Q3 2022 Chemours Co Earnings Call
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.
And your first question comes from the line of Duffy Fisher from Goldman Sachs. Your line is open.
Yes, good morning, guys.
Okay.
Yeah.
Can you hear me.
We can hear you go ahead, okay. Great. So first question is just.
When you look at the.
The magnitude of the slowdown you've seen so far maybe compare that to 2019. The last time you guys had at tier two slowdown and at that point. The portal wasn't fully developed how would you expect.
Basically the contract business versus the portal business to handle this slowdown. These are the last time when I think your volumes were down kind of double the market.
If we go back to 2019 your price held in better than the market price can you juxtapose that period kind of with an infancy of your new program versus now that you've kind of matured it and what you think youll see from at this time.
Yeah, Hi, Duffy, that's a great question listen in 2019 that was more of a story of share loss as we were implementing TBS.
We have regained that share and then some with the implementation of Thai pure value stabilization, so really what we're seeing.
In Q3, and as we go into Q4 is the combination of a lot slower demand.
As we said early in the year about 80% are still of our business was contracted.
And so we expect that that ratio to stay roughly in line and it varies from quarter to quarter, but our contracted business is good and obviously the value proposition with TVN is we respond to the market demand signals of our customers and we're seeing.
Across the portfolio as we said in our guide.
In September we're really seeing this more so.
In Europe and in Asia, specifically in mainland China.
And volumes and demand continued to do well in the Americas, North America, and Latin America.
So really what we're seeing is a response to much lower demand.
And the way I kind of think about it.
Trying to compare it is one is the demand has come off pretty significantly in a very fast way and I think a number of the coating companies have alluded to that especially as they look through into Q4, and we are responding to that by idling production and we're also at the same time.
<unk>.
Running through higher cost inputs that we bought early in the year through our P&L. So youll have all of these things kind of coming together.
Think to compare periods I would advise folks to look at sort of a rolling 12 months.
Performance on our <unk> business, which we expect to be much better with.
With TBS.
Even with some of the highest cost input.
We're running through in the next couple of quarters.
Great and then I think most of US contract unit margins price and kind of current raw materials, but can you help us for the next couple of quarters, how much extra above market.
Hogs are going to run through on a unit basis because of that high priced stuff you bought earlier. This year does that anniversary kind of into Q1 and then the other part that's a little bit tricky as you ramp down your plants, how should we think about the incremental cost per unit from things like absorbed overhead or just kind of running at less than optimal operating rates.
So I'll ask <unk> to comment here in a minute, but clearly we've been off of our target margin NTT and I expect to be up in our second half.
More so as we adjust production to meet demand.
Our view, we would expect volumes to bottom somewhere between the end of Q4 and into Q1 and with that in mind, we will adjust our production schedules accordingly.
To better match demand with.
<unk> and clearly as we come into year end.
We're focused on bringing down some of our own finished goods inventory from a cash perspective, so maybe with that I'll ask <unk> to comment thanks, Mark and thanks, Tony for the question look as you kind of look at the cost side, Mark said right. We are aligning our production.
With the demand in PT business and that means a lot of things right for us.
The cost side.
Just from the running then the operation should come down and also we are working with our suppliers as well to see what makes the most sense ultimately to create value for both of us over the longer term and we have started seeing some positives.
Smaller portion, but we started seeing some positives on that end.
But from a timing perspective, as youre going to look at but I think these higher cost sitting in the inventory overall and I'll probably run through towards the end of the Q1 and we should start seeing the benefit in the past.
Going to hit the coating season in Q2.
Great. Thank you guys.
Thanks, Stefan congrats on the new role Matt.
Okay.
Okay.
Okay.
Our next question comes from the line of Arun Viswanathan from RBC capital markets. Your line is open.
Okay.
Great. Thanks for taking my question good morning.
Just following up on on the guidance I guess a little bit.
It sounds like.
You were able to reiterate the full year.
And so I guess given your comments just then on just now on Tio too it sounds like more of that is coming from upside in TSS.
TSS and APM could you just flush that out for us as well.
Yeah. So you know.
TSS and APM are having a great year and in fact, if you would snap the line at the end of September .
