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Chemours (CC 0.10%)
Q2 2022 Earnings Call
Jul 29, 2022, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to The Chemours Company second quarter 2022 earnings conference call. [Operator instructions] Jonathan Lock, senior vice president and chief development officer.

You may begin your conference.

Jonathan Lock -- Senior Vice President and Chief Development Officer

Hi. Good morning, everybody. Welcome to The Chemours Company's second quarter 2022 earnings conference call. I'm joined day by Mark Newman, president and chief executive officer; and Sameer Ralhan, senior vice president and chief financial officer.

Before we start, I'd like to remind you that comments made on this call, as well as in the supplemental information provided in our presentation and on our website, contain forward-looking statements that involve risks and uncertainties, 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.

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A reconciliation of non-GAAP terms and adjustments are included in our press release and at the end of our presentation. As a reminder, our prepared remarks, a full transcript, and an audio recording plus our earnings deck has been posted to our website alongside our earnings release. This morning's call will focus purely on Q&A. With that, I'll turn the call over to our CEO, Mark Newman.

Mark?

Mark Newman -- President and Chief Executive Officer

Thank you, Jonathan. I hope everyone is doing well, and I appreciate you joining us today. Our record-setting quarter demonstrates the strength of the structural growth we are pursuing and our ability to execute even in a challenging supply chain environment. Our four priorities remain improving the earnings power of TT through the cycle, driving secular growth in TSS and APM, managing and resolving legacy liabilities and returning the majority of free cash flow that we generate to shareholders.

We believe these four priorities will generate significant shareholder value over time. With that, Rob, let's open the line for Q&A.

Questions & Answers:


Operator

[Operator instructions] And your first question comes from the line of Arun Viswanathan from RBC Capital Markets. Your line is open.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Great. Thanks for taking my question. Good morning I hope you guys are well. I guess, obviously, some very strong performance here.

Your pricing in TSS was above our expectations and similar to the last quarter. So it sounds like that is persisting. Maybe could you just comment on that first?

Mark Newman -- President and Chief Executive Officer

hey, good morning, Arun. Yes, we had a record-setting quarter in our TSS business also established another new record in APM, which had a record quarter last -- in our Q1 results. And candidly, when I look at our performance, we have industry-leading businesses in all three segments, which all contributed in various ways to our results this quarter. Clearly, the market remains quite dynamic from a refrigerant perspective.

And we continue to see high demand a very dynamic environment in which we are obviously taking advantage of supply demand dynamics in the market. Demand remains strong, as I said, in Q1 with a number of institutional users, whether it's in the office space, hotel space, restaurant space coming back online in a post-COVID environment. And so demand remains strong and we're taking advantage of that. Clearly, as you saw in our TSS results, we also had volume growth, and we continue to believe that we have a decade of growth ahead of us in this business as we see the transition from legacy refrigerants to low global warming refrigerants and our Opteon brand in particular.

So very pleased with the structural growth we're seeing in our TSS and our APM businesses.

Sameer Ralhan -- Senior Vice President and Chief Financial Officer

And Arun, this is Sameer. I just want to one more thing to just what Mark said is, as you look at the pricing across our businesses, especially in TS and APM. As we've talked in the past, there's a big focus around driving the value and use pricing as well. As you know, our products are essential in driving a lot of the secular trends and really enabling them.

So as we kind of look into that and the value that we deliver to our customers. So there's a big focus on the value and use pricing as well, which is -- which you're seeing in the numbers now.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Great. Thanks, Sameer and Mark. And I guess, just for a follow-up, just on the cash flow uses. Could you just remind us of your priorities now, what you'll be funding for the PFAS side as well as potentially some capital return? Thanks.

Mark Newman -- President and Chief Executive Officer

Yeah. We continue to invest in our business for long-term growth, especially in TSS and APM. In TSS, we just announced the investment in Corpus based on our projection of growth and the need for added capacity sort of beyond the 2025 time frame based on our updated projections. We're investing for growth, for example, in APM around semicon where we remain sold out.

You just saw the chips at get passed. So we expect even more demand coming there. So these are high-return growth projects. We're also investing, obviously, in running maintain and sustainability as we move toward meeting our reduction of greenhouse gas target and floor organic compounds.

So we're investing in the business for long-term creation of value and growth. But based on our cash generation, we're also able to allocate and return the majority of our free cash flow to investors or to our shareholders. And we're doing that through a stable dividend and a steady diet of stock repurchases. I'll ask Sameer to comment on the level of stock repurchases year to date.

Sameer Ralhan -- Senior Vice President and Chief Financial Officer

Thanks, Mark. Arun, as you've seen, we've made a pretty steady diet of share buybacks in the first half of the year. That's in line with how, what we have outlined at the beginning of the year, we'll expect to continue to do that. And meanwhile, as Mark said, we're investing in the growth, and we'll strengthen the free cash flow provides us the ability to even chip away on the debt side, you've seen us our commitment to get our debt down -- gross debt down to $3.5 billion, and we continue to make progress on that side as well, while putting money in the escrow as well to continue to strengthen the balance sheet.

