Q4 2022 Chemours Co Earnings Call
Pat if you would like to withdraw your question again press the star one.
Thank you Jonathan Lock Senior Vice President and Chief Development Officer, You May begin your conference.
Hi, good morning, everybody and welcome to the <unk> company's fourth quarter and full year 2022 earnings conference call.
And today by Mark Newman, President and Chief Executive Officer, and Smeal Rahman Senior Vice President and Chief Financial Officer before.
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 as described in <unk> SEC filings. These forward looking statements are not guarantees of future performance and are based on certain assumptions and expectations.
<unk> the future events that may not be realized actual results may differ and <unk> 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.
Deck has 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 and thank you all for joining US this morning I'd like to start this morning by first thanking our Kenmore as employees. The entire 6600 strong team <unk> for another great year, a year of improved results in revenue and.
Earnings and high free cash flow conversion, a year in which we set several records, especially as we think of our TSS.
And APM businesses.
But as you saw in the results we posted last night, we had a difficult fourth quarter.
And the results in the quarter were driven primarily by rising raw material costs also with higher energy and logistics costs.
Which were further compounded by weaker than expected demand mainly in our TTS segment.
Which also feeds into our unit rate cost in the quarter clearly the strong U S dollar and the winter storm at the very end.
Didn't help.
But clearly it was a weaker quarter.
With that we have stepped back and we looked at the year, we had a great year and with that in mind.
As we look at how we set the 2023 guide.
I'd like to make a few comments.
Our guide in my mind reflects our confidence in the work that's already underway in TT to improve margins from where we left off in Q4 throughout the year.
To deliver margins that will be essentially in line with fiscal year 2022.
We have a great foundation with TBS.
And we're adding to that work that we're doing on input costs and plant efficiency.
In TSS the growth thesis is intact.
With mid to high single digit top line growth.
And comfort in getting back to greater than 30% margins for the full year.
Based on mix and volumes.
And especially as we bear in mind, the step down in quotas, starting in early 2024 and APM the growth thesis in our advanced electronics.
And clean energy applications, which provide very high value in use is also intact.
From a bottomline perspective, clearly there will be some fade on less strategic.
Businesses, clearly that will be impacted depend on the strength of global macro.
And also.
Our sense that we are very much involved in driving growth and investing in growth in our APM business, which has an impact on the margins. Nevertheless, with all of these ingredients, we're confident in delivering margins again consistent with last year in the low twenties.
And then finally the team continues to work.
A number of legacy issues, both on legal and environmental areas.
As we continue to resolve legacy issues and with that we expect higher corporate and other spend in the year. So overall, we're starting the year on a weaker note with a lot of global macro uncertainty.
But the team is very focused on all of these points and delivering another good year for <unk> in 2023 with that Rob I will turn it over to you to open up 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.
First question comes from the line of Duffy Fisher from Goldman Sachs. Your line is open.
Yes, good morning.
First question just around <unk>.
If you contemplate kind of your midpoint and.
Revenue guidance that you gave.
Can I read into that that that's roughly are mostly I guess volume down and then maybe price off one or 2% with a little bit of relief on the raw material side is that the right way to think about what the mid case feels like rolling through.
Definitely I think that.
Yes, it's a very good characterization.
The way, we're thinking of the year is.
A modest volume recovery in the second half, but overall that would translate.
To volumes being down clearly TBS is working from a price perspective.
And the team is hard at work on the input cost side and efficiency, So maybe I'll SME or to comment further on some of the work we're doing on the cost side. Thanks Laura.
Is it going to look at the cost definitely we have started seeing some of the relief on that side as we kind of move through the year, we should start seeing the benefit of that but I would just caution a little bit as we move into Q1, we are carrying a little bit of inventory as you know from the Q4.
Into into Q1, but as quick as we can move through the year the input cost relief should help us on the margin side.
Fair enough.
Then if you look back you've had some good years in tier two kind of let's say three quarters of $1 billion or better on EBITDA. What does it take for this business to get back to that level, maybe over the next one to two to three years.
Yes and.
<unk>.
