Earnings Call Transcript - CC Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to The Chemours Company First Quarter Earnings Call. At this time, all participants’ lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Operator instructions: To ask a question, press star one on your telephone keypad. I would now like to hand the conference over to our speaker today, Jonathan Lock, Vice President of Corporate Development and Investor Relations. Thank you. Please go ahead, sir.

Jonathan Lock, Vice President, Corporate Development and Investor Relations

Good morning and welcome to The Chemours Company’s first quarter 2020 earnings conference call. I am joined virtually today by Mark Vergnano, President and Chief Executive Officer; Mark Newman, Senior Vice President and Chief Operating Officer; and Sameer Ralhan, Senior Vice President and Chief Financial Officer. Before we start, I would like to remind you that comments made on this call as well as the supplemental information provided in our presentation and on our website contain forward-looking statements that involve risks and uncertainties, including the impact of COVID-19 on our business and operations and the other risks and uncertainties described in the documents Chemours has filed 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 this presentation. I will now turn the call over to our CEO, Mark Vergnano, who will review the highlights from the first quarter. Mark?

Mark Vergnano, President and Chief Executive Officer

Thank you, Jonathan and thank you everyone for joining us today. I would like to start this call with a personal thanks and acknowledgement to those operating in the frontlines of the COVID-19 pandemic. Our first responders and medical personnel have gone bravely to help those in need and to control the spread of this terrible disease. Those in food service, grocery, sanitation, fuel delivery and energy put themselves at risk to help ensure that we have the things we need to run our business and support our families. We are all collectively the beneficiaries of your sacrifice. So, on behalf of the nearly 7,000 global employees of Chemours and their families, thank you. COVID-19 has been a game changer. As a global business, we have been adapting to the dynamics created by this pandemic since the beginning of the year, starting first in Asia. Protecting the health and well-being of our employees while supporting our customers continues to be our top priority. Our internal response to COVID-19 has been swift. During the first quarter, we implemented strong social distancing and control measures across all our laboratory and manufacturing facilities. This includes limiting access to our sites and restricting movement between areas on our sites. We have also implemented temperature health checks, increased mask use and provided additional training, including the use of social distancing. Early in the first quarter, we scaled our remote IT infrastructure ahead of government shelter-in-place rules. This gave our office-based teams and outsourced providers the ability to work from home very early with minimal disruption and cost. This disciplined execution of our business continuity plan has enabled us to continue to serve our customers safely and reliably. Today, all our plants are up and running, evidence that our early interventions are working. We can and will continue operating in this manner until public health officials and our health and safety teams judge it as safe to return to normal operations. Putting our people and our customers first is the formula which we believe will see us through this difficult period and enable us to thrive when it’s over. I would like to compliment our Chief Operating Officer, Mark Newman, and our leadership and crisis teams for their work to help safeguard the safety, health and well-being of our teams, their families and our communities worldwide. Moving now to the financials, we continued to carry some momentum out of 2019 into the first quarter of 2020 and delivered results which were for the most part aligned with our expectations. We saw weakness across certain end markets, including auto, electronics and mining, much of which was related to COVID-19. At the same time, we saw some relative strength in other markets, including plastics and coatings. In total, first quarter adjusted EBITDA was $257 million, with margins improving sequentially in both Titanium Technologies and Fluoroproducts. Sameer and Mark will cover the details around first quarter financial performance later in the call. As a result of COVID-19, we are moving into a period of greater uncertainty. Sitting here today, we are beginning to see the impact COVID-19 is having on consumption and consumer demand. The first wave has affected sectors such as retail, hospitality and transportation. We expect this will ripple through the entire industrial value chain. However, at this point, it is too early to forecast the full magnitude and timing of the impact on Chemours. Given this uncertainty, we believe it’s logical and prudent to withdraw our 2020 full year guidance. Despite this near-term demand-driven uncertainty, we remain confident in the strength of our competitive position and the balance sheet of this company. We exited the first quarter with $714 million of cash on the balance sheet, including $386 million of cash in the United States. We further fortified our U.S. cash position with an additional $300 million drawn from our revolving credit facility during the first half of April. This additional balance sheet cash improves our domestic cash position and will enable us to respond more quickly to any change in market conditions over the next few quarters. In total, we currently have approximately $1 billion of cash on hand with the majority of that in the U.S. Sameer will cover the details when he discusses our liquidity. Finally, we are acting quickly to improve both cash generation and cash conservation across the company. Let’s turn to the next page to discuss some of those details. First, we are increasing our cost management activities, implementing a cost management program across Chemours to reduce full year 2020 costs by $160 million through a combination of structural changes and deferral actions. We are reducing all discretionary spend, freezing non-critical hiring and delaying external spending wherever possible. We have also reduced structural plant fixed costs to improve the efficiency of our production units, something that was already in flight at the end of 2019. In addition, we are implementing temporary senior leadership salary reductions across the company, including a 40% salary reduction for me and a 30% reduction for my senior leadership team. We are taking these aggressive temporary salary measures well ahead of any further potential downturn in demand as a way to preserve jobs and to avoid layoffs. Layoffs for us are a last resort and we will do everything we can to preserve necessary jobs and healthcare benefits for our employees. I personally believe that this is important for us as a company and as an economy as we move through this temporary dislocation. It will speed our recovery and ensure our competitiveness on the other side. We will update our progress on these savings as the year moves ahead. Second, we are reducing our full year CapEx target by $125 million. For the full year, we expect CapEx to be approximately $275 million versus the $400 million we were originally targeting. The reductions will be focused on delaying or canceling growth projects in 2020. When combined with the solid liquidity position we built heading into 2020, we believe these actions give us significant ballast and financial flexibility going forward. The cash generation potential of this company can and will see us through this period of uncertainty. Finally, before I turn things over to Sameer, I want to say a few words about the character of Chemours. If there is one word I could choose to describe this company, it is resilient. In our short history, we have overcome more than our fair share of challenges. This management team has demonstrated time and again the willingness to make the tough decisions necessary to ensure our long-term success. Our actions through the COVID-19 pandemic have been and will be no different. We are resilient and we will overcome this crisis with the same grit and determination which you have seen us display over the last five years. With that, I will hand things over to Sameer.

