The Chemours Company

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

The Chemours Company is a leading global provider of performance chemicals that are key inputs in end products and processes in a variety of industries, most prominently in fluoroproducts and titanium technologies.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

The Chemours Company is a global leader in performance chemicals, with products essential to various industries. Despite its scale, it grapples with profitability concerns in a competitive and volatile market.

Business Overview

The Chemours Company (CC), formerly part of DuPont, is a global chemical company operating through three primary segments:

  1. Titanium Technologies: This segment is a leading global manufacturer of titanium dioxide (TiO2), a pigment used to create whiteness, brightness, opacity, and durability in products such as paints, coatings, plastics, and paper. This segment has strong customer relationships, including those in the automotive, architectural and plastic packaging industries.
  2. Thermal & Specialized Solutions: This segment focuses on refrigerants, propellants, and other specialized solutions, primarily serving the refrigeration, air conditioning, automotive, and electronics industries. It involves fluorochemicals with a range of applications.
  3. Advanced Performance Materials: This segment provides high-end polymers and advanced materials used in applications across a variety of industries, including electronics, semiconductors, aerospace, and transportation. This segment is also involved in innovative technologies like hydrogen production.

Chemours is a complex business with different segments, each with its own unique drivers and challenges. Understanding the interplay between these segments and their external factors is crucial for investors.

Financial Analysis

Revenues: The company generates revenue from its three main segments:

  • Titanium Technologies is the largest revenue generating segment. For the nine months ended September 30th 2024 it generated 45.5% of their revenue.
  • Thermal & Specialized solutions accounted for 32.2% of their revenue for the nine months ended September 30th 2024.
  • Advanced Performance Materials accounted for 21.4% of their revenue for the nine months ended September 30th 2024.

Looking into geographic segmentation, North America accounted for 41% of the sales for the nine months ended September 30th 2024 and 46.8% of the sales for the year ended December 31st 2023. Europe, Middle East, and Africa represent approximately 27% of net sales, while Asia Pacific accounts for a relatively low percent of net sales. Latin America accounts for just around 10% of the total sales.

Chemours operates in a globalized market and faces geopolitical factors, which can lead to some volatility in financial performance.

Profitability:

  • Operating Margin: Chemours’ reported operating margin for the nine months ending September 30th 2024 was 12% compared to 24.7% for the same period of 2023. For the year ended December 31st 2023, the operating margin was 19.7% compared to 18.9% in 2022. The lower margin is attributed to declines in revenue, especially in the Titanium segment due to demand pressures.
  • Adjusted EBITDA Margin: The consolidated Adjusted EBITDA margin declined to 21.4% for the nine months ended September 30th 2024, from 29.4% for the same period of 2023, and also declined from 23.7% to 18.5% for the year ended December 31st 2023. The decrease was attributed to lower volume and pricing, as well as higher raw materials and other costs.
  • Net Income: The company has had volatile net income. In the first three quarters of 2024, they have had a net loss of $21 million, whereas in the first three quarters of 2023, they have made $94 million. For the year ended December 31st 2023, the company had a net loss of $49 million compared to a profit of $578 million in 2022. The net losses were mainly attributed to lower revenues, restructuring charges, and increases in costs.

The company’s profitability has been quite volatile in the past few years, and their management hasn’t really improved these issues with their strategy. This poses a risk and a concern for investors.

  • Return on Invested Capital (ROIC): It is very hard to calculate this using provided data, but the economic profit margin for the company is highly volatile due to price volatility, supply chain issues, and industry downturns, resulting in volatile ROIC as well.

Liquidity:

  • The company has a debt-heavy capital structure and struggles with liquidity.
  • The total debt at September 30th 2024 was $3.89 billion. Also, net debt was $3.39 billion, which was significantly high considering a current market cap of approximately $2.8 billion.
  • Chemours has a revolving credit facility and other options to manage their liquidity, but they still rely heavily on financial arrangements and have high debt obligations.
  • The company has used their share repurchase program rather erratically, mostly to offset the dilution caused by their employee stock plans.

Moat Analysis: 2 / 5

Chemours’ moat is limited and is mainly dependent on their production advantages in some segments and patents in the performance materials segment. There aren’t strong enough switching costs, or network effects to provide pricing power.

