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spk05: remind everyone that this conference call is being recorded. I would now like to hand the conference call over to Brandon Onchess, Vice President of Investor Relations for Chemours. You may begin the conference.
spk08: Good morning, everybody. Welcome to the Chemours Company's second quarter 2024 earnings conference call. I'm joined today by Denise Dignam, Chemours President and Chief Executive Officer, and our Chief Financial Officer, Shane Hostetter. Before we start, I would like to remind you that comments made on this call, as well as in the supplemental information provided on our website, contain forward-looking statements that involve risks and uncertainties as described in Chemours' SEC filings. These forward-looking statements are not guarantees of future performance and are based on certain assumptions and expectations of future events that may not be realized. Actual results may differ and Chemours undertakes no duty to update any forward-looking statements as a result of future developments or new information. During the course of the call, we'll 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 press release issued yesterday. Also, we posted our earnings presentation to our website last evening. With that, I will turn the call over to Denise Dignam.
spk02: Thank you, Brandon, and thank you everyone for joining us. Before we get into our call this morning, I'd like to begin by welcoming a new member of our executive team. I'm excited to introduce Shane Hostetter as our new Senior Vice President and Chief Financial Officer. Shane brings over 20 years of experience to the leadership of our finance function, having previously served as a CFO of Quaker Helton. While Shane has only been with us for a month, he's already having a positive impact. We are happy to have Shane on board with the strong talent that he brings, solidifying our leadership team. During this transition, Matt Abbott, who served as our interim CFO, has been key in keeping stability and continuity within our finance team. Matt will continue in a leadership role within Chemours, returning to his previous position of Chief Enterprise Transformation Officer. I would like to express my sincere gratitude to Matt for his tremendous efforts and his leadership during a critical time for our company. In our discussion this morning, I will talk about our overall performance and some of the recent business challenges we faced and overcome. Then I'll hand the discussion over to Shane, who will go over our financial performance. I'll conclude by sharing our outlook for the third quarter. We will then close the call with a Q&A session to address your questions. In the first quarter, we faced many challenges and the second quarter continued along that course. Consistent with the demonstrated resiliency of our people, our team didn't shy away. putting forth tremendous collaboration and leadership in the face of uncertainties, controlling what we could control as we dedicated our focus to driving business performance. As the Comores leadership team faced these challenges, we did so with a renewed set of core values that were developed with inputs from across the organization. These values are the foundation of our culture, reflecting who we are as a company and what we believe. They are a key part of our formula for long-term success. They are simple, plain spoken, and are present in every aspect of how we work. Safety, integrity, partnership, ownership, and respect. As you are aware, we recently faced a disruption in our titanium dioxide production at our Altamira, Mexico site due to a severe drought in the region. While the drought had pronounced business implications, it was also very personal to our team. This was a sudden, extreme shift in basic needs for our people and the communities where they live. In response, we worked quickly to provide substantial support for those in need. I was amazed at how quickly our people organized and partnered to promptly supply potable water, food, and other essential needs to those impacted. We formed a cross-functional team that conducted an ongoing assessment of business impacts through scenario planning. Together, we determined the best way to meet customer demand. The duration of the downtime at our site was uncertain, and the team met regularly to ensure we upheld our commitment to our customers by optimizing our TIO2 production circuit. These plans required collaboration and agility with our TT employees working diligently around the clock with a deep sense of ownership. We take pride in our reputation as a highly reliable TIO2 supplier, and we believe our actions are a clear reflection of this. It was through these efforts that we were able to exceed our previous volume expectations with a 16% volume increase from the first quarter. This simply was not possible without the fast action, hard work, and excellent collaboration of our TT employees, our customers, and our partners in the community and region. For this, I thank our team. Because of this unexpected production outage during the second quarter, we incurred about $8 million of one-time cost. We anticipate this disruption will also affect our results for TT in the third quarter. which I will explain more when we talk about our outlook later. Even with these difficulties, our TT team continues to prioritize our strategic relationships with customers and to execute our TT transformation plan, targeting $125 million in cost savings in 2024. By the end of the second quarter, we have reached approximately $100 million in savings compared to the prior year. offsetting price declines. For the rest of the year, we anticipate continuing to make strong progress against our plan with year-over-year comparative savings slightly less than the first half, considering that we commenced our transformation plan in the middle of the third quarter last year. Now let's talk about TSS. In TSS, we continue to experience a seasonal demand pattern Although there was a slower start to the cooling season in the northern hemispheres, it has quickly warmed up. However, even with this elevated summer season, the market is still affected by excess HFC inventory. As we discuss our results for TSS's refrigerants, we have updated our sales reporting this quarter to break our refrigerant sales into two separate product categories, Option refrigerants, reflecting our low global warming potential offering, and Freon refrigerants. For the second quarter, Option refrigerants continue to see strong adoption, reflecting double-digit quarterly sales growth, both sequentially and year-over-year, while approaching 60% of our total refrigerant sales. This growth shows the effects of the U.S. AIM Act and EUF gas regulations that have progressively lowered the production and importation of high global warming