Sameer Ralhan, Senior Vice President and Chief Financial Officer

Thanks Mark. I will begin my comments on Slide 5. First quarter revenues of $1.3 billion were down slightly from last year, primarily due to volume and price headwinds in Fluoroproducts and reduced sales in Chemical Solutions. These headwinds in Fluoroproducts and Chemical Solutions were largely offset by stronger year-over-year sales in Titanium Technologies, which were up 10% from the same period in 2019. GAAP net income was $100 million, up 6% from the first quarter of 2019, while adjusted net income was $118 million, up 8% from the first quarter of 2019. This drove an 11% increase in GAAP earnings per share to $0.61 per share and a 13% increase in adjusted earnings per share to $0.71 per share. Free cash flow used was $62 million, an improvement of $115 million from 2019 levels. As a reminder, our heaviest use of working capital is typically in the first quarter. During the quarter, we amended our accounts receivable securitization facility, which resulted in a reduction of our debt level by $110 million with a similar benefit to cash flow from operations. Finally, as a reminder, our Board of Directors approved a Q2 dividend of $0.25 per share. This is unchanged from the prior quarter and will be payable to shareholders of record as of May 15. Moving to the next chart, first quarter 2020 adjusted EBITDA of $257 million represented a sequential improvement of 13% and was almost flat relative to the prior year’s first quarter. Looking at the bridge, results were driven by lower average prices across all three segments and 19% higher volumes in Titanium Technologies partially offset by lower volumes in Fluoroproducts and Chemical Solutions, with higher volumes overall providing a $14 million tailwind in the quarter. Finally, we delivered a $61 million improvement in costs and other. This improvement was driven by better operational performance in Fluoroproducts, cost benefits of the new Corpus Christi Opteon plant, and cost reductions across all businesses. These gains were partially offset by the negative impact from minimal F-Gas quota sales in the first quarter of 2020. Let’s turn to the next chart, where I will cover liquidity. Chemours continues to maintain a strong balance sheet and liquidity, giving us ample financial flexibility. As I said on the prior quarter’s call, we have put a greater focus on cash generation and management of working capital. Cash at the end of the first quarter was $714 million, down from $943 million in the fourth quarter. This cash decline is primarily due to seasonal working capital cash consumption. Our global cash balance of $714 million included $386 million of U.S. cash. We chose to supplement our U.S. cash position with an additional $300 million drawn from our revolving credit facility after the close of the first quarter. This cautionary draw representing just under half of our revolver balance reflects the desire to provide additional cash flexibility in the U.S., where the majority of our operations are located. It also provides near-term flexibility to respond quickly to any dislocations in the market. Turning to the next chart, here we have a more holistic picture of our current balance sheet, liquidity and leverage position. This illustrates why we are confident in our ability to weather the current conditions. Per the prior page, we executed in a strong global cash position and have added to our domestic cash reserves via our revolving credit facility. In total, we have approximately $1.4 billion of liquidity, if liquidity is comprised of approximately $1 billion of global cash, including the $300 million revolver draw and roughly $400 million of remaining revolver capacity. In regards to covenants, our maintenance covenant limit of 2x senior secured net leverage affords us significant cushion. As I said on the fourth quarter call, we have well-balanced and spaced maturities across our entire debt structure. We have no near-term maturities of senior debt. Our nearest maturity is followed by another set of maturities, again a very well-balanced and spaced set of maturity towers with no near-term implications for our liquidity. I will now turn the call over to Mark Newman to cover our segment results.