And that would have been a year, we would've had record years already in these two businesses so clear.
Clearly our secular growth.
Platforms are working.
In TSS.
Youll see both price and volume year over year as we continue the rollout of opt in.
And we look at better marketing of our products globally.
On APM.
We have.
A lot of excitement around our growth story here.
In areas of advanced electronics like semi con with so much work being done.
On a U S supply chain in this area.
And globally actually with the demand for chips.
And Youll Youll have seen our recent announcements on hydrogen and these businesses are growing at double digit rates.
While we have some faith in our less strategic lines in the company. So the way I think about the company today is clearly <unk> is going through an adjustment as we deal with lower demand.
But the team is really focused on the cost side.
And bringing our inventories into line here in the next couple of quarters.
And on TSS on APM, we're singularly focused on achieving our growth and so we would we have seen.
Courted so far this year and we would expect that growth to continue into 2023. So I think we're going through a bit of a transition where clearly our TSS and APM businesses are generating more earnings while we structurally adjust our TT business.
For the for the demand.
That's reflected in our guide for the full year.
Okay. Thanks for that and just as a follow up then on ATM.
Given that.
We have been hearing some slowdown in electronics.
Especially in China are you seeing any of that.
It sounds like you expect the strength to continue in 'twenty three what makes the commercial business a little different.
Maybe two.
To mitigate that that weakness.
So listen.
I'd say certainly there's a lot going on on the semicon infrastructure that.
Driving in a day.
Demand near term and we see.
Double digit demand growth over the next several years in this area. So.
There might be some moderate slowing in terms of overall chips, but in terms of our book of business. We had another record quarter in Q3, yes, maybe estimate to make some additional comments, yes, youll see a lot of the consumer electronics side for consumer electronics, Jeff, but thats a smaller piece.
Portion for US we have a lot heavier into the infrastructure side.
And as Mark said, and that's where you know once the project started they typically get through so on so the demand is pretty strong.
Okay.
Thanks.
Our next question comes from the line of John Mcnulty from BMO capital markets. Your line is open.
Yes. Good morning, Thanks for taking my question, maybe I can start out on the on the two specialty businesses. So the APM segment I think all year long, you've kind of spoken to your capacity constrained a bit and yet the volumes seem to kind of get unlocked a bit this quarter. So I guess can you help us to understand that and then for the TSS business.
I know you've kind of said Hey don't don't bake in these margins, they're kind of running pretty hot.
We've got some pretty high costs coming through the through the pipe in terms of raw materials, but other than the seasonal dip that we would normally see from say the first half to <unk>. It seems like they are hanging in pretty well. So I guess can you help us to understand what's going on there and if we should be expecting a bit more of a dip.
As we kind of look into <unk> and into 2023.
So John Thanks for acknowledging these two great specialty businesses in our portfolio.
Clearly TSS is.
We are pointing to a seasonally weaker Q4, so we want folks to make make sure we understand that we sell less refrigerants in the middle of the winter, but other than that.
As a multiyear secular growth business.
On APM.
We have been the team has done a really nice job under Denise is leadership.
Unlocking capacity in our highest value product lines.
And leveraging scarce inputs to really enhance our customer and product mix throughout the year.
So a lot of work happening there and then obviously behind that we have.
Approve some expansion investments that are going in there.
That will really put these high growth businesses in overdrive.
Starting in 'twenty four and beyond.
So I'd say the team has done a really nice job.
Unlocking capacity on existing assets biasing, the mix and Thats really driven.
Both variable margin and EBITDA margin.
On TSS.
Outside of the seasonality that business continues to perform very well both from a growth and a pricing perspective.
Lots of innovation happening in this business as well.
You will have read recently.
The award that we received from HR with respect to.
With respect to our op Tien XP 41, so we continue to show that we can really drive earnings here based on the growth and opt in.
And our customer Centricity in both in our markets around the world Samira than if you have any additional comments, yes mark.
Well I think you covered all the points, but I think on the margin side.
The only other point I would make is as we kind of get into the Q4, we are going to see some of the raw material cost inflation again.
