Albemarle Corp (ALB) — Q3 2019 Earnings Call Transcript

Thank you and welcome to Albemarle's third quarter 2019 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 www.albemarle.com. Joining me on the call today are Luke Kissam, Chief Executive Officer; Scott Tozier, Chief Financial Officer; Raphael Crawford, President, Catalysts; Netha Johnson, President, Bromine Specialties; and Eric Norris, President, Lithium. As a reminder, some of the statements made during this conference call about our outlook, expected company performance, production volumes and commitments as well as lithium demand 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 some of our comments today refer to financial measures that are not prepared in accordance with GAAP. A GAAP reconciliation can be found in our earnings release and the appendix of our earnings presentation, both of which are posted on our website. Now I will turn the call over to Luke.

Thanks, Dave. Good morning, everybody. On today's call, I'm going to provide a quick recap on quarterly performance, but want to spend the bulk of my time on the long-term position we're taking and how the recent strategic decisions we've made support that view. Scott will provide more detail into our third quarter and full-year performance. Excluding currency impacts, third quarter revenue grew by 14%, adjusted EBITDA by 12%, and adjusted diluted earnings per share by 22% year-over-year. Excluding currency impact, each of our GBUs delivered year-on-year EBITDA growth. Increased volume across all of our businesses and favorable year-over-year pricing in lithium and bromine contributed to that growth. With that, let me take a step back and set the stage for where we are today. As you know, the lithium market is dynamic. It offers a very strong future growth opportunity, and the long-term secular growth trends remain fully intact. However, we are - and we will be dealing with challenging market conditions for the next 12 months to 18 months. Since late July, we have announced several significant strategic actions to successfully position our business for the long term. Last quarter, we announced the decision to defer work on a price-only 125,000 metric tons of conversion capacity, freeing up about $1.5 billion of our $5 billion five-year capital investment plan. This will enable us to generate free cash in 2021 and is the right path to take based on current supply-demand dynamics. It provides us with the financial flexibility to take advantage of any opportunities we see. Importantly, this decision does not affect current customer commitments. We are in the position to deliver on all committed contracts and we have the ability to add capacity if current market dynamics improve. As you know, we have access to geographically diverse, high-quality, low-cost lithium resources and the financial flexibility to build or buy conversion capacity in the future if doing so creates value for our stakeholders. As we will discuss in detail at our upcoming Investor Day in December, battery technology continues to advance. We expect carbonate demand to continue to grow, but expect hydroxide demand to be much stronger. To that end, we're focused on remaining an agnostic lithium producer, whether our customers want carbonate or hydroxide or other lithium products. We have access to the world's best bromine and hard rock and the industry-leading conversion expertise to deliver on their needs and we remain committed to investing, to maintain our competitive composition and deliver a truly differentiated customer value proposition. When we shared our strategy in 2017, we told investors that we would take advantage of opportunities that accelerate and strengthen our long-term growth strategy. To that end, we announced last week the completion of our joint venture agreement with Mineral Resources, where we have a majority interest in a 60%, 40% ownership structure. All in, our investment of $1.3 billion consists of a cash payment of $820 million to MRL for 60% of the Wodgina mine and a contribution of a 40% interest in our 50,000 metric ton hydroxide facility currently under construction in Kemerton, Western Australia. We believe our investment in this new joint venture named MARBL Lithium will produce substantial long-term value. The JV provides access to a high-quality hard rock source, further diversifying our global lithium resource base and strengthens our position in the long term by giving us the ability to increase capacity to support future market demand. With the combined operating expertise of Albemarle and MRL, the top-tier Wodgina mine, and our market