Mark Newman, Senior Vice President and Chief Operating Officer

Thanks, Sameer and good morning, everyone. Before I cover the businesses, I would like to take a moment to thank every Chemours leader and team member for rising to the challenges we faced since the COVID-19 pandemic started. I am proud of their service to our customers and for the contributions our people have made locally with gloves, protective suits and laptops to first responders in the communities where we operate. It is a true demonstration of the spirit of Chemours and proof that we are indeed all in this together. As it relates to our businesses, let’s start with Fluoroproducts. Among our segments, Fluoroproducts was the most impacted by COVID-19 in the quarter. First quarter Fluoroproducts sales reflect lower volume across a number of fluorochemical and fluoropolymer product lines. Auto and other end-market demand weakened significantly late in the quarter, reducing demand for both refrigerants and fluoropolymers, which are used in the fabrication of many components. On the stationary refrigerants front, we continue to work with regulators in Europe on measures to control the amount of illegal imports into Europe, but at least through the first quarter, have yet to see significant progress. Pricing in the segment was a 4% headwind driven by HFC illegal imports into the EU and a slight decline in global refrigerant prices. Adjusted EBITDA for the first quarter came in at $140 million, down $19 million from the same period in 2019. This result also reflects the impact of lower F-Gas quota sales in the quarter. However, these headwinds were partially offset by improved operating performance across all our manufacturing facilities and the ramp up of our Corpus Christi facility. Given the current status of COVID-19, we anticipate continued weakness during the next quarter in auto as plant shutdowns and lower demand reduce unit volume across North America, Europe and Asia. This will have an outsized impact on Opteon volume specifically, one of our highest margin and highest growth product lines. We also expect there to be some impact to our fluoropolymer volumes going into applications such as electronics, industrial goods, oil and gas, and aerospace. We will be closely monitoring the intersection of Asian industrial capacity coming back online and U.S. and European customer demands, which are in decline. Finally, I wanted to mention some of the good work we have underway to support the fight against COVID-19. Our fluoropolymers have some very unique properties which make them ideally suited for emerging medical applications. We have been helping our customers fast-track new and expanded applications, including the use of our fluoropolymers in testing kits, barrier coatings on non-woven fabrics to protect healthcare workers, membrane technology used to ensure cleanliness and materials for gaskets that increase the durability of life-saving ventilators. I am proud of the work that our teams are doing to help support new material developments and novel applications in this arena. We look forward to winning this fight together leveraging the power of chemistry. Turning to Chemical Solutions, we exited 2019 with some momentum here across our mining solutions and PC&I product lines. However, as the first quarter progressed, mine closures across the Americas driven in part by COVID-19 have impacted volumes and spot pricing. North America demand for many of our PC&I products declined in the second half of the first quarter as well. First quarter revenue was $92 million, reflecting lower revenue from the MAP business, which we sold at the end of 2019, and weaker market conditions I just mentioned. However, better operating performance and cost saving measures enacted in the quarter enabled the business to hold adjusted EBITDA flat on a year-over-year basis at $15 million with margins improving to 16%. We remain very well positioned with our Mining Solutions business in North America, but are facing some uncertainty with mine closures and overall demand pattern shifts occurring as a result of COVID-19 and in spite of gold prices being up significantly year-to-date. Our focus for the balance of the year will be on the things we can control within this business: minimizing costs and ensuring solid operational performance. Moving to Titanium Technologies, sales of $613 million were up 10% compared to last year’s performance. Nineteen percent higher volumes in the quarter were driven by steady demand across all regions and additional share regain, mainly in plastics and laminates markets. On a year-over-year basis, price was down 8%. Overall, revenue was higher on a sequential basis as volume gains offset a modest 2% decline in price. In the first quarter, adjusted EBITDA of $138 million translated into an adjusted EBITDA margin of 23%. Margins improved sequentially from 19% to 23% reflecting the benefit of better fixed cost absorption across the circuit due to higher production. As we look ahead, it is increasingly difficult to forecast TiO2 demand over the next two quarters, normally our peak volume period in the year. Coatings demand will likely be supported by the DIY and residential repaint markets in the early part of the spring, with real estate transactions and new-build activity slowing due to COVID-19. Automotive and capital goods will likely lag as well given pressure on consumers’ disposable income and credit flows. We are actively monitoring our customer demand needs and their own supply chains to adjust to any demand changes as we move through the second quarter. Despite a challenging demand outlook, we continue to believe in the strength of our assets, portfolio and Ti-Pure value stabilization offer. All our TVS channels have unique value propositions, which will appeal to different market segments, especially in these challenging times. Our AVA contracts offer benefits from enhanced working capital management alongside supply reliability once market demand recovery begins with predictable prices. Flex gives our customers web-based access to lock in predictable pricing over the next six months. And distribution continues to be our preferred method of reaching customers with small volumes or in geographies not available through AVA or Flex. These unique channels are all backed by our world-class plant operations, flexible supply chain and the highest quality chloride pigment on the market today. With that, I will turn things back to Mark.