potential refrigerants since they have gone into effect. Our Freon refrigerant sales for the second quarter were generally flat from the first quarter with year-over-year double-digit declines driven by lower volumes under those regulatory step-downs. Weaker volumes in Freon refrigerants were further compounded by softer HFC pricing, primarily due to elevated market HFC inventory levels and a slower start to the cooling season. We attribute these HFC inventory levels to higher than expected pre-AIM inventory builds in the U.S., and we continue to believe that these market inventory levels will remain elevated through the rest of the year. To further underscore, as the U.S. AIM Act enacts its regulatory phase down, we are observing strict adherence and enforcement concerning the regulation. These efforts are evidenced through the U.S. Department of Commerce's ongoing work to mitigate circumvention of duties, and the U.S. Customs and Border Patrol's continued activities to restrict illegal importation of refrigerants. At APM, we see the continued macro recovery across APM's portfolios, with sequential double-digit top-line growth in both the Advanced Materials and Performance Solutions portfolio, in line with expectations. Our corporate expenses were generally in line with expectations as well. While the second quarter provided us with various complex business dynamics, the team has remained focused on business performance while remaining grounded in our core values. Before I hand the call over to Shane, I want to recognize our team by highlighting a couple recent business accomplishments. First, we recently received our permit to expand production of Teflon PFA resin at our Washington Works manufacturing site in West Virginia. This was a significant undertaking for the Chemours team. Our ability to secure a permit was critical as our customers rely on us as the only US-based supplier of this material, which is essential for the fabrication of semiconductor chips. I will speak more to the opportunities we see with Teflon PFA later. And second, in June, we released our seventh annual sustainability report, Partnering for Progress, which outlines Camorra's progress towards meeting our 2030 corporate responsibility commitment goals. Our commitment to sustainability as well as responsible manufacturing is unwavering and is reflected in the significant progress that we continue to make in meeting and exceeding our commitments to reducing emissions, innovating, to achieve more sustainable products and investing in the communities where we operate. Specific to our sustainability initiatives, I'm proud to highlight the approval by SPTI, the science-based targets initiative of our near-term target to cut our scope one and two greenhouse gas emissions by 60%. In addition to a new scope three emissions target to reduce emissions by 25% per ton, of production by 2030. This rigorous 22-month long process required close engagement between Chemours and SBTI, including a thorough review of our underlying plans, calculations, and methodologies. The approval by SBTI reflects our commitment to let science inform and guide our actions as we continue to make a meaningful impact in the global fight against climate change. I'd now like to hand it over to Shane to walk through our financial results.
spk07: Thank you, Denise, and good morning, everyone. First and foremost, I'm very excited to join Chemours as our new CFO. In my early time with Chemours, I've been impressed with the unified direction and the commitment to success of all our people, and I'm eager to help move our strategic goals forward to create more value for our shareholders. I joined Comoros because of its industry-leading portfolio, its operational expertise, and its resilient culture. I am proud to say that my expectations are aligned with what is being executed. I am confident that the drive of our people, along with our vast portfolio of industry-leading performance chemicals, will ensure the successful delivery of our long-term growth initiatives. Moving into our financial results, our consolidated net sales for the second quarter were approximately $1.5 billion. which were down 6% year over year. This sales decline was largely driven by lower pricing of 6% and portfolio impacts of 1%, which were partially offset by a 1% increase in volumes. Our consolidated adjusted EBITDA decreased from $324 million in the prior year to $206 million for the current quarter. This decline was driven by lower pricing, cost absorption free on production, and currency impacts. These headwinds were partially offset by ongoing TT Transformation Plan benefits, which strategically align with our focus on enhancing TT earnings and mitigating cyclical impacts. Second quarter adjusted EBITDA also includes a $6 million unallocated item related to third-party costs associated with the TT Transformation Plan. We anticipate this amount to approximate the same amount in the third quarter. Our consolidated adjusted net income was $57 million in the current quarter compared to $167 million in the prior year. And our adjusted net income per diluted share was $0.38 in the current quarter compared to $1.10 in the prior year. Our corporate expenses were $77 million in the second quarter, which aligned with our expectations. This $14 million increase in corporate expenses compared to the prior year was primarily due to costs associated with addressing our material weaknesses in internal controls over financial reporting, and the implementation of recommendations from the Audit Committee's internal review. In total, these costs approximated $11 million in the quarter, with the remaining increase in corporate expenses largely driven by additional litigation costs. Turning to our business segment performance, starting with TT. In the second quarter, TT's net sales decreased 5% year-over-year to $673 million. This decline was primarily driven by a 7% decrease in price and a 1% impact from foreign exchange, which were partially offset by a 3% increase in volumes. Despite the unplanned downtime at our Altamira, Mexico manufacturing site due to the extreme drought in the region, our volumes still grew ahead of expectations. This was largely due to robust demand in Asia Pacific and North America compared to the prior year. While TT's second quarter adjusted EBITDA decreased 8% to $80 million compared to the prior year, the segment's adjusted EBITDA margin remained flat at 12%. TT's experienced the local pricing declines that I mentioned earlier, as well as currency impacts, but this was partially offset by reduced costs from the TT Transformation Plan, which continues its strong execution and is outpacing expectations. On a sequential basis, TT's net sales increased by 14%, which is driven by a 16% rise in our volumes, a strong result given the headwinds we faced due to the Altamira downtime