Earnings Call Transcript - CC Q2 2021

Operator, Operator

Good day and thank you for standing by. Welcome to The Chemours Company Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Operator provided instructions. I would now like to hand the conference over to your speaker today, Jonathan Lock, VP, Corporate Development and Investor Relations. Please go ahead.

Jonathan Lock, VP, Corporate Development and Investor Relations

Good morning, and welcome to The Chemours Company's second quarter 2021 earnings conference call. I'm joined today by Mark Newman, President and Chief Executive Officer; and Sameer Ralhan, Senior Vice President and Chief Financial Officer. Before we start, I'd like to remind you that comments made on this call, as well as 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. With that, I'll turn the call over to our CEO, Mark Newman, who will review the highlights from the second quarter. Mark?

Mark Newman, President and Chief Executive Officer

Thank you, Jonathan, and thank you to everyone on the call for joining us today. I'm excited to be speaking to you today on my first earnings call as CEO of The Chemours Company. It's a busy time here at Chemours but the energy I feel from our people, from our customers, suppliers, and investors is still incredible. This has been in part driven by the broader macroeconomic recovery from COVID-19, but more importantly, I think it reflects the enthusiasm and passion of our teams and a deeply held belief that our chemistry has the power to change the world. To that end, I have charged the people of this company to drive even sharper focus on creating the best products for our customers and helping solve the world's biggest challenges from climate change to energy storage to high-speed data. Our chemistry is fundamental to the future, and through our innovation, we have the power to make a difference. There is a rich canvas of opportunity which lays ahead of us, and we are well-positioned to drive long-term growth for the benefit of all our stakeholders. In 2021, we are focused squarely on delivering on our plans and ensuring that we take full advantage of market opportunities, which we are uniquely positioned to capture. Turning now to the highlights from the second quarter on chart 3. Demand momentum from the first quarter continued into Q2 as the global recovery from COVID-19 continued at pace. We set a number of revenue and profitability records across the portfolio in the second quarter, including achieving the third-highest quarterly sales in Chemours's history. Net sales increased 51% to $1.7 billion, while adjusted EBITDA of $366 million increased $200 million from the prior-year quarter. Our Titanium Technologies results demonstrate the benefits of our TVS strategy, and the continued economic recovery driving our volumes to historic levels and supporting higher TiPure pricing across all channels. We are delivering on the challenging supply chain and logistic conditions, which is becoming a real differentiator in customer choice. The execution of TVS improves our quality of earnings by creating mutually beneficial long-term relationships with our customers and building a better book of business. In our Thermal & Specialized Solutions segment, we reported another strong quarter; rebounding global markets are supporting improved volumes and higher pricing in base refrigerants. Operationally, we have recovered well from the weather-impacted first quarter, which helped to support our strong margin performance in the quarter. The global transition to HFO technology is underway with many years of growth ahead, enabled by better enforcement of F-Gas regulations in Europe and the coming implementation of AIM regulations in the U.S. We have shown incredible progress in our Advanced Performance Materials segment. Demand has recovered across the majority of our end markets, leading to historic highs for quarterly sales and adjusted EBITDA this quarter. APM is transforming fast and primed to deliver. The business is delivering on proof points that support our near-term GDP-plus growth ambition. Meanwhile, we are positioning ourselves to capture secular growth over time as key trends take hold in semiconductor manufacturing, 5G communication, and hydrogen generation. I'm especially proud of these results in the context of global supply chain disruptions, which have impacted everything from the raw materials we procure to shipping containers which we use to serve our customers. Everyone at Chemours has stepped up over the last several months to support stable operations and I would like to take this opportunity to thank the entire team for their continued dedication to our customers. This week, we also announced the signing of a definitive agreement to divest our Mining Solutions business to Draslovka for $520 million or 10x 2020 fiscal year adjusted EBITDA. With this transaction, we are furthering our strategy to focus our portfolio and drive long-term growth around our three core businesses. This was a great result for Chemours, the Mining Solutions team and for our shareholders. We executed quickly having just launched the process in Q1 and anticipate the transaction will close by the end of this year. I would like to thank Jonathan Lock and all of the Chemours team involved for helping us achieve this great outcome. Before turning things over to Sameer, I wanted to cover one more topic. The most recent publication of our 2020 corporate responsibility commitment report released a few days ago. The annual publication of our CRC report has become a tradition at Chemours which I look forward to. Four years into our sustainability journey, we continue to make significant progress against an ambitious set of 2030 goals. I'll discuss the content of the report in more detail here on chart 4. In 2018, we set out to chart a new course for Chemours and the chemical industry more broadly. We introduced a comprehensive set of goals designed to push ourselves to a higher standard and we have been relentless in our pursuit of these goals over the last several years. As a reminder, these goals cover our shared planet, inspired people, and an evolved portfolio. When we set these goals, we weren't entirely sure how we would achieve them by 2030 but we have attacked them with the same resolve we took to the spin-off, our transformation, and reshaping our portfolio. As you can see on chart 5, even in a year marked by COVID-19, our teams have rallied around this common cause to deliver significant progress across the board. This is so important and exciting to me because we know that priorities become clear in times of crisis. In 2020, we kept our focus on our North Star, keeping our people safe and serving our customers, but also saw to it that we continue to make progress against our CRC goals. On the shared planet, we have reduced our fluorinated organic compound emissions and our greenhouse gas emissions by 48% and 20%, respectively, from our 2018 baselines. We are on track to hit both our 99% reduction target for fluorinated compound emissions and our 60% absolute reduction in greenhouse gas emissions by 2030. We are targeting net-zero greenhouse gas emissions by 2050. In our inspired people pillar, I would like to highlight the increase in female representation on the senior executive team up to 44% as of July 1st from 13% only a few years ago. There is still work to be done to ensure our overall workforce reaches 50% women by 2030, but I'm proud of the success we have had at the leadership level thus far. With respect to the ethnic diversity of our U.S. workforce, we are nearing our goal of 20%, again with significant representation on our senior executive team. Finally, in evolved portfolio, over one-third of our products by revenue make a specific contribution to the UN Sustainable Development Goals as we move closer to our goal of ensuring 50% or more of our revenue comes from offerings that make a specific contribution to the UN Sustainable Development Goals. The headlines are, of course, attention-grabbing, but Chemours is making a difference much more broadly across the portfolio. For all the details please have a look at our CRC report posted on our Investor Relations website. With that, I'll turn things over to Sameer, to review the financial results for the quarter. I'll be back to talk about our revised guidance before turning to Q&A. Sameer?

