Earnings Call Transcript - CC Q2 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to The Chemours Company Second 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. Thank you. I would now like to hand the conference over to our speaker today, Jonathan Lock, Vice President of Corporate Development and Investor Relations. Please go ahead.

Jonathan Lock, Vice President, Corporate Development and Investor Relations

Good morning and welcome to The Chemours Company’s Second Quarter 2020 earnings call. Joining us on the call today are 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'd 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 second quarter. Mark?

Mark Vergnano, President and Chief Executive Officer (CEO)

Thank you, Jonathan. And thank you everyone for joining us today. We are living in unprecedented times, and the last three months have been some of the most challenging I can remember. It started with COVID-19, first in Asia, then in Europe and the Americas. We have witnessed the incredible resilience of the human spirit in our collective response. In late May, we saw social justice take center stage and a societal awakening of tremendous proportion. I'm extremely proud of this company's response to both of these dramatic events in the first half of 2020. We have acted quickly on a global scale to face these challenges head-on and will emerge stronger and more united as a result. Regarding COVID-19, as I said in our first quarter call, our response was swift and strong. Early safety measures implemented across all our sites have proven effective and we maintain operational continuity across our global footprint. We continue to manage through the current surge of cases in the United States with our internal health and epidemiology team fully engaged. As a leadership team, we have had to make many timely, yet tough decisions as the pandemic has worn on. Through it all, we maintained our true north of putting our people first. As a company we remain committed to coming out of this pandemic stronger and more competitive. Turning to social justice. The murder of George Floyd on May 25 set off a firestorm of protest and civil unrest not seen in a generation. His unfortunate death put into focus many of the deep-seated issues in our society and has caused all of us, including this leadership team, to rethink and reframe our behavioral norms and practices. We have taken the opportunity to reflect and strengthen a number of our own internal practices regarding inclusion and diversity at the company. This includes a zero tolerance policy toward any type of discrimination, including racism. An expansion of our safety obsession value to include the holistic elements of emotional and psychological safety and expanded training and education programs across the entire company. These types of actions are not new to Chemours. They are, along with our 10/30 corporate responsibility commitments, part of the basis of why we think of Chemours as a new kind of chemistry company. A company that is working to inspire our 7,000 employees to create a better world that is better for all of us. I would like to invite those interested in learning more about our commitments and programs to visit our website for more information. Moving on to the results. The COVID-19 driven weakness which started in the first quarter extended well into the second and impacted nearly every end market which we serve. While the global macro was severely impacted by COVID-19, our second quarter cash flow proved resilient, reflecting the solid execution of our COVID-19 response plan. COVID-19 related headwinds resulted in a sharp drop in second quarter revenue with adjusted EBITDA of $166 million. Margins were impacted by low production rates as we managed working capital by idling several facilities across the company. As I said on the first quarter call, we are focused on maximizing cash generation through this demand trough. In the second quarter, our team jumped into action with swift cost-cutting and cash conservation actions and helped to offset some of the headwinds in the quarter. As a result, we were able to generate $50 million of free cash flow in the second quarter. This was an improvement of $167 million versus the second quarter of 2019. We still have significant work ahead of us as we turn our focus to revenue growth. But I'd like to applaud each of our team members around the world for their contribution to this excellent result. Our balance sheet remains solid with ample liquidity of approximately $1.4 billion. At the end of the second quarter we maintained a cautionary $300 million draw on a revolving credit facility. Looking ahead, we remain limited in our ability to forecast beyond the coming weeks. And while we're hopeful of an ongoing recovery, the view from our customers is not consistently clear. Barring a large second wave of virus, we believe the global economy bottomed in mid-May. Since then, order patterns have begun to stabilize with improvement each week in June and into July. While a positive sign, we do not yet have enough data to project the shape and trajectory of the recovery. As a result, and consistent with our first quarter practice, we do not believe it is prudent to provide quantitative guidance for the second half. Before I turn things over to Sameer to review the financial results in detail, I'd like to quickly cover the commitments we made last quarter and our proactive response to COVID-19. We covered some of these items earlier, but I wanted to use this chart to reinforce to all our investors that we have acted quickly and with purpose to create significant financial and strategic flexibility for the company. It starts with putting our employees and our customers first. We have not backed down on our PPE and health requirements at our sites and continue to use procedures, social distancing and masks to help limit the spread of the disease. We have been fortunate to be in a position to help our customers and supply chain partners with advice, PPE and other supplies during this pandemic and we'll continue to help those in need across the communities in which we operate. We took early proactive measures to bolster our balance sheet by eliminating discretionary spending, temporarily reducing salaries and scaling down CapEx to conserve cash. These programs remain on track. As we move cautiously off the bottom, we will continue to be vigilant from a cost perspective, mindful of the need to invest into the recovery and maintain momentum in key markets. Finally, on our first quarter call, I spoke about the resilience of Chemours—that grit and determination which has defined our short history. That resilience was on full display here in the second quarter, and I have no doubt we're well prepared for whatever else comes our way. I want to recognize the entire Chemours team for their effort this past quarter—the shared sacrifice, long hours and late nights. I know we will get through this together. With that, I'll hand things over to Sameer to review the financial results.