Great question, Duffy and Ed and his team are really energized around getting this business over time.
Back to sort of a mid twenty's EBITDA target margin.
What it will take is as full of plant utilization.
Clearly volumes are down overall as we look at 2023 today.
We expect that will continue to improve as we go into 'twenty four and clearly the team is quite focused on on the cost side of the equation.
And candidly, where we might be able to also deploy capital in that regard so.
A lot of work ahead of us but.
I think we're our view is this is a business. This is the best <unk> franchise, and we have a path to get here.
Great. Thank you guys.
Thank you.
Your next question comes from the line of Arun Viswanathan from RBC capital markets. Your line is open.
Great. Thanks for taking my question.
Yeah, I guess I wanted to go back to a similar topic. So.
You addressed some of the improvement in Tio too.
I guess on the TSS and ATM side I understand that the 24 outlook I'm definitely would get you back to that high single digit growth.
But in 'twenty three.
<unk> faced tough comps in the first half, especially given the pricing that you realized last year.
Digit gains in both businesses so.
We're also hearing some weakness on the electronics value chain as it pertains to ATM so could.
Could you just help us flush out.
How those two businesses kind of evolve.
Through the year and would you expect those two businesses kind of grow in.
In line with your targets in 'twenty, three on an EBITDA basis, or how should we think about that thanks.
Yes, no we certainly expect as I said at the opening.
Continued growth in line with our long term forecast on TSS in 2023.
Clearly.
We are continuing to see growth.
In in the deployment of our low global warming up 10, refrigerants as more and more stationary OEM players moved to opt in and blend so really good growth there.
We are expecting growth in auto Oems this year consistent with the <unk> outlook, and then a big part of the TSS business.
Is is asked is aftermarket the replacement market in the stationary business and a growing pool of vehicles that require <unk> technology. So so let me just say.
We're seeing good good demand signals here clearly.
With the quota now in place. This is the second year, we don't expect the same kind of price Delta as we saw going into last year, but certainly market dynamics continue to be very favorable.
Effective.
<unk> regime.
On APM.
We remain sold out on on a number of product lines, we're sold out on Teflon PFA and yes, while there is some weakness in the electronics market.
New Semicon, Fabs, especially where a U S supply chain is favored.
Our moving forward.
And then on our hydrogen economy business Theres a huge backlog.
Electrolyzed sirs, and Perm membranes required for those Electrolyze us so.
Denise and her team.
While we're seeing some fade in less strategic.
<unk> are really working at at opening up capacity to meet customer demand in some of our higher value applications.
Which we're investing in also.
With some of the investments we announced last year. So overall I think we're quite confident in the growth thesis of both TSS in APM.
Okay. Thanks for that market and just as a quick follow up a couple of years ago. You had mentioned about $125 million annual headwind from illegal imports of refrigerants into Europe from China.
Is that still the range of what you are seeing or does that also is that also less imports into there would that also be a tailwind that you'd experienced in TSS.
Yes.
Thank.
Would say that the situation in Europe has improved.
We continue to do a lot of work as an industry to monitor illegal imports.
But my sense is as we're moving more and more to <unk> blends in the European AG equipment base, that's becoming less of a factor on its own Sameer I don't if you have any other thoughts nothing modulate operating nicely or is it going to.
Look at the guide and the impact that you laid out our guide of course anticipates that there is no further deterioration in any of the illegal import situation have you seen in the past, but at the same time. We are really excited about the growth is coming from the U S side right.
With the aim act and there is a much better regulatory regime much better enforcement regime around.
These products so that we feel very good about that and the team is really focused on really pricing the products based on value value based strategy here. So we feel really good about TSS business.
Thanks.
Your 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.
So on TSS.
It had a kind of a wild ride in 'twenty two with some huge numbers in the first three quarters and then <unk> I mean look you guys warned hey, raw materials are going to are going to pinterest at some point.
Certainly certainly seemed a NICU.
A good bit more than I think we were expecting it to so I guess can you can you help.
