Q3 2023 Chemours Co Earnings Call

Participants

Brandon Ontjes; VP of FP&A and IR; The Chemours Company

Jonathan S. Lock; Section 16 Officer, Senior VP & CFO; The Chemours Company

Mark E. Newman; CEO, President & Director; The Chemours Company

Hassan Ijaz Ahmed; Partner & Head of Research; Alembic Global Advisors

John Patrick McNulty; MD & Senior U.S. Chemicals Analyst; BMO Capital Markets Equity Research

Joshua David Spector; Equity Research Associate - Chemicals; UBS Investment Bank, Research Division

Laurence Alexander; VP & Equity Research Analyst; Jefferies LLC, Research Division

Patrick Duffy Fischer; Research Analyst; Goldman Sachs Group, Inc., Research Division

Vincent Stephen Andrews; MD; Morgan Stanley, Research Division

Presentation

Operator

Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Chemours Company Third Quarter 2023 Results Conference Call. (Operator Instructions)
Brandon Ontjes, Vice President of FP&A and Investor Relations, you may begin your conference.

Brandon Ontjes

Thanks, Rob. Good morning, everybody. Welcome to the Chemours Company's Third Quarter 2023 Earnings Q&A Conference Call. I'm joined today by Mark Newman, President and Chief Executive Officer; and Senior Vice President and Chief Financial Officer, Jonathan Lock.
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 Chemours' SEC filings. These forward-looking statements are not guarantees of future performance and are based on certain assumptions and expectations of future events that may not be realized. Actual results may differ and Chemours undertakes no duty to update any forward-looking statements as a result of future developments or new information.
During the course of this call, management will refer to certain non-GAAP financial measures that we believe are useful to investors evaluating the company's performance. A reconciliation of non-GAAP terms and adjustments are included in our release and at the end of our presentation.
As a reminder, our prepared remarks, a full transcript plus our earnings deck have been posted to the Investor Relations section of our website, along with 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?

Mark E. Newman

Thanks, Brandon and good morning, everyone. Thanks for joining us. 2023 has been a challenging year with a weaker second half than we expected but the Chemours team remains focused on driving long-term shareholder value and improvements in our 3 industry-leading businesses. Most of our year-over-year performance deterioration has been driven really by lower TT volumes and we have responded with (technical difficulty) of the TT transformation plan which will shine through in 2024 as we see demand weakness decelerating. Our APM business is also seeing some demand weakness, especially in Advanced Materials but we have achieved, again, double-digit growth year-to-date of 11% in our Performance Solutions and this business remains tied into long-term secular gains in advanced electronics and clean energy, which we're hugely excited about.
And then finally, our TSS business continued with strong performance with another record net sales. This is the seventh quarterly net sales record in a row. And as we look again to 2024, we have the step down in the AIM Act that's going to drive further Opteon adoption. And beyond '24 (technical difficulty) of immersion cooling in 2025. So again, we're excited about the work that's underway here at the company. And despite the challenging environment, we see ourself in, remain focused on what we have to do going forward into 2024.
So with that, I'll turn it over to Rob to begin our Q&A.

Question and Answer Session

Operator

(Operator Instructions) And your first question today comes from the line of Duffy Fischer from Goldman Sachs.

Patrick Duffy Fischer

Mark, I was hoping you could just walk through on the step-down for HFO coming up this year. Historically, it seems like there's been a little bit more prebuying of the older product. But this time, that doesn't seem to have happened. So can you just walk through what's transpired over the last year? Did we build a little bit of HFC volume at the distributor level earlier this year and that's why there's not kind of a price bump in a run for the door here late? And then, how do you see that playing out next year? It seems like there is distribution inventories. When next year do you see that push that the step down here kind of really starts to accelerate the volumes for HFO?

Mark E. Newman

Yes. So Duffy, great question. And as you said, we have always indicated that we would wait til Q4 to see based on usage of inventory and quota usage in the year whether we would indeed have a step-up in HFC volumes. Interestingly, what we have seen in Q4 is higher HFC pricing. And so there is an indication in my mind that there is increasing interest in HFCs ahead of the quarter step down. Clearly, as we go into 2024, our view will be that there will be continued ramp-up in HFO volumes. Whether that happens at the beginning of the year or more ratably, we'll wait to see. But clearly, as we look at the OEM adoption of HFO platforms, we see meaningful growth in HFOs in 2024 for the full year.

