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 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. Jonathan Lock, Senior Vice President and Chief Development Officer, you may begin your conference.

Thanks, Rob, and good morning, everybody. Welcome to the Chemours Company's third-quarter 2022 earnings conference call. I’m joined today by Mark Newman, President and Chief Executive Officer, and Sameer Ralhan, Senior Vice President and Chief Financial Officer. 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' filings with the SEC. 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, and an audio recording plus our earnings deck have 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. I hope everyone is doing well today and I appreciate you joining us. Despite increasing macroeconomic uncertainty, our quarterly performance showcases the strength of our structural growth strategy. We remain committed to improving the earnings power of Titanium Technologies through the cycle, attaining secular growth in our Thermal and Specialty Solutions and Advanced Performance Materials businesses, and managing and resolving legacy liabilities while returning the majority of our free cash flow to shareholders. In the long run, we expect these four priorities to generate significant value for our shareholders. So with that, operator, let's open it up for questions.

And your first question comes from the line of Duffy Fischer from Goldman Sachs. Your line is open.

Yes. Good morning, guys. Can you hear me?

We can hear you. Go ahead.

Okay, great. So first question is just when you look at the magnitude of the slowdown you've seen so far, maybe compare that to 2019, the last time you guys had a TiO2 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 vis-à-vis 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 within an infancy of your new program versus now that you've kind of matured it and what you think you'll 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 Titanium Business Solutions. We've regained that share and then some with the implementation of Ti-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 earlier in the year, about 80% of our business was contracted. And so we expect that ratio to stay roughly in line. It varies from quarter to quarter, but our contracted business is good. And obviously, the value proposition with TBS is that we respond to the market demand signals of our customers and we're seeing that across the portfolio. As we said in our guidance in September, we're really seeing this more so in Europe and in Asia, specifically in mainland China. And volumes and demand continue 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 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 to Q4. And we're responding to that by idling production. And we're also at the same time running through higher cost inputs that we bought earlier in the year through our P&L. So you have all of these things kind of coming together. I think to compare periods, I would advise folks to look at sort of a rolling 12 months performance on our TiO2 business, which we expect to be much better with TBS even with some of the high-cost inputs that we're running through in the next couple of quarters.

Great. And then I think most of us can track 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 cost of goods sold 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 is 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 Sameer to comment here in a minute, but clearly, we've been off of our target margin in Titanium Technologies and expect to be off in our second half more so, as we adjust production to meet demand. In our view, we would expect volumes to bottom somewhere between the end of Q4 and into Q1. And with that in mind, we'll adjust our production schedules accordingly to better match demand with production. And clearly, as we come into year-end, we're focused on bringing down some of our finished goods inventory from a cash perspective. So maybe with that, I'll ask Sameer to comment.

Thanks, Mark, and thanks, Duffy, for the question. Look, as you kind of look at the cost side, Mark said, we are aligning our production with the demand in the Titanium Technologies business. And that means a lot of things. First is, the cost side just from running the operations 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, and while it's a smaller portion, we started seeing some positives on that end. But from a timing perspective, as you're going to look at, I think these higher costs sitting in the inventory overall are going to probably run through towards the end of Q1 and we should start seeing the benefit as we hit the quoting season in Q2.

Great. Thank you, guys.

Thanks, Duffy, and congrats on the new enrollment.

Your next question comes from the line of Arun Viswanathan from RBC Capital Markets. Your line is open.

Great. Thanks for taking my question. Good morning. Just following up 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 TiO2, it sounds like more of that is coming from upside in Thermal and Specialty Solutions and Advanced Performance Materials. Could you just flush that out for us as well? Thanks.

Yeah. So, Thermal and Specialty Solutions and Advanced Performance Materials 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 have had record years already in these two businesses. So clearly, our secular growth platforms are working. In Thermal and Specialty Solutions, you'll see both price and volume year-over-year as we continue the rollout of Opteon and we look at better marketing of our products globally. On Advanced Performance Materials, we have a lot of excitement around our growth story here, both in areas of advanced electronics like Semiconductors with so much work being done on a U.S. supply chain in this area and globally actually with the demand for chips. And you'll have seen our recent announcements on hydrogen. And these businesses are growing at double-digit rates while we have some fade in or less strategic lines in the company. So the way I think about the company today is clearly Titanium Technologies 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 Thermal and Specialty Solutions and Advanced Performance Materials, we're singularly focused on achieving our growth. And so we'd expect that growth to continue into 2023. So I think we're going through a bit of a transition where clearly our Thermal and Specialty Solutions and Advanced Performance Materials businesses are generating more earnings while we structurally adjust our Titanium Technologies business for the demand and that's reflected in our guidance for the full year.

