The Chemours Company (CC) Earnings Call Transcript & Summary

Good day. Thank you for standing by, and welcome to The Chemours Company TSS Mini Investor Day. [Operator Instructions] Please be advised today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to Jonathan Lock, Senior Vice President, Chief Development Officer. Thank you. Please go ahead.

Good morning, and thank you for joining us for this special Chemours Mini Investor Day covering our Thermal & Specialized Solutions business. I'm joined today by Mark Newman, President and Chief Executive Officer; and Alisha Bellezza, President of Thermal & Specialized Solutions. 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 at the end of the presentation. With that, I'll turn things over to Mark for some opening remarks. Mark?

Thank you, Jonathan, and good morning to everyone on the call. Thank you for joining us for this mini Investor Day covering our Thermal & Specialized Solutions or TSS segment. Coming off the excellent results we delivered in Q1, we are very excited to be sharing more about our TSS business and the potential for long-term secular growth we see ahead. As you will hear from Alisha in a few minutes, TSS is a unique platform and positioned to help support sustainable development across a wide range of end markets. The headline is Opteon, our low global warming potential refrigerant of the future, but the story goes far beyond and is built upon advanced climate-friendly solutions our technology enables. Before I turn things over to Alisha though, I wanted to recap the 4 key priorities we are driving as a management team here at Chemours. So you can see how this fits into the overall picture. Priority 1 is to improve TT earnings through the cycle while growing with strategic customers. We have the best book of contracted business in our history and are now focused on additional steps that will reduce earnings and cash flow volatility through the cycle while liberating capacity for our most strategic customers in high-value applications. Priority 2 is to drive secular growth in TSS and APM behind class-leading products and innovative chemistry. Today, you're going to hear more about the TSS story. And over in our APM segment, our industry-leading chemistry positions us uniquely to win in clean energy and advanced electronics like few in the industry. We continue to support investment in growth in key materials such as our Teflon PFA and Nafion membranes. Priority 3 is to continue to manage and resolve legacy liabilities consistent with The Chemours-DuPont-Corteva MOU. With this agreement in place, we will continue to put legacy issues behind us and work collaboratively with all stakeholders, including the communities in which we operate to ensure a sustainable future for Chemours. Finally, Priority 4 is to return the majority of our free cash flow we generate to our shareholders through a steady diet of share repurchases and a stable dividend. We are transforming Chemours through the investments in our first 3 priorities, but believe consistent cash returns to shareholders will compound our value creation over time. My entire leadership team is focused on these priorities, and we are excited at the number of levers we have to drive shareholder returns in the years to come. With that, I'll now turn things over to Alisha.