I mentioned before. TT's pricing and foreign exchange impacts each posed a 1% headwind, sequentially. Moving now to our TSS segments. For the second quarter, TSS's net sales were approximately $513 million, a 2% decrease from the prior year. This decline in net sales was driven by lower pricing of 4%, which was partially offset by a 2% increase in volumes. As shared earlier, TSS's decrease in pricing was driven by our Freon refrigerants portfolio, which was influenced by elevated HFC inventory levels from excess pre-AIM inventory builds prior to 2022. as well as a slower start to the cooling season. And, to a lesser extent, we did experience lower pricing in our foam, propellants, and other portfolio. TSS's volume growth was driven by our Option refrigerants portfolio, which was fueled by continued adoption in stationary as well as transition in the automotive air for market. Also, our Option volume growth was complemented by robust propellant demand in our foam, propellants, and other portfolio. In the second quarter, TSS's adjusted EBITDA decreased 25% year-over-year to $161 million, resulting in a lower adjusted EBITDA margin of 31%. This decline was primarily driven by lower pricing, increased costs to secure additional near-term quota allowances in connection with the U.S. EPA's technology transitions ruling, and reduced fixed cost absorption in our Freon refrigerants production in connection with lower HFC demand due to regulatory step-downs in the United States and the EU. On a sequential basis, TSS's net sales rose by 14%, which was driven by a 17% increase in volumes, partially offset by a 3% decline in pricing. The increase in volumes reflects seasonal trends in refrigerants, as well as stronger propellant demand in the foam propellants and other portfolio, sequentially. Now, turning to APM. Net sales for APM were $339 million in the current quarter, which was down 12% compared to the prior year. This decline was due to decreases in price, volume, and currency of 7%, 4%, and 1%, respectively. The price decline was primarily influenced by soft market dynamics across the advanced materials portfolio, as well as shifts in product mix within the performance solutions portfolio compared to the prior year. APM's volume decline was concentrated in the advanced materials portfolio, which reflected weaker demand in economically sensitive end markets. APM achieved adjusted EBITDA of $45 million in the second quarter, which marks a significant decline compared to the prior year. The decrease was primarily driven by lower pricing, currency, and impacts from other income. These additional items also impacted APM's adjusted EBITDA margin, which decreased 8 percentage points to 13%. Sequentially, APM's net sales increased by 13%, which was driven by a 16% rise in volumes, but tempered slightly by a 2% decline in pricing and a 1% currency headwind. APM's higher volumes were largely driven by a modest recovery in economically sensitive end markets across the portfolio. Separately, the company's other segment had net sales and adjusted EBITDA of $13 million and $3 million, respectively, in the current quarter. Turning now to our balance sheet and liquidity. As of June 30th, 2024, our consolidated gross debt was $4 billion and we have approximately $1.5 billion in liquidity, which includes $604 million in unrestricted cash and cash equivalents and $852 million in revolver capacity. Our net leverage ratio increased to 4.4 times in the second quarter. While our net leverage ratio remains elevated due to the market cycle, we remain in compliance with our covenants. and we did not draw on our revolver during the quarter. The company used 620 million of operating cash flow in the second quarter of 2024, which was 687 million more than the same quarter last year. As we anticipated, this higher cash usage was due to the release of 606 million in restricted cash and cash equivalents, which was reflective of the company's 2023 contribution to the Water District Settlement Fund, including interest. The settlement became effective in May 2024, where the company no longer maintained its reversionary interest in the fund. The company spent $73 million on capital projects in the second quarter of 2024, generally in line with expectations, compared to $58 million in the prior year, with the difference in spending being driven by overall payment timing. Also, the company distributed $38 million in dividends to its shareholders in the quarter. We anticipate our unrestricted cash and cash equivalents will remain at a similar level for the rest of the year. We project some working capital inflows in the second half as we work to reduce inventory and we focus on timely payments from our customers. Overall, we are confident in our current liquidity as well as our future cash flow capabilities, which will assist with creating further balance sheet capacity. As we look ahead to the rest of 2024, we do not anticipate any liquidity concerns that would impact compliance with our banking covenants. Related to capital allocation, consistent with our values and sustainability goals, I wanted to take a moment to highlight our key priorities as we remain focused on driving shareholder value. First, we will pursue focused investments in growth initiatives to enhance our portfolio. Second, we are committed to improving our leverage profile. Third, we will responsibly resolve contingent legal and or accrued environmental liabilities on terms and bases deemed to be in the best interest of the company and our stakeholders. And finally, and equally important, we will provide cash to our shareholders through our quarterly dividends. Separately, as an update to the remediation of our material weaknesses, we have provided disclosure in item 4 of our Form 10-Q. Though, I want to highlight a couple items. During the second quarter, we completed the modification of processes and procedures with respect to managing ethics complaints. we implemented enhancements to our controls over the verification of vendor master file changes to prevent unauthorized cash disbursements. These enhancements require a sufficient period of time to evaluate and test whether the controls are operating effectively. Overall, we continue to dedicate significant resources towards these efforts and remain committed to their timely remediation. To conclude, while the quarter's results were not what we wanted, I am encouraged by several aspects of our performance. TT had solid demand and continues to have strong execution against this transformation plan. TSS saw double-digit growth in Option year over year. And macro recoveries in APM are providing solid business momentum. With this foundation on top of our focus on sustainability growth initiatives, I am confident that our approach is the right foundational strategy to create shareholder value. Denise, back over to you.
