remain committed to working with our industry partners.
On countermeasures at the state and even level, we remain optimistic that rule of law and the fundamental value of F. gas as their regulatory scheme will result in an uptick in enforcement ahead of the 2021 quota step down.
Flora products net sales in the third quarter totaled $636 million down from $682 million in the third quarter of 2018.
We continue to observe sales weakness, particularly in Asia, where automotive and electronics demand have declined in the wake of the China U.S. trade issues.
In my visits with our customers and channel partners the demand outlook remains uncertain.
Adjusted EBITDA came in at $122 million, reflecting lower demand for a high margin up 10, stationary blends and lower f. gas quotas sales in the quarter compared to the third quarter of 2018.
These headwinds were partially offset by continued adoption of optune refrigerants into new automotive platforms in the U.S. and Asia.
As well as Fluoropolymer application development activities.
On the positive side, we saw the ramp of up 10 production at our Corpus Christi site, but this benefit was offset by operational headwinds elsewhere in our circuit, which have now been resolved.
These operating issues reduced flora products adjusted EBITDA margins by approximately 3% in the quarter and we expect a similar impact in the fourth quarter.
Ed and I are not happy with our operational performance. This year and we are taking actions to improve execution.
Moving to chart 10, I'd like to share more details on or investment that we're making at our Fayetteville works facility.
Specifically the capital investment in their new thermal oxidizer or tio as we called it.
While impressive I'm not sure that picture on the chart does justice to the scale of the investment we're making to control emissions at this site.
The T O is a state of the art Fluorinated organics chemical emissions control system. It is designed to eliminate fluorinated organic chemicals with greater than 99% efficiency.
The T O is the product of significant technology and engineering work by our teams in Wilmington, and in fact, Phil.
I'm very proud of the people across Kim Moore's who have come together to make it a reality.
Brian on our Fayetteville plant manager along with our enterprise capital team have been hard at work over the past several months, bringing the project online and I'm excited to announce at the T. O is mechanically complete as of October 31st.
I believe this 100 million dollar investment in first of its kind technology is that tangible example of our commitment to being a new kind of chemistry company.
And fulfill our drive to meet our 2030 CRC goals.
Moving to chart 11 onto our chemical solutions segment sales in the third quarter were $140 million, reflecting lower contractual pricing and volumes in a few product lines within performance chemicals and intermediates.
Mining solution is demand was stable despite the headwind of a contractor blockade at a customer mine in Mexico, which affected our shipments negatively in the Florida adjusted EBITDA was $23 million and segment margins of 17%, where the highest in any quarter on record. This.
It's also marks the third consecutive quarter of expanding adjusted EBITDA margins in this segment the product a better operating and market discipline across the segment.
As Mark mentioned at the start of the call we announced this shut down for a mess that means and Mesclun minds business at Bell West Virginia. This was a business that did not meet our long term return objectives inside our portfolio and we plan to reallocate resources to help drive growth and profitability.
Elsewhere in the cameras portfolio.
We're pushing to close the year strong in chemical solutions behind continued performance from our mining solutions business and incremental productivity improvements across the rest of the segment portfolio.
I'll cover our titanium technologies starting on the next chart third quarter sales came in at $614 million price declined at about 2% on both a sequential and year over year basis, reflecting product mix changes.
New channel development, and the impact of increasing sex sales.
Volumes were down 20% year over year, but oh by approximately 10% on a sequential basis.
Similar to last quarter adjusted EBITDA of $137 million was the result of lower type your pigment volumes driving higher unit cost across the circuit.
Or and raw material inflation continued to be within expectations.
Turning to the outlook, while we believe inventory levels downstream to be at or below normal levels. The overall demand environment appears to be balanced with limited visibility for a fourth quarter bounce.
Our outlook is from market growth to return to GDP like levels progressively over the next several quarters.
With prices holding at levels, which we believe reflect the value in use of our products and.
And de stocking ending early in the year, we remain confident in the long term outlook for T. O two pigment and are fully committed to our Tvs strategy.
On the next chart.
You're indicating we made some big strides during the quarter on all three elements, which stand behind type your value stabilization or Tvs.