Sameer Ralhan, Senior Vice President and Chief Financial Officer (CFO)

Thanks, Mark. I'll begin my comments on slide five. Second quarter revenue was $1.1 billion as COVID-19 impacted demand across most global markets. Lower volumes and high production costs across the two principal segments, Total Products and Titanium Technologies, resulted in lower margins versus 2019. GAAP net income was $24 million, while adjusted net income was $30 million. GAAP earnings per share came in at $0.15 per share, while adjusted earnings per share was $0.18 per share. Free cash flow was $50 million, an improvement of $167 million from the same quarter in 2019. Strong cash flow from operations driven by working capital management, combined with lower CapEx in the quarter contributed to the strong free cash flow result. Finally, our board of directors approved the Q3 dividend of $0.25 per share. This is unchanged from the prior quarter and will be payable to shareholders of record as of August 17. Turning to chart six. Second quarter 2020 adjusted EBITDA was $166 million, down from $283 million in second quarter 2019. Lower volumes due to COVID-19 impacted all three of our segments. We also experienced lower average selling prices due to customer and product mix, as well as the timing of contractual price down commitments in some product lines. Improved operating performance and efficiency gains in Fluoroproducts and cost reduction efforts across the company more than offset idle production charges and lower F-Gas quota sales in Fluoroproducts and high unit costs in Titanium Technologies due to lower operating rates. In total, costs and other were a $43 million improvement versus the same period a year ago. Moving to the next chart. Our liquidity position remains strong. Our cash balance at the end of the second quarter was approximately $1 billion, including $642 million of U.S. cash. In the quarter, we spent $61 million on CapEx and returned $41 million to shareholders in the form of dividends. As Mark mentioned earlier, we maintain the cautionary $300 million draw on our revolving credit facility. The strong execution of our COVID-19 response plan provides significant financial flexibility to respond quickly to any market disruption. Turning to the next chart. You will recall we used this chart on our Q1 calls to help lay out our current balance sheet, liquidity and leverage position. We continue to believe our balance sheet is a source of strength, and we have ample liquidity considering current market conditions. In total, we have approximately $1.4 billion of liquidity, with just over $1 billion of global cash, including the $300 million revolver draw. We maintain approximately $400 million of remaining revolver capacity. Our current senior secured net leverage ratio of approximately one times is well below the two times maintenance covenant level. Our maturity towers are well balanced and spaced with a nearest maturity in 2023. Of course, we will always look for new opportunities to improve our financial flexibility. But today I believe we are well-positioned given the conservative actions we took earlier in the year. I'll now turn the call over to Mark Newman to cover our segment results.

Mark Newman, Senior Vice President and Chief Operating Officer (COO)