spk02: Thank you, Shane. Let's look ahead to the next quarter. Consistent with recent quarters, we are providing a view of the upcoming quarter. On a consolidated basis, we expect a sequential low to mid single digit decline in net sales continuing into the third quarter, with a consolidated adjusted EBITDA anticipated to be down high single digits. Our sales forecast reflects the impact of unplanned downtime at our TT site in Altamira, Mexico. seasonality paired with weaker Freon refrigerant pricing in TSS, and partial offsets from a continued modest recovery in APM. For the third quarter, these sales assumptions anticipate the continued strong adoption of Option refrigerants, projecting double-digit year-over-year growth, and APM's performance solutions portfolio showing strong year-over-year growth. In TT, While we haven't seen major catalysts indicating a broad TIO2 recovery, demand remains stable as we enter the third quarter. Had we not experienced the downtime in the second quarter due to the severe drought in Altamira, we believe our third quarter sales will be flat to the prior year. Considering adjusted EBITDA for TT, we also anticipate that one-time costs associated with the production downtime are expected to range between $15 and $20 million in the third quarter. We do not expect the impact of the Altamira downtime to extend beyond the third quarter. We anticipate a sequential reduction in corporate expenses in the third quarter as we make thoughtful choices on spending and as we make demonstrable progress on the remediation of our material weaknesses and internal controls over financial reporting and the adoption of other recommendations from the Audit Committee's internal review. As we move into the second half of 2024, I want to reiterate my priorities to drive shareholder value. One, take costs out in APM, building on what we have done in TT, as well as our functional and corporate overhead. And two, invest in our businesses where we have significant opportunities to grow. We believe that these priorities are essential for Comor's future success, leveraging our operational expertise and innovation edge to our advantage across our businesses. Leaning into our advantages in innovation, one of the key growth markets in front of us is in supporting the advancement in artificial intelligence and high performance computing. Both our TSS Option refrigerant and APM performance solution portfolios have opportunities in this space, which is driving our focused investment in these businesses. Last quarter, in my prepared remarks, I mentioned the advantages of Option 2P50, a new fluid for use in two-phase immersion cooling. With liquid cooling being a more effective means to cool data center hardware than air cooling, We believe Option 2P50 is an innovative solution that outperforms both single-phase and direct-to-chip alternative liquid cooling technologies. Option 2P50 immersion cooling provides clear benefits. The potential to reduce the space needed for data center facilities by approximately 60%, enabling cooling energy savings of up to 90%, and nearly eliminating water consumption in most climates. These benefits deliver tangible cost savings, which was evident in a recent study that we participated in with LiquidStack and Cisco Hennessy, which showed that Option 2P50 Immersion Cooling Solution had the lowest total cost of ownership compared to the other cooling options. Option 2P50 had a cost advantage of up to 40% over the next best liquid cooling alternatives. We continue to plan the launch of Option 2P50 by mid-2026 and see this as an opportunity to meaningfully participate in the overall data center liquid cooling market. As we progress towards commercialization, we remain focused on ensuring that our product is safe for use throughout its life cycle and meets the appropriate regulatory registration requirements in the markets that we want to serve. We are in the qualification process with key hyperscalers, server, and chip manufacturers who see Option 2P50 as an essential solution for efficiently and effectively cooling server chip hardware, specifically high-performance chips and GPU hardware that will be instrumental in supporting artificial intelligence computing sources, which are more energy-intensive in nature. These qualification periods take time to complete, We look forward to providing updates as we progress in future periods. Our performance solution portfolio in our APM segment is also enabling the high-performance computing market with our Teflon PFA resin, a critical material for semiconductor manufacturing, which has expanded opportunity in the U.S. enabled by the U.S. Chips and Science Act. As the only U.S.