Mark Vergnano, President and Chief Executive Officer

Turning the last chart, I would like to emphasize that Chemours is taking action in response to COVID-19. As I said at the start of the call, we have a very simple formula of putting the health of our employees and supporting our customers first. We have moved quickly to help prevent the spread of COVID-19 throughout the company by enacting strong safety protocols across all our offices, laboratories and manufacturing facilities. Our employees’ health has by and large not been impacted by COVID-19 and we will continue to be proactive to ensure the health, safety and well-being of our people. The health and safety of our workforce enables us to provide supply continuity to our customers and to support our local communities. All our plants and operations are up and running and the flexibility of our supply chain enables us to manage through any near-term disruption. Chemours is operating well and we will stand by our customers throughout this crisis. We believe this is an incredible source of competitive advantage in these uncertain times. Secondly, we believe in the strength of our balance sheet. While we certainly did not anticipate an event of this magnitude this year, we believe that we have taken prudent measures to preserve financial flexibility. With $1.4 billion of liquidity, including $1 billion of cash on hand, we are well-capitalized heading into the remainder of 2020. We have no near-term maturities and have sufficient covenant headroom. Finally, we are acting prudently to reinforce the financial strength of Chemours, including immediate actions that will reduce cost by $160 million and CapEx by $125 million in 2020. COVID-19 will present a rapidly changing economic environment dictated by health challenges, which cannot be measured in pure monetary terms. Our hearts go out to those affected by this virus. Chemours and our nearly 7,000 employees stand ready to serve our customers, render aid in our communities around the world, and assist in the fight against COVID-19. With that, please open up the line for questions.

Operator, Operator

Operator instructions: Your first response is from John McNulty from BMO Capital Markets. Please go ahead.

Colton (on for John McNulty), Analyst, BMO Capital Markets

Hey, good morning guys. This is Colton on for John. On the 2% sequential decline in TiO2 pricing, can you talk a little bit on how much of that was product or selling platform mix versus how much of it was actual apples-to-apples price cuts?

Mark Vergnano, President and Chief Executive Officer

Yes, that was almost entirely mix for us. When you look at our channel mix and a little bit of regional mix, it was fundamentally all mix rather than apples-to-apples price cuts.

Colton (on for John McNulty), Analyst, BMO Capital Markets

Okay, great, that’s helpful. And second, I’d love to hear a little bit just on what you are seeing on the feedstock side and kind of what your core outlook is going forward?