Sources of Moat:

  1. Technological Capabilities:
    • Chemours’ innovative production processes, particularly in its Titanium and Thermal segments, present some cost advantages, which make it difficult for some new competitors to replicate.
    • The company’s Advanced Performance Materials segment has strong proprietary technologies that have value in particular applications.
  2. Brand Recognition:
    • Chemours’ product brands are recognizable and have a good reputation for durability and quality. This gives them a mini monopoly to extract value from their customers.

Weaknesses in Moat: * Lack of Pricing Power: Most of Chemours’ products have substitutes readily available which limits their ability to command a premium price. The auto and construction markets are very competitive. * Limited Switching Costs: Customers typically do not face high switching costs which makes it difficult for them to build durable competitive advantage. * Commodity Exposure: While they use branding, most of their products are commodities and the company is affected heavily by the pricing volatility. * Unreliable Patents: Though patents have been valuable, they are often challenged or can expire, removing the advantage the company had.

Chemours has some competitive advantages due to technological capabilities and branding in some segments, but these advantages are not strong enough and are susceptible to volatile markets and competition.

Moat Rating: Considering the above factors, I would rate the overall moat a 2 out of 5. While the company has some competitive advantages, they aren’t very durable or consistent in generating above-average profits for a long time.

Risks to the Moat and Business Resilience

  1. Economic Cyclicality: Chemours’ business, especially in the Titanium segment, is highly vulnerable to swings in the economic cycle and pricing volatility. Major recessions can significantly impact their sales, profits, and cash flows.
  2. Intense Competition: Chemours faces tough competition from both established players and emerging competitors, which has put pressure on their pricing power and margins.
  3. High Leverage: The current amount of debt is very high, which increases the company’s exposure to interest rate changes and also increases the risk of bankruptcy, especially in periods of negative earnings.
  4. Environmental Regulations and Liabilities: The chemical industry is heavily regulated, and changes to environmental laws can impact the business. They have faced severe litigation regarding PFAS. They are currently in the process of remediation and are likely to incur significant costs in the future.
  5. Market Sentiment: High market volatility can cause investors to panic sell and move out of stock, leading to downward pressure on stock prices.

The company’s resilience is rated as medium. While the company has some durable strengths (mentioned above), they are still very dependent on volatile market factors and the company’s balance sheet also leaves a lot to be desired.

While the company has been around for a long time, the financial performance can be drastically changed due to economic and volatile environments.

Understandability: 3 / 5

The Chemours Company is a reasonably complex business to understand.

  1. Pros: It has a three segment structure which is easy enough to understand. Their products and their importance is also readily available.
  2. Cons: Each of its segments operates in multiple, different industries and uses different technologies and raw materials. The complex nature of these sectors creates difficulties in understanding the dynamics of the entire enterprise.
    • The complex interlinked supply chains, various customers, and global operations make it difficult to predict and comprehend their financial results.
    • Their complex accounting policies related to impairments and provisions may confuse investors.

Thus, it is easy enough to understand at the surface level, but requires some work to really dig deeper and see their problems.

Balance Sheet Health: 3 / 5

The company’s balance sheet health is moderate. Here’s a breakdown:

  1. Debt Levels: The total debt of $3.89 billion is very high for the size of the company. This makes their balance sheet somewhat weak, due to the reliance on external funding.
  2. Cash Position: The company is cash strapped and doesn’t have a lot of cash reserves, which makes them more reliant on debt.
  3. Tangible Assets: Chemours’ holdings of Property, plant, and equipment (PP&E) account for a considerable portion of their assets at roughly $6 billion, providing a tangible backing.
  4. Intangible Assets: The goodwill in their balance sheet has been declining due to write-offs over the recent years. Their other intangibles, such as brand names and patents, can be very hard to value.
  5. Liabilities: The company has total liabilities, including deferred taxes, employee compensation, and other liabilities worth roughly $7 billion. Given the size of their equity ($2.8 billion), the amount is quite high.

Chemours has a debt-heavy capital structure with a lot of liabilities. This is a risk for the company.

Conclusion

While Chemours has some elements of a moat, the nature of their business in cyclical, highly competitive industries with low barriers to entry and high susceptibility to economic downturns makes their business quite a challenging one. Despite the steps they are taking to improve their profitability and cash flow, their success will mainly be determined by the quality of their execution and also macroeconomic factors. Investors should view the company with a lot of caution and understand what exactly they are investing in. The high debt and uncertain market makes the company volatile, thus it is not recommended for all types of investors.