Q2 2023 The Chemours Company Earnings Call
A very robust.
Recovery, especially in China post Covid.
And so we've always been of the mindset that we were going to have a gradual recovery I think as we were getting into the second half our view is that.
Versus our planning, we expect more modest demand recovery and maybe being pushed even into early 2024. So our expectations here sitting today is that in the second half we would see volumes versus the first half.
Flat to slightly up.
And obviously seasonally.
Q3, and Q4 Q4, especially tend to be weaker quarters. So I would say, we expect to see flat to slightly up despite the fact that the second half seasonality is typically weaker.
Your next question comes from the line of Josh Spector with UBS. Your line is open.
Hey, guys. This is James Shannon on for Josh.
Just hitting on the Taiwan plant again.
Yeah.
Just wondering if that has any impact on your mix of contracts.
Yeah.
As you can continue to talk about changing and improving the quality of that business is there anything that youre doing to think about changing the structure that you have in place.
Yes, no no no impact on our contracted business at all.
The way we have looked at this decision is.
Can we serve our customer needs well.
Going forward from our North American plants, and we've concluded we can so this is not there's really no. This is just a change in manufacturing that are changing in contracts as you saw in the quarter.
We pursued more opportunities.
In both our flex and distribution channels.
Which led to sequential growth in volumes as well so.
I'll, maybe ask Jonathan to comment more here on this in terms of how we see the dynamic here.
In the marketplace with respect to volumes.
Yes.
Obviously as Mark said in the second quarter, you can see the sequential growth in volumes of approximately 13%.
While it's a good results sequentially coming in first quarter or not necessarily in line with what we would call a recovery and so as we look out into the second the third and the fourth quarter the second half.
That causes us to to to take the glide path down slightly right from it.
Recovery, we were expecting so but all in all no change James to your question to kind of our approach to the market.
We've been talking about our ability to debottleneck our facilities.
Over the past couple of years, obviously that was delayed.
Inside of Covid as a result of Covid, but we're confident that through this transition.
We won't Miss a beat in terms of our ability to serve our customers both in the APAC region and globally.
Got it and just wanted to say congratulations to you Jonathan I had one other follow up on the <unk> business.
And that's just if I think about volumes being relatively stable through the rest of the year.
Does your guidance anticipate any raw material benefit.
So so clearly.
We are seeing some moderation in raw material costs, some are more sticky than others.
And obviously you know as.
As we as we re task.
Our remaining plants in TT that gives us an opportunity also to run at better utilization rates. So so in my view is we continue to work very hard our procurement team on input costs, clearly energy costs have come down or as we have said earlier this year.
There has been moderating and then our ore mix as advantage.
By by the decision we've made with respect to one yet.
Your next question comes from the line of Duffy Fischer with Goldman Sachs.
Your line is open.
Hey, good morning, guys.
First question is just around the <unk> SaaS.
Potential settlement.
We've all seen that a number of state Ags has kind of stood up against the three arms settlement would you expect something similar for your settlement, where there would be people.
That prominent that would try to.
Either alternate or kill it.
And if not can you go forward do you think with the judge <unk> dosing.
Yeah, Hey, Hey, Duffy.
Listen we saw the news of the AG opposition to three on settlement, obviously, when youre dealing with something that complex and thus far reaching.
I think we would certainly expect.
Folks to have an opinion right on how they think what they think the outcome should be sitting here today, we can't predict whether or not similar objections would be raised against our settlement or not.
But I think that what we do have confidence in is that the settlement that we entered we entered into based on what the plaintiffs have asked US is a very good settlement and I think that that opinion has been reinforced by the court right that they believe that this is a good settlement. So we're.
We're going to continue to to do what's asked of us by the court certainly and.
And worked through the process first through preliminary approval and then ultimately right through final approval at the end.
Great. Thanks.
And if we could turn to refrigerants.
You just update us on your latest thinking with the step down, particularly in North America with Hs level.
What do you think that does to pull forward volumes. The rest of this year and then can we still grow those volumes into next year with the step down and what are we seeing on supporting HFC pricing.
As we're moving into that step down for HFC.
So <unk> I'll ask Jonathan to comment further, but generally speaking as we look at the second half.
We think we believe that the step down is beneficial.
Two our second half clearly remember that this business has seasonally weaker especially going into Q4. So.
Bear that in mind as well.