Thanks, Sameer. Before I cover segments, let me just underscore some of Mark's earlier comments. The Chemours team sprang into action around COVID-19, and we kept our people safe, our plants running and met our customer needs, all while cutting costs and preserving cash. We also stepped up our efforts on inclusion and diversity, all part of our commitment of being a new kind of chemistry company. Our focus from this point is on profitable revenue growth in an uneven and potentially gradual recovery. The team is fully engaged, and we are not daunted by the challenges ahead of us. With that, let's move to the results in the second quarter, beginning with Fluoroproducts on chart nine. Second quarter Fluoroproducts sales reflect lower volumes across a number of fluorochemical and fluoropolymer product lines as COVID-19 impacted end market demand. Auto demand was particularly weak in the quarter with most plants in Europe and North America shut down for extended periods of time. As a Tier 1 supplier of Opteon HFO refrigerants to auto OEMs, we felt this demand impact almost immediately in our fluorochemicals business. Demand in fluoropolymers was less severely impacted, though there was reduced demand for automotive components and from industrial end markets in the second quarter. However, given where we sit in the automotive and other value chains on polymers, we expect demand weakness in Q3. Price was a 3% headwind in the quarter impacted by product and customer mix, as legacy refrigerant pricing bottomed in the first half. In total, adjusted EBITDA for the second quarter came in at $97 million with margins of 19%. Our adjusted EBITDA in the quarter reflects limited F-Gas quota sales and the impact of shutdowns and production line idling primarily on the fluorochemicals side of the business. These factors more than offset improved productivity and cost efficiency efforts across our sites. Going forward, the demand outlook remains mixed. While there has been some recovery in auto OEM volumes starting here in July, we have yet to see a sustained cross-industry recovery in demand. We believe that volumes likely bottomed in May and we are on a path to recovery over the coming quarters. As we move more fully into recovery, we expect fluorochemicals demand and margin to rebound more quickly given our auto OEM exposure as a Tier 1 supplier. On the other hand, we expect fluoropolymers to lag given that we're further back in the supply chain and the unevenness in recovery of other polymer markets. Longer term, we continue to have confidence in the growth potential of our polymers, which will be essential in areas such as Next Generation 5G networks, fuel cells and hydrogen infrastructure. Let's turn to our Chemical Solutions segment on the next chart. Sales in the second quarter were $82 million, down 37% reflecting the lower revenue from the sale of our MAP business and customer mine shutdowns across the Americas which impacted mining solutions. Adjusted EBITDA in the quarter rose nearly 20% to $19 million from $16 million in the second quarter of 2019. Adjusted EBITDA margin was 23%, reflecting an 1100 basis point improvement in margins from 12% in the prior year. This improvement reflects timing of cost reduction efforts and portfolio management actions. For the balance of the year, we expect demand to normalize as customer mines return to full operations. We continue to focus on our full-year cost reduction actions, cash generation and operational readiness. Finally, as part of our efforts to continuously improve our operating efficiencies and manage our portfolio, we made the decision to shut down our Aniline business effective at the end of the year. Let's move ahead to our Titanium Technologies segment on chart 11. Our sales in the quarter of $488 million were down 14% compared to last year. The decline was driven primarily by lower volumes due to soft demand in Europe, Latin America and Asia Pacific. North America has been relatively stable as the DIY trend has helped bolster in-market demand. Overall, volumes were down 20% on a sequential basis, consistent with the low end of our expectations headed into the quarter. Despite this decline, price was flat on a sequential basis and down 5% on a year-over-year basis, a testament to the resilience of our TVS strategy, the benefits of a flex e-commerce channel and the value our customers see in their partnership with Chemours. While the quarter as a whole reflected significant demand headwinds related to COVID-19, we experienced a modest recovery as we exited June, with weekly sales trending more favorably in the first two months of the quarter. In the second quarter, we continue to add AVA contract customers as TiO2 buyers were attracted to the value of supply certainty and market-share-based contracting offered through TVS. Adjusted EBITDA of $94 million was down 26% from the second quarter of 2019. Margins of 19% reflect the impact of lower fixed-cost absorption due to our low production levels. Looking ahead, we believe we're in the early stages of our market recovery, with regional differences emerging based on patterns of disease around the world. Downstream, architectural coatings, plastics and laminates demand will follow the path of their regional end markets ahead of a more coordinated global recovery. We continue to believe that we are well-positioned with our broad portfolio of AVA contracts, Ti-Pure Flex and distribution customers. We will continue to help our customers meet their pigment needs through these incredibly dynamic periods. I'll now turn things back over to Mark.

Mark Vergnano, President and Chief Executive Officer (CEO)

Thanks, Mark. I'd like to close my prepared remarks with a few observations on what we've seen early here in the third quarter and also some thoughts on the global recovery. Our order book patterns and conversations with customers indicate that Q2 marked the bottom of the pandemic-related demand downturn. We have yet to see a synchronized global recovery, but are hopeful that the regional and sector-specific recoveries we are experiencing continue to gain strength over the back half of the year. We do believe the trajectory from here will be positive, barring a major second wave of closures across major segments of the economy. One critical area will be the impact of stimulus in particular infrastructure stimulus, which we believe will play a meaningful role in restoring growth. The recent stimulus announcements in Europe and prospects for additional measures in the U.S. are welcome news for many of the markets in which we participate. Until then we will continue to run the business to maximize cash flow, while doing everything we can to support people and our customers. This strategy will allow us to emerge from this period stronger and well-positioned for growth in our core markets. With that, operator, please open the line for questions.