From a commercial perspective, we had our first full quarter of flex and began to get to a global scale with a new portal.
We believe flex will be a critical piece of the digital come more is going forward.
Second from a manufacturing and supply chain perspective, we're making great progress on our integration of southern Ionix minerals and have been impressed with the team and the capabilities we acquired in August .
Finally on new offerings I'm proud to announce a launch of our new lower abrasion and product for the inks market under the new type TR select Brent.
We have a growing pipeline of new products for specialty applications set to hit the market over the next 18 months targeted at specialty applications like Inc.'s. We know our customers are going to love. These products and I look forward to telling you more about the pipeline on future calls.
As you can see we are investing in all three of the critical elements behind Tvs and believe that over the long term these investments will create significant shareholder value.
With that I'd like to turn things back tomorrow.
Thanks Mark.
Turning to the next chart, we wanted to provide some early thoughts on 2020 as we move toward the end of the year.
We will be providing formal guidance early in the new year, but these are some of the key themes that have emerged as our planning process for 2020 is now fully underway.
First achieving top line growth in an uncertain market.
We will be focused on ensuring that we can maintain momentum in our high end product lines, even in the face of global uncertainty. This means engaging with their customers and creating the new product services it offerings to help them be more successful.
Implore products, we are helping equipment Oems creep. The next generation of hardware that is HFO specific and we'll bring opteon technology to a broader range of stationary applications.
Mark discuss the launch of our new type your select grades for inks and what that means for our customers as our technology continues to evolve and improve we will look to expand our footprint and enable type your chloride pigment to reach new end markets and geographies around the world.
Second operational discipline and productivity.
Given the weak global economic environment, we are working hard to ensure we operate as lean as possible without sacrificing long term growth.
Furthermore, we are redoubling, our efforts in maintenance and engineering to ensure we don't have a repeat of the operating issues, which hit our floor products network in 2019.
No that given his background and Sparks, who will bring a renewed focus to our manufacturing network to ensure we deliver on this goal.
Third we will prioritize free cash flow generation.
We are determined to maximize free cash flow conversion as a business and we'll be looking to more rapidly convert operating earnings into cash.
As we promised in 2018, we will return the majority of our free cash flow to shareholders overtime.
Finally, we will continue to execute against our CRC commitments in 2020. It is a bedrock of this company and we will not back down from the commitments, we've made to our shared planet our communities and our teams around the world.
As I said earlier, we will be providing 2020 guidance early in the new year, along with the specific initiatives, we're working on to enhance earnings and long term shareholder value.
With that operator. Please go ahead and open up the line for questions.
Thank you.
This time I would like to remind everyone in order to ask a question press star from the number one on your telephone keypad.
Your first question comes from Duffy Fisher with Barclays. Your line is open.
Yes, good morning, guys.
First question is just around floro.
The EBITDA, whether sequential or year over year was down more than sales.
Can you walk through the puts and takes on that because obviously, it's not just volumes and decremental margin, but the base business must be losing some price. So can you just kind of bucket.
How much was price how much was price in Africa gas versus you know HFO and just give us a little bit more color around the floro.
Sure W. Good morning.
Let me start and I'll hand, it to Mark.
Yes, you're right that we had we also have some operating issues right. So we had some operational issues that that hurt US you saw where their margin ended up.
If you take those operating issues out of there we'd be back into our low to mid twentys kind of margin. So so that had an effect on it but let me give it to marketing and walk you through a thanks, Marc said Duffy I would say the way I think about our flora business is the effect of illegal imports is inline with our prior quarter guidance.
<unk> of about a 125 million a year.
Bear in mind that impact of quota sales is somewhat lumpy. So if you're comparing to a quarter last year, where you had more acorda sales you need to kind of keep that in front of you and then finally as Mark mentioned.
We had some operational headwinds in the corridor.
The way I think about our operating side of the businesses.
We continue to ramp up volumes at our Corpus Christi facility that should have a natural benefit to our margins as we go forward, but in the quarter that was kinda overshadowed with some of the headwinds we had in the rest of our circuit. So.