Thank you, Mark. Let's turn to Slide 4. I want to start off by saying that I'm thrilled to be here with you today for the first time since we launched our Thermal & Specialized Solutions or as we call it, TSS business. Before we jump in, a bit about how we arrived at TSS because I believe our ability to redefine the business in our industry is reflected within our name. First is thermal. We all know that the heating and cooling of our environment, surfaces and equipment are foundational to modern society, and we are masters of thermal management. Second is specialized. From phones to propellants, our chemistry helps enable and power many of the great nonthermal modern conveniences and innovations that surround us. Finally, solutions. This is what we do. We bring the best chemistry to market and truly partner with our customers to deliver solutions, which go beyond the molecule. We have a lot of new information to cover today to help you get more insight into the business and get you as excited as we are about what's to come to deliver a mid- to high single-digit growth and above 30% adjusted EBITDA margin. Our vision for the future is simple. We want to use our chemistry to realize bold ambitions and move beyond the status quo to drive meaningful, sustainable change. Our society needs solutions that enable technological progress and innovation to contend with the unfolding threat of climate change, and that's where we come in at the TSS business. We bring the technical expertise needed to develop solutions that align with international regulation, create products with lower global warming potential, or GWP, and improve performance. Our solutions are enabling industries to address performance and environmental challenges. And that's what we want to discuss here today. First and foremost, we are a highly profitable business with high return, and we continue to generate consistent and reliable profitability, coupled with robust cash generation. But our financial performance is just one part of the value that our thermal management solutions create for our stakeholders. The second part centers around our positive ESG impact, which are driven through our innovation efforts. Today, we'll discuss our opportunities for near-term growth. We'll talk about how we're investing in mid- and long-term innovation. We'll also address some of the most important global mega-trends, which support the secular long-term growth of our business. And we'll talk through how we're doing all of this while still maintaining 30% plus EBITDA margin. We have a clear line of sight to a decade of growth in front of us, and that is being bolstered by a number of factors. First, it starts with the solutions that our products enable. They make significant contributions to the planet and to the people and communities we serve. Our chemistry is critical to so much of our daily lives. Our products play a critical role in the cold chain. They preserve perishable goods by ensuring safe delivery and storage in the transportation process. They also help facilitate expanded access to goods across the globe. We have high-performance thermal management solutions for different applications that are supported by a robust international patent portfolio. And we know that no single patent will significantly affect our market position. We continue to enhance our portfolio in recognition of this fact. Second, emerging regulations continue to increase the need for customers to use our existing and newly developed low-GWP solution. Specifically, our Opteon products are perfectly designed to facilitate this transition, and we're working with our value chain partners to make this happen smoothly. And finally, as the world continues to innovate and migrate to more sustainable products, we know that our solutions today and those we continue to create will be crucial to enabling forward progress. Throughout this presentation, you'll hear me elaborate on all of these components a bit more. TSS is poised to meet today's demand and tomorrow's opportunity. Let me show you how. Turning to Slide 5. Our product portfolio allows us to be #1 or 2 in all hydrofluoroolefin, or HFO, low-GWP applications. And our robust intellectual property portfolio supports our market differentiation for years to come. This gives us the ability to deliver differentiated products to address our customers' most important challenges. We are the drivers of innovation in this space. Our Opteon solutions are better for the environment and improve performance so they meet our customers' demand. By 2025, we estimate that our low-GWP products will have eliminated approximately 325 million tons of carbon dioxide equivalent globally from the atmosphere. That figure is roughly equivalent to the removal of about 69 million passenger cars driven in 1 year or the annual energy consumption of about 37 million homes. This forward progress aligns with our sustainability commitment at Chemours to be the leader in a new era of responsible chemistry. Our hope is to create a world in which critical chemistry meets the essential need to solve the seemingly unsolvable all while protecting the planet and its people. Looking to the numbers, our 2021 financial results reflected strong sales and margin performance that were driven by improved demand despite all of the auto OEM headwinds associated with chip shortages. Now in 2022, we delivered a robust first quarter performance with net sales up 40% and adjusted EBITDA up 90% when compared to the same time period from last year. Our Opteon low-GWP and legacy products continue to increase adoption in all of the markets we serve. Over the coming years, we envision a clear pathway towards short- and long-term sales growth. I'm confident that our customer-centered strategy, together with our innovative solutions, global manufacturing network and experienced team will enable our business to take advantage of its full growth potential, which is why I'm so confident in saying that we'll hit mid- to high single digits of top line growth for at least the next decade, all while maintaining above 30% adjusted EBITDA margin. So let's dive into it a bit more. Turning to Slide 6. To enhance customer experience in each of the markets and regions where we participate, we aligned manufacturing, supply chain and customer needs to enable an end-to-end agile integrated operation. This gives us the ability to drive reliability, performance, speed and innovation. By focusing on our customers and end market needs, we are able to embrace simplicity and make it easier for them to do business with us. For example, about a year ago, we launched the TSS Connect platform. In launching TSS Connect, our goal is to demonstrate how much we value our customers' needs and opinions in our planning processes. The implementation of the platform was successfully done and will continue to enhance the customer experience. The platform only further illustrates how our cutting-edge approach to advancing the customer experience serve to benefit us all in the long run. Moving to Slide 7. If you take a look at this slide, you'll see some of our key markets and applications. You might think that because we invented Freon, we're just a refrigeration company. And while, yes, we invented the refrigeration category and continue to revolutionize it with our Opteon low-GWP solution, we are actually so much more. Our products deliver value across multiple industries and applications. We collaborate with equipment manufacturers, formulators and other value chain partners to develop advanced solutions. These solutions deliver the optimal balance of performance, low GWP, safety and cost across a variety of markets from refrigeration and spray foam to specialty fluids and propellants. We also play a key role in enabling decarbonization through the replacement of fossil fuel-based heating systems with energy-efficient heat pumps. Heat pumps have become an increasingly recognized technology to reduce household emission while providing a versatile heating and cooling solution. For example, for home water heating alone, every 1 million units of heat pumps installed would save over 2 billion cubic meters of fossil fuel. With the EU Green Deal accelerating decarbonization and driving the region towards a climate-neutral economy, our products play a key role in this transition. Over the coming decades, the expectation is a double-digit growth of residential heat pump deployment. And another great example of a technology we're helping to innovate is foam. Foam insulation is important in construction and appliances due to its energy-efficient properties. For example, a single house insulated and [ air field ] with foam has an additional energy savings of approximately 5,600 kilowatts per year, which would be approximately 1,500 kilogram reduction of CO2 per year. We recently launched Opteon 1150 that joins Opteon 1100 in the Chemours portfolio of nonflammable low-GWP foam products. And more broadly, as the market and regulations at large continue to move towards more environmentally sustainable products, we're helping our customers by providing viable options to ease this transition. So let's look at how we plan to deliver on that. Turning to Slide 8. Clearly, our society needs solutions that enable technological progress and address the ongoing threat of climate change, and that's where we come in. We bring the technical expertise needed to