-based PFA resin manufacturer, a secure domestic semiconductor supply chain is not complete without our high-grain Teflon PFA resin. Teflon PFA is an absolute requirement to avoid contamination in the chip manufacturing process. It's used throughout a fab's infrastructure from fluid delivery and filtration systems to flow meters and wafer handling. In other words, It is our high-purity resin that enables the ultra-clean environments needed for advanced chip production. Teflon PFA helps to ensure fab reliability and uptime, as well as the safe, high-yield production of semiconductor chips. To emphasize our focus on investing for growth in this area, as I mentioned earlier, we recently obtained our permit for our newly finished Teflon PFA production expansion at our Washington Works manufacturing site in West Virginia. This has been a key priority for APM leadership team over the last year. And I want to acknowledge those on the core team who worked hard to complete this project and the strong support we received throughout the value chain. Our Teflon PFA product continues to be sold out and we look forward to starting operations, which we anticipate will commence by early September. We're excited about being able to serve our customers in this market. and the long-term growth prospects for Teflon PFA. At Chemours, we are passionate about driving shareholder value through innovation, specifically contributing to advancements in artificial intelligence and high-performance computing. These innovative advances are just a few of the developments in TSS's Option refrigerants and APM's performance solutions portfolios that are driving growth. In closing, While we exit a challenging quarter, we continue to build upon strong business fundamentals by solidifying our management team, continuing to drive costs out of the business, investing for growth, pursuing disciplined capital allocation, and building upon a corporate culture that reflects the core values that I highlighted earlier. It is our people that make Chemours who we are And I want to thank our dedicated global team of 6,100 employees for their commitment to our customers and executing with operational excellence. We will now open the lines to take your questions.
spk05: At this time, if you would like to ask a question, press star then the number one on your telephone keypad. We ask that you please limit your questions to one and one follow-up. Our first question will come from the line of John McNulty with BMO Capital Mortgage. Please go ahead.
spk11: Yeah, good morning. Thanks for taking my question. And Shane, congratulations on the role. Look forward to working with you. Thanks, Jeff. So I had a question on the TSS business. Obviously, the freon drag in terms of pricing around some of the inventory, I don't know, I guess pre-stocking ahead of, and now we're kind of dealing with the D-stock, clearly putting some real pressure on the profitability of the business. I guess, It sounds like you have some conviction that this is going to end at the end of the year. I guess, can you help us to understand that a little bit better and how to think about the inflection point coming? And then I guess, in addition to that, maybe just a follow-up question would be, in the past, we've been pretty used to seeing Comores sell your allocations, and yet this time around, you actually ended up having to buy extra allocation and there was a cost to it for you. So, I guess, can you help us to understand that dynamic and what the magnitude of that actually was?
spk02: Yeah, for sure. Thanks, John, for the questions. You know, first of all, yeah, we are seeing, you know, significantly depressed pricing in HFC inventories that are at a high level. And, you know, we are, you know, with the quota step-downs that are, you said, you asked, we have confidence and this is going to end. You know, with the quota step-downs that are occurring, that will be occurring, we definitely see that happening. You know, we have experience with that, with R22, and we're also seeing it in Europe. You know, it's a smaller part of our market, so you don't see that as dramatically, but it's absolutely happening in Europe. It's really... It's really part of the mechanism. The phase down is really working. And I want to bring us back to, you know, what our strategy is. We're really about driving, you know, our Option growth. And we had year-over-year double-digit growth and also sequential double-digit growth. And we've had no price deterioration. So when you think about that, right, we've always said that we have stepped down in pricing when it comes to auto OEMs. So you can see the impact of other segments coming in like stationary and automotive aftermarket, which I think is, you know, a really big statement. So your other question was around just quota and why, you know, this year, and I would say this is a this year issue. Quote is always a part, as you said, we sell, we also buy, we have bought in the past. This year is different and it really is caused by the technology transition delay of a year. So when you think about what our plan was coming into the year, that really flipped because you know, while we're still seeing tremendous growth, the growth actually would have been stronger. But we're seeing that, you know, there is still a demand for HFCs. And for every, you know, for every unit of Option, you actually need to, you can, for every four units of Option, it actually is one unit of Freon. So it's a massive impact. So in order to meet customer demand, we're out in the market and we bought quota in the second quarter, and we believe we'll be doing that in the future in this year. But again, it's really tied to this delay in the technology transition.
