Albemarle Corp (ALB) — Q1 2017 Earnings Call Transcript

Thank you, Lisa. Thank you, and welcome to Albemarle’s First Quarter 2017 Earnings Conference Call. Our earnings were released after the close of the market yesterday, and you’ll find our press release, earnings presentation, and non-GAAP reconciliations posted on our website under the Investors section at albemarle.com. Joining me on the call today are Luke Kissam, Chairman and Chief Executive Officer; Scott Tozier, Chief Financial Officer; Raphael Crawford, President Bromine Specialties; and John Mitchell, President, Lithium and Advanced Materials. Note that Silvio Ghyoot, President of Refining Solutions, is not with us today due to an important business meeting. As a reminder, some of the statements made during this conference call about the future performance of the company may constitute forward-looking statements within the meaning of federal securities laws. Please note the cautionary language about forward-looking statements contained in our press release. That same language applies to this call. Please also note that our comments today regarding our financial results exclude non-operating, non-recurring and other unusual items. GAAP financial measures and reconciliations from those to the adjusted numbers discussed today may be found in our press release and the Appendix of our earnings presentation, both of which are posted on our website. Now I’ll turn the call over to Luke.

Thanks, Matt, and good morning, everybody. In the first quarter of 2017, Albemarle continued to build on the strong momentum we established last year. Excluding divested businesses and negative currency exchange impacts, revenue grew by almost $95 million or 15% and adjusted EBITDA grew by $27 million or 14% compared to the first quarter of 2016. Growth was driven by adjusted EBITDA increases of 56% in lithium and 11% in bromine. The combined adjusted EBITDA margins for our three global business units reached 35%, up from 2016’s average of 33%. And total company adjusted EBITDA margins remain strong at 29%. As we’ve discussed in our recent Investor Day, demand for lithium continues to grow rapidly, and our business team continues to focus on increasing production to meet both the current and future demand of our customers. Our bromine business is benefiting from improved employment in demand across various electronic applications and reduced bromine production in China. At the corporate level, we completed our deleveraging plan following the Chemetall divestiture during the first quarter. As of the end of March, Albemarle's net debt-to-EBITDA ratio was 0.6. We’re also very pleased with the progress on our $250 million accelerated share repurchase plan and remain on track to complete the buyback by the end of June. Now I’ll turn the call over to Scott.