lower GWP and enhance product performance. As business president, I can confidently say to you that we have far-reaching forward-looking goals for TSS that makes us the best in the business. They also get me excited about our future. I know what you want to hear today, and that's how we're going to deliver on these ambitious goals. For us, providing innovative new solutions for our customers is our top priority. Whether we're talking about innovating in today's world or the world we anticipate playing in 2 decades from now, we have the solutions and the expertise to making real difference today and tomorrow. We're a leading thermal solutions provider, and we know how to retain that position. We need to be strategic in how we choose the partnerships, sustainable solutions and innovation opportunities we pursue. Our products are highly profitable because they solve real business challenges and they're environmentally sound. We have a lot of growth potential ahead, and we're laser focused on seizing these opportunities. It's our duty to prioritize customer focus and collaboration in the development of our application. We're a performance-based organization and our ability to execute on this stack is critical for our future. Moving to Slide 9. Let me take you through our TSS growth framework and expectations for the future. As I said earlier, we see at least a decade of growth ahead of us, which will be propelled forward by regulations and market-driven innovation. You'll note that these first 2 phases outlined here are well underway. Our near-term growth will mainly be driven by regulations that are transitioning markets and our customers away from higher GWP products toward our Opteon solution. You probably recall us talking about the European Union F-Gas regulation and the mobile air conditioning or MAC directive that were implemented in 2014 and 2017, respectively. Those 2 pieces of legislation did a couple of things in Europe. First, the F-Gas reg set forth an HFC phasedown schedule. It initially had a target to achieve a competitive low-carbon economy by reducing approximately 78% of emissions by 2050. And second, in 2017, the EU MAC directive went a step beyond, requiring all new passenger vehicles to use only refrigerant gases with less than 150 GWP. At the same time, legislation in the U.S. was passed to economically incentivize automotive manufacturers with CAFE or Corporate Average Fuel Economy credits to switch to low-GWP refrigerants. More recently, some other countries like Japan and South Korea have adopted similar legislation. These regulatory achievements resulted in significant conversion from HFC 134a to products like our new Opteon YF, going from a product with about 1,400 GWP to about 4 GWP. Today, the expansion phase is all about the adoption of Kigali as well as similar legislation and regulation. Like the F-Gas regulation, Kigali set forth a familiar approach to emission reduction targets and time lines by using a baseline year with a series of step-downs clearly laid out. At this point, approximately 130 countries have ratified the Kigali Amendment or have legislation that mirrors its intent, like the American Innovation and Manufacturing Act passed in the U.S. in December of 2020. Since we have hit more significant phasedown on top of already tight supply chains, we've noticed that our customers are transitioning to low and ultra-low GWP Opteon product within the automotive, HVAC and home market. Finally, we're seeing global mega-trends driving the need for more advanced thermal management solutions with a better environmental footprint. I'll go into more detail later on this. But for now, let me stress how important it is that we're not only planning for the short term, but that we are focused on the next decade ahead and even well beyond. Let's move on to discussing the different Opteon growth phases. On Slide 10, let me explain in more detail our expected short-term growth from the expansion phase. As you can see, these are some of our key markets and applications: mobile air conditioning, commercial refrigeration, air conditioning and heat pumps as well as chillers and foam blowing agents. These markets are all being impacted by evolving regulatory requirements and need constant innovation to support customer interests. We estimate the total addressable market for these segments to be approximately $11 billion by 2026. But what's really interesting here and what I want to direct your attention to are the growth rates that each market will convert to low-GWP products in that time frame. Growth in our industry is happening, and we are well positioned to serve these emerging low-GWP needs. Our investments in innovation and capacity enable a strong position to support our customers and partners through the next decade. We are very much in an expansion phase right now and moving into mass adoption of low-GWP solutions. Just take a look at the future of stationary markets, specifically with AC and heat pumps. You'll see that only about 25% to 30% of the market will have converted to low-GWP solutions by 2026. We have the infrastructure in place to get us there, and we're just getting started. So with this in mind, let's move to the next slide. As we mentioned earlier, in the last couple of years, we've seen how regulations in Europe play a pivotal role in moving the market towards low-GWP solutions. Despite the initial challenges faced in Europe when the regulations were rolled out, especially the influx of illegal HFC imports, there have been many learnings that stakeholders have taken into consideration to continue driving the phasedown. I have confidence that the expertise the regulators and industry gained in Europe will help achieve the intended climate goals faster and facilitate the transition in a successful way. Besides the work already being done to prevent illegal imports, the recently proposed F-Gas provision establishes even better measures to control and seize illegal imports. And it goes one step further with more stringent and streamlined penalties for those found to be violating the regulation. In the U.S., we do not expect to encounter the same magnitude of challenges we did in Europe. The EPA is also proactively addressing the threat of illegal imports with this proposal of our tracking system. It's also looking into the formation of a task force and well-defined sometimes very significant penalties for those in violation. We're ready for this next phase of regulation. We're ready for the U.S. AIM Act and the revised F-Gas regulation. We know how these regulatory trends will affect our market. We also have the tools in place to help our customers plan for and make this transition smoothly. And that's really exciting to us because it means they'll help us usher in this next era of environmental sustainability. These regulations drive the need for next-gen solutions, which I'll discuss in the next slide. Turning to Slide 12. As we've shared previously, we keep reinventing our product portfolio to support the phasedown regulation. We at Chemours have developed and commercialized a portfolio of low global warming potential solutions that leverage HFO technology. Our Opteon portfolio, in addition to existing low-GWP HFCs, enable our customers and value chain partners to transition to more sustainable solutions. We've invested about $1 billion in research and development, manufacturing assets and downstream product and application development with low-GWP HFO technology. We remain committed to the ongoing development needs of our customers throughout this phasedown. Moving forward, we will continue enabling innovation to support market and regulatory needs, and we'll continue protecting our customers, partners and investments with a robust international patent portfolio that continues to grow to cover our existing and new product pipeline. Moving to Slide 13. When we think about the future of our business, it's clear that it will be greatly influenced by 4 key trends in particular. These are some of the major market trends that we're seeing impact our everyday lives and are connected to some of the most important UN sustainable development goals. Let's start with decarbonization and electrification. Today, the world is working together to address climate change in different ways. The global temperature increase is one of the most pressing challenges we face today. One option to address the rise in temperature is to pair electrification with advanced decarbonization solutions to enable a more sustainable and potentially carbon-free future. To get there, the global economy needs to lower the carbon intensity that results from transportation, construction and heavy industries. While electrification is effective in many applications, it requires new thermal management solutions to reach full potential given the significant heat generated from the processes. This is an area where we, as the Chemours TSS business, can make a big difference. Today, we're at the dawn of a new era of connectivity. Remote work has become commonplace. E-commerce is the way to buy. Video calls are now a way of life and there are many, many other examples that I can think of that showcase our increased connectivity. To support this growth, we need to advance our infrastructure development like with data centers to accommodate these now commonplace experiences. And in order to assist our infrastructure development, we