Unpack that and then I guess with your optimism for hitting 30% plus in in 2023 in terms of the margins are kind of going back to your normal ish levels I guess, how should we think about the cadence of the recovery there and maybe maybe even a little bit of color for <unk> would be helpful.
Yeah. So John let me start and then I'll ask Samir to give you. Some added color on sort of a Q4 margins and some of the mechanics and calculus behind the numbers, let me start by saying we are fully.
I would say, let me start by saying Q4 in TSS was weaker than we expected. So while we were projecting lower margins in the quarter.
We were disappointed with our own results in the quarter Sameer will take you through.
Why the math, how the math works as it relates to 2023.
Q4, and the unique attributes of Q4 should not be viewed as any way as overshadowing. The year. We expect ahead of us in 2023, and so while we don't give a quarterly guide on or on any of our segments.
We would expect our recovery our margin recovery to start early in the year.
And as I said, we expect our full year margins to be north of 30% consistent with our long term guidance. So maybe I'll ask <unk> to give us some more color on Q4. Thanks. Thanks Mark.
Is it going to look at the Q4 margin right on the PSS side, it's really driven by three factors first one is really what you would expect the typical seasonality in the business because in the fourth quarter, our product extensively more southern hemisphere basis. So these are lower margin products for us so as a seasonality from a seasonality perspective, the Q4 margin generally are.
Going to be little lower than the second and third quarter, but then the other two factors are really kind of specific due to the timing at this point.
First one is the raw material inflation.
That hit us.
Some of the products coming that we are exploring kind of their prices increase and the other one was the lower fixed cost absorption, which happened because of the planned turnarounds in the early part of the quarter and then in December the winter storm had a pretty meaningful impact on the business as well at corpus. So those two are driving the unit rates and given that we are a LIFO company. We took a lot of that cost upfront in this.
Water and as we got to go into Q1 and into 2023, the margins should moderate back towards the guidance that you've given for the longer term margin of the business.
Okay.
Okay.
That's helpful color.
And then on the on the APM business. So for the first time Youre kind of breaking it out now into into two new segments. I guess can you help us to understand the margin profile roughly I mean, obviously you didn't give it. So maybe you don't want explicit detail out there, but but how should we think about maybe the difference in the margins.
Between them, considering one is higher growth in.
It seems like certainly higher value, but you're also investing a lot in it and one maybe is a little bit.
Taking less investment, but also may be a little bit less value add so I guess can you help us to think about the margin differential there.
Yes, I'd say, our entire APM portfolio has has very good.
Very high variable margin.
But clearly value in use on something.
Like like Penn membrane, and an electrolyzed, though or very high purity PFA four.
Small no at Semicon applications Fabs.
Carey carry a premium to the portfolio on average.
The intent of breaking out our performance solutions.
Versus our advanced materials was really to demonstrate the growth rate over time clearly the numbers in the chart.
Using three years of financials.
With Covid year. So the growth rates are probably a little higher on our advanced materials than we would expect over time.
But recall that we expect to growth in in <unk> or.
Our performance solutions to really start to accelerate as we approach the middle of the decade. So we felt it was important for investors to reflect that that that double digit growth rate, which is a.
A multiple of GDP.
As we move forward and clearly.
We view that as a premium business both in terms of our strategic value and offers a margin to the rest of the portfolio.
Got it thanks very much for the color I appreciate it.
Okay.
Your next question comes from the line of Matthew Deyoe from Bank of America. Your line is open.
Good morning.
Can you talk to just the working capital headwinds to cash flow thinking primarily inventories.
That balanced out is that going to drive lower operating leverage in <unk> and I guess, what should we think for working capital.
<unk> for the year.
Yes.
Yes, Matt why don't I take this one and the market comment afterwards, essentially as we kind of look at the working capital really it was predominantly in the TT business that you've seen in the in Q4, as we kind of move into.
2023, and the Q1 and beyond Q1, as you know seasonally we typically consume working capital right because of the seasonality bullish with the <unk> business and the DSS business. So we will consume working capital in Q1, but as we kind of move through the year, we should be able to.
Released had working capital and as reflected in the guide that we've given for the free cash flow greater than $350 million.