Operator, Operator

Operator instructions. Thank you. Your first question comes from John McNulty from BMO Capital Markets. Your line is open.

John McNulty, Analyst, BMO Capital Markets

Yes. Thanks for taking my question. So I guess the first one would be on the AVA contract. It sounds like you had a decent uptick in signings this past quarter. I guess when you think about the tone of the discussions around those signings, would you say it's more about your ability to consistently deliver on the supply side? Or do you think it's more about concerns on price hikes coming as we look to 2021 and as the market maybe gets to a more stable footing? How would you characterize all that?

Mark Vergnano, President and Chief Executive Officer (CEO)

Hey, good morning, John. I would say we continue to see steady increase in our AVA contracts. But you have to remember, AVA contracts play extremely well in a period like this when we don't require commitments to volume; we require commitments to market share. And so that allows this Flex to occur when you have an economy like we're seeing right now. So I think that's the biggest draw here. One, you get price stability. Two, you get the security of supply to your point. But you also aren't asking somebody to commit to volumes when things turn down in an economy, because of how we do the market-share calculation. So I think it all plays in a positive way to our customers, whether it's price, supply certainty, or the way we frame the contracts from a volume standpoint.

John McNulty, Analyst, BMO Capital Markets

Got it. That's helpful.

Sameer Ralhan, Senior Vice President and Chief Financial Officer (CFO)

Mark, if I could just add a bit. Having the Flex and the AVA channels are very complementary. So we build a relationship in the Flex channel, and from that people, as Mark said, move to AVA. So we're adding a few contracts in that way. I think what's also very important is a number of folks had cynically predicted that in a stress market we would see people walking away from AVA contracts. I'd say just the opposite: this is what our AVA contracts were designed to allow our customers to do — modulate volumes in these markets. So I think the wisdom of our TVS strategy is playing out and the proof is here. Folks are seeing the benefit of both the flexibility of our Flex portal where they can begin a relationship with Chemours as well as the design of the AVA contracts. So I think we're very encouraged by what we saw in the quarter.

John McNulty, Analyst, BMO Capital Markets

Got it. No, that absolutely makes sense. And then I guess on the second question, you indicated you had a number of plants idle throughout the quarter. Can you quantify somewhat what that financial impact was in 2Q? And then, can you give us an update as to proportionally, have you brought many of those plants back on? How should we be thinking about how that headwind around the cost side may be changing as we look to the third quarter?

Mark Vergnano, President and Chief Executive Officer (CEO)

Yes, John. When we assumed what second quarter was going to look like, we thought we would probably have some idling of facilities across the whole network of Fluoro. It turns out it was mostly on the fluorochem side, because refrigerants were way down primarily because of the automotive downturn. So that's why you probably saw the margins a little bit higher than what we had anticipated in fluoro. As we go into the third quarter, you're going to continue to see those margins about the same level because we're now going to be shifting to idling some of our fluoropolymer assets versus our refrigerant assets. And that's really because, as Mark noted earlier, we have a lag in our fluoropolymer chain to our customers. We're probably three months out in terms of seeing the effect of the upturn that we've seen in automotive. That is immediate for refrigerants because we're a Tier 1 supplier. It's going to be a lag on the fluoropolymer side. So you'll probably see some idle production in fluoropolymers. Today we haven't had much more idle production anywhere else.

John McNulty, Analyst, BMO Capital Markets

Got it. Thanks very much for the color.

Operator, Operator

Your next question comes from Duffy Fischer from Barclays. Your line is open.

Duffy Fischer, Analyst, Barclays

Yes. Good morning. Three questions just on the fluoro side. First, did I hear you right that you said that HFC pricing in Europe has turned up? If so, how much and what's driving that? And then, has HFC weakness in pricing in Europe over the last year impacted HFO pricing at all as you would look at it?