And obviously.
Sure.
We've had a very robust first half on <unk>.
I am bill rates.
Is does that continue in the second half and with weaker construction. That's also a moderating impact so listen I think it's beneficial to TSS with a step down in terms of folks wanting to make sure. They have utilized there their quota.
Clearly with end demand being more modest.
In a somewhat weaker economy in the second half that.
That could have an offsetting impact, but net net we've factored that into our guide.
Hey, Duffy I'll, just build on that comment and just to remind the folks on the call that the aim step down coming is 30%.
And the Afghan step down coming in Europe is 20%. So that's obviously a 2024 dynamic that we're going to that we're going to face into and I know that Joe and his entire team are ready to serve the market to make sure that.
Our OEM equipment customers get all of the product that they need to build out their fleet and to deliver that next generation of hff's hardware and to make sure that our distribution partners.
On the on the retail side are well taken care of.
Through that coming transition.
Just to be sure as we think about the guidance for the full.
<unk> guidance for the full year, we haven't really baked in a material amount of pull forward right. So we're not envisioning a scenario sitting here today, where you get a material amount of pull forward in either the third or the fourth quarter. Obviously, the things that are going to drive that right through the through the summer and into the fall are going to be how hard is it.
How much of an inventory depletion do we see down the channel and of course, what is the strength of the overall economy does that give folks the confidence to say, hey, I'm going to pull ahead some volume.
Into 24, so listen I mean, we this business continues to perform very well.
And obviously with the coming 24 step downs as you all know.
We'll be ready to serve.
The refrigerant market.
Need the product and maybe just one last comment Duffy, obviously, the step down in quota drives further adoption of <unk> technology.
We're hard at work at our Corpus Christi site to drive the 40% expansion, there, which we expect to have completed by the end of next year.
Great. Thank you.
Your next.
Question comes from the line of John Mcnulty from BMO. Your line is open.
Yes. Good morning, Thanks for taking my questions.
So in the mid.
Tier two business you seem to have some reasonable confidence that demand picks up.
Is that coming from your customers like I know you've got you've got these longer term contracts with customers. So you maybe have a little bit better peek behind the curtain in terms of in terms of what theyre thinking the real demand pull is like so is it coming from that or is it more just look we can't run at this low of a level for that long, there's just not that much inventory to realistically.
Destock I guess, how would you characterize your confidence on it.
Yes, So John you know as I said earlier, we had several quarters of very robust demand.
Before things started to soften last year in Q3 and really much more so in Q4. Our view typically is a typical ti O. Two cycle is somewhere between 12 and 18 months. So obviously this one feels like it it's more towards 18 in 12.
And as you've seen recently by some of the commentary by some of the U S coating companies I think it's been a lot more favorable.
Then it has been previously so again our view is hey, this is taking a little longer.
Yes, we continue to have a robust book of contracted business and really very active dialogue with with with key customers around the world, including the folks I have mentioned earlier here in the U S. Jonathan if you have any additional color, yes, no I mean, the only thing I'd add to that is.
That I think coming into the year, we thought that we would find the bottom kind of here in the early in the first half the order book would speak to a turn in the second half and that Hasnt been the experience that we've had here in the second quarter. I think we continue to we continue to look out at the order book and feel like we're at the bottom, but the inflection does not turning we're at the inflection.
<unk> point, but it's not turning as hard as we think about what could happen next year in 'twenty four we're not here to give a 2004 guide, but certainly that the north American Northern hemisphere coating season in 2024.
Is is what we're all playing for in terms of when we think the restock happens, it's just difficult for us to sit here today and think that ultimate and end market demand has really declined.
In line with how we've seen the destock right.
So.
What we're trying to do right now in the very near term and as evidenced by what we're doing with our manufacturing circuit is to reduce cost.
And and improve our overall circuit up utilization.
So with that we're well set up for 2024.
Got it okay. That's helpful.
And then I guess just on the TSS business, so kind of a look at like the cooling degree data and that type of thing would actually say <unk>. Despite all the press about the hottest day in the world and all that kind of stuff. It was actually kind of a light start to this to the air conditioning season.
But it looks like <unk> really ramped up aggressively do you feel that home like is it something that I hesitate to say it spot because that almost implies it's a commodity but like do you feel that hole when it gets hotter and I guess, how should we think about how that plays out.