Patrick Duffy Fischer

Okay. And then in Europe, we had an issue about a year into their big step down where you started to get some illegal product flowing in. How are you guys set up differently in the U.S.? Have you identified potential routes for that? And then who is, I guess, kind of the policing force if you notice that, that you would go after? Do you feel like that's set up well enough that you can stop that from happening in the U.S.?

Mark E. Newman

Yes. Well, first of all, we did a lot of work as an industry with the EPA in implementing the AIM Act to take every precaution to make sure that didn't happen here. Clearly, there's fewer borders as it relates to the U.S., Canada and Mexico than there is in the EU with 28-member countries. But listen, I think the industry, not just us but the OEMs who have invested significantly in the HFO franchise are very focused on rolling out that adoption. Obviously, there is meaningful climate benefit with HFOs. And so I think that risk is a lot lower here in the U.S. and certainly, we're not seeing any meaningful indication of that risk today.

Operator

Your next question comes from the line of John McNulty from BMO Capital Markets.

John Patrick McNulty

I was hoping maybe we could peel back the onion a little bit on the TT business because the volume weakness that you're seeing definitely doesn't seem to be matching up with what the end customers' volumes are doing. And I guess I'm a little bit surprised, it's gotten actually worse as we've gone through the year. And normally, I'd be a little nervous you're losing share or something like that. But in this case, you've got a lot of longer-term contracts locked up, so it doesn't look like that's the case. So I guess can you help us to think about where that demand disconnect is and when maybe we see the end of that destocking and kind of a normalization, even if it's lower than kind of whatever 2019 type levels? But when we see a normalization of that business, I guess, how should we be thinking about that?

Mark E. Newman

Yes. So John, it's a great question. And as I said in my opening remarks, we are seeing clear indications of this demand weakness decelerating. We typically think of a TT cycle as 12 to 18 months. And clearly, when we look at volume demand deterioration starting in late Q3 last year, we're at the 12-month marker here. And as I said, we're seeing real deceleration in the demand reduction. And in fact, I would say, as we look at our AP order book we're seeing indication there of regaining demand. Now as we look out into next year, our expectation would be that demand gains are more gradual. But it feels to us that the destocking is over. And obviously, as we go into Q4, which is typically a weaker quarter for TT, our expectation is that volumes will be flat to slightly down. I'll ask Jonathan to comment on sort of more volume details there.

Jonathan S. Lock

Yes, Mark, thanks. Just building on your comments, as you said, we are starting to see some green shoots here in AP, while demand around the rest of the world is fairly muted. But part of the transformation plan -- part of the TT transformation plan that we started with the Kuan Yin shutdown was to control what we can control, right? So that plan is going to deliver $15 million of cost savings in the fourth quarter and $50 million to $100 million over the course of next year, right? So we plan on having -- on showing a $100 million improvement in our TT earnings profile into 2024 and that's really what the team is focused on driving for the remainder of the year and on into next year. So John, we're really excited about the transformation in TT that's underway and ensuring that we can be the most cost competitive, the lowest cost and the best TiO2 producer in the world.

John Patrick McNulty

Got it. Okay. Fair enough. And then maybe we could just shift on our second question. Just over to the TSS business and the data center opportunity that you highlighted in the prepared remarks. I mean you're talking about some pretty significant cuts in terms of how data centers can cut down their energy. I guess can you help us in some way to frame the market potential for a product like this as you kind of ramp it up in late '25 and into '26 and '27?

Mark E. Newman

Yes. So first of all, the immersion cooling market represents a whole new add to our TSS franchise beyond the strong Opteon platform. So we're hugely excited about the potential of almost another business on top of what we already have going into 2025. As we have looked at the addressable market, I think there are estimates now running out through 2030 that suggests this is a $2 billion to $3 billion addressable market. But John, as you know, I mean, everyday, you hear another headline on AI and all that is happening in quantum computing that is really driving a significant growth in data centers. The energy reduction for cooling servers is an estimated 90%. It's certainly high 80s based on the math that I've seen.
So it's a significant reduction in energy and also a significant reduction -- it essentially eliminates water usage for cooling data centers where today, you are cooling massive amounts of air. So both in terms of the climate impact and obviously, the opportunity, it's significant. We're in the process right now of going through the project -- product registration process. And as we've said earlier, we plan to start commercializing that product in 2025 and obviously would have a significant ramp from there as we look at the addressable market that I talked about by 2030.