It offset that gain that you would normally see and as Mark said without that without the operational headwinds would be in the mid twenties as as we've kind of guided to this year.
Okay, and then on HFO, you said, it's still growing would it be growing on all three are on the volume level on a sales dollar level and on an EBITDA level.
So are up 10 wyeth targeted at mobile Airconditions air conditioning. It is growing in a it's a double digit growth story still obviously the legal they import aspect you know effect they ramp up of Opteon blends year over year, so that that.
So are having you know the headwinds is felt on the blends.
On on the Mac mobile Air conditioning segment, you know, we continue to see double digit.
Volume growth as well.
So to your point up yet all three are growing.
From a volume revenue earnings perspective, if you think about.
To Mark's point on the Opteon side, we're seeing the growth obviously is the U.S. remember, we've always talked about the U.S. will move to a 100% utilization of HFO in the mobile market, it's probably closer to 75% as we get toward the end of the year and Japan now is moving very quickly upper ramp by next year they will.
We had 40% of their whole car park. So those those are really what the drivers are for us.
Great. Thank you guys.
Your next question comes from John Mcnulty of BMO capital markets. Your line is.
Good morning, Thanks for taking my question.
So with regard to the T O two volumes they didnt come back quite as quickly as I guess, we would've expected given we seem to be passed the destocking phase I guess.
Can you give us an update as to how you're thinking about the health of the T O two market and your ability to drive volume recovery versus some of your peers, who may be at at least so far this year seem to have been been running a bit ahead of you. How you can drive that recovery going forward.
Well, John if you think about it we you know as we installed Tvs earlier in the year.
The whole goal of that program was really about giving supply surety to our customers as well as price predictability I don't think we would have told you. It when we started that that we would have expected.
To lose share during that period of time, but we have.
As you look at the move from last quarter. This quarter. We believe we've gained some share back as you can see as or volume turned up quarter upon quarter and that's really the the area that we lost or share was primarily around the plastics market a the our contracts really work extremely well and the coating side the plastic side.
It is where we had some issues with our customers.
And now that we have our type your flex portal up and running and operating that's where we're able to gain share back with that group because you know they can put in orders up to six months in advance now through that and we could move the price as we need to based on what we're trying to accomplish so we feel like we have all our tools in the and the tool kit now and I would say that.
We're gaining the share back that we want to and we're doing it in a thoughtful way as we're moving forward from that standpoint.
Got it and then in your.
Comments for 2020, you spoke to focusing on cash flow generation I guess what are the measures that you can you can take to squeeze out that incremental cash like how should we be thinking about about what you can do relative to the 2019 year as we look to 2021 and look at your cash flows.
Yeah, well number one is we have not been happy with our EBITDA performance. Obviously, we're going to we believe that we can increase our EBITDA performance both from a standpoint of as I as I said earlier on the topline growth that we want to dry but also around the cost line. We've got a lot of initiatives because we have a little.
Did have an uncertainty listen we do not predict that theres a recession around the corner that's not what we believe but we do believe it's a little bit uncertain in terms of the marketplace. So we're going to take some actions on costs to give us a little bit of balance there. The other is we have very high raw material inventories right now and we've got to work those through.
You can't do that all in one go so we have that really focus for 2020 to get those inventory levels. So I'd say working capitals. The other area that we really want to work on.
Great. Thanks, and then Atlanta.
Well last piece is capex.
We had some heavy capex this year, we're going to be a little bit more judicious next year as we go forward as well. So when you think about the free cash flow generation I'd say, it's all those three pieces.
Thanks, a lot mark.
Yes.
Your next question comes from Don Carson of Susquehanna financial.
Yes. Thank you Mark couple of questions first.
You didn't update your guidance is it that uncertain.
Fourth quarter outlook.
We're not putting a range.
Then secondly can you give us an update on some of legal issues here I guess really three three issues one the.
Separation agreement with Dupont, Ohio, CFO , eight cases, and also with SAP firefighting foams.
Sure done.
Well first of all you know we haven't changed our guidance and we talked last time. So thats why you Didnt hear us do anything different about that so we continue to to operate in the range of guidance that we gave everybody before.