Okay and.
I wanted to talk about PFS, there is potential for proposed ban in Europe .
Wondering what that looks like for your thoughts on the Gnathion expansion in France, and I guess Conversely.
<unk> announced that it was closing some of its PFS or all of its PFS operations. I mean, what are you thinking about or how are you thinking about that as an opportunity.
For your business and potential market share gains over the next years.
So.
And then maybe I'll start with <unk> first and clearly the way we think about it.
Fluorine chemistries are essential.
And we believe based on our technology can be made responsibly and so we continue to make significant investments in.
Driving that growth, whether it's for semi con applications, especially as countries around the world look at shoring up their own semi con supply chain or whether it's in hydrogen.
Renewable hydrogen, where we're really focused or Canada.
Candidly also in the EV applications.
Where where our polymers are critical so if you want these technologies.
Our view today is Florida polymers are the best solutions for those needs clearly <unk> made a decision based on on what they thought it was prudent for them and their shareholders.
We think it's prudent to continue investing and making fluoro polymers responsibly.
For the next generation of the economy.
As we think about the dossier in Europe .
Clearly that's a multiyear process.
And so we will be very engaged and working with our customers working with the same industries that I just talked to.
To make it very clear to regulatory authorities that this is a chemistry that Europe should embrace and they should embrace participants like ourselves who can make this chemistry responsibly.
We have always been an advocate of science based regulations and in fact, we have science based targets.
Our scope, one two and three emissions so.
This is this is the beginning of a long journey as it relates to the dossier, but you can expect that we will be very involved and very vocal with our customers and why we believe flooring chemistry has a place in modern society.
Okay.
Understood. Thanks.
Your next question comes from the line of Josh Spector from UBS. Your line is open.
Yeah, Hey, thanks for taking my question.
I wanted to see if I could try again on the cadence of earnings through the year and are getting a lot of questions from investors about really for first quarter and what Thats desktops looks like is there any way you can frame kind of a range of what you're assuming there or maybe first half second half and then relatedly. When you look at your range for the year at the low end you talked about recessionary conditions.
What really plays out in that scenario I guess, how conservative is that relative to what youre seeing today.
Yeah, Josh Thanks for your question and clearly the team's really focused coming off of Q4.
To drive improved results.
Starting in Q1, so let me just say the teams fully energized.
Around delivering a great year, and we need to make a record account.
As I think about the as Samir alluded to there were some cost issues in Q4 that were unique to Q4 and clearly we've started to see on some of the input costs some rollover.
Starting already.
Clearly we are seeing.
If youre looking at Nat gas prices in the U S, which really impacts our TT operations Youre seeing a big improvement there youre seeing a weaker U S dollar which is also helpful.
So I would say there were some unique cost issues in Q4, which we would not expect to repeat in Q1.
And then on the demand side, clearly TT is going to start off the year in a weaker place, but we expect some moderation based on.
The end of Destocking in Europe , the improvement in Asia after the lunar new year.
And then we're continuing to see the U S hang in there as we move through the year.
As we said earlier, our TSS franchise is very strong and so we would expect to see a good start to the year starting in Q1, and then on APM, Yes, we have the higher costs on some of the input costs flowing through.
Which really impacted Q4, but also we see in the year the ramp up of growth.
By relieving capacity constraints in some of our higher value applications. So listen I think it will be a journey throughout the year, but clearly I want to make it clear that we're very focused on making a record account, maybe I'll ask amir to give a little more color.
Thank you Mark.
Josh is going to look at the three businesses right on the <unk> side as you kind of look through the year as we said in the prepared remarks and in the.
Investor deck as well, we anticipate the destocking to near to be near and so as we kind of think about the rest of the year the demand recovery. The way we have modeled and what you see in the guide is really through the second half of 2023, so very slow ramp that we have.
We anticipate at this point on the TSA side is only one thing additive I would say to what Mark has already said is.
Given all the market and regulatory dynamics, we feel pretty good from a demand perspective, and we still believe as youre going to look at the reopening sports covered there is still a backlog on the commercial side. So we anticipate to Dr. <unk> to provide a tailwind as we get into the spring season.