Operator

Your next question comes from the line of Josh Spector from UBS.

Joshua David Spector

So I wanted to follow up on TSS a bit. And just -- when you've talked about your cut to guidance for the year, you framed it more in terms of TT expectations change. Within TSS, I guess, would you say your expectations changed much for this year? And kind of related to that, when you think about the rollout for next year, you said you're going to grow but prior step-downs were kind of coincident with a lot of the changes on the auto OEM side, where there was more complete conversion. How does that take place over this next year where it's more HVAC-related and OEMs don't have to change their equipment until the year after next. And has any sell-through around their changed? So really, what's changed around your expectations in next year?

Mark E. Newman

Yes. There is an equipment transition happening through next year to be ready for 2025. So our expectation based on our interaction with the OEMs is that there will be growth next year on TSS. Josh, we'll cover 2024 guidance when we get there. As we think of our guide for this year, obviously, the 2 -- the main challenge that we're having this year is TT volumes. And as I said in my opening remarks, we are also seeing some weakness on the Advanced Materials franchise of our APM business. And in that business, we are focused on growth mainly in our PFA business that goes into semicon and in Nafion, which services the rapidly growing hydrogen market. Today, we're sold out of both Nafion and PFA. We're actively working on expansion at our Washington Works plant in West Virginia. We're having some permitting delays, which, in fact, impacted our Q3 growth in Performance Solutions. But the [Team Belles] were close to having a permit there. And of course, that will be reflected as we ramp that plant up in early 2024 in our '24 results.
So again, very excited about the secular growth in both TSS and APM. Growth is never linear. And in APM, I think it's a lot to do with permitting on the PFA perspective. It's also related to how quickly you can debottleneck and obviously, every quarter doesn't yield the same results as we debottleneck our Nafion production. But again, long-term secular growth intact.

Joshua David Spector

Mark, appreciate that. And just, I guess, coming back to TSS, there's been, I think, some changes within the equipment side about what's going to be allowed heritage-wise or otherwise into next year. I honestly don't really know if some of the changes have been positive or negative for adoption for you guys. Can you comment on any of that?

Mark E. Newman

Yes. I understand there is -- the industry is still working through the recent regulation change with the EPA. It could have some near-term impact favoring HFCs. But listen, I think the focus on the complete changeover by early 2025 and all that's needed to meet that date is going to drive good Opteon traction in 2024. The other thing I would say is we've continued to see very strong [auto bills]. And I think as we look into next year, I think the current expectation is that will continue, which is also good. We also remember, as there's more EV adoption that's larger charge size. So listen, as we -- we'll talk more about '24 in February when we complete the year here. But again, very excited about the growth that we see coming in both TSS and APM.

Operator

Your next question comes from the line of Hassan Ahmed from Alembic Global Advisors.

Hassan Ijaz Ahmed

A question on the TT side of things as it relates to cost curves. Look, obviously, your margins have compressed a fair bit. I mean, latest quarter 10% EBITDA margins. And you're obviously one of the lowest cost producers out there. So I'm just trying to understand where the marginal producer economics are right now and how sustainable -- I mean, I'd like to think there's a large chunk of the industry that's in the red right now. And how sustainable that sort of environment really is and how that plays into how you're thinking about '24 and beyond?

Mark E. Newman

Hassan, that's a great question. And obviously, when you look at our results this year, pretty significant volume hit to the franchise. We had higher input costs as we started the year. It was quite a bit of inflation on the input side going into the beginning of this year. And under Denise's leadership, the team has done a lot of work to drive both variable costs and fixed costs down. Clearly, with lower volume and lower fixed cost absorption, that's not reflecting -- those improvements are not reflecting in our EBITDA margin today. But certainly, as we look into next year, we would expect those margins to expand and to come back to where we would expect them to be longer term.
The point -- I'll ask Jonathan to make a comment. But I'd just say there's -- clearly, there's a lot of products that I think is in the market today at kind of a marginal cost pricing reflecting marginal cost, not forecast and that's not sustainable over the long term. And what we're focused on is absolutely being at the low end of the cost curve and the work that the team is doing with the TT transformation plan gives us the confidence to commit to $100 million for next year. And as we said in the script, we're not stopping there. Denise and the team are really focused on ensuring that our franchise is the global winning franchise in high purity or high-quality chloride pigment. Jonathan?