Around the of the legal side of it.
As I've said before not not much I could talk about about the Dupont lawsuit, we have re filed.
Our reply to.
To do pod small motion to dismiss that is public and I'm sure folks could read that as I've always said that that.
Briefing in there is pretty self explanatory I, probably can't go in any more detail than you see there because theres a lot of detail in that but that continues.
In the Chancery court here in Delaware.
On the Ohio cases, as you might have seen in this is the m. deal.
Not really that caseload has not grown its about where it had been before.
Judge Sargis has taken a case that was going to be tried in November and he is now combine that with another case. So the first trial right now is set for January .
And we continue to prepare for that and we continue to really want to be aggressive around.
Driving that.
And then finally around the a triple fr firefighting foams side of it as we have always said most of these cases are really around Pos.
There are many defendants in those cases, it's going to take a long time to develop and again, we have never manufactured or use Pos.
Dupont before us never manufacturer or use Pos from that standpoint.
And as we've always said, we've never made firefighting foams as well so we feel that that's something that's probably in the distance said were minor player here.
Thank you.
Your next question comes from above cost of Goldman Sachs. Your line is open.
Thanks, Good morning.
Mark you you talked about the 10% sequential growth and as evidence of some market share recapture.
Sort of be the typical seasonal change from second to third quarter and then I.
I guess the fourth quarter last year was the first time and Joe to you saw real meaningful volume drop should we expect then that you could have stable or better volumes year on year in the fourth quarter.
Yeah, I'd I'd say normally Bob you would see a seasonally third quarter.
Down versus second quarter.
So we've we've been.
We've been aggressive if at the plastics market really working with our plastics customers to make something to make a viable for them in terms of.
Our offering that's really been the work I would say as you look toward fourth quarter. We continue to believe it will be flat to up from that standpoint. So that's that's really how we're trying to drive.
Thanks, and then you also in the Chem saw you talked about.
Record margin levels does getting out of the medical businesses move the margin needle much.
On a pro forma basis.
Yes, it helps yeah.
As Mark Newman here it will help it's been a business that's below our return objectives and.
Part of our strategy to make bell closer to breakeven, but certainly from an overall segment margin basis. It was it will help us.
Bob one of things, we've always said since the beginning since we spun is we believe that with the work we could do income solutions, we could move that segment toward the the typical averaged EBITDA margin of the company, which would be in the mid.
Mid Twentys and that's our goal our goal continues to be to bring Chem solutions up into the low to mid Twentys in margin.
You saw us set a high teens this this quarter and as we execute off of.
The closure of the Methylamines business, we think we're going to get very close to the 20% range and we continue to work on.
Great. Thank you.
Your next question comes from Arren. This one iPhone of RBC capital. Your line is open.
Great. Thanks, good morning.
I guess first off in.
Two I just wanted to get your thoughts on.
Some of the comments made earlier.
Looks like you're still kind of a little bit cautious on the volume outlook thing just give us a little bit more hearing from your customers as far as maybe whether it be inventory that they have.
Or even on your side and if that's been fully destocking and if so why wouldnt you be a little bit more encouraged with the backdrop.
What would it take it is it just.
No production or anything else that you're watching thanks.
Yeah, I run its Mark Newman here I would say our view is that Destocking is largely complete its really do we have enough economic stimulus today to create.
Hi, a demand going forward. So I think our view is.
We don't see anything certainly in the fourth quarter.
As we look globally that would drive.
Bounce in the fourth quarter in terms of demand, but we do.
Are starting to believe as we look out that we'll see progressive improvement in demand as we go through 2020, and so you know we expect the year to get stronger as we move through the year.
Based on where we think we are on inventories today and our expectation that as some of these current uncertainties in the marketplace, you know get cleared up especially around trade that we'd start to see strength in demand coming back as we move for the year. I'd also say you know from our perspective, you know we didn't have our.
Full arsenal of product offerings or channel offerings.
In our last quarter. This was the first quarter, where we had the full capability of flex, we continue to innovate and make that channel.