need to create high-performing, more sustainable solutions, and that's where TSS comes in. We have the thermal management expertise needed to partner in many of these areas and be a crucial part of the solution. When it comes to the growing middle class, its shift toward urbanization is being driven by societies that keep changing, just like our planet. In the world's fastest-growing regions, the growth of the middle class is leading to greater energy consumption and energy generation. This, in turn, increases the need for new technologies. Our solutions can enable systems to consume less energy with the same or better performance to support accelerated growth. And then the final key trends that I want to touch on here revolves around climate impact and the circular economy. All of the mega-trends I previously mentioned are focused on solutions that can reduce climate impact. However, it is also very important that we develop solutions that can enable circularity. And in TSS, we have the expertise and experience to help achieve this. Clearly, collaboration in this space will be critical across the value chain. These mega-trends are opening up the opportunity for us to move beyond just market-driven growth. They're allowing for us to make strategic decisions when it comes to our research and development processes so that we're actively paving the way for advanced technologies. But to make this more tangible for you, I want to show you some examples of how our low-GWP applications are leading to real world innovation. Moving on to Slide 14. When it comes to electric vehicles, this sector of the market is obviously of high interest and growing. There's no doubt that EVs have the potential to reshape the transportation sector by significantly reducing carbon emissions and facilitating a more sustainable future for all of us. Transportation is one of the highest CO2-emitting sectors. Electric vehicles could change this. There are studies that show that electric cars generate less than half of the emissions generated by gasoline-powered cars throughout their life cycle. But when we look at the realities of mass adoption, there are some challenges that stand in the way of EVs becoming commonplace, which fittingly enough, our thermal management expertise and Opteon solutions portfolio are well suited to address and even solve in many cases. Let me give you an example. I'm sure you're all familiar with how our Opteon refrigerants are used to cool the inside of a car on those hot days. But what you might not realize is we can play a role in heating them as well. When you look at the typical car that we all grew up with and compare them to EVs, one point is abundantly clear. EVs don't have a combustion engine. They have batteries. In the winter, when temperatures are cool and people need to heat their car cabin, an internal combustion car will generate heat from the engine to provide warmth. But with EVs, you don't have that option. Instead, they pull energy from their batteries, which takes away from their ability to perform and drive long distances. An option that does exist is to incorporate a heat pump, which redirects heat into the cabin and keeps temperature under control. Unlike the electric resistance heating system, which creates heat from the energy drawn, a heat pump merely redirects it. Our Opteon products enable the heat pump to operate efficiently. And even beyond temperature control, our thermal management solutions will be critical to EV innovation. There's a plethora of opportunities here to utilize our applications in ways that enhance electric vehicle infrastructure efficiency and performance to create more economical cars. But our innovation for the marketplace of the future doesn't stop here. I want to walk you through how our immersion cooling technology works as well. Moving on to Slide 15. In the same vein as EV, robust data centers are an important part of our present and future. The number and size of hyperscale and edge data centers is growing. Today, the world demands applications such as the cloud, Internet of Things, artificial intelligence and cryptocurrency. The emergence of these applications is resulting in IP changes that are forcing a new look for advanced technologies. There's an increasing demand for highly effective cooling solutions to lower power consumption, water use and carbon emissions while enhancing performance. Data centers require thermal management systems to remove heat from servers and ensure reliable operations. Their cooling systems use different mechanisms to ensure IT equipment is kept at an effective operating temperature. And again, this is where our innovation becomes critical to the industry. Let me paint a quick picture for you to give you some context into how this technology actually works in real life. Take a second and picture the smartphone that I know you all have on you right now. Let's say you leave it out on the sun all day. It starts overheating and not working well. Now it needs to cool down before you can use it again. But imagine if there was a special type of liquid that you could submerge your phone into and it would cool the device immediately without impacting its ability to function at all. Well, that technology does exist, and it's actually what immersion cooling allows us to do, particularly at large-scale data centers. When we say we're inventing the solutions of the future, this is what we're talking about. This is a new market opportunity for us and is a key part of our vision for the next decade of growth. We estimate that our immersion cooling solutions currently in development reduce energy use by 40% and potentially allow data centers to reduce up to 60% of space when compared to data centers that use traditional cooling methods like air or water. We're actively collaborating and investing in solutions that we believe will enable the required growth of data centers in a more sustainable way. Moving to Slide 16. I've given you a glimpse at 2 very exciting areas of innovation for our business, but even that was just a very limited peek at the world of innovation unfolding around us. The increased need for thermal management solutions is a reality. And in anticipation of this growth, we've developed several innovation principles that will guide us along every step of the way: first, our solutions need to be market-driven and aligned with relevant mega-trends that are important to our customers; second, our approach to addressing these emerging trends needs to be highly focused and based on well-defined growth platforms that could enhance existing solutions or adjacent expansion; third, we need to ensure that our solutions and approach are aligned with our Chemours corporate responsibility commitment to develop products that will be meaningful to the world; and fourth, throughout the entire process, we need to ensure that we are using our agile innovation management process in a way that enables our ability to fail fast or move forward. In the near future, we will share more details about other exciting growth opportunities that we're currently working on. We believe that they'll pique your interest too as they fall in similar veins as the EV and immersion cooling projects that we just discussed. One thing I want to make clear is that just because we've had recent success with our Opteon products does not mean that we're going to become complacent. We aim to be the partner of choice for our customers always. And with our technical expertise, innovation, IT portfolio and the exceptional execution of our commercial team, I firmly believe that we are the most well positioned to get there. Moving on to Slide 17. I know I've shared a lot of information with you today. I hope you got a sense of the energy and excitement that we have for the next chapter of TSS and Chemours. We wanted to give you a better understanding of the foundation of our business, the organic growth opportunities that we're seeing unfold and the new ones on the horizon that we're investing in to provide our customers and the world with better thermal management solutions. We are growth-oriented and continue to look for ways to innovate our solutions so they further enhance efficiency and contribute to the betterment of our world. Our CRC goals only reinforced this positioning and strengthen our commitment to ushering in a new era of responsible chemistry. By investing in innovation and a market that increasingly prioritizes sustainability, our Opteon portfolio will grow by double digits, contributing to a net top line growth in the mid- to high single digits and maintaining above 30% adjusted EBITDA margin over the next decade. Based on the market dynamics that we're seeing right now, 2022 continues to be a strong year, showing robust growth. We are truly meeting today's demand, and we are ready for tomorrow's opportunities. Now I would be remiss if I didn't take a second to thank both our customers and our partners for their ongoing trust and confidence in our ability to deliver exciting and emerging solutions of the future. I also want to thank the entire TSS team for their passion to deliver sustainable growth. As we wrap up here and move on to the Q&A portion of our presentation. I want to thank you all for your time and attention today. I look forward to continuing this conversation on our business. And now I'll turn it back over to Mark Newman for closing remarks.