Sameer Ralhan, Senior Vice President and Chief Financial Officer

Thanks, Mark. Turning to chart 6. Results in the second quarter continued the trend from Q1 with demand improving across the portfolio. Q2 net sales of $1.7 billion were up 51% year-over-year, and 15% on a sequential basis. The global recovery continued to pick up steam across most of our end markets. GAAP EPS was $0.39 per share and adjusted EPS of $1.20 per share. Adjusted EPS reflects add-back of two key charges: $169 million related to remediation of the onsite Fayetteville site to address legacy liabilities, and $25 million associated with the Delaware settlement which we announced several weeks ago. I'll cover these in more detail on the next chart. Adjusted EBITDA increased by $200 million to $366 million in the second quarter, driven by higher volumes and pricing with currency providing a slight tailwind. Margins rose to 22% on a company-wide basis. Free cash flow in the quarter was $189 million. Our cash performance in the quarter reflects our continued commitment to improving the overall quality of earnings to the company, and more importantly, converting earnings to cash. On July 28, our Board of Directors approved our third quarter 2021 dividend of $0.25 per share. This amount is unchanged from the prior quarter and will be payable to shareholders of record as of August 16, 2021. Turning to chart 7. Let's take a closer look at the composition of the two key charges we took in the quarter, including the potential cash flow impact over time. As previously announced, we entered into a settlement with the State of Delaware in the second quarter, of which Chemours' share of the cost is $25 million. This amount is expected to be paid in the third quarter of this year. Second, the $169 million add back to adjusted EBITDA is related to legacy remediation at Fayetteville Works. As you will recall, our consent order with the state of North Carolina has four key elements. First, emissions to air, which we addressed with the thermal oxidizer that became operational in December 2019; second, discharges of process water, which we are addressing with oxide treatment; third, treatment of legacy offsite drinking water supplies, which we are addressing in the surrounding community; and last, remediation of legacy onsite ground and surface water contamination. The charge of $169 million that we have taken in this quarter is primarily related to our current estimate to address this last item. As you can see at the bottom of the chart, it is primarily composed of estimated cost to build a barrier wall and the long-term operations, monitoring and maintenance costs. We anticipate a regulatory approval from North Carolina on the design of the barrier wall during the second half of 2021 and expect construction to take place throughout all of 2022 and the first quarter of 2023. The bars on the right-hand side of the page illustrate the free cash flow impact of the entire Fayetteville accrual of $355 million over 20 years. Over the next three years, commercial spend is roughly $18 million on construction and startup. Maintenance and operating costs are expected to be approximately $5 million of cash spend per year. Both of these figures assume a benefit of cost-sharing, under the MOU with DuPont and Corteva until the year 2040. We are proud of the work our teams are doing to ensure we live up to our consent order and enhance the sustainable manufacturing practices of the Fayetteville works site, which we expect to continue to be a key employer in the region and will play a key role in the growth of our APM business, serving markets such as 5G and the hydrogen economy. We continue to work cooperatively with the state of North Carolina to put the final pieces of the project in place. I hope that this chart is helpful to our investors to understand not just its impact on our free cash flow, but also a clear demonstration of what we're doing to honor our commitments. Turning to chart 8, let's review the adjusted EBITDA bridge for the second quarter. Second quarter 2021 adjusted EBITDA was $366 million, up $200 million from the same period in 2020. Higher pricing in Titanium Technologies and APM more than offset contractual price downs in TSS. Volume was a big story in Q2 on a year-over-year basis. We delivered significantly higher volumes across all of our operating segments, led by Titanium Technologies and TSS. I'll cover the segment-specific drivers and provide a bit more color in a few charts. Higher costs in the quarter were attributable to operating costs due to production ramp-up and supply chain issues. Raw material input inflation increased costs related to environmental and legacy costs and higher performance-based compensation. We continue to operate well despite global logistics and supply chain issues. Turning now to chart 9, where I'll cover liquidity. Our cash position, liquidity and balance sheet remain strong as we move into the second half of the year. Our cash balance at the end of the second quarter was $1.1 billion, up from $1.0 billion in the prior quarter. We generated $256 million in operating cash flow in the second quarter, while capex was $67 million. We returned $42 million to shareholders in the form of dividends, repurchased $13 million of stock and reduced the U.S. dollar term loan by $23 million. We will continue to have a balanced approach to capital allocation. Net leverage improved to 2.6 times on a trailing 12-month basis, down from 3.4 times in the prior quarter. Total liquidity is solid at $1.8 billion, including revolver availability of $689 million. We continue to be well-positioned and our balance sheet flexibility supports our operations and supply chain to meet increasing customer demand. On chart 10, I'll cover the results and outlook of our Titanium Technologies segment. Accelerating economic activity and normalizing seasonal consumption led to strong demand for the Titanium segment in the second quarter. Demand has steadily improved across all end markets, product categories, and geographies. Strong sequential volume growth reflected typical seasonal gains and progress towards our share recovery target. Our ability to meet robust customer demand was achieved despite supply chain and logistics issues around the world. Our flexible manufacturing circuit and the dedicated work of our operations, procurement, and supply chain