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. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. Thank you. Brandon Ontjes, Vice President of FP&A and Investor Relations. You may begin your conference.

Hi. 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, and 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?

Thanks, Brandon, and good morning, everyone. Thanks for joining us. You know, 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 three industry-leading businesses. Most of our year-over-year performance deterioration has been driven really by lower TT volumes, and we have responded with reductions 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 to long-term secular gains in advanced electronics and clean energy, which we’re hugely excited about. Finally, our TSS business continued with strong performance with another record net sales. This is the seventh quarterly net sales record in a row. As we look again to 2024, we have the step down in the AMAC that's going to drive further Opteon adoption and beyond ‘24, which allows for immersion cooling in 2025. So again, we're excited about the work that's on the way here at the company. Despite the challenging environment, we see ourselves in, we remain focused on what we must do going forward into 2024. So with that, I'll turn it over to Rob to begin our Q&A.

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

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

Yes, so definitely a great question. As you said, we have always indicated that we would wait until Q4 to see 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 is that there will be continued ramp-up in HFO volumes. Whether that happens at the beginning of the year or more rateably, we will 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.

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

Yes, well, first of all, we did a lot of work as an industry with the EPA in implementing the AMAC to take every precaution to make sure that didn't happen here. Clearly, there are fewer borders relating to the U.S., Canada, and Mexico than there are in the EU with 28 member countries. But 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's a 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.

Great. Thank you, guys.

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 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. Normally I'd be a little nervous you are 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. Can you help us to think about where that demand disconnect is and when maybe we see the end of that de-stocking and kind of a normalization, even if it's lower than whatever 2019 type levels? But when we see a normalization of that business, how should we be thinking about that?

Yes. So, John, it's a great question. 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 months to 18 months. Clearly, when we look at volume demand deterioration starting in late Q3 last year, we're at the 12-month mark here. As I said, we're seeing real deceleration in the demand reduction. In fact, I would say, as we look at our AP order book, we're seeing indications there of regaining demand. As we look out into next year, our expectation is that demand gains are more gradual. But it feels to us like the de-stocking 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 here.

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. 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. 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. We plan on showing a $100 million improvement in our TT earnings profile into 2024. 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.

Got it. Okay, fair enough. Then maybe we can just shift our second question over to the TSS business and the data center opportunity that you highlighted in the prepared remarks. You're talking about some pretty significant cuts in terms of how data centers can cut down their energy. Can you help us frame the market potential for a product like this as you ramp it up in late ‘25 and into ‘26 and ‘27?

Yes. The immersion cooling market represents a whole new add to our TSS franchise, beyond the strong Opteon platform. 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, estimates now suggest this is a $2 billion to $3 billion addressable market. Every day you hear another headline on AI, and all that is happening in quantum computing that is really driving significant growth in data centers. The energy reduction for cooling servers is estimated to be 90%, high-80s based on the math I've seen. It's a significant reduction in energy and also eliminates water usage for cooling data centers where today you're cooling massive amounts of air. The climate impact is significant, along with the opportunity. We're in the process right now of going through the product registration process. We plan to start commercializing that product in 2025, and we anticipate a significant ramp from there as we look at the addressable market by 2030.

Got it. Thanks very much for the call.

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

Yes, hi. Thanks for taking my question. 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, would you say your expectations change much for this year? Also, when you think about the rollout for next year, you said you're going to grow, but prior step down was 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? Has any sell-through around their change? So really what's changed around your expectations in next year?

Yes, there's an equipment transition happening through next year to be ready for 2025. Based on our interaction with the OEMs, our expectation 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, the main challenge we have this year is TT volumes. In my opening remarks, I also mentioned some weakness on the advanced materials franchise of our APM business. In that business, we are focused on growth mainly in our PFA business that goes into semiconductor and 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 are facing some permitting delays, which impacted our Q3 growth in performance solutions. The team believes we're close to having that permit, and of course, that will be reflected as we ramp that plan up in early 2024 in our results. We're excited about the secular growth in both TSS and APM. Growth is never linear. In APM, it's a lot to do with permitting on the PFA perspective. It's also related to how quickly you can de-bottleneck. Every quarter doesn't yield the same results as we de-bottleneck our Nafion production. Long-term secular growth remains intact.

Thanks, Mark. Appreciate that. Just coming back to TSS, I think there have been some changes within the equipment side about what's allowed heritage-wise or otherwise into next year. Honestly, I'm not sure if some of the changes have been positive or negative for adoption for you guys. Can you comment on any of that?

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

Your next question comes from a line of Hassan Ahmed from Alembic Global Advisors. Your line is open.

Good morning, Mark and Jonathan. A question on the TT side of things as it relates to cost curves. Your margins have compressed a fair bit. The latest quarter showed 10% EBITDA margins. You're obviously one of the lowest cost producers out there. I'm trying to understand where the marginal producer economics are right now and how sustainable. There's a large chunk of the industry that may be in the red right now. How sustainable is that environment and how does that play into your thinking about 2024 and beyond?

Hassan, that's a great question. Obviously when you look at our results this year, there was a significant volume hit to the franchise. We faced higher input costs at the start of the year. There was quite a bit of inflation on the input side, going into the beginning of this year. Under Denise's leadership, the team's worked hard to drive down both variable costs and fixed costs. With lower volume and lower fixed cost absorption, those improvements are not reflecting in our EBITDA margin today. We expect those margins to expand and come back to where we would expect them to be longer term as we move into next year. There’s a lot of product in the market today at marginal pricing. That’s not sustainable long-term. We're focused on being at the low end of the cost curve, and the work that the team's doing with the TT Transformation Plan gives us the confidence to commit to $100 million for next year. As we said in the script, we're not stopping there. Denise and the team are focused on ensuring our franchise is the global winning franchise in high purity and high-quality chloride pigment.