Thanks Luke, and good morning. In the first quarter, we reported adjusted net income of $1.05 per diluted share, which is a 13% increase from the first quarter of 2016, after excluding the effects of divested businesses. This rise was fueled by an adjusted EBITDA increase of $35 million, or about $0.24 per share, from our three GBUs. However, business results were partially offset by around $0.12 per share due to corporate costs, foreign exchange, tax, depreciation and amortization, and interest expense. As Luke mentioned, our $250 million accelerated share buyback program is progressing well. Currently, we estimate that this buyback will lead to an average diluted share count of about 112.1 million shares for the full year of 2017. We also anticipate our 2017 effective tax rate, excluding specific items, non-operating pension, and OPEB items, to be around 22%. Capital expenditures in the first quarter totaled $54 million, with significant commitments made for major equipment and services related to our wave one lithium projects. As construction and equipment deliveries advance throughout 2017, the spending rate is expected to rise. We continue to project total spending for 2017 to be between $350 million and $400 million. Corporate expenses for the first quarter amounted to $32 million, driven by compensation costs and negative currency exchange effects. We do not expect the current rate of spending to persist; however, based on first quarter costs and our revised outlook for the rest of the year, we now estimate that 2017 corporate costs will fall between $95 million and $105 million. Operating working capital at the end of the first quarter was 27% of revenue, which aligns with our 2017 guidance, and we expect to maintain a similar level for the remainder of the year. Adjusted free cash flow for the first quarter was robust at $76 million. For the full year, we continue to forecast adjusted free cash flow between $200 million and $300 million, with the anticipated increase in capital spending affecting the rest of 2017. Additionally, currency exchange rates had a negative effect on adjusted EBITDA by $5 million in the first quarter. We currently predict a total negative adjusted EBITDA impact for the year of $10 million to $15 million compared to 2016, primarily due to the euro. Our 2016 average exchange rate was slightly above €1.1 per U.S. dollar, while we now forecast €1.06 for 2017. Now let me discuss our business units. Lithium and Advanced Materials had another strong quarter, particularly in the Lithium sector. First quarter net sales reached $284 million, a 32% increase from the first quarter of 2016. Adjusted EBITDA for this segment was $120 million, a 39% rise from the previous year, with impressive adjusted EBITDA margins of 42%. The Lithium sector saw net sales growth of 58% and an adjusted EBITDA increase of 56% compared to the previous year. Adjusted EBITDA margins were 46%, surpassing our long-term expectations in the low-40s range for this sector. Volume growth for the first quarter was 39%, with pricing up by 21%. Battery-grade products were the primary drivers for volume growth and most of the pricing improvements. The majority of this growth came from our newly acquired spodumene conversion assets, while we also continued to utilize total conversion. Furthermore, La Negra II in Chile has commenced initial commercial production, with a strong performance anticipated as 2017 progresses. We are encouraged by the initial results from our new spodumene conversion assets in China, where production rates for the first quarter were exceptional, and both sites are rapidly integrating with the rest of Albemarle. We are already using Albemarle systems to manage and report production activities, and most administrative functions are being processed through our regional shared services center. The capital project to expand production by 28,000 to 25,000 metric tons of lithium hydroxide at the site is currently underway. In comparison to the first quarter of 2016, PCS sales decreased by $11 million, while adjusted EBITDA fell by $2 million. The downturn in our segments such as catalysts and organic metallics, along with the impacts from the SunEdison bankruptcy, were partly mitigated by initial results from our cost-saving initiatives and improved year-over-year performance in curatives. In the first quarter, Bromine Specialties achieved sales of $219 million and adjusted EBITDA of $68 million, reflecting increases of 12% and 11%, respectively, compared to the first quarter of 2016. The growth in sales was largely driven by increased demand for flame retardants in various electronic applications, alongside improvements in sales from elemental bromine and specialty bromine derivatives. High operating rates and ongoing productivity enhancements in manufacturing also contributed to the year-over-year advancement. The first quarter adjusted EBITDA margins of 31% exceeded the 2016 average of 28% by over 300 basis points. Although it's early in the year, we remain optimistic about the favorable trends we observed in bromine throughout 2016, which have continued into the initial months of 2017. Refining Solutions reported first quarter net sales of $185 million and adjusted EBITDA of $50 million, reflecting a 9% increase in sales, while adjusted EBITDA decreased by 10% compared to the first quarter of 2016. The growth in sales was equally supported by fluid catalytic cracking, or FCC Catalysts, and clean fused technologies, or HPC Catalysts. Increased FCC sales were driven by strong demand in North America, while robust global demand, particularly in the heavier feed resid segment, enhanced HPC revenues. Adjusted EBITDA decreased as anticipated, influenced by customer turnaround schedules and competitive trials at FCC, a less favorable product mix in CFT, as well as rising input costs. I’ll now hand the call back to Luke for an update on our 2017 projections.

Thanks, Scott. Our strong first quarter results have positioned Albemarle for another outstanding year in 2017. Lithium and bromine both outperformed our initial expectations in the quarter, with Refining Solutions and PCS performing about as expected. Lithium is forecasted to drive second quarter results with year-over-year growth similar to the first quarter. Bromine faces comp comparison both sequentially and against the second quarter of 2016, but favorable market trends appear to be continuing. In Refining Solutions, negative mix comparisons in CFT and FCC and some cost increases are expected to impact adjusted EBITDA compared to last year. Finally, PCS is likely to continue relatively flat year-over-year performance as competitive pressures continue to impact the base organic metallics segment. At a company level, our overall expectations have strengthened since the beginning of the year. More favorable outlooks for lithium and bromine are forecasted to overcome expected weaker performance in refining. We now expect 2017 net sales of between $2.9 to $3.05 billion and adjusted EBITDA of between $835 million and $875 million. Adjusted EPS should range from $4.20 to $4.40, up from our initial guidance of $4 to $4.25. As we noted in our recent Investor Day, we’re very excited about the growth potential of Albemarle’s businesses. First quarter results demonstrate our continued pivot to a higher growth profile, and we expect that to continue going forward. Our business teams are focused on meeting the growth challenge by driving results for the second quarter and the rest of 2017 and by executing on our capital projects and business strategies to drive long-term opportunities for our business.