Thank you, Alisha. I hope that you can all see how special this business is and why we're so excited about the future. With that, operator, please open the line for question and answer.

[Operator Instructions] Your first question comes from the line of John McNulty from BMO Capital Markets.

I guess, can you help us to think a little bit more about the longer-term profitability of the business? I know you've highlighted you expect to have adjusted EBITDA margins greater than 30%. Candidly, they're above 30% right now, and you're introducing a lot of new kind of exciting products that look like they have a higher price point or a higher value proposition. So I guess how should we be thinking about that in the long term?

Thanks for your question. Listen, we're very excited about the growth and the profitability of this business. Clearly, we got off to a really strong start this year. And so while we're viewing this as a 30%-plus EBITDA margin business for a long time to come, based on the start we had in Q1, we're likely to be higher than the guide this year. But very excited about both the top line growth that we're funding, both through the structural shift to low global warming refrigerants as well as the investment in innovation, which we went out of our way to share. I'll ask Alisha to make some more comments about how she thinks of the margin of this business. But clearly, excited to have a business with very high EBITDA margins or great EBITDA margins as well as a decade of secular growth. Alisha?

Thanks, Mark. John, good to speak to you. Mark is spot on in the way that we're thinking about this decade of growth in front of us, near term, really driven by regulations. And we're going to see Opteon growing likely mid-teens as it basically supplants HFCs through the phasedowns and getting to that net top line growth of the mid- to high single digits. And as we think about margins, we feel very good about being able to maintain the above 30% targets there. Longer term, you're spot on. We're working on innovation and those innovations that we have underway will provide a very strong value proposition. And we think that, that's what will help us sustain those above 30% industry-leading margins. So we're feeling really good about that.