Mark Vergnano, President and Chief Executive Officer

Yes. So right now, we are not seeing a whole lot of change in feedstocks. As you all know, high grade ore got a little bit tight in the fourth quarter of last year and continued into this year. Obviously it’s going to be dependent on demand going forward, but we are not seeing a significant change from an ore cost perspective at this point. Again, as we said before, we are set in our ore inventory in terms of what we need to buy and what we need to sell. From that standpoint, we feel very confident that we are not going to see any significant perturbation from an ore cost standpoint. Mark, do you want to add anything?

Mark Newman, Senior Vice President and Chief Operating Officer

Agree with Mark. We are well situated with our ore buys for this year. We had good inventory levels coming into the year, so we are not seeing a lot of ore inflation in this environment.

Colton (on for John McNulty), Analyst, BMO Capital Markets

Alright, thanks guys.

Operator, Operator

Thank you. Your next response is from Bob Koort of Goldman Sachs. Please go ahead.

Bob Koort, Analyst, Goldman Sachs

Thank you. Mark, I wanted to ask on the litigation front. You guys had a couple of cases tried in the first quarter. I guess the good news was one that wasn't a loss and the other one was, but maybe a lot higher than we saw a few years back. Can you sort of talk us through the decision tree over there and the next steps? The next round has been deferred until August — what kind of progress might we expect on some resolution there?

Mark Vergnano, President and Chief Executive Officer

Yes, Bob. We had two cases that were tried: one which resulted in a hung jury and the other which resulted in a verdict that we are appealing. We are going through the appeals process on that verdict and we believe we have very strong appeal points. First we will take it back to the trial judge and then to the circuit on appeal. As you said, the next set of trials was originally scheduled for June and has been moved to August. We will continue to work through that process as we always have. I know some folks have talked about potential settlements — these things always can include settlement discussions — so we will continue to pursue those where appropriate. Right now we are very focused on the appeal points and getting ready for the next set of trials.

Bob Koort, Analyst, Goldman Sachs

Alright. On the AVA contracts, I am curious how those held up in light of where you initially established those with your biggest customers a couple years back and should we still expect pricing for that kind of volume to be indexed to PPI or some other sort of macro inflation?

Mark Vergnano, President and Chief Executive Officer

Yes, that's how they're set up, Bob. These contracts have worked as we always said — they work best for our coatings customers and they have worked extremely well, especially in a situation like we're in now with COVID-19 because customers know what the price point is and they don't have to buy beyond what their needs are because we hold that inventory. They buy based on their share, so if demand goes down, they don't have to meet an arbitrary volume threshold; they maintain a share based on what they are selling. We think AVA contracts are working well for our customers right now, and they will adjust based on PPI values that we had set before, typically with adjustments twice a year.

Bob Koort, Analyst, Goldman Sachs

Great. I appreciate it.

Operator, Operator

Thank you. Your next response is from Josh Spector from UBS. Please go ahead.

Josh Spector, Analyst, UBS

Yes. Hey, guys. Thanks for taking my question. Just wondering within Fluoroproducts, can you provide any color on the volume difference between chemicals and polymers in terms of what you saw last quarter and any differences between early in the quarter and late in the quarter?

Mark Vergnano, President and Chief Executive Officer

Yes, let me get started Josh and then Mark can give you a little more color. When you look at Fluoroproducts, think of the Opteon side — the fluorochemical side — primarily refrigerants, and Opteon is being driven by automotive. Automotive really slowed down towards the end of the quarter as assembly plants in Europe and the U.S. slowed or stopped and production in Japan was affected as well. By the end of the quarter you saw a significant drop in Opteon volume. On the fluoropolymers side, polymers are used in both automotive and electronics. Automotive was weak and slowed toward the end of the quarter, while electronics was weak earlier because many customers are in Asia where the pandemic hit first; that started to pick up toward the end of the quarter. So you saw two crossing patterns across the quarter. Mark, do you want to add?

Mark Newman, Senior Vice President and Chief Operating Officer

Yes. To build on Mark's comments: overall volume impact across chemicals and polymers was somewhat similar in the quarter, but the shape was different. We saw the impact of COVID-19 in Asia early in the quarter, which had a more pronounced impact on polymers. Toward the end of the quarter we saw stronger order books as Asia started to come back online, especially in semiconductors. For the refrigerant business, especially Opteon YF, we started to see shutdowns of assembly plants in Europe and then North America in the second half of March, and that will carry into the second quarter. Going forward the impact on refrigerants will be higher in the second quarter, but in Q1 the impacts were similar in magnitude with different timing.