Okay. Thanks for that. And just as a follow-up then on Advanced Performance Materials, given that we have been hearing some slowdown in electronics especially in China. Are you seeing any of that? And it sounds like you expect the strength to continue in ‘23. What makes Chemours' business a little different maybe to mitigate that weakness?

So listen, I'd say certainly there's a lot going on in the Semiconductor infrastructure that is driving 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. Maybe I’ll ask Sameer to make some additional comments.

Yeah, Arun, you see a lot on the consumer electronics side. So consumer electronics, yes, but that's a smaller portion for us. We are a lot heavier into the infrastructure side. And as Mark said, once the projects start, they typically get through. So the demand on that side stays pretty strong.

Thanks.

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

Yeah. Good morning. Thanks for taking my question. Maybe I can start out on the two specialty businesses. So the Advanced Performance Materials 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 Thermal and Specialty Solutions business, I know you kind of said, hey, don't bake in these margins. They're kind of running pretty hot. We've got some pretty high costs coming 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 Q3, seems like they're 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 Q4 and into 2023?

Thank you, John, for recognizing the two strong specialty businesses in our portfolio. Thermal and Specialty Solutions is expected to experience a seasonally weaker fourth quarter, and it's important for everyone to keep that in mind. We typically sell fewer refrigerants during the winter months. However, this remains a multi-year growth business. Regarding Advanced Performance Materials, the team has excelled under Denise's leadership in maximizing capacity in our most valuable product lines, utilizing limited inputs to improve our customer and product mix throughout the year. There has been significant effort in this area. Additionally, we have approved some expansion investments that will accelerate the growth of these businesses starting in 2024 and beyond. The team has successfully unlocked capacity on existing assets and adjusted the product mix, resulting in improved variable and EBITDA margins. For Thermal and Specialty Solutions, despite the seasonal factors, the business continues to perform well in terms of growth and pricing. There is a lot of innovation taking place as well. Recently, we received an award from AHR for our Opteon XP41, demonstrating our ability to drive earnings through the growth of Opteon and our focus on customer needs across global markets. Sameer, do you have any further comments?

Mark, I think you covered all the points, but I think on the margin side, only other point I would make is, as we kind of get into Q4, we are going to see some of the raw material inflation again as some of the things just kind of flow through the pipeline into the inventory. But I think in Q4, we are 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 exit the Northern Hemisphere and the business moves more towards a little bit heavier on Southern Hemisphere side, the margins tend to be a little lower on that end given the product mix. So you're going to see a little bit of that as we move into Q4 as well.

Got it. Okay. That's helpful. I would like to follow up on the Titanium Technologies platform. It seems that based on the guidance from Advanced Performance Materials and Thermal and Specialty Solutions, Titanium Technologies is expected to have an EBITDA in the two-digit range, likely around $80 million to $100 million, possibly a bit lower in the fourth quarter. As you deal with high-cost ores and reduced inventory levels, how much improvement can we expect in Q2 and Q3 next year? Will the increase be significant, or will it be a gradual rise? It appears that Titanium Technologies is reaching levels that we weren't sure we would see again.

I think your observation about the numbers is quite accurate. Our approach is to align our production schedules with demand for the long-term benefit of the business. As Sameer mentioned, we're still managing higher-cost inventory purchased earlier this year. The team's primary goal is to return to our target margin of 25%, which will take time given our current position and what we expect at the year's end. The team is committed to this objective. We anticipate experiencing some challenging quarters as we adjust our production schedules. However, if we examine our earnings over the last 12 months, they are significantly better than the lows we've experienced without TBS. Additionally, in terms of our Titanium Technologies business and the strength of our assets, being linked to the U.S. energy supply compared to European markets and our TBS portfolio positions us well to navigate the current challenges relative to some competitors. This is an important factor to consider as well.

Got it. Thanks very much for the color. Appreciate it.

Your next question comes from the line of Mike Leithead from Barclays. Your line is open.

Great. Thanks. Good morning, guys.

Hi, Mike.

Good morning. I would like to follow up on the previous question regarding the projected Q4 earnings outlook. Can you provide a high-level overview of how you anticipate the distribution between the segments? Additionally, in relation to that last question, could you clarify what might be seasonal or temporary costs, such as the elevated COGS we might see in the upcoming quarter, compared to what we should expect as we move into the early part of next year, considering the current macroeconomic conditions?