More attractive to our customers and especially in segments, where we lost share. So that plus you know the product offerings that we announced that we're bringing to market. You know our view is we have a very strong portfolio that we're going to make full use of as we move into 2020, even in spite of we mark.
Demand in a room is the only thing I'd add to Mark's comments and he mentioned in the beginning but we think that the channel has very low inventory levels of two pigment in it so you're not going to need a whole lot of pole in the marketplace for for things to turn up.
We're positioned well to be able to take care that we we have capacity.
Ready to be able to.
Handle that and really be able to meet our customers' needs when that occurs.
Thanks, and just as a follow up on the Fluoro side, you mentioned that you feel you haven't reached a tipping point.
In controlling the illegal imports situation.
Could you just elaborate there what's it going to take any any thoughts on on timing and if you haven't reached a tipping point.
Is it because the problem continues to get worse or is the case that it's slightly different this time around.
Maybe just provides more detail there thanks.
Yes, so we have an industry wide.
Concerted efforts around advocacy on enforcement. This is a tax trade and environmental issues. So.
We really believe there's a significant basis here for greater enforcement.
Or complementing that with.
A lot of investigative work as to where illegal imports are coming through and then in a we're raising public awareness. This is the equivalent of having in a buyer estimates five to 6 million additional cars on the road. So we are working on all three fronts with our industry partners we have seen.
A couple of high profile seizures, this year in Greece and Poland.
Our view is this is something that you know will continue to have greater impact as we move through 2020, but our focus today is to.
In short maximum impact as we look at the next step down in quota requirements happening in 2021 so.
This is not going to happen in a single day, but we're encouraged by some of the early indicators of our success and we'll continue to do more you know on on the points I mentioned earlier and tomorrow is pointing were not alone here right. So we're working with.
Many of the refrigerant suppliers out here who are also.
Impacted by this.
From a primark standpoint. This is a very important issue for us, but it's an important issue for the world I mean, you're talking about 20 to 30 million tons of carbon dioxide going in the atmosphere because of this.
So this is a this is something that the European Commission in the EU understands is not good for the world not good for the environment.
But also not good for them in terms of trade in tax perspective, as Mark mentioned, so all the constituents, whether it's the refrigerant manufacturers or the EU or the individual states. All understand that this is something that hurts, everyone and we've got to fix it together and so we've been continuing to put a full court press.
This.
We'll continue to do that until this things solved.
Thanks.
Your next question comes from Josh Spector of Yes. Your line is over.
Yeah, Hey, guys I was wondering if you could bucket your sales of two in the quarter between how much are under long term contracts versus what percent would be under flex Puerto Plata sales.
Yeah, we have about over 50% and in our contracts.
Today, the remainder would go either go through distribution.
Or through our flex portal, so it'd be a mixture of those too but about over half is in our long term contracts.
So I guess I'd be curious if you can give some more context around the dynamic around price mix relative to you were gaining some share I guess, assuming that flex portal plays a part and that would you expect pricing to decline as you came back share in the fourth quarter or how do you see that mix playing out.
Yes, I think we think that price will be fairly stable might have some small.
Increments of price coming down, but that would be really isolated to how we operate the flex portal from that standpoint, but you know I don't you shouldn't consider that to be dramatic it's primarily in the plastic space is where we're we're working that where we have grades that are very specific to those customers.
From that standpoint, but you shouldn't be expecting dramatic changes in pricing I think it'll be subtle and and small and targeted.
Maybe the only thing I'd add here is the flex portal gifts Kenmore is a unique advantage to have very targeted price discovery in the marketplace.
By product line and by segment and so.
This is a really very precise tool in helping us as we move forward in time in terms of the adaptational that we need to make going forward.
I think thats really important for everyone to to understand is that.
The way, we're going to market and I know we've talked about this for probably a year now about Tvs is a very different route to market than than we've ever done or anyone has ever done.
These aviate contracts or are really stable contracts with our customers gives them as I mentioned before surety of supply is wells predictability on price, but this tool that we're using which is the flex portal tool as Mark said is really allows us to do discovery around price, but at the same time these things change on a.