Josh Spector, Analyst, UBS

Thanks. That's helpful. And maybe on TiO2 volumes — some competitors have talked about 2Q volumes down maybe 15% to 20%, yours are tougher to estimate given share gain being a factor. Can you provide any kind of range or thoughts about how you're thinking about volumes in the next quarter?

Mark Newman, Senior Vice President and Chief Operating Officer

As we think about volume sequentially from where we came out in Q1, we see resilient activity in DIY and strength in plastics, but construction and other markets are being impacted as we go into Q2. My expectation is that volumes will be down slightly on a sequential basis versus Q1.

Mark Vergnano, President and Chief Executive Officer

Yes, Josh. To add to Mark's point, architectural coatings producers with access to DIY performed well in Q1 and we expect that to continue into Q2 to some extent. Plastics is another area of strength. Industry data from TZMI indicated total volume could be down 10% to 15% for the year; that aligns with the expectation of a somewhat weaker second quarter.

Josh Spector, Analyst, UBS

Okay, thanks.

Operator, Operator

Thank you. Your next response is from Duffy Fischer of Barclays. Please go ahead.

Duffy Fischer, Analyst, Barclays

Yes, good morning. Question on the Fluoro segment: could you help walk us through what you've seen in volumes on the polymer and gases side? Some people are talking volumes down 40% or 50% in April and May due to autos. What did you see quarter-to-date there and when do you see an inflection? From discussions with your customers, do you think things start to get better in June?

Mark Newman, Senior Vice President and Chief Operating Officer

Duffy, think of refrigerants and polymers separately. For refrigerants, Opteon is heavily automotive and until automotive assembly restarts in Japan, the U.S. and Europe, it will be weak. The numbers being cited in the market — 40% to 50% reductions in automotive volumes — align with what we're seeing for refrigerants going into automotive. Normally you'd see a second quarter restocking for stationary refrigerants ahead of summer, but that seems slower this year. For polymers, we still see weakness from automotive end markets, but we are seeing a pickup in semiconductors, especially in Asia as those facilities come back online — an important positive for our polymers. I can't give a precise inflection date; the key thing to watch is when auto manufacturers restart, which will be the major driver for recovery.

Duffy Fischer, Analyst, Barclays

Okay. And then once we estimate where volumes end up, how should we think about decremental margins on the two fluoro halves? Whether volumes are down 10%, 15% or 20%, what's the decremental pattern and do decrementals get worse as volume drops further?

Mark Newman, Senior Vice President and Chief Operating Officer

Duffy, we will run the business with a strong focus on cash generation. Our refrigerant business is a high-margin business, so variable margins are relatively strong. We will be thoughtful about how much product we build into inventory in Q2. The earnings impact could be a little higher than a pure decremental margin analysis would suggest because we are prioritizing cash and will avoid building excess inventory until demand visibility improves. That said, we have made significant improvements in operating performance and costs in Fluoroproducts, which will help as volumes recover. So think of Q2 as a larger dislocation in volume from automotive, with actions focused on preserving cash and being ready to ramp up quickly when automotive demand returns.

Mark Vergnano, President and Chief Executive Officer

Duffy, to add to Mark's point: we had significant operating problems in Fluoroproducts in the past, but Mark Newman and the team fixed those. We were operating extremely well coming out of Q4 and in Q1. Historically, Fluoroproducts has been a mid-20s margin business and we were in that range in Q1. We will not build excess inventory while automotive production is shut; we will maintain the right inventory levels for customers and take appropriate idle or fixed cost actions in Q2 so we are positioned for the rest of the year without holding high-cost excess inventory.

Duffy Fischer, Analyst, Barclays

Great. Thanks guys.

Operator, Operator

Thank you. Your next response is from Don Carson of Susquehanna. Please go ahead.

Sandy Klugman (on for Don Carson), Analyst, Susquehanna

Thank you. It’s Sandy Klugman on for Don. First question: what were your TiO2 operating rates in Q1 and what are the company’s expectations for Q2?