Operator, we’re ready to open the lines for Q&A. But before you do so, I would remind everyone to please limit your question to two per person and at one time, so that everyone has a chance to ask questions. Please feel free to get back in the queue for follow-ups if time allows. Please proceed.

Just wanted to confirm what kind of pricing volume expectations are embedded in your updated guidance. You said 21% price growth in lithium for Q1. Do you see that continuing? Thanks.

This is John Mitchell. From a pricing perspective, we’re focused on long-term agreements with our customers. We now have over 80% of our volume under agreement in the 2017 year. And you’ve seen that we’ve been able to secure a 21% increase in pricing in Q1. We expect that to continue, and that pricing to hold for the remainder of the year. From a volume perspective, we’ve always messaged that we expect to bring on about 10,000 metric tons or more per year of additional incremental volume. So we’re on track to do or better in 2017.

Great. And then as a follow-up, could you just give us an update on projects in the industry? I understand you guys are bringing on 10,000, but what about the other projects that you’re seeing in the industry? Do you see those coming to fruition and what’s the cadence of that through the year?

So with regard to additional capacity filling the demand need in 2017, we see principally the mines in Western Australia providing some of that capacity in conjunction with some Chinese extra capacity that’s out there in the market. And then also Albemarle is playing a big role in meeting the demand need as well as a result of the two Chinese assets that we have that we’re ramping up in Xinyu and Chengdu and then also our ramp-up in La Negra, our La Negra II plant.

The only thing I’d add is that it is consistent with the expectations and the discussions we had in Investor Day playing out pretty much as we expected it would.

Could you give us your latest view of the lithium demand in China, specifically in the EV market? We had a pretty slow start of the year in January and February, but a bounce back in March. What are your customers telling you? Do they see reacceleration going forward or clearly slow environment?

Yes, this is John. We see it was just really a short-lived, no real concern by our cathode and battery customers. If you look at the number of units sold and the breakdown of EVs and plug-in hybrid sales in 2016, in China was about 45% of the market. In Q1, they’re about 30% of the market, and that’s really just off of a strong March. So we see a good rebound in China. They’re going to be a significant player in terms of the overall EV and plug-in hybrid growth going forward, and no concern from the customer base.

And then if I look at your new financial guidance, 35% plus for lithium segment, for free EBITDA growth, I think those guidance suggest that $100 million in the first quarter could be the high water mark for this year? Is that correct? And if it is, why is that?

Yes, Scott. One of the key things that drove our first quarter was great performance out of our factories. So we’re a little bit hedging on that, make sure that if that continues, we have a bit of an upside that’s based into that range. So we continue to think that we’ll have $100 to $100 plus in the following quarters, so.

John, I had a question for you on the Jiangli assets under Albemarle fold. Can you talk a little bit about operating rates and how much more you could ramp those before your expansion? And then do you expect most of that production to stay within China or would that also be an export engine for you?

Hi Bob, so the nameplate capacity of the two combined plants, the Chengdu is 5,000 metric tons, and Xinyu 10,000. So we have room to continue to ramp up in 2017. And then we’ve already begun the expansion of another 20,000 to 25,000 metric tons in Xinyu bringing total capacity there to 30,000 to 35,000 metric tons by probably early 2018. And in terms of where we’re placing products, it’s a combination. I mean, that product is qualified with our key battery customers. And so we’re able to export it to even customers with the most stringent quality metrics. So we worked hard through the integration period and the negotiation period to ensure that those plants were qualified.

So John, just to follow up on that. If you could provide lithium hydroxide or lithium carbonate from any of your locations to your customers, or is it there are some customers where you come from Chile or elsewhere, how does that specification flexibility for your work?

So it is true that certain customers have specifications that may lend themselves to only being supplied from certain assets. However, we are trying to make sure that we have as much flexibility in our Albemarle supply chain as possible so that we can supply customers from multiple facilities. So in the specific case of lithium hydroxide, we have a single battery customer that we can supply from Kings Mountain, from Xinyu, and from Chengdu, but we have to make sure that each of those plants are qualified to the specific customer specification. But we’re taking those decisions, what makes sense, what’s economical, what’s efficient for us, and making sure that we have as much flexibility in our system. But it is true that each individual plant, no matter whether it’s Albemarle or through someone else, have to get qualified to a specific customer specification.

If we look at your lithium results on a sequential basis, your sales increased $8 million, and yet the EBITDA increased $11 million in playing contribution margin of more than 100%. Just wondering if you could walk us through some of the moving parts and elaborate on how you’re able to accomplish that.