teams led to record operating performance. Turning to the numbers. Second quarter net sales rose 76% to $859 million. Volume increased 66% versus the prior year and 15% sequentially. Price was up 5% year-over-year and improved 3% sequentially, driven by gains across all selling channels. In the quarter, we began to see the benefit of price actions taken over the preceding two quarters reflect. Pricing in our contracted AVA channel also improved driven by both contractual and negotiated mechanisms, reflecting an inflationary global environment. Adjusted EBITDA for the segment rose 133% to $219 million driven higher by the volume-led sales recovery. Adjusted EBITDA margin increased by 600 basis points to 25%. Embedded in our improved results were higher client fixed costs to support volume growth, modestly higher warehousing and expenses associated with supply chain constraints. Multi-year supply contracts insulate us from short-term movements in price, but like most of the industry, we were dealing with lingering raw material shortages that forced us to operate the manufacturing circuit suboptimally to meet higher customer demand. As we look ahead, we expect continued strong performance in the second half with demand reflecting typical seasonal patterns. Our teams are 100% focused on supporting customers, meeting increased demand, and driving adjusted EBITDA margin expansion. Normalization of supply chain challenges will be a key component in achieving this all. Moving to chart 11. Thermal and Specialized Solutions delivered a strong year-over-year second quarter with contributions across all regions and markets driven by the economic recovery, with sequential upside driven further by strong seasonal refrigerant trends. Opteon adoption drove improvement across stationary and automotive markets despite constrained automotive production from the ongoing semiconductor chip shortages. Our customers continue to select Opteon as a differentiated solution of the future and we continue to be the partner of choice. Earlier this quarter, we announced that Johnson Controls has selected Opteon XL41 to replace R-410A in North America in HVAC products and air-cooled scroll chillers. We also announced our support at the Beijing 2022 Winter Olympics with Opteon lower GWP refrigerants at a number of facilities. These agreements are positive for the Chemours Opteon franchise and for the planet. Looking more closely at the results, Q2 net sales increased by 47% year-over-year to $340 million and increased 12% sequentially. Volume growth led to year-over-year recovery; price was a 3% headwind on a year-over-year basis driven by contractual price downs in certain product categories, but rose 5% on a sequential basis. Pricing reflected improved demand conditions, including stronger enforcement of F-Gas in Europe and healthier demand in the Americas. Segment adjusted EBITDA increased 113% year-over-year to $117 million in the quarter. Adjusted EBITDA margins increased 1,000 basis points to 34% versus the prior-year quarter. Higher sales volumes, mix and improved plant operating rates more than offset modest headwinds from lower segment prices and higher costs needed to support higher demand. Looking ahead, we expect a continued market recovery along normal seasonal patterns. Adjusted EBITDA margins are anticipated to continue in the low 30% range for the remainder of 2021. We are well-positioned to support customers' transition from legacy HFCs to next-generation lower global warming potential solutions as U.S. AIM regulation accelerates Opteon adoption. EPA is working to craft standards for HFC transitions under the U.S. AIM Act, which is expected to go into effect from January 1, 2022. Turning to chart 12, I'll cover our Advanced Performance Materials segment. I would like to start by highlighting the strong performance for the segment with just the highest quarterly net sales and adjusted EBITDA in Chemours history. The segment continues to benefit from strong demand with strength in our electronics, communications, industrial and transportation markets. Logistics and raw material availability challenged our ability to meet demand in this quarter. It's a testament to our employees and the collaboration of our suppliers and customers that enabled us to achieve the results we shared today. We continue to drive pricing actions at the customer and product level, which can sometimes be muted by mix effects across our diversified product portfolio, as was the case this quarter. Given the specialty nature and high performance characteristics of APM products, we work with our customers to ensure that our pricing is reflective of the value they provide. Net sales improved 24% year-over-year to $362 million driven primarily by 19% volume growth. Segment adjusted EBITDA was $74 million, a 76% increase over last year's second quarter of $42 million and a notable 45% improvement sequentially. The sequential EBITDA growth demonstrates the operating leverage of this business and highlights the long-term potential of our top-line growth journey. Adjusted EBITDA margins of 20% improved 600 basis points versus the prior-year quarter, exceeding our initial expectations and previous guidance for high teens margins, despite being weighed down by costs related to supply chain disruptions and higher performance-based compensation. Looking ahead to the rest of the year, we anticipate strong customer demand to continue to drive growth on a year-over-year basis. We believe full-year adjusted EBITDA margins will be in the high teens percent range and we remain committed to achieving the low 20% in 2022. Moving ahead to our Chemical Solutions segment on chart 13. Second quarter net sales were $94 million, an increase of 15% year-over-year inclusive of a 17% portfolio impact from the shutdown of our aniline business last year. 26% year-over-year volume growth was driven by a continuation of robust demand in sodium cyanide and glycolic acid products. We expect momentum to continue in Mining Solutions with steady improvement in the gold mining environment and the demand for glycolic acid is expected to remain strong as well. Adjusted EBITDA was $19 million for the second quarter of 2021 with modest cost headwinds from logistics and supply chain considerations offsetting a better sales performance. With that, I'll turn things back over to our CEO, Mark Newman.