So again, the strength of the free cash flow for is the ability to execute on all fronts.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Thanks.

Operator

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

Rock Hoffman -- Bank of America Merrill Lynch -- Analyst

Hi. This is Rock Hoffman on for Matt DeYoe. My first question is, so the EPA, I've set a health advisory for GenX, which I think is the first consideration for GenX, do you think that this is the first step to inclusion of GenX in any pending circular decisions to be made later this year?

Mark Newman -- President and Chief Executive Officer

Yeah. We don't see a tie-in between the health advisory and circular. Clearly, we see a normal -- the normal process, as I understand it, is a health advisory precedes a MCL or drinking water standard. And so clearly, we are challenging the health advisory based on the science.

We -- in our view, both the assessment from a toxicity perspective, assessment from an exposure perspective and the due process that should have been followed in something like this. So we've decided to challenge this particular thing from a legal perspective. But in the quarter, as you saw, we took a charge related to the connection between the health advisory and the consent order in the state of North Carolina. So we believe the science is flawed.

We're challenging it on that basis. But given the connect in our consent order, it gave rise to the charge in the quarter.

Rock Hoffman -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you. And just a quick follow-up. So -- if we look at something like the heat wave in Europe in 2Q, is that driving a lot of volume for your business? And is that some kind of responsive to weather in general?

Mark Newman -- President and Chief Executive Officer

So typically -- it's a great question. Typically, when you have a really warm summer, it can extend the season in terms of either retrofits or upgrades or simply just replacement of refrigerants in existing equipment. Clearly, we see a long-term growth projection in refrigeration as a class, given rising global temperatures, but we also see, obviously, the transition to more sustainable refrigerants where we are a market leader. So the point that you're raising may not create an increased demand, although it will extend the season somewhat that we normally see.

But it really speaks to the long-term growth of refrigerants and our ability to deliver a decade of mid-single-digit growth -- high mid-single-digit growth in this business.

Rock Hoffman -- Bank of America Merrill Lynch -- Analyst

Great. Thank you.

Operator

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

John McNulty -- BMO Capital Markets -- Analyst

Yeah, good morning. Thanks for taking my questions. So obviously, some really chunky margins in the APM segment given your shift toward more value -- high-value kind of solutions. Was there anything unusual about this quarter's strength and maybe we shouldn't necessarily continue.

And I guess, also in your prepared commentary, you kind of highlighted, look, you're in year 1 of a multiyear journey and transformation in this business. Can you give us maybe a little bit of a peak at year 2 and the type of actions that may continue as we look on the growth and on the margin side for the business?

Mark Newman -- President and Chief Executive Officer

Hey, John. Thanks for the question. And when you think of where APM came from a little over a year ago, it's become a real contributor to the total earnings of the company. So we're very excited about where we go from here and the ability to sustain double-digit margins going forward.

What we've said historically about APM is it has very high operating leverage. So clearly, we're sold out on many product lines, so we are having great demand and as a result, really great mix with the business. So I wouldn't point to anything unusual in the quarter. But I think if you look on a full year basis, our guide would still be in the low 20s EBITDA margins on sort of a more modest volume print with normal seasonality.

So clearly, the journey continues in transforming and accelerating this business. And we're really proud of what the teams accomplished. But I'm not ready -- we're not ready at this point to sort of change the margin profile. Sameer, do you have anything else?

Sameer Ralhan -- Senior Vice President and Chief Financial Officer

Nothing, Mark. You laid out pretty well. And, John, as you know, this is a business in which we have the most operating leverage. So as we look at the volume as it came in the second quarter and especially in the first half that drove the margin.

But as we move into the second half with some of the planned turnarounds coming, and some of the seasonality that typically comes in to Q4, I think, overall, for the full year, you'll still see us in the low 20s, and that's a target that we have, as Mark outlined.

John McNulty -- BMO Capital Markets -- Analyst

Got it. Fair enough. And then on the TSS segment, can -- the pricing was obviously really strong, up 39%, almost 40%. Was this largely the Opteon side really kicking in? Or can you speak to the HFC side? Or was it both? Like I guess how should we think about the dynamics that drove kind of that really high level of pricing?

Mark Newman -- President and Chief Executive Officer

Yeah. I would say it's both. We're seeing really good demand -- strong demand for our refrigerants. Clearly, as you know, a lot of the installed base today is based on our legacy refrigerant platform, but we're also seeing increased strength of adoption and speed of adoption of Opteon, which you would expect as base refrigerant prices are higher.