Jonathan S. Lock

Yes. The only thing I'd add there is, Hassan, we've kind of seen that coming, right? And the actions, as Mark said, that Denise took early in the year, while painful, we think are absolutely necessary in order to drive out -- in order to drive our cost of manufacturing down. So we're going to see, again, $15 million of that benefit show up here in the fourth quarter as a result of the Kuan Yin closure and a full $100 million show up next year through the TT transformation plan. And as we go through the next couple of quarters, we'll continue to update you on the progress against that $100 million as well as additional initiatives that we're launching as we think about it, to go to optimize the entire manufacturing chain, right, from our mines to our pigment plants and all of the associated overhead. We've got our eyes firmly fixed on getting to lowest cost. So we'll continue to update you on the path to that first $100 million and incremental savings as they become visible to us.

Hassan Ijaz Ahmed

Fantastic. And if I could dig a little deeper into those incremental savings that you mentioned, Jonathan. Obviously, the transformation plan, $100 million over there. But as I sort of sit there and think through the sort of growing zone as they relate to your input costs, right? I mean ore costs had been high but I'd like to imagine that in this weak sort of volume environment, ore costs are beginning to look a little shaky. And I'd also like to think chlorine costs are looking a little shaky. So above and beyond the $100 million that you guys are talking about for 2024 as it relates to the transformation plan, I mean how do you think the input cost side of things could sort of play out next year?

Mark E. Newman

Hassan, you were breaking up there a little bit. But let me just say, yes, a number of the input costs have come down this year. And obviously, as we look into next year, we're driving further reductions through our procurement team across a number of input (technical difficulty) A lot of the cost focus so far has been on really our fixed costs with the Kuan Yin closure. Other efficiency gains in our plants and other focus is on yield improvements, both in our pigment plants and at our mines. So listen, we're -- as I said, we're committed to the $100 million but you should take from my comments that we're not stopping there. We're focused on driving all forms of cost reduction in TT, both on the fixed and the variable side, given the current market dynamics.

Operator

Your next question comes from the line of Laurence Alexander from Jefferies.

Laurence Alexander

Just 2 quick questions. One on the TT productivity program. Can you flesh out how you think about changing your incremental margins when volumes recover? And then secondly, on the data center cooling initiative, what you see is the CapEx required to support the growth out through 2030?

Jonathan S. Lock

Laurence, this is Jonathan here. Obviously, as we look at the kind of controllables in TT, we're taking the cost out today. And as we -- as the market recovers, hopefully, starting here in 2024, those cost savings will accrete to the bottom line more rapidly as we can spread the cost over a larger tonnage base. Today, we're not manufacturing. We're not operating our plants at anywhere near the optimal levels in order to get the right amount of fixed cost absorption. So the gains from market recovery are going to come hopefully starting in '24. We're not counting on that as we kind of look at the cost opportunities. But as they come, that will just compound on top of the $100 million cost savings that we're putting into place today.
With respect to the CapEx, we haven't guided to '24 CapEx or even '25 CapEx. But just to give you an idea of how the immersion cooling plant would roll out, we'd start with a smaller pilot plant. That's not a significant capital outlay, at some point here, pre-commercialization. And then depending on what we think the volume needs are, we'd, for a larger facility to bring it more fulsome to market probably sometime in '26, '27 time frame. But those are plants yet to come. We're really excited about getting the product commercialized in the first instance and then also finding the -- the right set of hyperscaler partners to really make a mark in terms of how data centers are built and the amount of energy and water that gets consumed.