Mark Vergnano, President and Chief Executive Officer (CEO)

Yes, Duffy, we haven't seen any direct relationship between HFC and HFO pricing from that standpoint. Most of the HFO sales are contractual with the automotive industry, and the blends that go into the stationary side haven't shown a pricing effect from HFC movement. I wouldn't say we've seen HFC prices turn up significantly; I would say we've seen them bottom. And we've seen less imports from China at the end of the quarter. So we haven't seen a significant uptick in HFC pricing, but we believe we've probably seen the bottom of that pricing.

Duffy Fischer, Analyst, Barclays

Okay. And then, could you dig in a little deeper — I wasn't quite clear what you were trying to communicate around auto ramp and what that's going to do for volumes in your fluoropolymers versus volumes in your fluorochemicals. The lead-lag there, is that inventory that needs to be worked down as they start to ramp back up? Could you flesh out how we should think about your volumes ramping back up in both those parts of fluoro vis-à-vis an auto ramp?

Mark Vergnano, President and Chief Executive Officer (CEO)

Sure. On the fluorochem side, we're a Tier 1 supplier, so you see an immediate impact as facilities start coming back up. On the fluoropolymer side, roughly 20% of our volume is in automotive. The rest is automotive-related industrial, wire and cable, electronics, and other areas. In the automotive side of our fluoropolymer business, we're further back in the chain. Yes, there's probably inventory that has to flush through. But as order patterns start to get stronger and production resumes, we usually see a delay. Think of it primarily as inventory that's already in the channel that needs to work its way through.

Duffy Fischer, Analyst, Barclays

Terrific. Thank you guys.

Operator, Operator

Your next question comes from Bob Koort from Goldman Sachs. Your line is open.

Bob Koort, Analyst, Goldman Sachs

Thank you very much. Good morning guys. Mark, one question I sometimes get from clients when they think about investment in Chemours is whether the price stabilization strategy might take away some of the upside relative to playing other cyclical companies. Can you talk a little bit about how you see the trajectory of incremental margins as you start to regain volume? And then, what kind of price response you might expect in the future if the world does start to tighten up again for you relative to maybe what the market would do?

Mark Vergnano, President and Chief Executive Officer (CEO)

Sure. Let me start, and Mark Newman can add. As we look at the third quarter right now, we're seeing volumes start to increase — low to mid-teen volume increase. We've seen price stability. That will help margins because we'll have more utilization on our assets. Utilization improvement has a meaningful impact on margins independent of price. As we move forward, AVA contract customers, which make up a majority of our volumes — somewhere in the 50% to 60% range today — might go up to maybe 70% at most. Those customers have price protection and PPI will drive price movements for them. But the Flex channel allows us to move price where it needs to be based on market conditions, so we can participate in a price move upwards when it happens. Part of our value proposition is to give customers on AVA contracts some level of price stability while also benefitting from improved utilization. In the mid-term, I think utilization will have as much impact on margin as anything else. Mark, do you want to add?

Mark Newman, Senior Vice President and Chief Operating Officer (COO)

Yes, Bob. I'd just re-echo those points. We have a lot of room to grow to meet future demand based on our utilization today, and that has significant operating leverage. We continue to have an advantage running our plants across the circuit. With both flex and distribution channels, we can take price as it becomes available in the market. So I like our options here as we move forward and believe we have significant volume upside and the ability to take price in several of our channels. The AVA agreements also provide real stability to both us and our customers.

Bob Koort, Analyst, Goldman Sachs

Thanks for that, Mark. You mentioned lower costs. I know there's a little skirmish with one of your suppliers. Can you tell us what you've done in this downturn in terms of the mix of your ore supply? I guess traditionally we would expect you to go to lower-grade, cheaper ores when demand wasn't as high. But you've also done some acquisitions to bolster your own supply. Can you give us a sense of how that has changed that ore slate over the last year and then in an upturn if it would change some more?

Mark Vergnano, President and Chief Executive Officer (CEO)

Yes. Our job is to... (Mark Newman continued).

Mark Newman, Senior Vice President and Chief Operating Officer (COO)

Go ahead, Mark, sorry.