Mark Newman, President and Chief Executive Officer

Thanks, Sameer. We are updating our guidance for the full year to reflect the momentum we feel across the business. We now believe that our full-year 2021 adjusted EBITDA and adjusted EPS will be in the upper end of the previously communicated range. Recall that we had raised both of these figures during our Q1 earnings announcement. We are leaving our free cash flow guidance unchanged at greater than $450 million to reflect the impact of one-time cash payments in the year, including our Ohio MDL payment earlier in the year and our recent settlement with the State of Delaware, which Sameer took us through. Operating cash flow continues to be strong. This outlook, of course, excludes the impact of the Mining Solutions divestiture that we just announced. We believe we are well set up for a great 2021 and we will continue to focus on executing our differentiated business strategies throughout the year. We remain fully committed to generating significant earnings and free cash flow through the cycle, improving our quality of earnings over time, and maximizing the value of Chemours over the long term. In July, we celebrated our 6th birthday as a company. It's hard to believe how quickly the time has flown. We have achieved a lot in the last six years and our bright future is built upon the strong foundation we have laid as a team. It all starts with our people. The 6,500 employees of Chemours who I am so proud to lead. I look forward to continuing our great work together. As CEO, I promise to lead with an eye toward helping each of you succeed and enjoy a rewarding career at Chemours. Together, we must continue to move fast and with the entrepreneurial spirit that has served us so well since the spin-off. As I think about the future, it is impossible to ignore the macro trends and the context in which we operate. As a chemical company with a long and proud heritage, we are the foundation for innovation around the world. Improvements in the performance, environmental footprint, and cost of our products has a multiplier effect well beyond Chemours. Opteon and Nafion are just two examples of how Chemours chemistry can change the world. We will continue to deliver market-leading improvements in our industry to help power the future. I look forward to engaging with you, our investors, over the coming months to help you see the full potential of this company through our eyes. I believe the future is bright here at Chemours and I appreciate your support in helping us achieve all that we are capable of. With that, operator, please open the line for questions.