Some of these things just kind of flow through the pipeline until the inventory, but I think into Q4, we're going to see some of the impact and also in Q4, the regional mix changes. So I just want to point to that as well because as we exited the northern hemisphere and the business moves more towards a little bit heavier on the southern hemisphere side, the margins tend to be lower on that and given the product.
So if you're going to see a level of that is going to move into Q4 as well.
Got it Okay. That's helpful. And then maybe I can just ask a follow up on the on the titanium technologies platform.
So I mean, it looks like just the implied guidance when you kind of triangulate between APM in TSS, it kind of looks like.
TTS coming in with EBITDA, that's going to be two digits instead of three so software.
I don't know $80 million to $100 million range, maybe even a little bit lighter than that in the fourth quarter.
I guess how.
When you get through the heavy cost that you have with the high cost ores and maybe running lighter for Destocking I guess, how big of a jump off can you get as you get into like the <unk> and <unk> next year.
Can we see kind of a.
Is it relatively steep or is this something where you would gradually grind higher because it does seem like <unk> is coming in at levels that admittedly, we weren't sure we would see again.
Yes, So again, John I think your observation on the math.
It's not far off and I would just say our view is.
We want to do the right thing long term for the business by adjusting production schedules against demand.
And clearly as Samir alluded to we're still working through on the P&L.
Higher cost inventory that we bought early in the year.
So the focus of this team is to get this business back to our 25% target margin over time that will take a little time from where we are today and certainly where we exit the year.
But the team is singularly focused on achieving that and clearly we are going to have a couple of rough quarters here as we adjust production schedules.
But if you look at the earnings over sort of a trailing 12 month basis.
<unk>.
There are a lot better than prior lows.
That we've seen without TBS.
The point I would make is.
When I look at our <unk> business and the quality of our assets. The fact that were tied to the U S energy.
Supply versus European.
Our book of business on TBS.
Like in terms of weathering the turbulence.
We are well set up here versus some of our competitors. So.
I think you should put that in the mix as well.
Got it thanks very much for the call I appreciate it.
Your next question comes from the line of Mike <unk> from Barclays. Your line is open.
Great. Thanks, Good morning, guys.
Hi, Mike.
Good morning, first question I'll, just kind of want to follow up on the last one just on the implied for Q earnings outlook.
Maybe just walk through high level, how you're thinking about the split between the segments and then related to again. The last question. Maybe you can help us frame just kind of what might be seasonal or transitory like that high cost.
Cogs that are running through maybe over the next quarter or so versus maybe what we should expect carrying into the early part of next year, just given where the macro is.
So Mike we don't guide by segment or by quarter really so what I'd say is our full year guide that we provided in September still spends and we expect to be within that guidance range.
Clearly I think we're acknowledging.
As we have in our materials that we're going through a bit of an adjustment on TT.
And really it's trying to align our production schedules with with demand.
Way that allows us to finish the year with better inventories on our own side and we would expect this demand declined to bottom in the next couple of quarters, It's probably as we go into <unk> of next year. So.
We're going to have a couple of quarters here with TT, where we're making these adjustments.
By the way. This team was very focused when the market was very tight on meeting customer needs and we achieved very high delivery to promise.
I have no doubt that this team being now more focused on the cost side.
Make real progress as we go into next year.
Fair enough and then secondly.
The recent $200 million capacity expansion of Gnathion I was just hoping maybe you could give us a bit more color.
Relative size of expansion, how far along that extend your ability to serve the market.
If youre willing to give anything in terms of IRR or payback periods.
Yeah I'll start with the last question. These are very high return projects well in excess of our cost of capital. So these are these are great expansion projects to do.
We've said that we expect the electrolyzed than fuel cell membrane market to be somewhere between two and $3 billion by 2030.
And so this announced capacity.
We would expect to come online late in 2000 and for early 'twenty five.
And based on a lot of the announced expansions.
We will be hitting the market.
Stride at a very good time as I said earlier when you look at the APM results Youre seeing the impact of that team and liberating capacity on existing assets on on high value markets like membrane. So.
That will continue.
Through next year.
Activity through this new capacity coming online, but view this as.