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 stands 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 Titanium Technologies and really it's trying to align our production schedules with demand in a way that allows us to finish the year with better inventories on our own side. And we would expect this demand decline to bottom in the next couple of quarters, probably as we go into 1Q of next year. So we're going to have a couple of quarters here with Titanium Technologies 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. And I have no doubt that this team being now more focused on the cost side will make real progress as we go into next year.

Fair enough. And then secondly, the recent $200 million capacity expansion in Nafion, I was just hoping maybe you can give us a bit more color just relative size of how that extends your ability to serve the market and if you're willing to give anything in terms of IRR 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 great expansion projects to do. We've said that we expect the electrolyzer and fuel cell membrane market to be somewhere between $2 billion and $3 billion by 2030. And so this announced capacity, we would expect to come online late in ‘24, early ‘25. And based on a lot of the announced expansions, we'll be hitting the market in stride at a very good time. As I said earlier, when you look at the Advanced Performance Materials results, you're seeing the impact of that team liberating capacity on existing assets on high-value markets like membranes. So that will continue through next year, actually with 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 membranes.

Great. Thank you.

Thank you.

Your next question comes from the line of Matthew DeYoe from Bank of America. Your line is open.

Good morning. Is there any risk that you won't be able to debottleneck certain Florida products kind of given community pushback? I know Wilmington keeps your piece and at least the press in that region hasn't been too positive as it relates to potential expansion in Fayetteville. So is that kind of the Nafion expansion? Is that happening elsewhere? Is there any reason why you maybe couldn't get that done?

As we see things today, Matt, we're quite confident that we will get it done. We continue to have very good engagement with the local community and the local authorities. And so this debottlenecking is sort of within our permitted capacity today. So I wouldn't expect us to have any issues whatsoever.

Understood. And I know it's early, but if we think about price next year for Thermal and Specialty Solutions or at least kind of the cadence as we move through the year. You'll have Opteon 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 or should we think about it as flat? How does that look now, I guess?

So clearly, we had, with the adoption of the AIM quotas this earlier this year, we've had very good pricing activity consistent with the quota mechanism. 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, there's a step down as we go into 2024, which 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 Opteon. Sameer?

Thank you, Mark. Matt, I would like to add a few points regarding the pricing and business mix, particularly related to the aftermarket segment. As Opteon adoption increases and expands, we anticipate growth in the aftermarket area as well, leading to improved pricing and margins for us. This will be beneficial as we move ahead.

Thank you.

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

Hey, everyone. This is James Cannon filling in for Josh. I appreciate you taking my question. Could you provide some insight into the volume reductions in the Titanium business? Specifically, how much of that is related to the contract or flex business? Additionally, are you experiencing any pricing pressure or pushback during negotiations?

Yeah. 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, it's really reflecting the decline in demand of our contracted customers. As you saw in our release, prices remain relatively flat, sequentially. And the way I kind of think about that is 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 prior highs. So I would say that's a kind of volume price mix that you're seeing in the quarter.

Yeah. The only other point I would make, James, is, as you're going to think about the volume equation. I would think a little bit more from a regional perspective rather than from our channel perspective. As Mark said in his opening remarks, and earlier as well is, it's Europe and Asia where we have seen the majority of volume decline. North America is holding up and Latin America has been a pretty good market for us as well.

Okay. Great. And then on the Advanced Performance Materials side, we talked about the capacity expansions there. If we were to assume the growth rates that you're seeing pan out, could you quantify how much additional capacity could be needed by 2030?

Yeah. So certainly as it relates to membranes, this will serve our needs for the foreseeable future. As we look out from here today. I think I've said this before previously. We think CapEx envelope for the whole company of somewhere between $400 and $450 million is a pretty reasonable estimate to support our growth aspirations in all of our businesses, especially Advanced Performance Materials and Thermal and Specialty Solutions. And the significant capital expenditure we're making on best-in-class abatement technologies to achieve our corporate responsibility commitment of reducing fluorinated organic compounds by 99%. So I think there's 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. 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 Sameer. Just wanted to revisit some of the comments you made about the volumes in Titanium Technologies. Look, 8% sequential declines in volumes. And when I compare that to what I'm hearing from some of your competitors, arguably with European sort of bias. Those volume declines sequentially are as high as 25%. So I'm just trying to understand if you could give me some color around what the market looks like right now, demand-wise, are you doing materially better than the broader market and the like?

Hassan, good morning. That's a great question. So clearly, when we look at our regional mix, we're probably more exposed to North America than some of our competitors who have a bigger exposure to Europe. And so to the earlier comment of seeing a pretty dramatic fall-off in volumes in Europe and Asia, especially Mainland China, I think that works into the equation. As 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 Q3 and Q4 to sort of get more in line with where the market is. But clearly, our regional mix is more biased to North America, and our production mix is also very biased to North America where I think we can benefit. For example, as natural gas prices and other input costs come down.