So one of the key things is acquisition of our Chinese assets. As you recall, last year, they were part of our pooling portfolio, so there’s a bit of an arbitrage in terms of taking them into the Albemarle portfolio. And then also, we’re getting better performance out of those assets than the old owners were getting out of it, and it’s a great team that we have there in China. So we’re getting better performance, and we’re also getting the effect of arbitrage around the tolling fee. And then, obviously, we have better pricing this quarter versus last quarter.

That’s helpful. And as a follow-up, you commented you planned to increase production by 10,000 tons or more this year. I was wondering if you could comment on the composition of the positive increment there. For example, how much are ramping that La Negra II and other sources of new supply this year?

So I believe on previous calls, we hinted that La Negra will be ramping up kind of the 1/3, 1/3, 1/3, so this year bringing 6,000 to 7,000 metric tons of carbonate coming on from La Negra and then the balance coming from the Chinese assets in Xinyu and Chengdu. So we’re pretty much on track, and I see some extra volume coming out of the Chinese asset going forward, though.

This is Neil calling in for Vincent. It looks at your guidance for lithium for the balance of the year is down a bit versus growth experienced in Q1, so I was wondering if you can just touch a bit.

Can you say that again? We can’t hear what you’re saying. It seems like there might be an issue with your microphone, so please repeat that.

Sure. Can you hear me now? I was just saying it looks that your guidance for lithium the balance of the year is down versus the growth you experienced in Q1. So I was wondering if you could just touch on that a bit.

Yes, I think that’s a similar question and it was asked earlier. If you really look what we said, we had a really strong performance out of our Chinese assets in the first quarter. And one quarter does not a year make. So we have to make sure that we can operate that on a consistent level during the course of the year. If we do that, we can be able to achieve better than we did in both the first quarter. If we don’t, we’re going to have a little downside. So what we try to do is range with a regional expectation will be for operating those assets, and that’s how we get to the forecast that we’ve got. But we will have a very strong growth year-over-year in lithium, both on the top line, volume and on the bottom line.

All right. And another question on bromine. Given the strong quarter, have your longer-term expectations for bromine flattish to low single digit type growth in your business that you gave in your Analyst Day? Has that changed at all?

This is Raphael. I think we are pleased with our Q1 results. We do think it will perform better than what we originally expected for the full year. But on the long-term basis, bromine is still a lower growth business from a volume and an EBITDA standpoint. But we’re certainly doing all the things we can to keep our margin profile high. And if there are additional volume opportunities in some of our markets, we’ll be looking to capture those opportunities.

Raphael. I might add, too. We’re in a favorable electronics market right now as well, I think favorable tailwinds from that. As you know, there’s a quite cyclical industry that we just got to be cautious that we take this trend in being long-term. Eventually, that’s going to turn and cycle back down.

China apparently is considering mandating electric vehicles as a percent of each manufacturer sales in a couple of years. Do you have any insights into what percent that they’re thinking about targeting and how quickly they might implement something like that?

Yes, we don’t have any insight on what the Chinese government would do there other than what we would read in the press. So we don’t know. But anything that they do in such a state is going to be a continuation of what we’ve seen around the world from a regulatory standpoint, and encourage you for electronic vehicles, and we see it is something that could possibly impact our lithium business in the growth process.

One of your competitors announced that they’re looking into a major capacity expansion in Argentina, about 20,000 tons in the next two or three years. If they move ahead with that project, does that change your view on the supply-demand balance over that time frame? And how do you see supply-demand being impacted by that much capacity?

Yes, we have announced plans to add approximately 100,000 metric tons of capacity in lithium carbonate and lithium hydroxide between now and 2021. We are well-integrated into a resource that ensures we have the necessary feedstock. We have always stated our intention to capture 50% of the growth, while relying on other major players to help fill the gap. I believe this position remains valid. John, you would still see that supply and demand appears to be relatively stable during this period, correct?

Yes, Luke. Just second to Luke's said, we track all the projects around the world. We make sure that they’re considered in terms of the supply-demand balance. So I think the project that you’re referring to has been included in some other analysis. We don’t see any change in terms of our outlook in terms of supply-demand balance.

Great. In bromine, you mentioned you have high operating rates. Could you quantify the current utilization of your bromine assets? Additionally, when do you expect to see an increase in the demand for clear brine fluids?

