The Chemours Company (CC) Earnings Call Transcript & Summary

I can't comment about everyone else. I could say, from our standpoint, we had a little bit heavier inventory both the finished product and ore that we're -- we have an opportunity from a working capital point of view in this year to adjust from. But to be honest with you, I can't really talk...

I didn't know if there's like an industry now -- okay. Then from your customer standpoint, let's say things started to get tight, we get through this COVID virus, and things kind of come back this summer if it's a relatively healthy year. I get a lot of comments that people think there's a pricing cycle that can happen in TiO2. And if we just think -- let's talk North America first. What's the likelihood of that versus the likelihood of, there's just a lot of volume to be regained before there would be kind of any thought -- because in some ways, what you've told your customers, listen, we don't want to drop price and value stabilization. The flip side is that we don't want to raise price for you unless we're getting some cost push. So is it realistic to think about a meaningful North American price increase this year if things turned out good? Or is that something that's kind of much farther in the future, would you say?

Obviously, in our AVA contracts, we have a mechanism around price. And that's part of the value proposition to our customers, right, so that they have a -- one, a surety of supply, but also can plan for pricing for the year. And as I mentioned, that seems to work extremely well for our coating customers. On the portal, we have the ability to move price, and what we're seeing right now is that we've been moving price up in time. So if you're going to buy in 6 months, our price points are higher, and we're seeing an uptake of volume through that. So that gives us a sense that pricing could move up through the year based on what we're seeing in the portal. And again, that's something -- if we didn't have this portal, we wouldn't be able to see in the past, right? You'd be sort of trying to decide how to set your contract pricing as you're going forward. Here, we can actually test that and really see what's happening. And right now, we're seeing our pricing move up through the year based on the portal, which gives us some confidence that there is a price-up opportunity through the year.

Okay. And then maybe just a last one for me on TiO2. When you look geographically, do you see any kind of structural disconnects in the pricing between Asia, Europe and the U.S.? Or do you think on a relative basis, the pricing between the geographies is about where they should be?

Fairly consistent across the geography. We're not seeing a disconnect anywhere. I think about 18 months ago, we saw a bit of a disconnect in Europe. That seems to be self-correcting itself. And in time, pricing in the TiO2 business across regions sort of gets to the right band ex currency. It gets to about the right band, and I think we're in that band now. I think we're a little bit off of that probably 18 months ago.

Fair enough. Okay. Let's jump to Fluoro just to kind of knock out the major segments, because obviously, we want to talk about PFAS and some of the stuff going on there because we get a lot of questions. But in the Fluoro side, was a terrific story kind of 2, 3, 4 years ago with the early adoption of HFO, particularly in the mobile applications in Europe. Large numbers. You've done a lot of that. You've done a big chunk of the U.S. So that's not growing as fast. And so Phase 2 was supposed to be moving into stationary applications. So just kind of walk through how is that progressing with the impact from the HFC that we didn't see coming 18 months ago, causing HFC pricing to fall. So the gap between the 2 is bigger. How do those 2 play against each other in your mind kind of 2020, '21, '22? And can we put the genie back in the bottle on the HFC in Europe eventually?

Well, first of all, Opteon for us is a growth story. And as we've said, we see this as a decade-long opportunity for growth. We have not changed our opinion about that. It always was going to ramp up faster in automotive because Europe moved to automotive, and 100% of the vehicles had to be on HFOs. The U.S. will be completely at 100% on new automotive builds by 2021. We're at 75% penetration today. And Japan by 2023, again, about almost halfway through that ramp up occurring. So you're always going to have a faster ramp-up on the automotive side. Stationary, so think of chillers and stationary HVAC and commercial refrigeration, always was going to be a more steady ramp up, but stationary is 5 to 7x bigger market than automotive. So it's a huge opportunity. Europe was going to lead that with their F-Gas regulation, and we saw that starting in 2018. And it really stalled in 2019, as you said, as we saw legal imports of HFCs. So these are legacy refrigerants coming from China into Europe sort of slowing down that ramp-up. We've been working with the EU for, well, number one, awareness. It's a front page story in the Financial Times a couple of weeks ago. So I think we're getting the awareness up. The OLAF, which is the regulatory body of the EU, has now stepped in to drive enforcement. We're seeing more enforcement happen by country. And so in our guidance that we gave last week, we're not assuming that that gets solved during the year. We're saying it gets solved by the end of the year. I'm hopeful it could be sooner than that, but that's at least how we set the guidance. But the European Union does another step down in quotas in the beginning of '21, a 30% step down. So we know they have huge incentive to solve this. Otherwise, they're not going to be able to get to their greenhouse gas forming potential goals that they've set as a continent. So this is going to get sorted out. We'd hope it gets sorted out sooner than later, but we believe it'll get sorted out by the end of the year. But this is a ramp-up of growth opportunity for us for the next 10 years, and we feel very confident with our patent position and the uniqueness of our blends as we do proprietary work with all of the large manufacturers.