spk11: Got it. Okay. No, that's helpful. And then Maybe we can just shift over to the TIO2 platform. So, you know, obviously a lot of noise around Altamira, but it does seem like the overall TIO2 markets are actually, you know, if you took Altamira out of the equation, you actually did a little bit better than maybe expected. So I guess, can you speak to the markets that you're seeing right now and how you think they progress over the next 12 months, just given, you know, what should be in improving coding's market as we look out over the next 12 months, potential for tariffs in certain regions. I guess, can you help us to think about how you see that market playing out over, again, the next 12 months?
spk02: Sure. Yeah, I mean, right now, what I would say is we see stable demand. And actually, you know, going into the third quarter, We could have sold more, and we believe we could have sold similar sales as we did in the third quarter of 23. We definitely see the bottom is here. We have confidence with the potential for a Fed interest rate cut in September, and we think that's going to bring some real confidence to consumers as we end the year. We don't see a major catalyst right now, but as I said, the potential interest rate drop. Also, the tariffs in Europe are also going to help us as well. There is a lot of inventory that was imported ahead of those, but we definitely see as we end the year, we're going to start seeing some momentum in Europe as well.
spk11: Great. Thanks very much for the call, Eric.
spk05: Our next question comes from the line of Mike Leadhead with Barclays. Please go ahead.
spk10: Great. Thanks. Good morning, team. And I just want to say I appreciate the increased disclosure around the T&SS product breakout starting this quarter. That's very helpful. First question, I want to follow up on the HFC market. Can you just help us better contextualize HFC pricing? It's obviously tracking lower. than where people thought, but just where are we in pricing if you were to look over the past, I don't know, couple years or so, where are we relative to the historical context, and how comfortable are you that this starts to bottom out here as we go into the back half of this year?
spk02: Yeah, I mean, pricing is elevated, I'll say, versus where it's been in prior years, but significantly lower than our expectations. You know, as I said in response to John's questions, we definitely see that there's going to be a turnaround there. I mean, the whole, you know, philosophy around the quota reduction is going to drive, you know, more scarcity when the quota is reduced. So we definitely see that turning around. It's been a pattern. You know, we saw at R22, we're seeing in Europe now where Europe is more advanced in in the phase down.
spk10: Great. That's helpful. And then I just wanted to ask on debt and leverage, maybe for Shane. Can you speak to the cash you expect to generate in the back half of this year? And just where do you big picture want to get with leverage before utilizing cash for, say, some more discretionary areas?
spk07: Yeah, thanks, Mike. As I indicated in the script, we see Cash balance is being stable in the latter half, similar to that side, indicating some cash inflows from working capital as we work to improve collections, as well as working down some of the inventory on that side. As a long-term target, we are targeting to get below three times sustainably, but such will take some time as we improve our earnings coming out of where I would say is near trough levels, and hopefully the markets improve here in the near future.
spk01: Great. Thank you.
spk05: Our next question comes from the line of John Roberts with Mizuho. Please go ahead.
spk06: Thanks. Congrats on getting the Teflon environmental permit here. Before you launch Option P250 in, I guess, mid-2026, are you going to need a similar permit? Are we going to go through a similar type process for that?
spk02: Yeah, hey, thank you for the congrats on the PFA permit. It's definitely really exciting for us. Related to the Option P250, clearly we're going to need permits, you know, wherever we want to sell. We're going to need to get product registration and permits. So, you know, there are things that we're working on in, you know, all the countries where we want to sell.
spk06: And then Altamira is a pretty important asset. Is there anything you can do to make that plant more resistant to further droughts?
spk02: Yeah, good question. I mean, hey, we never take a good crisis to miss a great crisis to improve. So we actually did substantial work as we entered this crisis to look at how we can reduce our need and our water usage. So really great efforts by our engineering team. So that's one thing, and we are continuing to work on that. The other thing is we have some other engineering solutions that we're pursuing locally ourselves and also with the local government. And then thirdly, we do have options relative to supply chain you know, what kind of inventory we keep, you know, during those periods. So we're going to be deploying all those strategies. It's certainly a key focus for us to never have that situation again.
spk06: Great. Thank you.
spk05: Our next question comes from the line of Josh Spector with UBS. Please go ahead.
spk01: Hi, good morning. I had a couple questions to follow up on TSS. I guess I'm somewhat confused with the commentary around fixed cost absorption being a headwind in Freon. Basically, you're saying demand is slightly higher than you expected in your buying quota. On the other hand, inventories are higher. And I guess your comments seem to indicate that you're saying it's down because of the step down. I guess wouldn't it have been a planned impact that you could try to mitigate or work through? So can you talk through what's going on there and maybe help size what that impact is to Q3Q?
spk02: A fixed cost absorption for Freon MY, that is a headwind. Is that correct? Yeah, I mean, just because when we say that demand for Freon is year over year, it's actually down, right? As you think about the quota step down, it's actually down. So, you know, that's really what's driving the fixed cost absorption issue in that product line.