Sure. While I won't comment directly on our operating rates, I want to refer back to what we discussed at Investor Day regarding one of our main strategies in the bromine business, which is focusing on productivity improvements. Throughout last year and into the first quarter, we have seen benefits from this approach, allowing us to get more from our existing asset base. This has positively impacted our ability to meet existing demand. We will continue this strategy and will be able to extract more from our asset base at the same or lower costs than before. This is a significant achievement for us. Jim, what was the second part of your question?

Clear brine.

Yes, I’m sorry. On clear brine, we still see good demand in the Middle East. We saw that through last year. We see that in the first quarter. But if you remember, Albemarle was strategically advantaged with having a plant, both in North America as well as in Jordan. So we’re able to capture opportunities in clear brines as they come up. We see the Middle East is still fairly good. Gulf of Mexico, we should see that coming back at the end of 2017 or, let’s say, the second half into 2018. And the rest of the world is soft, at least from our perspective.

Question on lithium. I know you have long-term contracts with your customers. So what percentage of your contracts would you say have been repriced in the last 12 months?

I mean, it’s a significant portion of the last 12 months. If not all, it’s pretty close. So we’ve had good pricing over the last one, contract by contract, PJ. But we’re getting price increases across the board on battery-grade products. Probably not as much, John, I would say on the technical grade products. Maybe comment some more on that, but I think on battery grade, it’s safe to say the entire industry has seen pricing increases.

Yes, P.J. Just to reiterate what Luke just said, I would say mostly all of our battery grade customers have seen some pricing movement. As you get into other markets, as we’ve said before, we typically price the value. And you look at a lot of other external factors, like energy prices and things like that, to make sure that the value of our products makes sense for the consumer. And again, in terms of our long-term view with customers, we’re going to treat our customers in a very fair way where we can work together to supply the needs of the industry, the energy storage market, and we’re going to grow together. And so that’s really a key part of our overall strategic approach and partnership approach with the leading battery producers in the world.

Great. And then there are junior miners trying to advance projects, in Australia as well as in the Americas, would you look at M&A versus doing your greenfield project in Argentina?

Yes, I think, PJ, what we said at the Investor Day still holds. We’re going to look to deploy the cash that we have in a way that creates the greater shareholder value. We’re obviously looking for M&A opportunities that would de-risk or expedite our strategy that could certainly become what resources where we believe they’re viable resources that put us on the cost position that would allow us to be competitive and maintain market leadership globally that are priced at a point, that we can get a better return on that and we can own other investments that we see. So it all comes down to what’s the viability of the resource and what kind of return can we get on their asset. But John talked in Investor Day about the resource team, we’re out scouring the globe for resources, that includes new resources, that includes companies that are in start-up phase that are looking to attract dollars. So we’re very active. But just because something is for sale and somebody’s talking about it, doesn’t mean it’s a quality asset, and it doesn’t mean that you can meet the value expectations of that particular owner.

PJ, this is John. Just one other quick comment, and again, we mentioned this during Investor Day, but I think it’s important in terms of our approach. We are only building out capacity on the back of long-term agreements, which is different than maybe others in the market. So it’s really going to come down to our partnership arrangements with our customers, and what their demand is, and then that’s going to lead to us building out capacity, whether it’s through Greenfield, Brownfield, or M&A.

Luke, on refining, I believe your guidance implies a better back half in the first half of the year. Can you discuss the drivers of improved performance and is that sustainable into 2018 as well?

I didn’t hear the last piece of it.

Is that improved second half performance sustainable into 2018 as well?

Yes, okay. I’m sorry. I think as I look overall at refining, it’s doing about what we would thought. I think both from a margin standpoint as well as from the EBITDA standpoint, you’re going to see a stronger end of the year. And it just told you to see the mix. I think FCC will be strong in 2018 than in 2017 from what I see today. And then when I look at HPC, it just depends on what that mix is going to be. How much of it’s going to be resid, are we going to get a good mix for some of our high profit or not. So I would say on FCC, for what I would see, it would be stronger, a strong and continued in ‘18. But for HPC, it’s still too early for me to call right now, David.

Very good. And Luke, you mentioned in bromine reduced production in China. Can you discuss that, quantify that and how that might impact pricing and margins as is going forward?