Can quickly change depending on what we're learning or what we're getting back from our customers. So it gives us a lot of tools here to be able to work inside the market Im really help our customers.
Okay. Thanks.
Your next question comes from Laurence Alexander Jefferies. Your line is open.
Hi, This is Adam because this on for Laurence Alexander I was wondering in tier two could you provide any detail around end markets here I was wondering like where it was demand weakness and.
If you saw any signs of demand stabilizing and high there plastics coatings or paper.
Geographically Asia continues to be.
Week as we've said earlier you know we've made some gains in the quarter on plastics, but we continue to regain share there and then we have seen some weakness in laminates as well, but we continue to assess that going forward.
Things appears to be stable and fairly strong across so to Mark's point, I'd say regionally Asia seems to be the weakest.
And we're seeing some regain now on the plastic side coatings.
Has been stable all you're wrong in our opinion.
And North America, then is it continues to be the strongest market.
Okay, great. Thanks, a lot and my last question after the shutdown in chemicals solutions I was just wondering potential areas for portfolio simplification.
From here on.
Yes, it's something we constantly look at in terms of our portfolio in terms of Where's the best place to to invest and what you know is our where do we have the right to grow so I think you've seen us since the very beginning be be aggressive around or portfolio and we'll continue to do then.
Okay. Thank you very much.
Your next question comes from Vincent Andrews of Morgan Stanley Your line is.
Hi, guys. This is Steve hands on for Vincent I, just wanted to maybe ask a question on the margin side and T O too.
There was a comment about continued.
Margin compression in the slide deck, so how should we be thinking about that relative to what you did in the third quarter and kind of on a year over year basis and 20, Tony Thanks.
So you know the margins have compressed this year on a year over year basis, primarily into it to you know the impact of lower fixed cost absorption with our lower volumes in the big Delta. This year is volume with price being relatively stable.
Obviously I you know our plan is to have a very thoughtful re gain of share against our capacity.
Availability over time, and we're going to do that very thoughtfully.
And as we do that we would expect better fixed cost absorption and you know will continue to evaluate market dynamics in terms of other dimensions as we move forward.
And then and then maybe just a follow up on the.
Specialty business in tier two if you could maybe provide some color on on the overall plan there.
From a strategic perspective.
Yeah. This is an area that and for those of you follow till two industry, you know, especially when you get into the specialty areas whether things are fibers. These are areas that for the most part chloride hasn't played a big roll in.
We've had some breakthrough stec technology breakthroughs here.
For instance in the in the new grade we talked about.
We can get into the ink market would that with a much brighter product.
So it allows us some functionality that maybe other products won't have so what we're trying to look at is where do we bring added functionality to our customers.
That that allows them to either have a unique offering a different offering or a better offering from that standpoint, and I think the RTT team has done a really nice job of evaluating how to use our technology in a different way.
In that area and as Mark mentioned before we have Oh, we have a nice roadmap over the next 18 months of product introductions that we can bring into the marketplace that I think will will be exciting for our customers and allow us to really get into areas that in all honesty, we haven't been in before so this is areas for us that.
We see future growth for us.
And enhanced products for our customers.
Thank you.
Your next question comes from P.J. Juvekar with Citi. Your line is open.
Hi, Mark Petri I'm Propecia.
Yeah, Hey, I was far from up your cash flow from operations here today, This 250 million.
What are the levers tissue to the 600 million fully or target.
Yes. This is some Eric essentially if you look at the free cash flow for the full year typically a Q4, we tend to have quite a bit of working capital unwind as well and we that said we are focused on as Mark mentioned earlier right on the raw materials side, we are little heavy Soviet looking at bunch of option. So how are we going to drive that.
In a value creative way, so it's all going to be it on the working capital site and anything else that we can drive on the cost side. So we feel pretty good about where we need to get too.
Thank you and secondly, what's your new introductions into the specialty on markets. How fast do you think those and customers and the inks and fibers will switch from phosphate crater chloride create and what kind of margin uplift you expect.
Yeah, you know I don't think we can we can give you a good forecast for that product just got to introduce we're just working with our our customers that are outside being sampled to them right now.