spk01: Okay, yeah, I guess my expectation would be that was expected, and I guess maybe we should have expected it. And I don't know if my line's breaking up or yours, but maybe you're not able to hear me completely. But I'll try again at a high level and just ask around TSS. Within 2Q, 3Q, there's a number of unique things going on this year. Throwing pricing aside, I guess, what are issues you would call out in terms of one-time cost impacting you guys? You said the Quota by, I don't know if this fixed cost absorption thing is more of a 2024 or a longer term issue. You have some higher cost material you're buying on Option to fill the gap until you get Corpus. So no demand improvement to go from 24 to 25. How much is EBITDA helped from some of these things abating? Or is that not the right way to think about this?
spk02: Yeah, I mean, there are a number, as we've talked about before, there's a number of things that are impacting our cost in TSS. Some of them are one-time. Some of them will be ongoing. So, you know, from a corpus expansion perspective, you know, we have additional costs associated with capital that we're incurring this year. We also have... additional volume that we're buying from our JV partner in China, which when we have this product online, you'll see that drop in price, I'm sorry, cost going into 2025. We expect a two-year ramp of that plant. We're adding 40% capacity. The fixed cost absorption You know, depending on what happens, I mean, we have inventory of our Freon product, and depending on what happens with demand, it's either going to be a tailwind or it will remain a headwind. But as you, you know, I'm trying to think of the other one is quota. We believe that that is going to be more opportunistic going into 2025. versus this year it was a headwind, and that was specifically related to the technology transition. Does that answer your question, Josh?
spk01: Yeah, except the quantitative side of it, but I'll follow up offline. Thank you.
spk05: Our next question comes from the line of Hassan Ahmed with Alembic Global Advisors. Please go ahead.
spk04: Morning, Denise, and congratulations, Sean, on the new role. My first question is on the TT side of things. I was pleasantly surprised seeing the sequential uptake in volumes around 16%, particularly with what transpired in Altamira. Can you just talk a bit about maybe potentially what you saw across the regions? Were you gaining market share despite the outage that you guys saw?
spk02: Thanks for the question, Hassan. The way I would characterize it is that we see our share as stable and we kind of see across the regions. We saw a little bit of uplift in North America And, you know, Asia X China. But, you know, I would characterize it as stable demand and stable share.
spk04: Fair enough. And just continuing with sort of the DT side of things, I mean, obviously, you know, the whole anti-dumping side of things in the European Union, you know, recently popped up and, you know, we all know that Historically, 15,000 to 20,000 tons a month of product is transported from China to the EU. It just seems that regionally, some of these anti-dumping measures are actually expanding. How should we think about the profitability impact, maybe the EBITDA impact for you guys?
spk02: I agree with you. The EU anti-dumping is definitely an opportunity for us. It's an opportunity for us to gain share. And these things are increasing. And you probably are aware of Brazil action that is currently happening. And I probably wouldn't stop it at that. I would just say that we have really I don't know if I would quantify it per se, but, you know, you know the impact of volume, what that has on our EBITDA, and it definitely will accelerate our EBITDA growth.
spk04: Very helpful. Thank you so much.
spk05: Our next question will come from the line of Lawrence Alexander with Jefferies. Please go ahead.
spk00: Good morning. Two questions. I guess Shane just would love to hear your thoughts on differences in culture or how you see sort of how commerce is operating from a working capital perspective or any other observations you'd like to share. And I guess separately on the data center opportunity, given how fast that industry appears to be scaling up, You have these long-term targets for TSS in the high single digits. Would we be looking at there being higher than that in the kind of 20, you know, early 2030s if your products get approved and adopted?
spk07: Thanks, Lawrence. I'll start off. You know, I won't compare and contrast anything. I will just say, you know, as far as Chemours goes and just my expectations of the company, I'm very excited to be here. You know, I mentioned in my script, you know, I came to the company for its innovation and, you know, just its commitment to the world and its new emerging technologies, as well as the people, and for that matter, just the resiliency of all the people around here. And really excited to be here in my first month. It's exactly what I expected coming in. You know, as I think about your specific question around working capital, you know, obviously, just initial views, but I mentioned in the script we will work to appropriately collect from our customers on that side as well as reduce inventories on that side so as to try to push improvements on our overall working capital going forward to enhance cash flows.
spk02: Yeah, maybe I'll add on to even that first segment. I know you didn't ask me about culture, but I'd love to just add on As I mentioned in my prepared remarks, we did a complete values refresh for the company. We did it extremely collaboratively. We had over 1,200 people submit surveys. We did over 50 focus groups. We had participation from over 22 countries. We have a really sound and solid culture in this company, and I'm really proud of the team. Moving on to data centers and what we project, could it be higher than high single digits as we get to the end of the decade? I think we're not going to, at this point, this is what we're saying. One thing that we have to recognize with this technology is this is not drop-in replacement. This is going to require some time for retrofits or as you build new, it's really as you're building new data centers that you use this technology. So it's going to take some time to develop. We definitely see it as a meaningful contributor as we get to 2030. Thank you.