Yes, I think we’re experiencing some effects from the situation in China. This was mentioned in our previous comments. I believe we are seeing some positive developments there, but Raphael can provide more details.

Yes, David, I agree with what Luke is saying. There is a positive impact from the tight supply of bromine in China, which is benefiting local pricing that remains favorable. Compared to last year, we are seeing an average increase of 50% in local bromine prices in China, which supports our bromine business development there, although it is still relatively small. Recently, we have also observed limited exports of flame retardants from China, which may relieve some pressure on our other markets. This situation has been beneficial for us in terms of volume and maintaining pricing. We monitor this closely, have teams on the ground in China, and analyze all major reports continuously. We remain cautious as we come out of the winter months when production is lower. As we approach the summer, we need to assess how production may ramp back up in China and the potential impact before we can accurately evaluate the overall situation.

I have a quick question about lithium. Are you saying that you are sold out for the year regarding battery grade? Is the industry also essentially sold out for the year?

I can’t really comment on the overall industry, but I can comment on the fact that every metric ton that we bring on the market is sold. So it’s sold be our long-term agreement. Some of those agreements have options if we are able to produce more volume, we can place it directly with those customers. So as much as we can make in the battery grade will be placed into the market to our long-term customers.

And as a quick follow-up in terms of battery grade, is all the incremental demand coming from EVs or are you seeing some growth in consumer products as well as other areas?

Yes. So as we outlined in Investor Day, we continue to see growth in consumer products area. These are cellphone, power tools, that sort of thing, and 7% to 8% per year. And the big growth is actually coming from the transportation space, automobiles, buses, that sort of thing. Small contribution from food storage, really, very, very small that’s more of story that’s 5 to 10 years out type of thing.

John, I was hoping that you could comment a little bit on whether you’ve seen the impact of the higher cost out of Chile related to the royalty payments. And also, can you talk about the contribution of potash in the quarter?

So Mike, the royalty payments, community payments, are all fully baked into Q1 results. So that went into effect January 1. So it’s all part of the mix now. With regard to potash, as you know, potash is a pretty small part of our business in terms of the way it contributes about 5%. As we actually extract more brine out of the viatorcoma, we’ll have the ability to expand on a potash basis. But right now, we’re essentially maxed out in terms of our potash plant and we’ll evaluate as we extract more brine what the opportunities look like for potash going forward.

All right. And then I was also hoping you could comment on what you’re seeing in terms of lithium carbonate versus lithium hydroxide pricing in your outlook. I assume that the 20%-ish growth number for the rest of the year is kind of a blended average from everything. Is one of them significantly stronger and increasing? Can you just give us some color on that?

Regarding pricing, I would say no. It is not necessarily stronger or weaker on an incremental basis. As you may know, the price for hydroxide tends to be higher than carbonate. However, on a year-on-year basis, one is performing better than the other at this moment.

A couple of questions, if I may, revisiting the refining catalyst business. First of all, in the first quarter results, you talked about trials and a couple of other things, the debt to EBITDA, but I would have thought that would’ve also impacted revenue. So was it most fixed that margin supply?

Yes, it was primarily a matter of price and mix, which you could describe as a disconnect. As we mentioned during our Investor Day, we’re focusing on expanding into the resid market and how it affects our capital trading. We experienced strong volume in hydro treating catalysts, but much of it came from the resid segment, where our margins are weaker. Additionally, we sold more resid through our joint venture in Japan, contributing to this mix issue.

Okay. So the turnarounds that you mentioned, that impacted your profitability, should we sort of keep that in mind for a year from now when they may not happen in the first quarter as an adjustment to our expectations or is it just the ramp sort of forecast beyond the current quarter?

Dmitry, this is Matt. Since Silvio is not here, let me take this one. If you look at what we’ve said about FCC from the beginning of the year, we knew that some of our major customers were going to be undergoing turnarounds and doing competitive trials in FCC, and that’s why our Refining Solutions guidance have been back-ended a little bit second half versus first half. It’s kind of like Luke said earlier in response to ‘18, it’s probably a little too early to get into detail in ‘18. But right now, our review of ‘18 in FCC is favorable.

Fair enough. And then as my follow-up question, just fantastic really quick one, and I understand as a small business than the PCF portion of the company, but I mean, we haven’t had other than business probably two to three years. If I could change or whether it’s something you shouldn’t do more something with that, but that market needs to change for both the polyolefin piece and the organometallic piece to actually become something that we can talk about positively?