A very significant increase in our membrane capacity consistent with our goal of continuing to have a very meaningful share and being a market leader in membrane.
Great. Thank you.
Thank you.
Your next question comes from the line of Matthew Deyoe from Bank of America. Your line is open.
Yes.
Good morning.
Is there any risk that you won't be able to debottleneck certain fluoro products kind of given community pushback I know the Wilmington.
Jason at least depressed in that region had been two positive as it relates to potential expansion in Fayetteville. So.
Is that is that kind of the.
Gnathion expansion is that helping happening elsewhere is there any reason why you maybe couldn't.
Get that done.
As we see things today and that we're quite confident that we will get it done.
Continue to have very good engagement.
With the local the queue in the local community.
So this this.
This debottlenecking is sort of within our permitted capacity today. So I wouldn't expect this to have any issues whatsoever.
Understood and.
I know, it's early but if we think about price next year for TSS or at least kind of the cadence as we move through the year you'll.
Youll have opt in on price concessions to auto Oems.
So I, usually think about it starting as somewhat negative, but we have continued roll through on the legacy HFC side that will keep price up versus should we think about it as flat how does how does that look now I guess.
So so clearly we had in our with the adoption of the AME quotas last or this earlier this year we've had.
Good pricing activity.
Consistent with our quota mechanism.
We're not we're not expecting that we would have.
The same kind of year over year price change that we saw going into the quota mechanism clearly theres a step down as we go into 2024.
We will provide a different market dynamic.
But we expect this business to continue to have good pricing and good volume growth with the rollout of opt in Sameer.
Sameer, yes.
Thanks, Mark Matt the other couple of things I would add as you can think about the pricing of the mixes of businesses also the aftermarket side of the business is that as the option on adoption happens after young.
Is expanding we should see an expansion on the after market side as well, but is it a.
Little better pricing and better margin for us so that should be helpful. As well is going to move forward.
Yeah.
Okay.
Your next question comes from the line of Josh Spector from UBS. Your line is open.
Hey, guys. This is James Kennedy on for Josh Thanks for taking my question.
I was just wondering if you could give us some more color on the volume declines in the titanium business how much of that is contracted on the flex business.
And.
Whether or not youre seeing any pricing any pressure or pushback on some of the.
Negotiations there.
Yes, so I'd say as we have said the majority are about 80% of our business is contracted so I'd say.
With the volume decline is really reflecting.
The decline in demand of our contracted customers.
As you saw in our release prices remained relatively flat.
Sequentially.
And the way I kind of think about that as we continue to see good price activity on our contracted book.
But clearly spot prices, which we have on our flex portal.
Have come off from from prior high So I would say, that's the kind of volume price mix that youre seeing in the quarter yes.
Yes, the only other point I would make came says is going to think about the volume equation I will take a little bit more from a regional perspective, rather than from a channel perspective, as Mark said in his opening remarks earlier as well as it's Europe and Asia is where we are seeing the majority of the volume decline North America is holding up in Latin America has been a pretty pretty.
Good market for us as well.
Yes.
Okay, Great and then.
On the APM side, we talked about the capacity expansions there.
We were to assume the assumed growth rates that.
You're seeing pan out could you quantify how much additional capacity could be needed by 2030.
Yes, so certainly as it relates to.
As it relates to membranes.
This will.
All of our needs for the foreseeable future.
As we look out.
From here today.
I think I've said this before previously we think our capex envelope for the whole company.
Somewhere between $404 50.
Pretty reasonable estimate to support our growth aspirations in all of our businesses, especially APM in TSS.
And the significant capital expenditure were making on on best in class abatement technologies to achieve.
<unk>.
Corporate responsibility commitment of reducing floor organic compounds by 99% 99, 9%.
So.
I think there is no worry in my mind that.
We'll get meaningfully outside this capex envelope across our three businesses as we move forward in time.
Okay.
Okay, great. Thank you guys.
Your next question comes from the line of Hassan Ahmed from Alembic Global Advisors. Your line is open.
Good morning, Mark and Tim here.
Just wanted to revisit.
Some of the comments you made about the volumes in PT.
Yeah.
8% sequential declines.
And volumes.