And it's really going to.
Come down do does this give them more value.
Or more opportunity versus what they have today in their portfolio. So I think it's really on our customers as they adopt these and really drive that but as I said our strategy is as part of the total PBF strategy.
It's not just about contracts, it's not just about a portal, it's not just about having a low cost.
Capacity increases, it's also about new product offerings and this fits right in the wheelhouse of our Tvs strategy of new offerings.
Thank you.
Your next question comes from Jeff Zekauskas of JP Morgan Your line is open.
Thanks, very much I.
I think that your titanium dioxide production ton or insurance sales tonnage.
Maybe down I don't know 250000 tons this year.
And maybe that's equivalent to 4% of global industry demand.
Which which is just enormous and the volumes.
You know tronox or wholesale down can you place some of this.
Volume contraction in context in that classically people think about the titanium dioxide industry growing two or 3%.
It looks like this year, it's shrinking I don't know 5% 6%.
What do you think about that.
Yeah, No Jeff you know you're you're right.
And I would say that we probably have seen one of the largest de stocking events in the history of this industry and I don't think people.
Felt that in the beginning.
But this has been a significant destocking event, that's happened across the world.
Number one too is you don't have any significant market pull going on across the world.
Mark alluded to that earlier before when he said, we probably don't need much of an incentive.
Incentives across the world to be able to.
Create demand here. So I think you've just had a combination of significant destocking across the board at the same time fairly uncertain market conditions.
That's just have held down GDP now remember the the biggest weakness we've seen around the world has been Asia and Asia has been the driver of GDP growth around the world for the last decade. So I think when you put that altogether debts to us what we're seeing which is why I don't think you're going to need to see.
A very dramatic change in the market dynamics to pull.
Demand for T O. Two I think that can happen relatively quickly depending on the market conditions right now we just don't have a.
Clear line of sight around what the market's going to do from a from a just a macro point of view, but it doesn't take much for this to change dramatically because as Mark said before I think the inventory levels are at significantly low levels across the board across all our customer base and downstream from them.
Okay and then thank you for that and then for my follow up.
I don't think Seagate chemicals, whether its peak faster fairway have been declared hazardous substances by the EPA.
The EPA does declare them as hazardous substances.
How does that affect the liability profile for these chemicals, regardless of who is responsible for that is whether it's you are three dupont third quarter or somebody else that is how does that change in the categorization of the chemicals affect the ultimate.
Ultimate liabilities and would.
Would these companies be responsible for the costs of clean up that have already taken place or is it only things that go forward.
Yeah. So first of all you're absolutely right. It who they are not see it is not considered a hazardous substances by the EPA.
At this point in time.
We can't speculate from that standpoint, what will happen.
If that was a declaration, but remember the way. The EPA does this is usually in a very science based approach again for US we don't participate in and see a chemistry any any longer we never did Dupont got out of that.
Almost a decade ago now from that standpoint, so you're talking about legacy.
Situation out there to start with what what happens if that occurs again that is really up to the EPA. The EPA at that point has lots of choices of how they would want to handle that so I think it's really hard Jeff to speculate what that would mean.
In the future.
Okay. Thanks, so much.
Yeah.
Your final questions come from Jim Sheehan of Suntrust. Your line is open.
Thanks, This is Pete Osterlund on for Jim.
I'm Fluoro products has there been any negative price or margin impact for your opteon portfolio related to the slower ramp for the alteon blends or have margins have been generally stable over the past couple of quarters.
It's primarily a volume story, you know with the with the you know the impact of illegal imports.
As I said earlier on the on the mobile air conditioning side, we continue to see you know double digit volume growth.
With some contractual price declines baked into.
Into our revenue going forward and our plan, obviously is as we ramp up corpus to get better on the Cogs side on on our HFO technology.
Thank you.
Okay.
I will now return the call the Mark Vergnano for closing remarks.
Thank you, Chris and again I want to thank everyone for your time. This morning. Thank you for your continued interest income wars, and we look forward to seeing you while we're on the road here in the fourth quarter. Thanks again.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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