Operator, Operator

Operator provided instructions. Your first question is from John McNulty with BMO Capital Markets.

John McNulty, Analyst (BMO Capital Markets)

Yeah, good morning. Thanks for taking my question. Maybe a quicker, relatively easy one to start out. On the TiPure business, you commented in the release that you saw pricing across all channels. Can you maybe unpack that a little bit for us and speak to the pricing trends that you were able to capture in the TVS side of the business, the contract side of the business as well as — and then maybe give us a little bit of color as to what you were seeing in the portal and distributor side?

Mark Newman, President and Chief Executive Officer

Yeah, hi. Good morning, John, and really a great interest in supply from our TiPure franchise throughout the quarter. As we have said, we adjust pricing regularly on our Flex Portal and through our distributor channel and as well there are mechanisms to pass on price increases contractually through our AVA contract. So we are seeing clearly with our strong production in the quarter and ability to supply more product through our Flex and AVA channel, but we are also seeing an ability to take price based on our contractual arrangement and where PPIs are coming in this year. Maybe on PPI, I think the view is we will see mid to high single-digit this year; these are still published indices, but again, that's the primary mechanism in AVA and we continue to take advantage of that contractually.

John McNulty, Analyst (BMO Capital Markets)

Got it. That's some helpful color. And then thinking about the TSS segment, it sounds like the AIM Act is going to be certainly a sizable contributor to growth. Can you help us to quantify how additive that will be as you looked to 2022 when it first gets initiated into the U.S.?

Mark Newman, President and Chief Executive Officer

So we expect — so first of all, we are very excited about the AIM Act and the enforcement of the EPA regulations that are being designed and should be finalized later this year. And we believe that will provide a significant leg of growth in the stationary market, especially, and our expectation in the initial step down from a baseline perspective is approximately 10% in the near term with a larger step by 2024. So our expectation is we'll start to see some impact in 2022 but that impact will become more significant as people migrate to HFO technology. Clearly, as you heard in the call, we have OEM manufacturers who are already switching their product line, so that along with the order of magnitude in mind will really drive it.

John McNulty, Analyst (BMO Capital Markets)

Great, thanks very much for the color.

Sameer Ralhan, Senior Vice President and Chief Financial Officer

Thank you, John.

Operator, Operator

Your next question is from Bob Koort with Goldman Sachs.

Bob Koort, Analyst (Goldman Sachs)

Thank you very much. Good morning. Mark, I was wondering — you guys talked about sort of flexing your circuit in Titanium Technologies in order to meet customer demand. I presume that to mean higher grade, more costly orders. I'm wondering if you could help quantify what the penalty on margins was or maybe as you look forward, how much more margin uplift you might expect in Titanium Technologies?

Mark Newman, President and Chief Executive Officer

Yeah, I'll let Sameer make an additional comment here, but as we look at a year, clearly there is operating leverage in our Titanium Technologies business which you see with the margin expansion going from Q1 to Q2. We are having to give up some expansion in margin, really to focus on meeting strong customer need and addressing all of the supply chain disruptions. So, as we said early in the year, we've really not been able to put, quote-unquote, optimize the circuit given strong demand and our desire to meet customer needs first. But as we work through the year, I think we continue to look for opportunities throughout the months. Sameer?

Sameer Ralhan, Senior Vice President and Chief Financial Officer

Yeah. Thanks, Mark. Bob, only additional comment I would make is as all the markets kind of normalize there will be an opportunity for us to optimize our circuits and drive the margin expansion, but given all the supply lined up right now we expect it to be more of a Q4 phenomenon than Q3. So Q3 margins to be in line with where we are.

Bob Koort, Analyst (Goldman Sachs)

Got it. And then in APM, you had a very respectable improvement in margins, obviously a lot of volume recovery and fixed cost leverage coming through. Kind of surprised with that kind of volume cadence there was no pricing. So can you talk about the competitive dynamic there? I would have suspected that maybe broadly pricing across that franchise would have improved. Thanks.

Mark Newman, President and Chief Executive Officer

Yeah. These are high-value-in-use polymers and they are priced for the most part based on value in use. There is a bit of a mix in APM when you have a strong economic recovery that we're seeing towards the more commoditized end of the spectrum. So I would say there is a mix impact there as well. And then finally, we were taking price through the quarter. But you will see the impact here as we move forward through time of that showing up more in our results.

Bob Koort, Analyst (Goldman Sachs)

Great. Thanks for the help.

Operator, Operator

Your next question is from Josh Spector with UBS.

Josh Spector, Analyst (UBS)

Yeah. Hey, guys. Thanks for taking my question. I guess when you talk about in TiO2 normal seasonal trends in the second half, can you just give us some more color on if that's a function of demand or more supply constraints? And within that outlook, where do you think your inventory and then customer inventories are at this point?