And when I compare and contrast that to what I'm hearing from some of your competitors arguably.
With European sort of bias.
Those volume declined sequentially are as highest 25% so I'm just trying to understand.
Could give me some color around what the market looks like right now our demand wise are you doing materially better than the broader market and the like.
Hi, good.
Good morning, that's a great question so clearly.
When we look at our regional mix.
More.
Exposed to North America.
And some of our competitors, who have a bigger exposure to Europe .
And so to the earlier comment of seeing.
Pretty dramatic fall off in volumes in Europe .
In Asia, especially in mainland China.
Think that works into the equation.
Some of.
The other analysts have commented clearly we would expect.
More dramatic volume declines going into Q4 to really adjust our production schedules.
To what we're seeing again in Europe and in Asia Pacific So.
I kind of look at this over the next over Q3 and Q4.
So to get more in line.
With where the market is but clearly our regional mix.
Is more biased in North America, one and two in our production mix.
Is also very biased in North America, where I think we can benefit for.
For example, as natural gas prices and other input costs come down.
Thank you Sir.
Blow up more on the lines of the overall portfolio.
See you guys.
Continuing to show us the growth nature of the APM business, the DSS business and Fortunately or unfortunately.
The industry ourselves included have done a great job.
I guess, reducing the cyclicality with NTT, but it's pretty clear that it remains there. So how are you thinking about the overall portfolio as it sits right now I mean is there some thought process.
Maybe a broader split between the growth side of the business and the more cyclical side.
Yes, So Hassan I would say I'm very focused and this leadership team is singularly focused on the four strategic priorities.
We think those four focus areas.
Will.
Will generate significant shareholder return over time. This is a bit of a marathon not a sprint and clearly we remain focused despite sort of the near term headwinds in TT on this longer term strategy. So.
I think we've never said that there is any.
Commercial deep commercial tie between our flooring business in our <unk> business. So I think we've always been clear, but as it relates to any restructuring clearly thats something that we would work on with our board at the appropriate time, but certainly no intention to move down that path today.
Very helpful. Thanks.
Thank you so much.
Yes.
Your next question comes from the line of Vincent Andrews from Morgan Stanley . Your line is open.
Hey, guys. This is will hang on for Vincent Thanks for taking my question here.
So should we expect I guess, Joe to EBITDA margins to kind of remain below that 20% range as long as kind of overall market demand.
<unk> is relatively weak and then I know you've talked about your goal of getting back to kind of 25% EBITDA margins in the TT business.
Outside of.
Outside of maybe.
Pricing.
Volume recovery, what are the things that kind of need to happen in order to get there.
Yes.
Ill kick off essentially is it going to look at our margin as Mark said right in Q4, and it is going to get through Q1, we will get through the high priced inventory that we have so I think thats once we get through that we'll be in a much better position, but overall from a margin perspective, yes pricing those things allows for the same time, we are aligning our production along with the demand as well.
So that should be helpful in getting the margins.
It's in a better position as well so I think thats. The way you should look at it our goal is to get into the low to mid twenty's over time, but.
It says youre going to give you the 23 guide will be giving.
Giving you more sort of a view around what the margins may look like for 'twenty three.
Yes.
Gotcha, Okay, and then I guess given the weaker demand that we're seeing what are you guys seeing kind of upstream in the.
<unk> market are you seeing that kind of spend a significant amount of kind of further loosening in F&B there.
Yes, well look I mean, I think as I said earlier right.
We've been having very active dialog with all of our suppliers.
PJ suppliers on with respect to aligning the production with the demand and what that means in terms of the cost for us as well because ultimately we want to be.
Drive a long term peripheral then situation for everyone. So yes, we have started seeing some some movement on that side as well, which is in the positive direction for us.
Yes.
Got it thank you.
Your next question comes from the line of Laurence Alexander from Jefferies. Your line is open.
Hi, Good morning, this is Kevin I'll stick on for Laurence.
My first question is just I was wondering what your perspective, those inventory levels of your customers heading into winter compared to like normal levels.
Second question.
Did you say stay elevated I guess wondering if at all how that looks like and how you think about your margins.
We're quite for expanding margins should expand in change.