Got it. No, that's helpful. And then we know you did a large-scale expansion of Opteon not that long ago in terms of capacity. I guess when you think about the capital required to keep up with the growth that you're looking at, I guess, how should we think about what may need to be added or the investment that we should be considering as we kind of look forward? And how should we be thinking about the cash harvesting ability of such a high-growth business?

John, that's a great question. Clearly, when we size Corpus and we tripled our capacity, it was with having both F-Gas in Europe and AIM here in the U.S. So our view was this was going to be the refrigerant of the future, certainly in those 2 major markets. And with that in mind, that's how we size Corpus. The team has done a really nice job of finding more capacity in that asset as they continue to run at higher rates over time. And clearly, as Opteon or low global warming refrigerants expand globally, we'll continue to invest behind that expansion in markets. As you know, this is a business today that generates good margins, great cash conversion on earnings, and we would expect that to continue despite investing to stay ahead of the curve here as HFOs expand globally and in other applications.

Maybe I'll add 2 little anecdotes into that. So first of all, we have a phenomenal team at our Corpus Christi site. And they have been doing some really creative work, as Mark was alluding to, of [ weaning ] out as much capacity as possible with the existing asset footprint and really driving uptime in a meaningful way to help serve our customers well. The other thing that we've done, John, is we launched our Opteon 1150, which is production that comes from our El Dorado, Arkansas facility. So it's a new line of HFO technology, primarily serving the foam market today, but we see growth in that one, too. So we've been creative in how we've approached capacity and our ability to serve our customers effectively. It's really the integrated supply chain and the way we have ourselves set up around the world that gives us a ton of confidence to be able to globally, very effectively and efficiently serve our customers. Thanks for the question.

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

Yes. So just a couple of questions around the market size and growth. And you gave a lot of good information on Slide 10 in the presentation. I'm curious if you could comment where is the penetration of low-GWP refrigerants in those various markets today? And in terms of Chemours' portfolio, what's the mix of Opteon versus everything else? And you gave a comment earlier to John's question about 15% growth in Opteon. What's implied in the growth of everything else in your calculus?

Josh, it's Alisha. Let me walk you through a couple of aspects to address your question. First, maybe I'll start with the end, which is the mix of our portfolio. The way that we're looking at it today, we expect that by the end of this year, the majority of our revenue will be generated from Opteon products. As we look at the market that we shared on Slide 10 and, obviously, alluded to in our prepared remarks that there's a pretty big runway ahead of us for conversion to HFO technology and our Opteon solutions. When you think about it in the mobile market to begin with, recall that in Europe and pretty much in the U.S., new vehicle production starting in 2017 all needed to use HFO technology to comply with regulations or to be able to access the CAFE credits in the U.S. So really, we've got the biggest car parks ex-China, let's say, using HFO technology now. So the growth in the MACs market is going to come from aftermarket usage, which is growing pretty significantly today. But again, as we look on a global basis, hitting that 50% target by '26. On the stationary side, Europe has been leading the way in conversion, and that's really driven by the F-Gas regulations. U.S., we are in the beginning innings here, and so a lot of growth in front of us. We've been really working very closely with major OEMs here in the states where we have 6 of them who've chosen our Opteon XL41 to convert to. So that really won't start in a meaningful way until we start to get closer to that first major step down in 2024. So really excited about being able to serve our customers and help create a smooth transition through this regulation.

Alisha, I would just maybe add a couple of points. Certainly, from a regional mix perspective, the U.S. is lagging Europe on stationary adoption. And so we would expect more growth, relatively speaking, in the U.S. versus Europe. The second thing I'd point out is Chart 10 shows the market CAGRs. Clearly, HFOs are growing at a more rapid rate within those CAGRs, so these are structurally markets that are growing. But within this growth, HFO growth is higher, certainly in the markets where there's an adoption underway.

That's really helpful. If I could just do one quick follow-up. I guess, Alisha, you mentioned most of the portfolio, Opteon technologies by the end of the year. Earlier, you said about 15% growth in HFOs. It's obviously higher than your target. Is that just the math of the blending? Or is there something else in there?

I think it's the majority of revenue by the end of this year and into '23. We would definitely expect that mid-teens growth of HFOs, which is above the rate of HFCs to get us to that mid- to high single digit overall for the business. Maybe a little bit higher growth rate this year, as Mark was alluding to, given the strong start that we've seen.

Your next question comes from the line of Arun Viswanathan from RBC Capital Markets.

Great. It's very helpful. So I just wanted to understand maybe if you could discuss pricing in this business. In some of these chemical businesses, we get data on how prices evolve. But this is a little bit more specialized, as you note. So is pricing kind of conducted with customers individually? And maybe you can also address how new products play into that? Should we see some of the growth that you allude to in the mid- to high single digit also driven by mix improvements?