knowledge, we are well positioned to benefit from a rapidly growing market, which is increasingly emphasizing hydroxide. The joint venture supports our long-term view, but in the short term, we made the decision to idle production of the Wodgina mine until market conditions support production economics. The returns for this project will still be very attractive. We anticipate that when the JV is producing lithium hydroxide at a rate of 100,000 metric tons annually, the return on invested capital will be a healthy 17% to 19% or roughly two times our cost of capital. Staying with lithium, I want to address pricing and contracts. As we commented in our preliminary earnings announcement, current market conditions are challenging, and we're experiencing pricing pressures in China and on our technical grade products. Today, our pricing strategy under our long-term battery grade contracts has held. As you can see on pages 10 and 11 of our earnings presentation, Albemarle's third quarter lithium pricing was up slightly year-over-year despite a significant year-over-year decline in market conditions. Recently reported China carbonate prices appear to have stabilized in the range of $7 a kilo. We expect that this price level is at or near the marginal cost of production and do not expect China carbonate prices to drop further in any material way. However, China carbonate at $7 a kilo puts pressure on pricing across the global lithium portfolio, including the fixed and variable pieces under our long-term agreements. We know that our long-term agreements are of great interest, concern and focus. So let me broadly address the matter here. As we have been in the past, we are in active discussions with customers on our agreements. Those discussions involve price, volume, allocations between carbonate and hydroxide, length of the contract, and the value that Albemarle offers for quality, security of supply, flexibility between carbonate and hydroxide, sheer volume of product needed, and the ability to meet the customers' growth expectations. It is obviously not in our best commercial interests to discuss contract negotiations publicly, so we are not going to do it. These are active discussions with many moving pieces. As the dust settles on these negotiations, we'll give you a better look at what this means for our annual outlook. Rest assured that we understand the value we bring to the supply chain and we intend to capture our fair share in these discussions. Now let me switch gears and talk a little bit about 2020. As a part of our strategy, we continue to assess our business portfolio. We have received multiple inquiries about our Fine Chemistry Services and Performance Catalyst Solutions businesses, so we have initiated two processes to pursue these opportunities. They are both profitable businesses with strong operating teams. So if we can come to an agreement on a valuation that we feel is appropriate, we will pursue a divestiture. If we are not able to secure a valuation that we believe to be appropriate or in the best interest of our stakeholders, we will continue to operate these businesses. We would expect both of these transactions to be 2020 events. In terms of how we see our portfolio performing in 2020 versus 2019, our preliminary view today is that we expect Catalysts, Bromine, and Fine Chemistry Services to be essentially flat. There are some gives and takes in each, but right now, assuming no overall economic slowdown, these businesses should net to approximately flat. Lithium will be lower year-over-year due to pricing pressure across the portfolio and not having new conversion capacity to drive any significant volume growth. We have initiated a structured program across the company to capture sustainable cost savings and expect this program to deliver over $100 million in sustainable cost savings over the next two years. Taking all this into account, our preliminary view is that our full-year 2020 EBITDA performance could be lower than full-year 2019 results by around 10%. In closing, we are taking swift actions to navigate the market challenges that we see in 2020 and emerge even stronger to capture the long-term growth opportunity in a profitable manner. We will continue to build on our strength in manufacturing excellence in Bromine and Catalysts and we will transform processes for lithium, similar to our other businesses to ensure best-in-class operations. We can - we will continue to be conscientious in our asset management and capital plan and seek to be nimble in response to changing and dynamic market conditions. With that, I will turn the call over to Scott.