Hey, Kevin.
I wouldn't say inventories are elevated across the board for sure, but if we just focus on tio two for a moment clearly the slowdown in Europe , and China has been quite dramatic and I think.
Our end customers are adjusting their inventory levels accordingly.
In the Americas, and especially North America.
I'm of the view that inventory levels are in line with where where our end customers want them and in fact, I would say as we prepare for the coating season, there could be even some inventory build in anticipation of a robust coding season I just wanted to remind everybody that the U S consumer.
It remains very strong so while we're seeing the impact of of I would say higher energy pricing.
On the European consumer and the Covid Lockdowns in China.
We are seeing very robust.
North American customer activity and consumer activity. So our expectation is we haven't really seen any meaningful change.
In our North America book and in fact year over year, we are seeing growth still on a revenue basis. So.
I just wanted us to make sure we keep that in mind.
Got it.
And your next question comes from the line of Roger Spitz from Bank of America. Your line is open.
Thank you and good morning.
I Wonder if you would consider a housekeeping I guess for the global.
Yes.
Industry, what you think 2022.
Growth or decline might be versus 2021, do you have any preliminary thoughts.
2023 versus 2022 could look like a snapback or or what have you.
Roger.
Read some of the analyst reports in terms of the overall industry and I suspect based on how weak. The second half has been there is some suggestion that we could be down a couple of percentages as an industry. This year on volume.
And as it relates to next year, obviously, we will start the year with a weaker first half, but the projection for next year would really depend on sort of the overall global macro assumptions, which I think are still emerging.
Got it and when you say.
Thank you.
Marks that you have idle tier two capacity.
Can you give that.
Any sense of what percent of your total capacity and just so I understand.
The capacity are you talking <unk> idling.
Some lines as plants versus say.
So our time right on the entire plant.
Well for Asia is weak.
No.
All of the Taiwan facility.
Tom.
So Roger we don't we don't disclose that information we consider that.
That we want to keep close to the vest, but we have the flexibility of taking down individual lines at our plants.
As you know our plants are quite large relative to our competitive set so when we idled our line that could be equivalent to a competitor idling a plant given the size of our facilities. So that should help you sort of dimensionalize.
And when we say we were taking some idling one one of our lines.
It's quite significant and rather just so maybe I'll just add to that is as you kind of think about our <unk>.
<unk> right.
As you think about the flexibility with respect to the ore mix that we can use so we can flex our capacity quite a bit and optimize our cost structure based on the market conditions with that strength of the technology as well.
Got it and just one last one on this one is when you do idle aligned at the facility from a physical and cost standpoint.
Was it onto our story as it is it relatively easy and not terribly cost.
When you do that.
Roger This is something our team knows how to do very well so.
We.
I would say our TT team. It's one thing they are really great at is manufacturing and they know how to simultaneously bring a line down.
Take cost out of the system.
Well be ready to bring that line back up very quickly based on market demand. So.
Think of this as a very flexible approach clearly as we design type pure value stabilization, we had in mind, our manufacturing flexibility, both from an or and align loading perspective.
And so we're just following our playbook, which has proved very successful over time.
Thank you very much for that appreciate it.
And there are no further questions at this time, Mr. Mark Newman I turn the call back over to you for some final closing remarks.
Thank you Rob and thank you all for joining us today.
As I thought about the increasing uncertainty in the global macro environment.
I'm very thankful for the high caliber team we have here at <unk> that staying focused on meeting the needs of our customers and running our business as well.
As we've covered today.
Going through some transition hurry issues on TTS, we adjust production to meet demand.
We're also very focused on capturing the full growth potential of TSS in APM and we're doing that at a time when we're growing earnings year over year, we're generating a lot of cash in fact, this will be the third year that we've generated over <unk> 5 billion in free cash flow.
And we sit with relatively low leverage so.
<unk>, we're ready for what's coming at us in the next couple of quarters, whatever that may be but I want you to understand that we and we all remain focused on our four key strategic priorities to create long term shareholder value and so I. Thank you again for your interest and we'll be in touch.
This concludes today's conference call. Thank you for your participation you may now disconnect.
[music].
Okay.