Mark E. Newman

I just wanted to -- Laurence, I just wanted to add to Jonathan's comment a minute here. Clearly, with the closure -- on the TT question, clearly, with the closure of Kuan Yin, we're now down to 3 large plants to service all our customer needs. And what we typically see is we probably have more fixed cost leverage than some of our other competitors, given how large our plants are. Obviously, as we look at a more gradual recovery, we'll see how that translates into margin recovery. But again, remain very focused on both fixed and variable cost. And then on the immersion cooling side, again, we're very focused on how we commercialize that in a very thoughtful way.
And then the last point I would make is, we are very disciplined around capital allocation. And we will allocate capital against -- if you think about our 5 strategic priorities, we're allocating capital to improve how we improve our TT earnings and margins. We're allocating capital to grow TSS. We're allocating capital to grow APM in the high-value markets of Advanced Electronics and Hydrogen. And then finally, we continue to make real progress on resolving legacy liabilities with the MoU arrangement we have with DuPont and Corteva. So if you look at how we're deploying capital, it is all in a way that over time will really -- will drive meaningful returns to our shareholders.

Laurence Alexander

Just to sort of follow on, the -- if you do get the data immersion solution to a $1 billion business, can you give us a sense for what the incremental CapEx that would require, I mean, regardless of the timing? And then your return on capital on that would probably presumably be above kind of your historical targets, I mean, given the market that you're selling into and the savings you're providing, is that fair?

Mark E. Newman

That's fair. And listen, we're -- as Jonathan said, we'll have -- we usually have a much smaller investment near term as we do proof of commercial concept and then more later. So we're really talking about capital in a really out-year period here to get to the TAM that we talked about in 2030. So we'll have more to say about that later. But listen, this would be very high return, high-margin growth because this is really driving significant value to data centers. By the way, data centers today account for 1% of the global carbon footprint and a meaningful consumption of water. So we see a real value to our customers and the planet here in this product and we're keen to bring it to market.

Operator

Your next question comes from the line of Vincent Andrews from Morgan Stanley.

Vincent Stephen Andrews

I was wondering if you all could provide some additional details on trends and the outlook for TiO2 market. Specifically, I was wondering what you're seeing on imports and exports across the different regions. If you could provide a little color on the setup for 2024? And if there are any notable trends within inventory levels in the channel?

Jonathan S. Lock

Yes. I mean -- thanks for the question. It's Jonathan here. As we look at it, right, in terms of the destocking, the destocking in TiO2 started in the third quarter of last year. So as Mark said earlier in the call, it's been with us now for quite a long time, right? We're going on 12 months. And even as we feel like we've gotten -- we can kind of see the bottom here and the demand destocking has decelerated here in the third quarter going into the fourth quarter, we're not seeing -- outside of Asia Pacific, we're not yet seeing the green shoots of a turn, right? But we believe that in terms of the actions that we've taken, we're well positioned for that market turn.
But to answer the question kind of directly, we are seeing some green shoots here in Asia Pacific. Inventory levels as a result of kind of prolonged destocking down the chain do not appear to be high. And with the cost transformation that we've started in this year, we believe we're well positioned to take advantage of the cyclical turn when it happens. So I think that, obviously, as we move into the -- into February and we put -- we close the books on '23 and we give our guidance for '24, we'll have a much better sense for whether or not '24 coating season will develop in the way that we hope it does. So stay tuned and we'll continue to update you both on the transformation plan as well as our perspective on the '24 recovery.

Vincent Stephen Andrews

Awesome. Appreciate the color. Do you mind also providing some additional detail on the $1 million of run rate cost savings expected for next year? You mentioned earlier during the call that the facility closure, maybe $50 million to $100 million of savings, if I heard you right. Is there a range for that $100 million of cost savings that you're expecting next year? And I mean, is there some upside to that depending on what other actions you're taking?

Jonathan S. Lock

Yes. So the cost savings that we're committing to for next year is $100 million, $100 million on a run rate basis. $50 million of that is driven by the Kuan Yin facility closure that we announced on our last call. So we are planning on delivering $100 million of run rate savings here next year. And as I said, a couple of questions ago, we're going to continue to build on that number and we look forward to giving updates as we get more line of sight to incremental run rate savings beyond the $100 million as we go through the next couple of quarters.

Operator

And we have reached the end of our question-and-answer session. Mr. Mark Newman, I turn the call back over to you for some final closing remarks.

Mark E. Newman

Thanks, everyone, for joining us today. Look, the year has been a challenging year and the Chemours team has really responded well in focusing on the things we control, in driving cost reduction in TT and in being focused on how we service the growth in TSS and APM as we go into next year. And we'll continue to look forward to staying in touch with you and to continuing to drive real value for our shareholders as we go forward. Thank you.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.