Thanks, Luke, and good morning everyone. For the third quarter, we reported net income of $155 million or $1.46 per diluted share. Adjusted earnings per share were $1.53, an increase of about $0.22 per share compared to third quarter 2018 or 17% growth. Our businesses delivered about $0.23 per share of growth with double-digit earnings growth in both Bromine and lithium and high single-digit growth in catalysts. Our lower effective tax rate contributed about $0.06 and a lower share count as a result of our 2018 share repurchase program contributed about $0.03; those gains were partially offset by $0.04 of higher depreciation and unfavorable foreign exchange, which was a 7% headwind compared to third quarter 2018. Regarding our business performance Lithium, reported third quarter net sales of $330 million and adjusted EBITDA of $127 million. Excluding the unfavorable impact of currency, lithium sales were up 23% and adjusted EBITDA was up 9% year-over-year. This growth was due to increased volume and favorable pricing, despite the impacts we communicated in our earnings pre-release. As a reminder, these included, first, a volume shortfall, which impacted the third quarter by about $15 million in EBITDA. This was primarily due to Typhoon Tapah, which caused lithium shipments from ports in Shanghai to be delayed into October, and we expect this to be fully recovered in the fourth quarter. Second, the use of tollers to meet customer commitments and address operating issues in Chile. This resulted in an EBITDA reduction of around $10 million. The technical team in Chile has focused on reliability improvements, which have enabled operating rates to now reach full capacity, given customer commitments; tolling is expected to continue into the fourth quarter. Third, impacts also included a $7 million out of period adjustment regarding lithium carbonate inventory values that was identified and corrected during the third quarter close process. Finally, an overall 1% increase in lithium pricing versus prior year. However, continuing price pressure on lithium sales in China unfavorably impacted EBITDA by about $5 million versus our expectations. Finally, adjusted EBITDA margin was 39%, and it would have been 40% if we excluded the $7 million out of period adjustments. Bromine reported third quarter net sales of $256 million and adjusted EBITDA of $89 million, up 11% and 14% year-over-year excluding unfavorable currency impacts. Adjusted EBITDA margins were strong at 35%, up nearly 90 basis points benefiting from 7% higher pricing, a favorable product mix and high plant utilizations, price and volume were favorable across geographies and most of our products. We continue to see weakness in the automotive and construction sectors; flame retardant demand for electronics and drilling fluids in the oilfield market remains strong. Catalysts, third quarter net sales were $261 million and adjusted EBITDA was $67 million, up 5% and 8% respectively compared to the third quarter of 2018, excluding unfavorable currency impacts. Adjusted EBITDA margins were 26%. Favorable pricing in Fluid Catalytic Cracking or FCC catalysts was offset by lower volumes due to the delays in the startup of two customers' new FCC units. We currently expect both of these units to be in operation in 2020. Clean-fuel technology or hydroprocessing catalysts benefited from higher sales volumes and a favorable product mix. On the innovation front, on October 31, Exxon Mobile and our Albemarle together launched a transformative hydroprocessing suite of catalysts and service solutions for the refining industry called the Galexia platform. The new platform helps refiners realize the full potential of specialty catalysts and enhance client performance by analyzing and identifying operational opportunities that extract greater value. Corporate costs in the third quarter were $39 million, an increase of $16 million over the same period in 2018, primarily driven by unfavorable currency losses of approximately $11 million. Our cash from operations was approximately $346 million for the nine months ended at the end of September, a decrease of $31 million versus the same period in 2018, primarily due to the timing of payables and the collection of certain receivables. Capital expenditures through September were $608 million. Expenditures for the La Negra lithium carbonate expansion and the Kemerton lithium hydroxide project remain on track, and we now expect full year 2019 CapEx to range between $900 million and $950 million. At the end of the quarter, our net debt to adjusted EBITDA was 1.6 times; with the close of the MRL deal, we estimate our gross debt to adjusted EBITDA ratio to move from 1.9 times to around 2.8 times, and net debt to EBITDA to be around 2.6 times. We have funded our payments associated with the new joint venture by borrowing approximately $1 billion under an unsecured credit facility. We expect that this borrowing along with other corporate funding activity may ultimately be converted to long-term debt given attractive economics. As communicated in our pre-release on October 24, we expect 2019 pro forma net sales to be $3.6 billion to $3.7 billion, reflecting 7% to 10% growth. Adjusted EBITDA to be $1.02 billion to $1.06 billion, equating to 2% to 6% growth, and adjusted EPS of $6 to $6.20 or 10% to 14% growth. Drilling down into the businesses, we expect that bromine will continue its strong performance and deliver adjusted EBITDA growth in the low double-digit percent for the full year. The Catalyst business has improved since our second-quarter outlook and we now expect it to be down low-single digits on a percentage basis, excluding divested businesses. And finally, Lithium is expected to grow EBITDA in the low to mid-single digit percent range and deliver full-year adjusted EBITDA margins of around 40%. You've likely seen reports of civil unrest in Chile and are wondering how this is affecting our operations. First, I'm happy to report that all of our employees are safe. At this time, our plants are operational and shipments are moving on schedule. We have lost approximately 500 metric tons of production since the unrest started, but it will not materially impact our financial results. We will continue to monitor this fluid situation very closely. Based on our current geographic sales and production mix year-to-date in our expectations for the rest of 2019, we currently expect our full-year effective tax rate to be about 18%, excluding special items, non-operating pension and OPEB items. This rate is in part a reflection of strong operating performance at our bromine plants. To close, we will be prudent in these challenging times, act on cost reduction measures to align our cost structure and maintain our leadership position to deliver value to our stakeholders. We look forward to sharing more details with you at our Investor Day on December 12 in New York City. And with that, I'll turn the call back over to Dave.