Yes, Hassan, we've been seeing this coming. The actions that Mark referenced earlier this year, while painful, were absolutely necessary to drive down our cost of manufacturing. We'll see $15 million of that benefit show up in the fourth quarter as a result of the Kuan Yin closure, with a full $100 million showing up next year through the TT Transformation Plan. As we progress 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 to optimize the entire manufacturing chain from our mines to our pigment plants and all associated overhead. We're firmly focused on getting to the lowest cost.

Fantastic. If I could dig a little deeper into those incremental savings, Jonathan. The transformation plan mentions $100 million for 2024. But I believe ore costs are beginning to look a little shaky in this weak volume environment. I’d like to think chlorine costs could also be looking a little shaky. Beyond the $100 million for 2024, what do you think about input costs for next year?

Hey, Hassan, you were breaking up a bit. A number of the input costs have come down this year. As we look into next year, we're driving further reductions through our procurement team across these inputs. Much of the cost focus has been on our fixed costs with the Kuan Yin closure. We're also looking at other efficiency gains in our plants and improvements in yield in both our pigment plants and mines. While we're committed to the $100 million, you should note that we are focused on all forms of cost reduction in TT, both fixed and variable, given the current market dynamics.

Your next question comes from a line of Laurence Alexander from Jefferies. Your line is open.

Good morning. Just two quick questions. One, on the TT productivity program, can you flesh out how you think about changing your incremental margins when volumes recover? Secondly, on the data center cooling initiative, what you see as the CapEx required to support the growth through 2030?

Hey, Laurence, this is Jonathan. As we look at the controllables in TT, we're taking costs out. As the market hopefully recovers starting here in 2024, those cost savings will accrete to the bottom line as we can spread the cost over a larger tonnage base. Currently, we're not operating our plants at optimal levels for adequate fixed cost absorption. Gains from market recovery will come starting in 2024. We aren't counting on that as we look at cost opportunities, but as they come that will compound on top of the $100 million cost savings we are putting into place today. Regarding CapEx, we haven't guided to ‘24 or ‘25 CapEx. Just to give an idea, the immersion cooling plan would start with a smaller pilot plant which won't require significant capital outlay. Depending on volume needs, we may seek a larger facility for broader market introduction around ‘26, ‘27, but those plans are not finalized yet. We're excited about commercializing that product and about finding the right partners to revolutionize data center energy and water consumption.

I just wanted to echo Jonathan's comment. With the closure of Kuan Yin, we're down to three large plants servicing all our customer needs. We likely have more fixed costs leveraged due to the size of our plants. As circumstances evolve, we'll evaluate how this translates into margin recovery. Our focus extends to both fixed and variable costs. On the immersion cooling side, we are very focused on thoughtful commercialization. Lastly, we are disciplined around capital allocation and will continue to deploy it among our five strategic priorities, aligning capital to enhance TT earnings and margins, grow TSS and APM in the high-value markets, and advance our efforts to resolve legacy liabilities.

Just to clarify, if your data immersion solution becomes a billion-dollar business, could you provide insights into the incremental CapEx that would be required? Would your return on capital for that presumably exceed your historical targets given the market you're selling into and the savings you're providing?

That's fair. We typically have a smaller investment near-term as we do proof of concept and then expand later. Capital for meeting demand projected through 2030 is more long-term. This endeavor offers high return, high margin growth, providing significant value for data centers. Today, data centers account for 1% of the global carbon footprint and consume substantial water. We see real value to customers and the planet with this product and are keen to bring it to market.

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

Hi, I was wondering if you could provide some additional details on trends in the TiO2 markets. Specifically, what you're seeing in imports and exports across different regions? Can you provide insight into the setup for 2024 and notable trends in inventory levels in the channel?

Thanks for the question. As we look at de-stocking, it began in the third quarter of last year, and as Mark mentioned, it's been with us for almost a year now. Even as we feel like we've reached the bottom and demand de-stocking has decelerated into Q4, we're not seeing, outside of Asia Pacific, significant green shoots indicating a turn. We believe we’re well positioned for the market turn with actions we've taken, but to address your question directly, in Asia Pacific, inventory levels from prolonged de-stocking do not appear to be high, and with the cost transformation we've implemented this year, we are well positioned to seize the cyclical turn when it happens. As we move toward February and finalize ‘23 results, we’ll provide guidance for ‘24, bringing clarity about this coating season developing as we hope.

Awesome. Appreciate the color. Can you also provide additional details on the $100 million run rate cost savings expected for next year? You mentioned earlier during the call that the facility closure might yield $50 million to $100 million of savings. If I heard you right, is there a range for the $100 million of cost savings expected next year, and is there potential upside based on other actions you're taking?

The cost savings we are committing to for next year is $100 million at a run rate, of which $50 million is driven by the Kuan Yin facility closure we announced previously. We are set on achieving $100 million of run rate savings next year. We'll provide updates on incremental run rate savings beyond that as we gain more visibility in the coming quarters.

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.

Thanks everyone for joining us today. The year has been challenging, but The Chemours team has responded well by focusing on controllable factors, driving cost reductions in TT, and focusing on growth in TSS and APM as we move into next year. We look forward to staying in touch with you and continue to drive real value for our shareholders as we advance. Thank you.

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