Go ahead, John.

I believe this business has growth potential. However, it is currently facing some overcapacity issues in the organometallics sector, which has led to volume growth but also price declines over the past few years. We hope to have reached the bottom of this trend. Overall, the business is set to grow due to the rising demand for plastics and the development of new high-performance plastics and resins for packaging. As mentioned during Investor Day, we are confident in its growth profile. We also encountered a significant customer bankruptcy, contributing to a challenging year, but we are optimistic that we will recover and the business will return to a positive trajectory moving forward.

Okay. So 2018 when we should see at least the polyethylene turnaround then it sounds like maybe a couple of more years for organometallics?

That’s right.

First is on the guidance. I think as I look at the EBITDA guidance was raised by about $35 million, but the net cash from operations and adjusted free cash flow remain the same. Is there some additional cash usage that, of course, something like working capital, or is it more so that a lower net cash from operations and free cash flow lines have a wider range, so this adjustment doesn’t really move a needle?

Yes, David. Looking at the guidance, EBITDA has increased by $35 million, which is due to higher revenue and consequently increased working capital. Most of the guidance increases are expected in the second half of the year rather than the second quarter. Therefore, the working capital will remain on our balance sheet. As a result, we anticipate our cash flow to be roughly the same, possibly a bit better, within a range of $200 million to $300 million. There are no significant changes in spending reflected in this guidance. Capital expenditures are consistent with our expectations, and other items are also in line with what we projected.

All right, great. And then it looks like as we have discussed, Chinese EV sales maybe a little weak in January and February, but bounced back in March. But they are stepping down their incentives this year versus the previous year. Are you concerned at all about that and what’s your outlook for Chinese EV sales for the remainder of ‘17?

As we said a little bit earlier on the call in talking to our cathode and battery customers and just having spent a little bit of time in Asia. No concern in our end, that the actions by the Chinese government or the incentives will in a way affect our guidance for the remainder of 2017.

This is Dan Rizzo on for Laurence. The cyclicality that you mentioned in bromine before, is that lessening with your reduced exposure to electronics end market?

This is Raphael, Dan. I don’t think that we reduced our exposure to the electronics. But what I would say is that there’s been a greater diversification of applications within the electronics that has given us more confidence going into the future. As Scott had mentioned, there’s still cyclicality in electronics overall, but we’re no longer as dependent, for example, on PCs and TV sales that we’ve diversified, but the markets have diversified into wire and cable for automotives. So transportation wire and cable and Circuit Boards have really increased and some of the end markets have changed. So we feel like it’s in a more stable position going forward.

So from my standpoint, I think Raphael mentioned really growth point there I think we have de-risked that bromine business on the downside because of the broad applications that we have in that business and how this evolved over the last five or ten years.

I had a follow-up on the Lithium business and perhaps the margin profile there. You mentioned that obviously strategically, you’re shifting a bunch of your tonnage to captive conversion from toll, but you did mention toll conversion still part of the mix. So I’m just wondering how far along are you in shifting overall toll volumes to captive conversion? And what sort of affect do the toll volumes still have on margins? And how do you see that playing out over time?

So this is John. The transition from toll to captive occurred due to the acquisition of the two Chinese facilities we obtained. Initially, these were tolling facilities for us, but now they are producing volumes that contribute to our portfolio, and we are also increasing the volumes within those assets. Tolling will always be part of our portfolio. We still have a couple of other tolling partners that we will continue to work with this year. The tolling volumes for those other partners may not be growing, but we are committed to maintaining those relationships for the long term.

And just the influence on the margins, I guess, apples-to-oranges now that you have those significant chunks of conversion capacity effectively captive via the acquisitions?

Yes. So margins from a tolling facility, as you can imagine, will be lower than the margins from a facility that we own because the toll needs to make some kind of process in terms of operating that asset for us. So yes. So you end up improving your margin by shifting from tolling to captive assets.

So what you got to look back overall, when you look at the fact is what your capital cost, what’s your cost of depreciation that goes in there, how do you operate the assets versus how they were operated before, what do our ages any standards and the other process standards that we have, how does that impact that margin. We’ve obviously, as you would expect, believe that resid rely tolling that we make more money and we de-risk of those strategies by having. So you saw some improvement in our first quarter margin. And if you look at that, we said a good deal of it was driven by a recent of those Chinese assets that we own. So it’s a positive move, and as we bring on more and more capacity and reduce our unit costs down, we will be able to continue to deliver the best-in-class type of margins that we did in the first quarter.