Yes, Arun, thanks for the question. Clearly, as you saw in our Q1 results across our entire portfolio in this current inflationary environment, we've been able to stay ahead of inflation across the portfolio. As we alluded to on the Q1 call and earlier today, there is a structural shift going on in the marketplace. And we've started the year whether it's the return to the office post COVID, increase in travel and hotels or eating out at restaurants, there's just really good institutional demand for refrigerants. So it's created an environment with very strong demand, especially here in North America. And then we have the beginning of a step down in quotas under the AIM Act. And we had a lot of issues last year on China. Supply, in fact, continue to have issues on China supply. So the team has done a really nice job in this business in being very dynamic, understanding the needs of the customer and being able to take advantage of the supply-demand dynamic. I'll ask Alisha to comment further on sort of how she sees pricing in the year.

Appreciate it. I'm going to pick up exactly where you left off, which is the teams around the world really did a phenomenal job starting -- I'd say in the second half of last year, as we saw inflation headed our way and really started to work with our customers to anticipate what that was going to look like and get ahead of it. So Mark said it well, the supply environment has been challenging in many markets of the world. And working really closely with our customers, we were able to take advantage of that situation to smooth out the effects of what the cost side of that is going to look like for the business. As we think about our day-to-day, we don't have a ton of long-term contracts with lots and lots of customers. There are certain ones. Certainly in the auto space, we have contractual obligations. But by and large, a lot of our business is really done on a day-to-day or a PO basis, and that gives us flexibility to adjust to seasonality, which sometimes has an influence on pricing and the market dynamics that we face, which have been very, very challenging and changing pretty rapidly. Thanks, Arun.

Great. And if I could just ask a follow-up. So I think in the past, you guys had noted that illegal imports into Europe had maybe a negative $125 million EBIT drag on Chemours, I think, in '20 or so. Do you see that kind of -- or where do we stand on that level of impact? And is there a potential for some of those headwinds to develop in North America as AIM is implemented? Or maybe you can just comment on that.

Happy to do that. I mean it's a great question and something that we've been spending a lot of time with our value chain partners to think about how to anticipate for. In Europe, there's been a tremendous amount of learnings as we alluded to in the prepared remarks. Not just at The Chemours level, but across the industry participants with regulators. Remember, illegals kind of defeat the purpose of the regulation. So there's a unified view that controlling HFC illegals is what's going to be good for the planet. So we need to take actions to do that. The biggest challenge and the biggest learning that we had in Europe was making sure that there was awareness and understanding of the magnitude of the problem. And the team in Europe has done a great job in working across the value chain to do that. With the F-Gas revision, we feel really good that there's now some good structures and proposed penalties in place that are going to serve as a disincentive for future illegal imports into Europe as well as a common system that's going to go into the European Union 27 member states that should help track better and control that on an ongoing basis. And then as we look across the pond here in the U.S., EPA has done a great job of trying to get ahead of this and understand what happened in Europe and be proactive. So creating a joint task force that has Customs and Border Protection, it has the Department of Homeland Security, has the Department of Justice that are all aligned and thinking about how are we going to prevent illegals from entering. They've also proposed, as part of their regulations and their rule-making, a tracking system that's going to ensure that any HFC product has a QR code. Yes, a QR tracking code associated with it. And on top of that, they've said that for imports of HFCs coming into the U.S., they need to submit a 14-day advance notice. So already with just AIM compliance or underway in -- since January, they've seized material because it hasn't been in compliance with these regulations. On top of all of that, what gives us some good confidence that they're on the right track is using their Clean Air Act authority and the ability that they will have to put some really stiff criminal and civil penalties in place should they find people that are violating the rules. So we feel really good, and we'll continue to work across the value chain to make sure that we can prevent this from happening.

So Arun, just maybe a reflection. Clearly, it's taken a little while for F-Gas regs to work as intended. And so we're very encouraged by the improvements that Alisha noted that are coming -- that have happened and are on the way and by AIM being adopted here in the U.S. And with both sides of the Atlantic with regulations working effectively to drive lower global warming refrigerants, very excited about the earnings potential and growth potential of this business having capacitized Corpus with that in mind. So this has really been a while in coming, but we're very excited about where we are today.

Your next question comes from the line of Josh Silverstein from Wolfe Research.

I was just curious if maybe, kind of in ballpark percentages, what might be kind of the recurring or stable sales for TSS versus what may be a little bit more economically sensitive? I'm just curious if there's clearly some particular growth opportunities here. But also equally, with some growing recessionary risk coming up, and I'm just wondering how that's factored into the kind of mid- to high single-digit growth outlook for you, guys?