That is it. And as a follow-up, more on the lines of the overall portfolio. I mean, obviously, you guys continue to show us the growth in nature of the Advanced Performance Materials business, the Thermal and Specialty Solutions business. And fortunately or unfortunately, again, the industry yourselves included, have done a great job in, I guess, reducing the cyclicality within Titanium Technologies, 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 of maybe a broader split between the growth area side of the business and the more cyclical side?

Yeah. So Hassan, I would say, I'm very focused and this leadership team is singularly focused on the four strategic priorities. And we think those four focus areas 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 Titanium Technologies on this longer-term strategy. So I think we've never said that there's any sort of deep commercial tie between our flooring business and our Titanium Technologies business. So I think we've always been clear. But as it relates to any restructuring, clear that's 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, Mark. Thank you so much.

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

Hey, guys. This is Will Tang on for Vincent. Thanks for taking my question here. So should we expect, I guess, TiO2 EBITDA margins to kind of remain below that 20% range as long as kind of overall market demand is relatively weak? And then I know you talked about your goal of getting back to kind of 25% EBITDA margins in the Titanium Technologies business. But, look outside of maybe, pricing and volume recovery, what are the things that kind of need to happen in order to get there?

Yeah, Will. This is Sameer. I'll start. Essentially, as you look at the margin, as Mark mentioned, in Q4 and moving into Q1, we'll work through the high-priced inventory we have. Once we get past that, we'll be in a much better position. Overall, from a margin perspective, while pricing is currently low, we are aligning our production with demand as well. This should help improve our margins. Our goal is to eventually reach the low to mid-20s over time. As we provide guidance for 2023, we will give you a clearer picture of what the margins may look like for that year.

Got you. Okay. And then I guess given the weaker TiO2 demand that we're seeing. What are you guys seeing kind of upstream in the ore market? Are you seeing a kind of significant amount of kind of further loosening in supply there?

I believe we've been actively communicating with all our strategic suppliers to align production with demand and understand the associated costs for us. Our aim is to create a long-term win-win scenario for everyone involved. We're starting to see positive movement in that area as well.

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 Estok filling in for Laurence. I have a couple of questions. First, what is your view on your customers' inventory levels as we approach winter compared to typical levels? Second, since they are still elevated, how does this impact your thinking regarding the margins you need for expansion in Titanium Technologies?

Hey, Kevin. I wouldn't say inventories are elevated across the board for sure. But if we just focus on Titanium Dioxide for a moment. Clearly, the slowdown in Europe and China has been quite dramatic. I think our 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 our end customers want them. In fact, I would say as we prepare for the coating season, there could be even some inventory builds in anticipation of a robust coating season. I just want to remind everybody that the U.S. consumer remains very strong. So while we're seeing the impact of higher energy pricing on the European consumer and the COVID lockdowns in China, we are seeing very robust North American customer activity and end 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're seeing growth still on a revenue basis. So I just want us to make sure we keep that in mind.

Got it.

And your next question comes from the line of a technical difficulty.

This reports in terms of the overall industry. And I suspect based on how weak the second half.

Can you provide an idea of what percentage of total TiO2 capacity this represents? Additionally, when you idle capacity, are you referring to shutting down certain lines within the plants, or are you considering idling entire facilities, such as entirely pausing operations at the Taiwan plant due to weakness in Asia?

So Roger, we don't disclose that information. We consider that something 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 idle a 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, when we say we're taking some idling. One of our lines is quite significant.

And Roger, this is Sameer. I'll just add to that as you kind of think about our plans. 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 question on this topic. When you idle a line at a facility, is it challenging from a physical and cost perspective, or is it relatively straightforward and not very costly?

Our Titanium Technologies team excels in manufacturing. They are skilled at taking a production line offline to reduce costs while being able to quickly ramp it back up in response to market demand. This flexible approach was a key consideration in the design of Ti-Pure Value Stabilization, ensuring our manufacturing capabilities are adaptable both in terms of raw materials and line capacity. We are adhering to our successful strategy.

Thank you very much for that. I 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 Chemours that's staying focused on meeting the needs of our customers and running our business as well. As we've covered today, we are going through some transitional issues on Titanium Technologies as we adjust production to meet demand. But we're also very focused on capturing the full growth potential of Thermal and Specialty Solutions and Advanced Performance Materials. 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 $0.5 billion in free cash flow. And we sit with relatively low leverage. So 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 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.