Mark Newman, President and Chief Executive Officer

So we continue to see strong second half demand across all of our businesses including in TiO2. And clearly, as we've stated, we are taking action to be able to supply our customer needs. And if you look at inventories across, especially in TiO2, our sense in talking to our customers is that inventory has remained low and lower than folks would like to see across the entire supply chain. As we look into 2022, clearly we see the potential impact of stimulus coming and usually our high correlation with strong TiO2 demand. So yeah, looking out today, we certainly see very strong second half demand. Some of it is primary demand, some of it is really a preference for certain types and the TVS strategy. And as we look beyond 2021, clearly, we could see the impact of the stimulus and rebuilding inventory.

Josh Spector, Analyst (UBS)

Okay. Thanks, I appreciate that. And in the slide on your outlook, you talk about the majority of free cash flow being returned to shareholders, which isn't a change from how you talked about it previously, but you have a high cash position now. You're getting proceeds from Mining Solutions. How quickly do you return that cash to shareholders and what's the right level of cash that you think you should be holding on a normalized basis?

Mark Newman, President and Chief Executive Officer

So Sameer, Sameer could comment on the right level of cash, but clearly, as we said in our call, we view our capital allocation as being balanced. There's a certain level of deleveraging, which we think is prudent from our learnings coming through the depths of the COVID-19 pandemic. And then we continue to return value to shareholders through dividends and stock repurchases which we started in the quarter. So we're going to have this balanced view going forward while we continue to invest — re-invest prudently in the business. Sameer, I'll ask you to make a few comments.

Sameer Ralhan, Senior Vice President and Chief Financial Officer

Yeah. Thanks, Mark. I think Josh, the way you should be thinking about us from a balancing perspective is, as you've said, you're right, we do want to reduce our gross debt by roughly $0.5 billion over the next few years. So you're going to see us using our cash in a balanced form and that will make sure that leverage is less than three times. With respect to the Mining Solutions point that you made, I think the way you should be thinking about it is the proceeds of Mining Solutions, of course, give us a bit more degrees of freedom, but the proceeds combined with a strong operating cash flow will be used in line with our capital allocation policy. So you'll see us using it in a balanced form and that is composed of distributions to shareholders, investments, and share buybacks.

Josh Spector, Analyst (UBS)

Okay, thank you.

Operator, Operator

Your next question is from Matthew Leo with Bank of America.

Matthew Leo, Analyst (Bank of America)

Hi. So it looks like price declines in TSS are starting to moderate a bit. Is there any real tangible evidence that the illegal refrigerant trade into Europe is slowing, or is that more a function of just perhaps the shipping constraints we're seeing more broadly? And if it is the former, how do you expect pricing to develop in that segment, and when theoretically, if it's possible, would we see that royalty income flow back to the company or is that still kind of out of the question?

Sameer Ralhan, Senior Vice President and Chief Financial Officer

So, Matt, we remain very positive on our outlook for the TSS business. It's a multi-year secular growth trend with both regional and regulatory drivers. To your question on pricing, we had cost downs in some of our large OEM contracts, mainly on the automotive side, but across the rest of the portfolio, pricing is really driven by market dynamics. As we said earlier this year, we see improving market dynamics in both North America and in Europe. In Europe, if you read the reports you will see that there has been a higher pace of seizures of illegal refrigerants. And as we said earlier this year, the combination of economic recovery, higher base refrigerant prices and enforcement, that really is driving a better margin. So the overall pricing performance in the quarter is a function of better fundamentals in North America and Europe, along with our cost downs that we had in some of our large OEM contracts.

Mark Newman, President and Chief Executive Officer

This is Mark. Just one little point if I could add is, Matt, on the royalty question, I'm assuming you mean royalty income. The way you should think about this is the team can operate the full spectrum of monetization options; this can include royalties, product sales, or bulk sales, so it doesn't have to necessarily come through a single royalty stream. We will optimize across the portfolio.

Matthew Leo, Analyst (Bank of America)

Okay. And one more if I can, did the AVA and flex mix in 2Q shift back to more normal levels? It seemed like 1Q was pretty contract-heavy. And I guess of that 15% quarter-over-quarter increase in TiO2, how much of that was flex volumes?

Sameer Ralhan, Senior Vice President and Chief Financial Officer

So I think what we said on Q1 is we've moved our share of AVA contracts up towards about 70%. We had previously been around 60% and this is really part of our strategy to build out our AVA book. So that's really where we are today. Our expectation is we would like to stay in that range of about 70% because we want to be able to supply all of our AVA customers. Most of these contracts as you know are based on some share commitment so we have to grow with our customers and be able to support them. We are very dedicated to all three of our channels as part of our TVS strategy and we really view Flex and distribution as a way of making sure we can serve all our customers' needs.