Mark Newman, Senior Vice President and Chief Operating Officer

We saw better operating performance in the quarter coming out of Q3 and Q4; EBITDA margin improved sequentially from 19% to 23% in TiO2 as a result. We are seeing better operating rates across our fleet. We still have the ability to produce more as demand increases, consistent with our aim to align market share with capacity share over time.

Sandy Klugman (on for Don Carson), Analyst, Susquehanna

Okay, great. Thank you. And then moving to the balance sheet, are there any key covenants that investors should be aware of at present?

Sameer Ralhan, Senior Vice President and Chief Financial Officer

Yes, this is Sameer. Regarding our credit facility, we do have a maintenance covenant, but we have significant room on that covenant. We feel comfortable about our covenant flexibility and our liquidity position.

Sandy Klugman (on for Don Carson), Analyst, Susquehanna

Okay, thank you. Final question: have you seen a reduction of Chinese refrigerant exports into the EU given the region’s shipping constraints in Q1?

Mark Vergnano, President and Chief Executive Officer

It’s been hard to gauge perfectly. Most likely, exports were lower early in the year because China’s production and exports were down initially. As China has started to ramp up, internal consumption has been slower and export patterns are still stabilizing. It’s probably lower, but it's too early to be definitive because statistical reporting has been delayed and the situation is dynamic.

Sandy Klugman (on for Don Carson), Analyst, Susquehanna

Thank you very much.

Operator, Operator

Thank you. Your next response is from Laurence Alexander from Jefferies. Please go ahead.

Adam Bubes (on for Laurence Alexander), Analyst, Jefferies

Hi, this is Adam Bubes on for Laurence today. I was wondering in regards to illegal imports of HFC refrigerants, are you seeing any impacts from the coronavirus there or anything that would change your outlook?

Mark Newman, Senior Vice President and Chief Operating Officer

Early in the quarter we saw some supply chain issues coming out of China across refrigerants, but China appears to be coming back online. Overall, we have not seen further deterioration in our refrigerant business in Europe versus what we saw last year. There are practical limitations in field enforcement against illegal imports with COVID-19 lockdowns, but overall we have not seen material further deterioration. From a year-over-year comparison, quota sales were a headwind. Specifically, we were down $19 million year-over-year in Fluoroproducts results with a $21 million delta in quota sales last year versus this year. Despite that, our improved cost and operational performance plus the Corpus Christi benefits helped to offset the quota impact and COVID-related weakness.

Adam Bubes (on for Laurence Alexander), Analyst, Jefferies

Okay, thank you. And my second question: could you provide more color on the $0.19 volume increase in TiO2 — how much is market share gain versus overall demand, and where were volumes sequentially?

Mark Vergnano, President and Chief Executive Officer

We believe we regained some share, primarily in plastics and laminates where we had lost share previously, and those gains were driven mainly in Asia and Europe. Sequential volume was slightly higher from Q4 to Q1. Mark, do you want to add color?

Mark Newman, Senior Vice President and Chief Operating Officer

Sequential volume was up above 2%. We have been regaining share since the second half of 2019 with a focus on plastics and more recently laminates. From a channel perspective, our Flex e-commerce platform has helped customers plan purchases and is a value add for price discovery and order patterns, which has been helpful. Regionally, Asia showed more strength and plastics, particularly packaging related to COVID-19, has been resilient.

Adam Bubes (on for Laurence Alexander), Analyst, Jefferies

Okay, thank you very much.

Operator, Operator

Thank you. Your next response is from Vincent Andrews of Morgan Stanley. Please go ahead.

Steve Haynes (on for Vincent Andrews), Analyst, Morgan Stanley

It’s Steve Haynes on for Vincent. Wanted to come back to TiO2 volumes and your comment about being sequentially down slightly in Q2. Some coatings customers are pointing to significant volume declines for Q2. Could you split apart how April has been versus expectations for May and June? That would help us understand May and June expectations.

Mark Newman, Senior Vice President and Chief Operating Officer

Right now, we expect volumes to be down versus Q1 based on current signals. April was fairly anemic but we have seen some strengthening. Demand signals are coming downstream, and we are reacting to those. We had been on a path to regain market share through 2020, but with the pandemic we will be prudent and that timeline might extend into 2021. May and June will be telling — June in particular will be important to understanding Q2 volume outcomes for TiO2.