I mean, that's basically how the quota mechanism works. So -- and John, maybe with that, we felt it was time to add some incremental capacity at our Corpus facility. It is, in our view, the lowest cost facility in the world. And as we project out the adoption beyond '25, we thought it was the right time to add some incremental capacity there to that facility.

So again, this speaks to the thesis of refrigeration as a whole is a growing class -- product class. And obviously, within that, the trends for to low global warming refrigerants is really benefiting our business, and we want to be ready to support our customers in that regard.

John McNulty -- BMO Capital Markets -- Analyst

Got it. Thanks very much for the color.

Operator

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

Mike Leithead -- Barclays -- Analyst

Great. Thanks. Good morning, guys. First one, just on the Fayetteville environmental remediation charge in 2Q.

Can you just help us with what the cash spend related to that was in 2Q? And just how we should think about related cash spend over the next 12 months there?

Sameer Ralhan -- Senior Vice President and Chief Financial Officer

Yeah, Mike. This is Sameer. I'll take this one. Essentially, when you look at the charge, right, overall, if you just zoom up and look at the overall spend at the Fayetteville site, roughly $250 million will be spent over the next three years from a free cash flow perspective.

And a big chunk of that, frankly, is the construction of the wall. And as you know, that $250 million is subject to the 50% recovery from DuPont and Corteva as per the MOU agreement that we have with them. And beyond that, the remaining $260 million is really a long spend. That's really maintenance, monitoring, and operations of the off-site and on-site operations over the next 20 years.

So there's a very slow burn on that one. And as we're going to lay that out, that's roughly $16 million per year among all of us and half of that is recoverable from DuPont and Corteva per MOU, so roughly $8 million a year. So it's really the upfront, the construction of the wall, but beyond that, these are pretty small numbers.

Mike Leithead -- Barclays -- Analyst

Got it. Makes sense. And then secondly, for TiO2, you obviously talked about or constraints through the fourth quarter. I guess if we just take a step back, bigger picture in a world where we're probably a bit constrained in ore.

Can you just talk about your comfort in your availability and sourcing for ore over the next few years, say, to commence.

Mark Newman -- President and Chief Executive Officer

Yeah. We continue to look for opportunities to strengthen our ore sourcing. Clearly, we're the largest commercial buyer of ilmenite. So we do have a significant market presence.

We work with all the strategic or suppliers. We also work with some of the more junior miners in the space. So we're sitting here today, our view is the or constraints will relieve in Q4, consistent with our prior outlook. And again, we remain confident that through a whole host of market mechanisms, we can bring on more ore supply.

As I said in Q1, the world is not short of titanium-bearing ores, but clearly, we need more mining to be brought online. And we're confident, given the market dynamics and given our presence in the market that's very achievable.

Mike Leithead -- Barclays -- Analyst

Great. Thanks.

Operator

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

Josh Spector -- UBS -- Analyst

Yeah. Hey, guys. Thanks for taking my question. Just going back to TSS and focusing on the volume side, at least versus our estimates, that there was some of the bigger surprise.

So curious if you could comment on the 15% growth where you saw the biggest opportunity there by market, especially given automotive down year over year. That's a pretty impressive number. And how do you think the second half develops at this point? Were there earlier sell-in or anything else you kind of note that you're seeing in the second half that may be similar or different? Thanks.

Mark Newman -- President and Chief Executive Officer

Yeah. I'd say the second half, we've reminded folks all year is subject to normal seasonality. You normally see a lot of demand in Q1 and Q2, as I said earlier, with a hot summer that could make Q3 marginally better. But clearly, we expect normal seasonality in the second half where it would be weaker.

On auto, which you mentioned, we see auto consistent with IHS forecast being up slightly year over year. I think IHS is around 3% or 4%. So our full year is done that outlook. The auto industry remains very challenged from a supply chain perspective.

So that's baked into our numbers. But the big driver of volume for us is really the transition on the stationary side. As I said in Q1, we have signed up with major OEMs of stationary equipment from chillers to cooling equipment for supermarkets, to air conditioning. And so that adoption is going quite well.

Clearly, with both F-Gas in Europe and now AIM in the U.S., OEMs have two very large markets to serve that are moving to low global warming. So it's really on that basis that we're seeing this kind of growth. And again, that kind of growth is implied in the investment we're making at Corpus where we see a decade of growth related to this transition.

Josh Spector -- UBS -- Analyst

Thanks. And just on the cost side, where you guys talked about higher raw material costs for the second half. Is that in some of your back integrated products? Or is that some purchase products? I'm curious if you could comment on how you see the second half transpiring? Is there another step up we should be considering into 2023? Or is it more transient than that?

Sameer Ralhan -- Senior Vice President and Chief Financial Officer

OK, Josh, this is Sameer. Let me take that one, and Mark will jump in. Essentially, if you look at the cost side, into the second half, yes. Some of it is just really things moving to the inventory, be it through the -- our own, manufacturing are some of the components that we purchase from other places.