And especially in the first half of the year and APM has lesser seasonality, but it will be.
So the trend should be similar to this year.
Okay. Thanks, and then if I may if you could just comment on the lower end of the guide I guess, what's baked in there in terms of recessionary expectations and just I guess a follow up to the prior one could you size the cost.
That you expect to see sequentially.
Yeah.
Yes, if you look at the low end side and the modest modest recession. What we have assumed is that U S will have a more modest recession and also the recovery in the Europe and Asia will be delayed until 2024, so thats the way, we kind of model from our economic scenario point of view and of our three businesses as you know tier two is the most economically sensitive business.
So that's a big part of the guide range.
Your next question comes from the line of Hassan Ahmed from Alembic Global Advisors. Your line is open.
Good morning, welcome Camille.
I'm just taking a look at the guidance for 2023, and specifically on the TT side of things.
You guys had adjusted EBITDA margins of 7% in Q4.
And if I take a look at the commentary, you're giving or baking into 2023 guidance.
Youre talking about 2023, adjusted EBITDA being similar to 2022.
So call it around 18% so I'm just trying to understand how we bridge to that.
Yes.
So thanks for the question clearly, we would expect to see margin improvement in TT starting in Q1.
As Samir said some of the higher cost inventory will still be flowing through the P&L.
But already we're seeing some improvement in input costs.
That will start to impact our business in Q1.
The guide as Samir said.
<unk> in the top end of the range.
Really tied to how strong or weak second half recovery is with respect to <unk> volumes. So I'd say for the full year.
We are expecting volumes to be down year over year slightly.
But.
The range of volume Delta to 2022 will depend on the second half recovery.
And clearly as we get better utilization of our plants in the second half and lower input costs.
We arrive back at a full year EBITDA margin in line with 2022.
And Hassan Decimetre ill, just one more thing I would say on the margin side to what Mark just said is the margin recovery will be through the year, So youre not going to see getting 18% right away, but this will be a margin recovery through the year as the tanks that are started easing up on the cost side. Thanks for the.
Great work with the team and also on the commercial side by Ed and team those things should really start flowing and benefiting the P&L in the margin that's going to go through the year. So it will be a modest.
The improvement for the year.
Understood very helpful and as a follow up just sticking to the guidance and now on the EPS side of things I mean, I take a look at the EPS range for 2023, you guys have given.
And it assumes flat.
Shares outstanding right.
You guys, obviously repurchased $144 million in shares in Q4 $4 $95 million in 2022, So I'm just trying to understand.
How we should think about sort of the run rate for buybacks.
And as it relates to the guidance as well.
So clearly we don't factor.
We keep the share count constant as you noted has been in our guidance.
But clearly we have demonstrated historically.
Our willingness to return cash to shareholders, while also deleveraging and funding the escrow if you saw how we deployed capital.
As you think about this year.
With our free cash flow guide of greater than 350.
The way I think about capital allocation. This year is we're stepping up our investment in growth.
To fund <unk>.
Really high return applications in both TSS and APM.
Clearly, we think we're at a prudent lever leverage ratio today.
But we will also keep in mind and we have an approval from our board around stock repurchases.
Clearly we are as we think of the year also I would just say we're keen to resolve.
Legacy claims against the company and so we wanted to also factor that in mind as we think of that.
Five key strategic priorities, which drive value for our shareholders over time. So the point is well taken on the share count.
We will continue to deploy capital against the four key priorities the top four but we will also use capital allocation wisely to drive or augment the value from those first four priorities.
As we move forward in time.
Very helpful. Thank you so much.
Thank you.
Your next question comes from the line of Vincent Andrews from Morgan Stanley . Your line is open.
Thank you very much.
Can I just ask.
Two comments you talked about the recovery through the year you spent a lot of time referencing Europe and.
In Asia in China, which is easy to understand could you talk about sort of the end markets and I think we all have a pretty good idea of what's going on in paint and coatings, but what about the balance of the book.
What are you seeing in terms of how those customers are behaving and what is your expectation for how their volume is going to flow through the year.