Yes. So clearly, what we tried to do today, Josh, is provide a long-term view in terms of what we believe is a long-term growth rate for much of the next decade, mid- to high-single digit. And that's a net growth rate. So as Alisha mentioned, we have HFOs, our Opteon, growing in the mid-teens. And as we phase down HFCs, we have a net growth here that translates to mid- to high single digits. This business has a seasonal factor. So the first half is typically stronger than the second half with most of the refrigerant sales in the Northern Hemisphere for the summer cooling season. And then the other overlay, I would say, is auto, right? This year, we still expect autos to grow over last year. But clearly, those growth rates have been coming down based on availability of semiconductors for that industry. So I'd say those are the kind of factors that I would think about as an overlay either on our Q1 results or full year results. Clearly, our view is auto demand will continue to grow. And so that's a growth trend. Alisha mentioned the growing car park that's on HFO technology. But what's ahead of us really is the adoption of low global warming refrigerants in stationary where we have an advantage based on our innovation and our products in the portfolio today.

Great. And maybe just sticking with auto. I'm sorry if you have mentioned this before, but have you mentioned what the potential uplift in revenue maybe for EVs or relative to the ICEs, whether it's like 1.5x or 1.3x? I'm just curious what kind of revenue uplift there is.

Yes, Josh, as we look at it, probably shorter term, yes, the EV will require a bit more charge size than traditional ICE vehicles do today. Longer term as we think about integrated thermal management, that could increase even more. So I don't have a specific number for you, but generally speaking, we see an upward trend.

Got you. Yes, I was kind of wondering if there was an opportunity for like software sales and management to go with this and kind of some -- just revenue transfer that.

Yes. I think we're certainly -- as we're solutions-oriented, we're going to be thinking about how to integrate and work with auto OEMs for that thermal management needs. So I think we'll tell you more as we continue to proceed here.

Your next question comes from the line of Matthew DeYoe from Bank of America. [Operator Instructions]

I have a couple. So as we look at the mid-single to high single-digit growth number, I mean, how lumpy do you expect this will be? Should it be outsized growth in cold years and then lower or flat growth outside that average in that range? Or do you expect this to be kind of an annual 5% to 9% repeatable growth?

Great question. Appreciate it. Mark alluded to the fact that this year, we're seeing auto recovery, we're still seeing some COVID recovery. So that's a big driver for improved demand. More generally, to your point, over the next few years, regulation are the biggest drivers of growth for the business. So with auto recovery in '22 and now expected to carry into '23, it will make a transition. So we'll see that coming in as a big driver of demand. But then the transition will start to become meaningful in the stationary markets. And remember, stationary markets are about 3x as large as auto. And then you put on top of it or put the perspective of regulations like AIM in the U.S. and European F-Gas regulations. They're definitely leading the pack to convert away from HFCs. And these regulations really create a structural supply constraint, so effectively shifting customers to low-GWP solutions like our Opteon portfolio. So when we think about this next big step down in 2024 in the U.S., as an example, there'll be another 30% reduction, which is equivalent to about 90 million tons of CO2 coming out of the market. That is -- that demand doesn't go away. It needs to be replaced by Opteon technology, so low and ultra-low GWP products. And as we've said, we really believe we're in a great spot and probably the best spot to work with customers and help them transition into our high-performance solutions. So longer term, it's been the mega-trends that kick in. And that necessitates, as we were just talking about with the EVs, a different kind of need for thermal management and the innovation that we have cooking now is what we'll be able to provide to the market in the latter part of this decade of growth that we see coming. So really, near term, this year is shaping up to be very nice. Regulations in the short term drive a good bit of growth and then longer-term, innovation is going to be what provides our path forward.

Yes, Matt, if I could add. I think the essence of your question is, is mid- to high single-digit a long-term forecast or a near term? I'd say it's a long-term forecast as we look out over the next decade. Clearly, they're drivers today that we're seeing that would point to a higher rate in the near term. But we're really excited about how we capture this long-term rate in the company as well as the near-term opportunity given the earnings profile of the business, the cash conversion of the business and the technical capabilities of the business to offer innovation beyond the structural shift driven by regulation to the mega-trends that innovation will feed into.

Okay. And the discussion focused on auto briefly and one thing I wanted to ask, and maybe I missed it. When I think about the auto OEM business, I'm just going to go to a slide -- yes, so the mobile air conditioning, right? And if I think about primary OEM and then the secondary market for Opteon, how big could that secondary market end up getting on like an annual basis? Is that like 20% of the OEM market or 120%? What does that look like from a recharge perspective?

It compounds over time, as you can imagine, right? So it's a little bit dependent on crash rates and other things that could require recharge to the system. But yes, the aftermarket and the recharge rate, it does get bigger than the annual OEM consumption as the vehicles age. So you've got vehicles that really began in 2017. We're starting to see the demand for places like AutoZone or O’Reilly that need to have Opteon YF in their stores because customers are coming in with those newer vehicles and need it to get recharged.

There are no further questions at this time. I would now like to turn the call back over to Mark Newman, President and CEO.

Yes. Listen, thanks, everyone, for joining us today. We're very excited about our TSS business. We're really grateful to be able to share more details with you about the foundation that we have, the next phase of Opteon growth, largely driven by some of the structural shifts that are aided by regulation. But beyond that, some of the significant innovation that I see in the portfolio that will sustain growth for many years to come. So we look forward to seeing some of you on the road as we travel this week, but really appreciate you all dialing in and look forward to sharing more with you over time. Thanks again.

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