And again, I go back to our philosophy and strategy to secure long-term agreements with customers on a long-term basis, multi-year basis, and bring on capacity to meet those contracts, and so as we bring up our own captive capacity, it is essentially sold out day one. So we need the relationships with the tolling partners to give us some flexibility as well.

But Chris, if I can add one more point. I know everyone is wondering about the margins. You can't just look at it from one angle and assume that as we move to our own conversion assets, our margins will be straightforward. We have additional costs that we will be incurring throughout the year, particularly from an expiration standpoint. These costs didn’t impact the first quarter as much as they will in the next three quarters. We need to invest that money to understand the quality of the potential resources we might develop over the next decade, and this spending will increase over the remainder of the year. So as we assess our overall margins this year, our lithium margins could end up being slightly higher than our initial target. However, I don’t expect the first quarter's margins to continue at the same level for the rest of the year.

Okay, that’s helpful. It makes sense. And then just one quick follow for Raphael, a lot of air time today. Just real quick, though. Just on the strength you’re seeing in flame retardants, bromine flame retardants specifically, and understand that the rising tide of an overall more healthy electronics market. But can you talk about specifically where you’re seeing strength for BFRs? Is it across the board, or is it more specifically PWBs versus enclosures versus connectors for automotive? Thanks.

Yes. Sure, Chris. It’s roughly in the printed wire board market as well as the connector space that we’re seeing the strength in flame retardants. It’s not so much in enclosure. It is good news that when we look at the statistics, certainly, we’ve seen the bottoming out or leveling out on the enclosures market, but it’s not what was the meaningful contribution to our improved performance. And now, we think it will drive the rest of the year.

Regarding the growing market, are you observing notable strength in other areas besides electronics? Additionally, how long do you anticipate the reduced volumes from China to continue? Will it be for one to two quarters or longer? Thank you.

So the largest market for Albemarle is our flame retardants market, which is also the largest market for the industry. Next is completion fluids, followed by a range of specialty applications that, while small in volume, have performed well overall. The strength of our business primarily comes from flame retardants, which will drive our results for Q1 and for the year ahead, along with some recovery in clear brines later in the year. Regarding China, we expect prices to average higher than the past five years and remain strong throughout the year. However, we are uncertain about what the second half of the year will bring, especially with summer production potentially increasing in China. Production has been low, but demand has remained relatively good, which has pushed prices up. We expect conditions to be favorable, but we are not making long-term assumptions. This is why we are continuously working on enhancing productivity within our assets to maintain competitiveness regardless of market fluctuations.

This is Ryan Berney. Just wanted to get one more in for John, if I can. John, I wanted to ask you about I know you got a couple of questions answered already, but I think there was some chatter that perhaps you’ve got some inventory that may have been on a lower COG basis coming out of last year. So I guess, can you talk about the $60 million to $70 million in the royalties and any other costs this year? And your guidance in the back half seems to be somewhat flat with the first half, really just kind of the read we’re getting from you, so I guess I think about production growth presumably we have La Negra II in the back half, so we should be getting some significant help there. So I’m wondering if those $60 million to $70 million in the earnings headwinds there, that you called out are both more back calculated and maybe if you can give some granularity on how much you see and you saw in the first quarter?

Yes, so Ryan, it’s Scott. So specifically about the lower-cost inventory, one of the key things to remember with the Chilean concession and the royalty that we’re paying as well as the community payments, that’s tied to production that started in 2017. So we did not see a full run rate, if you will, of that royalty in the first quarter. So we saw something like, I don’t know, $7 million to $8 million in the first quarter. We’re still expecting to see a full year of around $50 million. So that certainly had some support for that margin in the first quarter. And maybe, John, you can talk a little bit about the production ramp-up La Negra II, and how that layers in for the rest of the year?

Yes, so we’ve started production in Q1, certainly going to continue to ramp from a volumetric perspective, increasing throughout the year. And as we’ve said, we’re going to probably bring 6,000 to 7,000 metric tons on this year and then another one third in 2018. So it’ll be a continuous ramp through 2017.

So, Lisa, this is Matt. I think we’re out of our time limit. Thank you. You could close the call for us.