And then you're going to see that dynamic you receive, frankly, in -- both in the TSS and APM side as well where the supply chains tend to be a little longer, right? So as we've kind of told in the past, in the polymers, materials can sit through the inventory as they go through different components almost six months or more, right? So you're going to see some of the stuff on the raw material inflation side that happened early in the year, kind of really channeling through the system and showing up in the second half. So that's a dynamic for both the segments.

Josh Spector -- UBS -- Analyst

OK. Thank you.

Operator

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

Vincent Andrews -- Morgan Stanley -- Analyst

Hi, guys. [Audio gap] sold through AVA contracts currently. And you've talked about that kind of being at the right level in the past. My question is that kind of given the uncertain macro outlook, is there any desire to possibly increase that portion? Or is that still your target for now?

Mark Newman -- President and Chief Executive Officer

No. Clearly, as we've said in the past, we have what we consider to be our best book of contracted business. And we target a level of about 70%. And that allows us in a tight market like we've been experiencing the ability to ensure we can meet all of our customer needs.

And we -- I'm really proud of our TT team and how they've achieved very, very high rates of delivery to promise in the upper 90s to be honest, despite some of the ore challenges we've had this year. Going forward, I would expect that number to remain around the target. And clearly, it will modulate depending on demand from contracted customers and demand in the spot market. So I think we -- our view is this is a really prudent level.

going forward, and I don't see any fundamental change. To the point you mentioned about seeing some potential weakness. Clearly, this is a strength for the franchise as we go. If we see any further weakening, we're seeing some weakness today and in parts of Europe and in AP, especially in China.

But to have this strong book of business, if you see any global macro weakening from here is a really great thing. And the team is very focused on how we modulate the circuit to optimize the needs of the market going forward with this contract is in place. So -- it's a great franchise, and we're really proud of what we've built here.

Vincent Andrews -- Morgan Stanley -- Analyst

Got it. And then I guess, just as, I guess, a little follow-up. I mean, some coatings players have kind of talked about destocking opportunities, both for retailers as well as within their own inventories on the TiO2 side, which kind of, I guess, seems to run opposite to what you and other TiO2 producers have been talking about over the past few quarters. Could you give us a little update on how you guys are thinking about the channel inventory situation right now?

Mark Newman -- President and Chief Executive Officer

Yeah. We've also read some of the comments around destocking, I would say, particularly in EU and Asia. Clearly, the way we supply our customers is, they don't have an incentive to build massive inventory given our commitment to supply and the pricing certainty that they enjoy. So our assessment is inventories are still relatively low.

They may be better than they were at the beginning of the year. And the consumer, as we look at the data around U.S. consumer remains relatively strong, even though they may be spending a little bit more money on travel at the moment. So net-net, we feel really good about the strength of our contracts and the relationships that we have with a large number of strategic users of our pigment both in the coatings segment and in the laminate space.

Vincent Andrews -- Morgan Stanley -- Analyst

Got it. Thank you.

Operator

[Operator instructions] Your next question comes from the line of Laurence Alexander from Jefferies. Your line is open.

Sameer Ralhan -- Senior Vice President and Chief Financial Officer

No, I think Mark, you said it right. It's really around the Europe and Asia in pockets, frankly, I mean the APM and TS businesses -- TSS businesses continue to execute well, execute great, and we see tremendous opportunities. And we really watching the macro like everybody else, as you said.

Kevin Estok -- Jefferies -- Analyst

Thank you.

Operator

Thank you. And there are no further questions at this time. Mr. Mark Newman, I turn the call back over to you for some closing remarks.

Mark Newman -- President and Chief Executive Officer

Well, listen, thank you, all, for your interest and continued support of Chemours. I'm immensely proud of what the team has accomplished, especially in the last year. As I look across our three businesses, how we've met the challenges on the ore side, for example, in TT, but also the long-term growth that we're seeing in TSS and APM. And we've talked a lot about this to you in our investor meetings, and we're delivering against that commitment to drive growth in those two businesses.

So we're immensely excited about the future and where we can take the business from here and look forward to meeting with you in the coming weeks as we get out on the road. Take care.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Jonathan Lock -- Senior Vice President and Chief Development Officer

Mark Newman -- President and Chief Executive Officer

Arun Viswanathan -- RBC Capital Markets -- Analyst

Sameer Ralhan -- Senior Vice President and Chief Financial Officer

Rock Hoffman -- Bank of America Merrill Lynch -- Analyst

John McNulty -- BMO Capital Markets -- Analyst

Mike Leithead -- Barclays -- Analyst

Josh Spector -- UBS -- Analyst

Vincent Andrews -- Morgan Stanley -- Analyst

Kevin Estok -- Jefferies -- Analyst

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