If the current trends continue throughout the rest of this year.
Yes, so John as you alluded to we had a relatively cool first part of the summer, which which which.
Delayed the start of the season.
And obviously with with our more recent warm weather, we will see higher utilization rates are higher consumption of refrigerants.
As folks need to service their equipment to deal with the current weather patterns, we're seeing especially here in the U S and Europe and so our view has always been that any any pull ahead related to the step down.
Would come later in the year dependent on how much quota folks had use throughout the year a lot of the refrigerant.
What's really great about our TSS business.
Is that a significant portion of it.
As a replacement or a service business.
And so there's not a lot of transparency in terms of where distributors are in terms of consumption of inventory and so we yes. It creates demand when you have hot days like we're seeing recently.
But there's also quite a bit of inventory in the system held by distributors and is typically not a lot of line of sight as to where that inventory level is and where the folks will need to consume more.
To use up their quota so as we reflected on the second half. We believe there will be some pull ahead as it relates to the step down folks will want to make sure. They have used their quarter, but a lot depends on utilization through.
Through the end of the year.
Especially through the cooling season this summer and we'll just kind of have to watch it as we go.
Got it I appreciate the color.
Your next question comes from the line of Matthew Deyoe of Bank of America. Your line is open.
Hi, good morning, Thanks, Shlomo for Tiano filling in for Mark.
The first question I wanted to ask is a little bit longer term, but theres been a lot of press about.
The emerging cooling for data centers and how this could benefit companies like Morris.
What are you seeing there and how far are we from this actually being decent.
Ms for your company.
Yes, so it is a.
<unk> question. So we continue to work very diligently on developing and commercializing.
Immersion cooling we had talked about this.
Several months ago in any one of our investor update on our thermal and specialized solutions business and as we look at the explosion in AI and.
The need for high speed data and data centers, we're very excited about what this technology will offer.
We will have more to say in the future in terms of an official announcement.
But but I remain confident that immersion cooling.
Present.
Another significant growth franchise.
For our thermal and specialized solutions and.
And then in a very direct way will tie.
To the growth of AI.
In the U S, especially in around the world. So.
More to come on that but we remain confident that this is a technology that we can commercialize probably not not in the immediate future, but certainly something that.
<unk> will be part of our planning as we look out between here and certainly the middle of the decade.
Okay perfect.
I also want to ask a little bit about.
Okay.
Refrigerant imports have been some articles from some mentioned probably biomedical HFC call Leach and above the high amount of <unk> refrigerants come to the U S from China.
I don't believe it was amongst your quarter your second quarter results, but is it something that youre concerned about.
In the second half of the year.
Yeah, So hey, there, it's it's Jonathan as we think about illegal imports.
We learned a lot of lessons out of Europe right. So as we were as we were launching <unk> technology in Europe on the stationary side, specifically, we learned a lot of lessons from the illegal imports that came across from eastern Europe .
And southern Europe and.
Change the quota dynamic in that market. So we took a lot of those learnings around inventory management border control checks.
And working with authorities and layer that into our approach to to the U S market and worked a lot with EPA number homeland security and a number of other agencies in order to make sure that as aim was getting stood up we had some of the right enforcement mechanisms in place and we create.
Some awareness right around the issue.
So obviously, we need to remain vigilant on illegal imports. It is not something we're ever going to take our eyes off of.
To your question, specifically about <unk>, we wouldnt necessarily view that as an illegal import issue, but more of a composition of of product issue and the importation of that being used to kind of skirt.
To skirt other regulations around the import of <unk>. So.
Our teams are all over this Joe and his entire team.
They work hand in hand, with federal state and local authorities here in the U S to ensure that there isn't a.
There isn't a problem going forward. So we'll keep we'll keep an eye on it but for now we remain confident that the law can be well enforced here in the U S.
Okay.
Okay.
Your next question comes from the line of Laurence Alexander with Jefferies. Your line is open.
Hi, This is Dan Rizzo on for Laurence.
Given what you've done with it.
Doug.
Joe to plant or are there other facilities youre, taking a look at that might be higher cost debt might be.
Sure Tom.
Okay.
No no no not at this time and obviously our expectation would be.
All of our remaining facilities.
Utilize low grade ores, and a wide spectrum of ores, which is improve their cost competitiveness. So so not at all.
And then so.
Have you stated or what.