Yes, well clearly as we think of our tier two business globally.
The majority of our product ends up in architectural coatings.
And the U S market continues to be robust there is still if you listen to some of the calls by coating customers.
Backlog on the professional side.
Europe .
As a primarily a coatings market for us as well and we had seen a pretty significant destocking in the second half, especially in Q4, we're seeing signs that that's moderating.
China is a high end coating market for US also a laminate market were also big in laminates in Europe .
Those markets are tied to.
To end consumer demand in whether it's furniture flooring are or kitchen cabinets and so again in Europe I think the expectation is we will start to see some.
Some return as the customer the end consumer becomes less stressed.
As it relates to energy cost in Europe , and then finally, the last part of our business is in plastics and that that that tends to be more tied to global macro I would say generally.
But even there I would say.
If we if we look at strong auto globally and other applications like that we would expect continued recovery throughout the year as well off of what we saw in the second half of last year.
Okay, and just as a follow up.
I just wasn't 100% clear on TSS in the fourth quarter.
Volume side of the equation, whether that came in below your expectations.
And what caused it.
Yes, so I'd say.
Yes.
Seasonally Q4 is a weak quarter right.
As you know.
The season can either be relatively good or relatively weak. So I would say in our volumes were somewhat lower than expectation, but I would say, what what transpired in Q4, which Samir took us through in detail is more some of the movements on the cost side.
No.
It's seasonally a weak quarter, we had some pretty major plant turnarounds are tires as we call them.
That that were completed in Q4, so you always have the startup from our major tire.
You have a lot of costs being absorbed as you bring your plants up online and then we had the winter storm at the end, which also resulted in either lower operating rates or <unk>.
Higher costs related to how you read the plants after the storm.
So I'd say Q4 is that from a TSS perspective had elements of maybe slightly weaker demand, but I would say the cost factors are probably more significant in terms of the margin compression that we saw.
Thanks, so much.
Your next question comes from the line of John Roberts from Credit Suisse. Your line is open.
Thank you could you comment on the backlog for an afternoon and.
Do you think the backlog accelerates in 2023 after the IRA how far out are you taking orders.
John That's a great question and there was as.
As I understand it.
There is a two year backlog on Perm Electrolyzed sirs.
Before IRR.
So with IRA.
The inbound requests for access to our capacity.
Our significant and Denise and her team are really working hard to unlock existing capacity.
Clearly.
We were involved in hydrogen.
In a in a very significant way, we have the announced joint venture.
With full mitek in Germany, we are a partner in the hydrogen hub.
Application for West, Virginia, and we also announced the.
The partnership with.
With the Dod.
On clean hydrogen at our.
<unk> here.
With University of Delaware here hearing, Delaware, So a lot going on in the hydrogen space and Kenmore is continues to be extremely relevant.
In the work, we're doing both on improving membranes, but also improving our.
Our volumes to meet the significant backlog in announced projects globally.
And then you mentioned higher legal costs in 2023 is that related to preparing for the first trial for <unk> or increased settlement negotiations or something else there.
Yes.
I would say you know we've been in settlement discussions regarding the water utility cases and have now progressed those discussions.
Through the court appointed mediator so in anticipation of the work, we're doing there and other aspects.
We're also very focused there clearly we have a number of major remediation projects to online.
That we're bring into completion, but maybe I'll ask <unk> to give some more granularity I think Marc you touched it John the way I would think about the guide on the corporate and other site, which I'm, assuming you're referring to it's a combination of both both the legacy environmental and some.
Some of the legal costs. So it is not just legal.
Great. Thank you.
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.
Thanks, Rob and again were really excited as we look into the new year.
We're going with <unk>.
In our next chapter.
We're really excited about the work we're doing to drive improved results in TT and prosecuting the growth in TSS and APM and resolving some of the legacy issues that we've had since our inception. So a lot of good work here being done.
I look forward to seeing as many of you as possible this year and getting the word out on on what <unk> is doing around sustainability led growth going forward. So thank you and look forward to seeing you all this year.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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