Okay. And you just built a brand-new HFO plant. One, how did that ramp? And is that giving you kind of the cost point that you thought it would? How much of that is still yet to flow through the P&L kind of on an annualized basis?

Yes. So it started up at the beginning of last year. We had a little bit of first couple of months of typical start-up issues. Since then, it's been ramping up beautifully. State-of-the-art largest HFO facility in the world down in Corpus Christi, Texas. We're really happy with the ramp-up, really happy with the quality and the production we're getting out of that. It does give us a better cost position. Some -- because we're not ramping up in volume on the stationary side, we're seeing that getting a bit offset by the price down in the OEM auto market. So you're not going to see -- you're going to see the benefit of that, but you're not going to see it as pass-through as cleanly as you would if we had to ramp up on volume on the stationary side. So that will be a little bit delayed, not that the cost reduction is delayed, it's just the effect it has on the bottom line might get delayed.

Okay. And then I guess speaking of the delays, you were going to build or maybe still are going to build a cyanide plant in Mexico. Looking at your CapEx, that looks like it's not in the plans for this year. What's happening with that? And what are the probabilities that that gets built kind of anytime in the next 2 or 3 years, or at least gets started in the next 2 or 3 years?

Yes. So that is with the Supreme Court of Mexico, the permitting issues. We've had some folks who have challenged our permitting. We've decided, even though we have some ability to get that started again, we want surety in Mexico that we're going to be able to have that permit. We don't want to have stop and start or we don't want to put capital in the ground and then stall. But we don't think that's the right use of our cash. So we're going to wait until we get that verdict from the Supreme Court. We believe that will happen this year. And once we get that, we're very open to get started on that project.

Okay. Okay. And does that at all hinder that business today, not having that going? Or what you've got today kind of sustains itself into perpetuity even if this never gets built?

Yes, we've been able to open up capacity at our Memphis facility in the last year. So I think we have the capacity we need for 2020. I don't think it's going to get in the way of the growth that we see in 2020. We'd like to get this up and running in 2021 because we see the growth continuing. Gold mining in Mexico continues to be advantaged versus the rest of the world. So we see tremendous opportunities for growth. That is a -- that whole Chem Solutions segment is a -- with mining solutions being the centerpiece, is something, as you know, we've worked hard to fix in our first 5 years of life, and we now have that at the margins of the rest of the company with higher growth rates. So the growth rate of the mining solutions business should be more like 2x GDP going forward. And enough capacity this year, but going forward, we're going to need that facility.

Okay. So let's jump to PFAS because I would say that's generally where I get the most questions on you guys. So I guess broad picture, sitting down with an investor, what does that investor need to understand about the PFAS potential liability? How can you analyze it? How do you bucket it? And then I'll jump in with some questions. But just how do you view it as obviously somebody that owns shares in Chemours?