Utilization rate is now for <unk>.
The closing of this facility.
No we haven't.
We tend we typically update our nameplate capacity in our 10-K disclosures once a year the way I think you should think about this is the.
The immediate impact.
Of the cornea and closure will obviously reduce our nameplate capacity.
And but we continue to work on Debottlenecking of our remaining facilities such that I would I would expect over time that change in your nameplate capacity to be quite modest. So the immediate impact obviously is both a cost a fixed cost reduction and a better <unk>.
Utilization of our circuit.
But again part of our analysis and making this tough decision was looking ahead.
To customer demand.
And being confident that with with some of the work underway to Debottleneck. Our three facilities here in North America that we could serve our customers well.
And last question, if the coatings season.
So next year as strong or stronger than expected I guess, you could easily flex up to meet any anticipated demand surge.
Yes, Sir and obviously as Jonathan said.
We really wanted to take advantage of the continued weak demand.
Two to get our manufacturing footprint right.
In anticipation of a more robust 2024, so that we can serve our customers well and obviously from a profitability perspective.
We would get RTI hotel business back into sort of the 20% to 25% EBITDA range. So.
Again, we're thinking ahead to 2024, and how we serve that market well.
Thank you very much.
Your next question comes from the line of Mike <unk> from Barclays. Your line is open.
Great. Thanks, Good morning, guys.
First question on APM could you maybe drill down into what areas, you're seeing the demand weakness in the second half and then separately could you just update us on how you're seeing demand specifically developed for Gnathion in your semi con PSA currently.
Yeah.
It's a great question.
Remember, we've always described 2023 as a transition year for APM, well, what do we mean by that.
We're really ramping up our ability to our capacity in our performance solutions space to serve both clean energy and advanced electronics markets and so.
In terms of where we're seeing weakness it's in our advanced materials business.
Of that as you know.
In a broad industrial or in some specific segments like land cables, which are tied to construction.
We're seeing some weakness there as well so I'd say generally speaking.
Weakness, we're seeing is is in our advanced materials business.
On our performance solutions business, we remained sold out.
So what.
What what.
Are you witnessing is our growth rate here this year Israeli capped.
By how much capacity, we can liberate so as we look at the second half.
We expect advanced.
Materials to be weaker from a volume perspective, and obviously there is only so much you can do in the second half.
I'll leave capacity and Thats, just the timing it takes to implement capital projects or in some cases to get permits to.
To expand at some facilities. So the team's really hard at work in and doing everything possible to maximize throughput in our performance solutions area.
But theres just practical limits in what we can achieve in the second half, while we're seeing a weakening of the advanced materials, which today is the larger the larger portion of the total revenue of that business. Jonathan and then if you have any additional color yes, no. The only other thing I would add is that <unk>.
Obviously, if you look at APM like as a business regionally our exposure to Asia Pacific is is pretty high right at the 35% to 40% of the overall business and so as we think about that in the kind of the lack of a strong recovery in China, and and whatever kind of spread that has.
The rest of Asia, that's certainly impacting the business.
The only other thing I'd remind folks on the on the call or is that Q3 of 2022 is going to be it is going to be a tough comp right.
For Q Q3 of 2023, so as we look ahead, we do expect a drop off there on a year over year basis. In addition to something thats going to happen sequentially in terms of both.
Both topline and Bottomline.
Okay.
Great. That's Super helpful. And then just second on <unk> could you maybe talk about your pricing assumptions as we go into the second half and yes, and I think you've previously talked about getting the business back to about 20% EBITDA margins to exit the year, where do you think the borrowers now just given all the moving pieces are seeing here.
Yes.
We don't provide pricing guidance.
On a forward looking basis as you saw in the recent quarter.
Our price was down 1% and so.
That reflects.
Both regional and customer mix that also reflects channel mix with more volume.
Relatively speaking going through flex and distribution. So again, our view is the second half.
Guided that volume, we expect to be flat to slightly up.
We're clearly working on rationalizing capacity.
Which will be beneficial starting in the second half, but rarely will will show real benefit as we go into 2024.
Great. Thank you.
Your next question comes from the line of John Roberts with Credit Suisse. Your line is open.
Thank you two questions first a short one do you plan to do a debt offering to fund your share of the <unk> settlement and then.