spk05: Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Please go ahead.
spk09: Great. Thanks for taking my questions. Congrats, Denise and Shane, on those roles, and I appreciate the comments. I guess just wanted to ask first on TT. So, you know, it sounds like utilization rates are probably still in the 50 to 70% range. I don't know if that's accurate, but maybe you can just characterize or give us some kind of range on where you think both industry and Comoros' own utilization rates are on TT. And if they are in that range, do you think that any footprint rationalization would be necessary? Obviously, you guys sit on the lower end of the cost curve, and we appreciate your flexibility on ore use, but, you know, are there any structural oversupply issues in any markets that we should think about? Maybe I'll start with that.
spk02: Okay. Hey, thanks, everyone. Thanks for the question. We don't comment on utilization rates, but, you know, certainly, you know, I think about pricing stabilization. I don't think of utilization rates in that range. And, you know, I'm not going to comment on any footprint rationalization, but, you know, only to your point of, You know, it's really important in a commodity business to be the left side of the cost curve, and that's where we're focused. And, you know, we see with our TT transformation plan that we are, you know, we're ahead of plan. You know, through June, we're already $100 million less towards that achievement of the $125 million cost savings that we laid out the end of last year.
spk09: Okay, that's great. And then could you, well, maybe I'll ask another question as well. The immersion cooling opportunity, we had heard, I guess, in the past that the size of that is maybe on the order of Option or it could be a similar kind of, you know, driver of future earnings for you guys. So I know that could be different between PS and Option. But how do you think about the or how should we frame the opportunity for Chemours in emerging cooling?
spk02: Yeah, you know, the TAM for the liquid cooling market by 2028 is like $2.5 to $3.2 billion. You know, as I said, you know, our technology is a little different, requires different equipment. But, you know, we expect it to be meaningful by 2030. So, you know, I think you can draw the conclusion that it's a very significant opportunity for us and will be a big part of our future.
spk06: Great. Thanks.
spk05: As a reminder, to ask a question, press star 1 on your telephone keypad. And our next question will come from the line of Vincent Andrews with Morgan Stanley. Please go ahead.
spk10: Thank you. Good morning. I want to clarify a couple of things on the 2P50 product. Denise, I think if I heard everything you said correctly, and I may not have, when you spoke earlier about the, I believe you said it was 40%, provided 40% cost savings for the customer. I assume based on your later comments, that's if I'm building a brand new data center,
spk02: your product versus the incumbent offers that versus if i already have a data center that math wouldn't apply because it's not a drop-in replacement and i'd have to buy some other equipment is that is that the correct way to think about it yeah hi vincent thank you for the question yeah that is the right way to that is the right way to think about it and that's why you know it is going to take some time to develop it's going to take you know the adoption and but but we're super excited about it i mean this is such a compelling value proposition, especially where we are in this point in time in the world when it comes to water and power and space and the needs of computing power in the future.
spk10: And just to follow up on that, there were two other things that you mentioned. One was that you're in a qualification process with all the sort of large folks that would like to use it. And then you yourself, if I heard you correctly, wouldn't have the product available until 2026 as a function of production or permits or what have you. So those I assume are two separate processes where you have stuff you have to do on your own and then you have to be qualified in. So could you just walk us through sort of what the, you know, big mileposts are on both sides of that equation so that, you know, we can be following along and understand what's happening as it happens?
spk02: Yeah, sure. Sure. So for the qualification, we actually need substantial volumes in order to do the qualification. So we're in the process of that right now. It's going to take six to nine months. We're in the middle of that process with various hyperscalers. So that's that piece. In parallel, We're working on commercial scale quantity. And that is what we're saying we will have available in 2026. Okay. Thank you very much.
spk05: Our next question comes from the line of John McNulty with BMO Capital Markets. Please go ahead.
spk11: Justin Capposian, yeah good morning sorry just one one follow up I had a question just on on the balance sheet, I think you spoke to. Justin Capposian, you've made the cash payment out to the water districts as as part of the as part of the cleanup of that liability. Justin Capposian, You still have $600 million or so of restricted cash sitting on the balance sheet, I guess that strikes me as as higher than I guess I would have thought post that payout so, can you help us to understand. what that kind of is holding as far as a placeholder or why it's sitting in restricted cash.
spk07: Hey, John. Related to the restricted cash payment, it was settled in this quarter for about $600 million in the outflow. If you look on the balance sheet, our restricted cash balance is not 600. You might be reflecting what it was last quarter or last year on that side. So you would see a significant decline in our restricted cash. I think it's around $60 million in this quarter. I'm sorry, $15 million.
spk11: Got it. Thanks for the clarity.
spk10: Sure. Thanks, Joe.
spk05: We have reached the end of our question and answer session. Thank you for joining the Chemours second quarter 2024 results conference call. You may now disconnect.
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