So I think PFAS has become sort of a cloudy issue for a lot of people, and it gets lumped into a lot of things. So first of all, PFAS refers to a class of chemicals. What is being talked about from a regulatory standpoint or a legal standpoint is really 2 discrete chemicals, right? So PFOS and PFOA. Those are long chain, C8 compounds that -- or where most of the regulation is really aimed at. And a lot of the, really, talk has really been about PFOS and PFOA. The first thing, I think, everyone has to understand is obviously DuPont was the legacy before Chemours, and we have indemnification back to DuPont. But DuPont never manufactured or used PFOS. So PFOS is not a DuPont legacy issue at all, right? The second is around PFOA. PFOA, DuPont was a customer of PFOA from 3M for years. In 2002, they started making PFOA for their own use to make polymers. It was a polymer processing aid, and it was never sold as a commercial product. So PFOA never went out to anyone else as a commercial product. It was only used by DuPont in their manufacturing of polymers. So when we talk about what is the issue for Chemours to deal with around that, it is at the 3 manufacturing sites in the U.S., Fayetteville, North Carolina; Parkersburg, West Virginia; and Deepwater, New Jersey. That's where the polymers are made or where the chemical itself was made. And that's where all the work we've been doing around remediation. Now DuPont remediated Parkersburg, and they remediated New Jersey over a decade ago. And we just are in the midst of working with North Carolina DEQ to really adhere to our consent order we have with them around operating in Fayetteville. So that's really our big issue there. So number one, I'd say don't think of -- PFAS, everyone tries to put in this big lump. The real work that's going on, on regulatory and legislative standpoint is PFOA and PFOS. The second is firefighting foams. So firefighting foams are really where a lot of the legal issues are. Chemours gets pulled into those lawsuits, just like any manufacturer of fluoro products has been pulled into that. But we've never been a manufacturer of firefighting foams, nor have we been a formulator of firefighter foams. So from that standpoint, we don't believe that this is anything that's going to significantly affect us from that standpoint. Yes, there's a lot of noise about this. So it's an MDL that's gone to -- a multidistrict legislation that's gone to South Carolina. It'll take years for the judge to sort this out, and it could be a decade before that thing is -- so there's not a cash outlay that's going to happen. And when that all said and done, we don't believe that Chemours is going to have a significant play there because we did not play in that. So when you think of PFAS, people try to make it a big issue, think of it in those buckets. PFOS and PFOA, which we've really don't play in. And really, PFOA -- PFOS, we never played in. PFOA, from our legacy with DuPont, has really been an issue at our 3 sites, which we're working on. And then firefighting foams, which we really have not been a major participant in at all.

Okay. So to jump to a couple of -- so on the firefighting foams and the South Carolina MDL, how do you -- if you say we haven't done this, how do you actually extricate yourself from that? Is it something you have to go all the way through and make that case to the jury and the jury decides? Is it a technical issue you can take to the judge and say, "Hey, these guys are suing for this product. We never did it." How and when do you get to separate yourself from that particular...

I think, Duffy, we've got to let the judge sort of sort out how he wants to bucket these cases. Because he's taken them all in, and now he's got to figure out exactly how does he bucket these into either sets of plaintiffs or sets of trials or sets of defendants. He really has to decide how he's going to do that. Once he does that, I think we can intervene in terms of why are we even involved in this from that standpoint. So I think that has to happen first before you'll see us ever get exited out of any of those cases. I think that's the first thing that has to happen. Again, that's going to take time because this judge seems to be very thorough, and he also seems to be very thoughtful in terms of how he's doing it. But this is going to be years from that standpoint.

And then what about the other angle where we've had a number of state attorneys generals come out and sue, again, naming you guys and DuPont, and again, maybe where you didn't have a plant that produced, where you didn't sell, maybe it came from firefighting foam, maybe it came because you sold a precursor chemical to a shoe manufacturer who then used it. How do those cases play out? How much leverage does the state attorneys general have at coming at producers? Does that eventually get rolled up to a federal level and we have one national come to reckoning day on that? Or are we going to have to basically come up with a solution for each of the different states?

So I would say in the states where we operate, whether it's North Carolina, New Jersey or West Virginia, those conversations have been very direct. For instance, in North Carolina, we have a consent order with the state in terms of what we have to do and what they're asking us to do, and those are very straightforward from that standpoint. The states where we don't operate, we can't even get an answer of what they're looking for from us. So I think they've cast a pretty wide blanket. It sort of gets to my earlier comments about PFAS. It's a wide blanket that they're casting, and I'm not sure exactly where they're going with it, and we can't really get clarity around that. I think the solution set to this is eventually the EPA coming out with their rules. Now again, I believe that the rule setting will be specific to PFOS and PFOA. And we look forward to that because I think that's going to be helpful to set whether it's drinking water standards or other standards so that every state doesn't try to set its own standard, you actually have a body who uses science and thought to come up with those standards. So we're very open to that, and we're hopeful that Administrator Wheeler and his team do that sooner than later because I think that's helpful.

Okay. And I guess we've got time, we can -- if there's one question in the audience, we could take one question. Going once, twice. Sold. Well, again, Mark, thank you very much for coming and spending some time with us. Thanks for spending the day.

Thanks, everyone. Thanks for spending the time with us. Thank you.