Mark Vergnano, President and Chief Executive Officer (CEO)

Bob, obviously chloride ilmenite is our advantage and we try to utilize that advantage all the time. We will utilize as much chloride ilmenite in our network as we can. We can operate at much lower ore levels than others can, so we want to do that, especially in a time like this. We have processes to beneficiate our inputs, and we're always looking for ways to do that. Yes, we're having an issue with one of our suppliers right now, but we feel that's a contractual issue that is straightforward, something the contract allows us to do. Don't read anything into that except a normal way of operating our business day-to-day.

Mark Newman, Senior Vice President and Chief Operating Officer (COO)

And Mark, the only thing I would add is we made a great investment in Southern Ionics down in Georgia. That continues to go very well and has the potential to increase our internal supply with further investment up to about 20% of our requirements.

Operator, Operator

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

Josh Spector, Analyst, UBS

Hey, everyone. Good morning. Thanks for taking my question. Just back to Fluoro, I was wondering if it's possible to get quantitative in terms of volume declines in the quarter by chemicals versus polymers, so we can frame the sequential improvement in those segments as well?

Mark Newman, Senior Vice President and Chief Operating Officer (COO)

Overall year-over-year our volumes are down closer to 23%. Think of it as a tale of two very different businesses. Auto was down really significantly — in the 40% to 50% range — based on the outages we saw in Q2, which impacts refrigerants immediately because we're a Tier 1 supplier. Polymers were down more in line with industrial demand, in the 10% to 20% range depending on the product line. So overall, the fluoro business will be up slightly in Q3, but it will be a very different mix. We expect polymers to demonstrate a one-quarter lag and to start showing recovery in Q4.

Josh Spector, Analyst, UBS

Okay. Thanks. That's helpful. And just on Chemical Solutions, obviously a pretty good performance in this quarter. As mining demand improves, do you see margins holding where they were? Or was there anything unique in this quarter, such as licensing income, that drove margins significantly higher?

Mark Newman, Senior Vice President and Chief Operating Officer (COO)

Think of Chemical Solutions as roughly a 20% EBITDA business. We were better in this quarter due to timing of cost actions and portfolio actions related to MAP. Last year we had some second-half sales from closure of methylamines that we won't get this year. But we expect mining solutions to start to recover and, net-net, you should think of this as somewhat close to a 20% EBITDA margin business with quarters above and below that level.

Josh Spector, Analyst, UBS

Okay. Thanks.

Operator, Operator

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

Laurence Alexander, Analyst, Jefferies

Good morning. Can you put in context the total net headwinds you've had from illegal refrigerants to give us a sense for if there were effective regulation what the step up in that business area would be?

Mark Vergnano, President and Chief Executive Officer (CEO)

Hey, Laurence. Last year we were clear that it was about a $125 million EBITDA headwind for the year from illegal refrigerants. So that's a good gauge of the negative impact and a potential uplift for us if that issue is addressed.

Laurence Alexander, Analyst, Jefferies

And when volumes start recovering for TiO2 in the industry, how much of the industry volume growth does Chemours expect to capture given the stabilization strategy and the way customers have navigated this?

Mark Vergnano, President and Chief Executive Officer (CEO)

We've been clear that we want to gain back our rightful market share, so we believe we will capture a lion's share of industry growth, perhaps a bit more than the industry growth rate. We also recognize that in the second quarter we weren't pursuing aggressive market-share capture because it wasn't the right time to create instability. Now that volume growth is coming back — in the third quarter we're anticipating low to mid-teen volume increases with price stability — we should start to be able to gain market share again as we go through the year. We'll continue to pursue targeted market-share gains smartly.

Laurence Alexander, Analyst, Jefferies

Lastly, is there a charge associated with shutting down the Aniline facility?

Mark Vergnano, President and Chief Executive Officer (CEO)

There is. Sameer can give you the numbers. It's fairly small. To put it in context, if you remember back in 2016, we basically sold the Aniline business to Dow and this was the last asset that couldn't be part of that sale for complicated reasons of the spin. So it's a very small charge.

Sameer Ralhan, Senior Vice President and Chief Financial Officer (CFO)

Laurence, it's roughly $12 million of charge that's tied to the Pascagoula shutdown. The majority of that is essentially tied to the assets piece and a couple of million tied to severance.

Operator, Operator

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

Arun Viswanathan, Analyst, RBC Capital Markets

Great. Thanks. Good morning. Just wondering about the inventory situation in TiO2. Could you comment on what you're seeing across geographies, as well as the export situation out of China? Maybe help us on those two items?