The longer question is how do you re optimize the tier two network do you have some export you mentioned, it's a swing plant. So do you have some exports into Europe that you can serve from North America now and do you just drop your customers in Asia.
Yeah, Hey, John It's Jonathan here on your question about the financing, we're obviously always looking at.
Different.
Mechanisms to drive liquidity here, obviously, we have the sale of the glycolic acid business, which we project will close at the end of the month.
So we're always looking at liquidity to make sure that our balance sheet as an order today, we feel good about the capital structure that we have the go forward liquidity of the business.
So we'll we'll approach that Opportunistically, obviously, we have the 2025 term loan B I think thats, what youre, referring to kind of the two terminals in front of us.
We'll continue to take a look at that and if there is an open window, maybe maybe think about doing something there.
And then John on the on the question.
With respect to our Ti two facilities no we don't plan to drop quote unquote any customers.
We're very focused on very high levels of customer service and today actually we leverage.
All of our plants to serve our customers' needs globally, clearly well have to readjust in terms of what plants are tasked with what with specific customer requirements.
But that's something the teams very capable and has done before so I don't expect any meaningful interruption here in terms of customer service or meeting customer requirements. As a result of this decision.
Yes.
Alright, thank you.
Your next question comes from the line of Jeff Zekauskas with J P. Morgan Your line is open.
Thanks very much.
I've always thought that the capacity of the Taiwan plant was 160000 tons.
Is that right.
And you've talked about the cost savings from closing the plant.
If a plant, making any money or is it losing money.
Yes.
What's the tradeoff there.
Yes, Jeff you've asked two question is that we probably wouldn't answer in the sense of we don't disclose individual plant capacities and we certainly don't report out other than at the segment level.
Our profitability as I mentioned it is a higher cost plant in our fleet because of its use of high grade ore and therefore.
The benefit of the closure is to more fully test the remaining plants.
And to reduce our dependence on high grade or so.
I think those together will have a meaningful benefit as we've disclosed it's a $50 million run rate cost savings.
Again, which we would expect to start to see in our pro rata form in the second half here, but obviously on a run rate basis, starting next year.
So is the 50 million of net cost savings.
Net.
Or there is an officer.
Yes, Sir that's the net cost savings that's a net cost savings on the EBITDA, Jeff and then obviously as we disclosed in our.
In our press release and in our materials, there will be a $25 million cash impact here in 'twenty three.
And similar number in 2024 in order to effectuate those those are cash costs associated with things like severance.
And for my for my follow up.
Imports of titanium dioxide into China as of about August last year fell off a cliff.
That is maybe imports into China or something like 15000 tons.
And they fell to I don't know 4000 tons of mob and they've stayed low since that time.
Is that something which.
Effected your decision that is is China now being more supplied by.
Okay.
I owe to companies in China.
And secondly in your in your comments, you said that the subsequent cost savings will be substantial and closer to the plants.
What is that about that is there a cost savings thats above that $15 million starting in 'twenty four that's meaningfully above.
So Jeff clearly there is a fixed cost savings by eliminating a plant.
Obviously.
There will be a continued focus on optimizing the remaining circuit and obviously the remaining circuit will will use a wider variety of ores, but what we've disclosed for now is the fixed cost savings.
Which which we believe we will achieve as a result of that.
Just to comment on China.
No.
Again, I think there was a lot of euphoria earlier this year.
With the change in in Covid, 19, and the expectation that the China economy would come Roaring back and obviously that hasn't happened.
High grade high grade pigments into China.
<unk> are tied to some degree on high end local consumption, but a lot to do with exports from China.
And things like furniture, and other durable goods, which have also been down so our view is.
High grade imports into China.
Or not necessarily being substituted by Chinese producers, but are being you know the demand is being impacted.
Where those products go into in terms of high end furniture, and laminates for export which are also down.
Tied to both a weak economy in Europe .
And weaker construction in North America.
Okay. Thank.
Thank you very much.
There are no further questions at this time, Mark Newman I'll turn the call back over to you.
Jamie Thank you and thanks, everyone for your interest again, we continue to be very active in terms of driving our five key strategic priorities.
And I, just really wanted to take this opportunity to thank our entire team of employees who.
Who are passionate and focused about moving the company forward. So thanks again, and we will look forward to catching up with some of you on the road.
Okay.
Thank you.
This concludes today's call you may now disconnect.
Okay.
Thank you.
Yeah.