Mark Vergnano, President and Chief Executive Officer

There is a lot of uncertainty as we go into the second half of the quarter. We'll have to see how demand evolves.

Steve Haynes (on for Vincent Andrews), Analyst, Morgan Stanley

Okay. Thanks guys. I appreciate it.

Operator, Operator

Thank you. Your next response is from P.J. Juvekar of Citi. Please go ahead.

Eric Petrie (on for P.J. Juvekar), Analyst, Citi

Hi, good morning, Mark. It’s Eric Petrie. How do you view TiO2 fundamentals currently compared to prior down cycles? Do you think recovery is slower if pricing has been more stable, preventing capacity reductions in past cycles?

Mark Vergnano, President and Chief Executive Officer

Eric, this situation is very different from prior cycles. We were coming out of a destocking period last year and beginning to recover in Q3 and Q4, so when the pandemic hit we were on a different starting point. Prices were fairly stable and inventories were not excessive because destocking had largely normalized. Going forward, stimulus measures that uplift GDP tend to benefit this GDP-driven industry, particularly construction. When demand starts to come back and stimulus kicks in, we expect upside in recovery. The recovery dynamic is different because we were already on a path to improvement before COVID-19 hit.

Eric Petrie (on for P.J. Juvekar), Analyst, Citi

Helpful, thank you. On the Fluoroproducts business, you previously commented that you expect full Opteon conversions at auto OEMs in the U.S. by 2021 and in Japan by 2023. Do those timelines still hold given production cutbacks?

Mark Vergnano, President and Chief Executive Officer

Yes, our anticipation is that those timelines still hold.

Operator, Operator

Thank you. Your next response is from Jim Sheehan of SunTrust Robinson. Please go ahead.

Pete Osterland (on for Jim Sheehan), Analyst, SunTrust Robinson

Good morning. This is Pete Osterland on for Jim. On TiO2, given volumes were up a bit sequentially in Q1 but expected to be down in Q2, how do you expect margins next quarter to behave? Would they revert closer to the levels in Q4 below 20% or is there anything on the operational front that could reduce the margin impact?

Mark Newman, Senior Vice President and Chief Operating Officer

We typically don't guide quarter-by-quarter on margins. We'll be thoughtful about our market approach in light of demand impacts. We will look at ways to meet customer needs using the flexibility of our global operating fleet, and that will be the primary driver for margin outcomes in the quarter.

Pete Osterland (on for Jim Sheehan), Analyst, SunTrust Robinson

Thank you.

Operator, Operator

Thank you. Your last question comes from Arun Viswanathan of RBC Securities. Please go ahead.

Arun Viswanathan, Analyst, RBC Securities

Thank you. Good morning. You discussed some of the order patterns; looking out into Q3 and Q4 you had some price increases on the table. Do you still expect any potential success with TiO2 price increases later in the year given the recent situation?

Mark Vergnano, President and Chief Executive Officer

Arun, we don't have a good picture of the rest of the year, which is why we suspended guidance. Our AVA contracts and prices in the Flex portal reflect higher prices later in the year than earlier, but that portal can be adjusted as conditions change. Ultimately, demand will drive outcomes in this industry rather than capacity changes. Given the uncertainty about second-half demand, it's hard to predict price success right now.

Arun Viswanathan, Analyst, RBC Securities

Great. And on supply-demand and Chinese suppliers: they made inroads the last few years. Would you expect those inroads to continue, or could you regain share given potential financial constraints for some suppliers?

Mark Vergnano, President and Chief Executive Officer

We will continue our path on regaining share, but we'll be smart and prudent. In a lower demand period we will avoid actions that cause marketplace imbalances. There was a dislocation in China with very low demand in Q1, which affected exports. As China’s domestic demand rises, that should stabilize export patterns. Again, demand is the primary driver and we will stay close to developments.

Arun Viswanathan, Analyst, RBC Securities

Thanks.

Operator, Operator

At this time, there are no further questions. I would now like to turn the call back over to Mark Vergnano, President and CEO of Chemours. Please go ahead.

Mark Vergnano, President and Chief Executive Officer

Thank you, Ditomora, and thanks everyone for joining. I don’t think I ever imagined myself saying this, but I really miss seeing you all in person. I am hopeful that we will be able to get together at some point. Until then, I hope you all stay safe and healthy, and thank you as always for your support of The Chemours Company.

Operator, Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.