Mark Vergnano, President and Chief Executive Officer (CEO)

I'll kick it off and Mark can add. If you walk through the regions around the TiO2 business, North America continues to hold up fairly well, driven primarily by coatings and DIY. We're starting to see a shift to contract-type painting again. Asia is improving, and we've seen Europe and Latin America improving as well; Latin America is maybe a little surprisingly improving. Coatings overall seems to be on an improving trend. Plastics has been slower in recovery. We play in packaging via polyolefin master batches and PVC. Packaging has held up; PVC and construction have lagged, which could be helped by infrastructure stimulus. Laminates have been the most sluggish. China is starting to get the most positive economic direction and is the largest user of TiO2. A lot of excess capacity that was exporting from China is now starting to be consumed domestically, so we expect less China export volume. Overall, we don't see a big inventory build occurring in our channels, which is why we're seeing some improvement in our third-quarter volumes. Mark, anything to add?

Mark Newman, Senior Vice President and Chief Operating Officer (COO)

Some comparisons have been made to the global financial crisis; one principal difference is last year we had a lot of destocking in the industry, so we're coming into this with different inventory levels. As we look at markets globally, North America and China are showing resilience or strength. APAC had been quite weak but is starting to show strength in places like India. Latin America continues to be weak but is a relatively small market for us. We're encouraged by the signs across channels, product mix, and geographies, and that drives the volume increase going into Q3.

Arun Viswanathan, Analyst, RBC Capital Markets

And how do you think about pricing in those regions given what you just said? Is it possible that you see increases potentially in North America but not in Asia or Europe? How should we think about that?

Mark Newman, Senior Vice President and Chief Operating Officer (COO)

Pricing did fall pretty dramatically in China in Q2 and we're seeing that start to reverse as demand picks up there. Globally we think this is a good phenomenon. In Q2 our sequential price was stable, and our outlook with the volume increases is for prices to remain stable. As demand picks up, could there be pricing pressure? Sure. But today our view is prices globally remain stable other than China where they are rebounding from a low.

Arun Viswanathan, Analyst, RBC Capital Markets

Okay. Thanks. I'll turn it over.

Operator, Operator

Your next question comes from P.J. Juvekar from Citi. Your line is open.

P.J. Juvekar, Analyst, Citi

Yes. Good morning, everyone.

Mark Vergnano, President and Chief Executive Officer (CEO)

Good morning, PJ.

P.J. Juvekar, Analyst, Citi

Mark, you mentioned demand for fluoropolymers in 5G and hydrogen fuel cells. Can you take a minute and tell us exactly what those fluoropolymers are used for — maybe heat management — what kind of discussions are you having with customers? Have you actually seen any orders yet?

Mark Vergnano, President and Chief Executive Officer (CEO)

Yes. To be clear, this is about fluoropolymers, not refrigerants. We have high-end melt-processable polymers, primarily our PFA polymer line, which serves the electronics industry and semiconductors. It goes into tubing, liners and other equipment used in semiconductor fabs to reduce contamination. When a new fab is built, we have orders directly for those materials and we continue to have that business. The upswing in potential semiconductor investment in North America is a positive for us. Fluoropolymers also go into materials used for 5G where traditional polymers don't meet the frequency requirements, so fluoropolymers are required. On the hydrogen side, it's about membranes — think of Nafion-type membranes for fuel cells and hydrogen generation — and we sell into those applications today. We see significant growth potential in these areas.

P.J. Juvekar, Analyst, Citi

Thank you for that color. And talking about the Ohio MDL update and your lawsuit with DuPont, is there a way to collaboratively work with DuPont to come up with a solution? Have you had any discussions, and can you give us an update?

Mark Vergnano, President and Chief Executive Officer (CEO)

PJ, we continue to work with them, and I'm convinced we will come up with something that makes sense for our shareholders. Whether we go through arbitration or litigation, the endpoint is likely to be a settlement between the two companies. We continue to talk. These are hard issues to get the right answer for both sets of shareholders, but I believe we will find a way to do that.

Operator, Operator

Your next question comes from Jim Sheehan from SunTrust. Your line is open.

Jim Sheehan, Analyst, SunTrust

Thank you. Good morning. Could you talk about why you're confident that legacy refrigerant prices in Europe have bottomed? You say imports are down — is that due to recession or more to enforcement?