Josh Spector, Analyst (UBS)

Okay, thanks.

Operator, Operator

Your next question is from Hassan Ahmed with Alembic Global.

Hassan Ahmed, Analyst (Alembic Global)

Good morning, Mark. Obviously very strong volumes within titanium dioxide, great 15% sequential gains in the quarter. Now we know obviously, you guys had commented on regaining pretty much all your lost market share by year-end. So I'm just trying to figure out where we stand with regards to sort of regaining that lost share, have you guys played catch-up yet? And I guess where I'm going with the conversation is how should we be thinking about volume growth in the back half of the year? Do you feel that you will grow at a more rapid rate in the market?

Mark Newman, President and Chief Executive Officer

I would say, based on our assessment and it is a market that we will have to look at where everyone reports in the quarter, but certainly based on our assessment today we continue to regain share, and in fact, I think it's very likely that we have recaptured the share that was impacted during the earlier transition to TVS. With respect to the second half I will just say, we see strong demand in the second half. Our team is very focused on being able to supply that from both the supply chain and operations perspective going forward.

Hassan Ahmed, Analyst (Alembic Global)

Understood. And now sticking to TiO2, more on the raw material side of things, obviously on the ore side we have seen supply issues be it in South Africa, be it in Sierra Leone and it seems some of these issues will linger on for a while. So how are you guys thinking particularly as you look at 2022 and contracts get reset in the like? How are you thinking about availability as well as pricing for ore? And part and parcel with that, it seems chlorine supply now is becoming a bigger issue as well and chlorine prices obviously marching up as well. So what's the thought process over there and how do you feel about that market as well?

Mark Newman, President and Chief Executive Officer

Hassan, we remain well-positioned with respect to our supply of all of our inputs to meet our customers' needs for 2021 and continue to work on our book for 2022 based on our outlook today. Clearly, some of the supply chain factors, whether it's ore availability or other inputs, are having the impact that we can't optimize our circuit to fully optimize margin, again due to the high demand that we're seeing. Our focus really remains on supplying our customers and this is a huge part of our value proposition and it's a strengthening part of our franchise as we regain share. So this has been the focus. Our view is as things moderate going into the second half and into 2022, some of these disruptions will be transitory and we will be able to optimize our circuit more fully.

Sameer Ralhan, Senior Vice President and Chief Financial Officer

Nothing in the market just grows unbounded. For raw materials, we secure them from a diverse set of suppliers on a long-term contractual basis. We make every effort to ensure that supply is staggered and that includes ore supplies.

Hassan Ahmed, Analyst (Alembic Global)

Very helpful. Thanks so much, guys.

Operator, Operator

Your next question is from Vincent Andrews with Morgan Stanley. Steven Haynes is on for Vincent.

Steven Haynes, Analyst (on behalf of Morgan Stanley)

Hi, this is Steven Haynes on for Vincent. Staying on TiO2, I was wondering if you could just talk a little bit about demand trends in China and whether you are seeing any type of slowdown or if demand is remaining strong and any additional commentary you might have on export outlook would be great.

Mark Newman, President and Chief Executive Officer

On our TiO2 demand, we are seeing strong demand across really all of our product lines and in every region, and we continue to have a great franchise in China which is growing. So with respect to exports from China and Chinese producer market share, our assessment has actually seen some decline this year based on an inability of some producers to fully supply market needs.

Steven Haynes, Analyst (on behalf of Morgan Stanley)

Thank you.

Operator, Operator

Your next question is from Arun Viswanathan with RBC.

Arun Viswanathan, Analyst (RBC)

Great, thanks for taking my question. I'm just curious if you could comment on the disruptions in supply chain issues for TiO2, we've seen the purchasing issues but the impact as that flows through for you guys and would that be positive just given your flexibility to source from several areas. Thanks.

Mark Newman, President and Chief Executive Officer

As we said earlier, we source all of our major inputs very strategically. We have long-term contracts, we diversify our supply base, as Sameer said, and we ensure that they're staggered and well-managed. So we don't have to do panic buying at any one time. And with that, we remain well supplied despite a lot of challenges from a supply chain perspective. The main impact it's having on our business is our inability to fully re-route our circuit to drive production from our lowest-cost plants to optimize margin. But I think in our view these are transitory aspects. We continue to evaluate and the team has just done an amazing job from procurement, supply chain, operations, and customer service to ensure we continue to meet customer needs to the best extent possible.

Arun Viswanathan, Analyst (RBC)

Okay, thanks for that. And just some color over on the mobile side for refrigerants and would you expect some extra catch up next year due to the severe chip shortage over there? Thanks.