Mark Vergnano, President and Chief Executive Officer (CEO)

It's probably a combination of both. We continue to work closely with regulators in Europe and they are stepping in to help because there was a step down in quota that has to occur at the end of the year and they recognize the importance of enforcement. So enforcement is probably the primary driver. We're seeing prices show a slight uptick toward the end of the quarter. I wouldn't call it a victory yet, but it's a promising sign.

Mark Newman, Senior Vice President and Chief Operating Officer (COO)

During the height of COVID-19 in Europe many facilities were shut down and there was softness in the market. With facilities reopening and more activity, we're seeing bottoming of refrigerant prices. From an enforcement perspective, we continue to work in Europe and expect continued progress in the second half. During the height of COVID-19, investigatory work in the field was lessened, but those efforts are regaining strength. Also, in our Fluoro results year-over-year you see the impact of lower quota sales, which accounted for about a $12 million delta year-over-year. Setting the quota issue aside, we don't see the illegal refrigerant problem getting worse, and ongoing efforts should improve the situation in the second half.

Mark Vergnano, President and Chief Executive Officer (CEO)

To be clear, we're seeing volume start to come back and demand returning in our base refrigerant business. Usually prices follow demand, which we're starting to see.

Jim Sheehan, Analyst, SunTrust

Thank you. And TiO2 — could you give us a flavor for your July demand and how July 2020 compares to July 2019?

Mark Newman, Senior Vice President and Chief Operating Officer (COO)

June was stronger than May and July has been stronger than June. The order book in August is looking solid. Sequentially we feel good about where buying is going right now; that's why we expect Q3 to be positive versus Q2 in the low to mid-teens. I can't give a definitive month-over-month year-over-year number yet, but sequentially we're seeing nice improvement.

Operator, Operator

Your next question comes from Roger Spitz from Bank of America. Your line is open.

Roger Spitz, Analyst, Bank of America

Thank you. Good morning. Other than your TiO2 plants, are you operating at a lower rate elsewhere? Can you comment on your average operating rates in Q2?

Mark Vergnano, President and Chief Executive Officer (CEO)

We don't disclose specific utilization rates. They are lower than normal and vary across the network depending on customer demand and products. When utilization rates rise you'll see positive effects on margins. TiO2 facilities are hard to idle for short periods, so decisions to curtail are typically longer term. As demand signals improve, utilization will increase and that will be additive to results.

Roger Spitz, Analyst, Bank of America

Got it. You mentioned gaining back market share. Can you give a sense of how much you've regained — 10%, 25%, 30% of the market share you lost?

Mark Vergnano, President and Chief Executive Officer (CEO)

If you go back to Q3 and Q4 and Q1, we've been working to gain share then. In Q2 we were not trying to gain share because it wasn't the right environment. Our aim is to get to the rightful capacity share Chemours should have in the industry. That's our goal going forward.

Operator, Operator

And your last question comes from Vincent Andrews from Morgan Stanley. Your line is open.

Vincent Andrews, Analyst, Morgan Stanley

Thank you. Normally we think Q4 is a seasonally weaker quarter than Q3. Do you think that's going to happen this year? Or because customer inventory levels are already quite low, might Q4 not have that typical fall-off?

Mark Vergnano, President and Chief Executive Officer (CEO)

That's the key question and why we aren't providing guidance. We have a clearer picture for Q3, but Q4 remains unclear. Normally Q4 would be weaker, but given 2Q could be the weakest quarter this year and the potential impact of stimulus — particularly infrastructure stimulus — the dynamics could change significantly. There are also factors such as companies conserving cash. There's a lot to learn in the coming weeks, and right now we can't call Q4. I wouldn't assume normal seasonality.

Vincent Andrews, Analyst, Morgan Stanley

Okay. Understood. Thanks for the comments.

Operator, Operator

There are no further questions. I'll turn the call back over to Mark Vergnano for closing remarks.

Mark Vergnano, President and Chief Executive Officer (CEO)

Thanks. And thank you all for joining today. The grit and resilience of this team hopefully showed through. We made some difficult calls, but I think we had a positive result in our quarter because of the actions we took very early around this. I think we're starting to see some demand coming back to us in the third quarter and we are poised and ready to respond as revenue comes our way. So again, thank you for your support of the company. We appreciate all our investors' support during this time. Please stay safe and stay well. Thank you.

Operator, Operator

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