Mark Newman, President and Chief Executive Officer

Yeah, that's probably — that's a great question. That's one of the areas where we see some noise in our Q2 results and expect to see some recovery as we move through the rest of this year. Most of the OEMs are indicating to us that to the extent they can, they will try to catch up in the second half of this year and dealer inventories remain extremely low based on all the public data that we're seeing. And so our expectation is the demand from an order perspective will go well into 2022 as OEMs try to rebuild the related inventories and really respond to very strong customer demand for vehicles.

Arun Viswanathan, Analyst (RBC)

Thanks.

Operator, Operator

Your next question is from PJ Juvekar with Citi. Eric Petrie is on for PJ.

Eric Petrie, Analyst (on behalf of Citi)

Hi, good morning. It's Eric Petrie on for PJ. How did Nafion and ion exchange membranes grow in the quarter and first half and are you seeing greater demand pull from electrolyzers or how do you see fuel cells currently?

Mark Newman, President and Chief Executive Officer

We continue to see growth across all of our APM segment including Nafion. As we highlighted in our APM deep-dive earlier in Q2, we see this business in three phases. One, where we are today is a pretty significant turnaround and expansion of margin in the quarter. The second is really a GDP-plus growth through product development across the entire portfolio. And then thirdly a focus on secular growth as we move towards the middle of the decade around hydrogen and 5G. So we're spending a lot of money today in that business on product development and working within the ecosystem of the hydrogen economy to tie ourselves in very well with both the growth in main brands for electrolysis and fuel cells. So a lot of work going on there and we continue to see improvement in that business, but that really becomes a secular growth story starting toward the middle of the decade.

Eric Petrie, Analyst (on behalf of Citi)

Okay, helpful. And just secondly, you announced I think groundbreaking at a new mining facility for titanium ores in Florida, will that increase your backward integration into ores or is that to replace declining production at other sites?

Mark Newman, President and Chief Executive Officer

That's primarily to replenish mines that are at end of life in Florida. So our view continues to be approximately 10% integrated based on our Florida, Georgia complex mining, but these are great ore bodies and provide a strong local supply given all the supply chain risks that we're seeing today.

Eric Petrie, Analyst (on behalf of Citi)

Thank you, Mark.

Operator, Operator

And your final question comes from Roger Spitz with Bank of America.

Roger Spitz, Analyst (Bank of America)

Thank you. Good morning. Two questions. First is Mining Solutions. Would you be prepared to provide us LTM June 2021 sales and EBITDA recognizing that the business is materially improved since 2020?

Mark Newman, President and Chief Executive Officer

Roger, I'm not sure I heard your question. Could you repeat it for me, please?

Roger Spitz, Analyst (Bank of America)

Of course. Would you be able to provide Mining Solutions LTM June 2021 sales and EBITDA?

Sameer Ralhan, Senior Vice President and Chief Financial Officer

Yeah. Roger, why don't I jump in. As you know, we don't disclose that specifically. But overall, if I think about the mining business based on the commentary in Q1 and Q2, yes, we have seen strength in the business on a year-on-year basis, but I wouldn't characterize the increase as so large that it materially changes the multiple. The proceeds that we guided are at 10 times adjusted EBITDA, so that multiple is consistent.

Roger Spitz, Analyst (Bank of America)

Got it. And secondly, you spoke about normal seasonality in Q3 for TiO2, but would you be prepared to give any view of what year-over-year TiO2 volumes for you guys might look like in Q3?

Mark Newman, President and Chief Executive Officer

No, not really. What we've said is normal seasonality, but a very strong second half demand.

Sameer Ralhan, Senior Vice President and Chief Financial Officer

One more point I would add, Roger, is that at this point, the teams are running the circuit flat out given the ore issues some have raised on other calls. But at this point our circuit is running flat out. We'll get into Q4 and have an opportunity to optimize it further as Mark said earlier in the call. So at this point, it's all about meeting the customer's needs that we have.

Roger Spitz, Analyst (Bank of America)

Got it. Thank you very much.

Operator, Operator

I will now turn the call to Mark Newman for closing remarks.

Mark Newman, President and Chief Executive Officer

Well, thanks everyone for being with us today. When I reflect on the quarter and we review our year-to-date, I'm just very thankful to our 6,500 amazing employees for so many achievements: responding to really strong demand, meeting our customers' needs, going after secular growth, especially in our two core businesses, looking for opportunities to selectively resolve legacy liabilities and our progress on our corporate responsibility commitment. And we're doing that in an environment that is challenging, and we continue to delever the company and we continue to return cash to shareholders. So, just really thankful for the focus, the execution, and the accountability of the team. And we remain, as I said earlier, focused on delivering a great 2021. So, thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Please disconnect.