Operator, we are now ready to open the lines for Q&A. But before doing so, I would like to remind everyone to please limit questions to two per person to ensure that all participants have a chance to ask questions. Then feel free to get back in the queue for follow-ups if time allows. Please proceed.

Good morning. This is Dylan Campbell on for Bob. And when we look at the 10% decline that you're looking at for 2020, give us a sense of what moving pieces are embedded in that guidance in terms of the rollover in terms of lithium volume growth, and then, I guess, the growth for the Catalysts and Bromine businesses.

Yes, so, this is Luke. Let me try that at a high level, if you look at page 11 in our earnings presentation, you can see that year-over-year lithium prices are down about 30% and Albemarle has been flat to up slightly on our year-over-year comparisons each quarter on lithium pricing. The big mover that we're seeing on the down for the profitability from '19 to '20 all comes down to lithium pricing and how much of that we can offset with cost reductions. On catalysts, when we look next year, we’ll probably have higher volume in FCC catalysts, and it depends on HPC, how those bills come in. First half of next year will likely roll into 2021, so again Catalysts will have some moving bits and pieces. But FCC would be stronger from a volume and price standpoint, and HPC probably a little bit weaker. But we're working hard to get some of those additional loads in 2020. Then on bromine, we don’t expect any additional volume; I mean we're running flat out right now and allocating every bromine molecule we have. So it all comes down to what we see from an overall economic condition. What happens in electronics? What do we see from automotive? We see a little pickup, and this pricing hold, that being offset by cost actions. Those are the big moving pieces; it's preliminary right now. We'll obviously have more information as we finish this quarter and head into next year. So we'll update that on our year-end earnings call.

Okay, thank you. That's helpful. And then considering the situation, assuming that the market tightens once again, how do you preserve some type of upside, considering the fact that the majority of your volumes are going through your contracting structure?

Under those contracting structures, we have the ability to raise the price on a certain percentage of that volume just like we have in the past. If the conditions tighten, we'll certainly be looking at pricing actions that we can take to raise those prices.

So, this is Matt DeYoe on for Steve. I want to talk a little bit about the potential fallout to you in the industry from the EU proposal to ban certain flame retardants and consumer electronics and display applications. Broadly, what percent of demand goes into that market? Do you think consumer electronics companies can adapt to new standards more globally?

Yes, we've looked at that and expect it will have minimal impact on our business going forward. Starting when it goes into effect in 2021, customers will make some alternate substitutions there. But we've looked at that and we think we have our alternative paths to replace that business.

So at a high level, we've been dealing with the regulations globally concerning flame retardants. We have done a really good job of moving away from some of the products that we consider smaller. We're getting a larger molecule, so it's harder to form bio-accumulate, if at all. We're constantly evolving our technology to meet the needs that our customers have. What you see in Europe, it's a small piece today; we believe it’s controlled and we will continue to innovate to bring products to the market to meet the serious issues related to flame retardants. I think that it's - it won't have an effect in 2020, maybe a small effect, if anything, around the edges and long-term we will continue to innovate to provide the really needed flame retardants that our customers need.

All right, thank you. And then if I can touch on the contract. So, I think past discussions stipulated that the contract terms could be renegotiated if customers could find similar quality and quantity products. As you're seeing demand slowdown for EVs, is what's happening is more proliferation of technology such that different producers can now hit the specs? Or are you just seeing more supply to a market from the same four or five incumbent tech-savvy producers?

I think all those four or five tech-savvy producers you're talking about have sufficient volume. What you're seeing is an oversupply in the market today. Carbonates are selling in China right now at $7 a kilo; that's probably below some of the cash conversion costs for some of those China converters. You should not have the impression that there is any technological advance by some of the marginal producers; it is where it's been. The specs are getting tighter and, ultimately, long-term for those EV battery grade customers, you're going to see those big four or five able to meet those specs on a consistent regular basis with the volume. There is other volume out there that is not the EV spec; and that's where you're seeing in the technical grade some other lower specs for other usages, where you're seeing those lower producers coming in at prices they’re comfortable with.

All right, thank you.

Good morning. If I take a $100 million EBITDA guide down in lithium, it looks like you’re guiding down to average price decline next year of 15% to 20%. Can you maybe give a little more color on how we break down the price declines between your contracted and your non-contract base? So this is a very massive 30% drop, your non-contracted base and a small decline in your contract base or is it going to be similar?

Yes, so as I said, I'm not going to get into discussions about specific contracts because we're in the middle of negotiation and that doesn't do us any good. So, let me back up and just say at a high level, there is pricing pressure across the portfolio. The most pressure is coming in carbonate, particularly in technical grade and in China, but that is having a ripple effect across the portfolio. You’re going to see it as you said, different levels of price movement according to different products and according to that end market, but that’s about all I’m comfortable going into, given the fact that we're in the middle of discussions.

Appreciate that. Second question on Kemerton. So it looks like if you have almost enough spodumene at Greenbushes to support the Kemerton in the next wave for hydroxide in 2021 and beyond there, maybe not quite enough to get the 50,000 tons, I mean 45,000. Does that mean you look for operational improvements at Greenbushes, will you source external carbonate? It doesn't seem like it makes sense to restart Wodgina to run at very low rates just to supply the extra marginal spodumene there.

I can't see us buying carbonate from other parties to do anything. We'll have sufficient carbonate supply to do whatever we need to do from a spodumene standpoint. We will source spodumene from the source that provides us the highest net back to Albemarle and our stakeholders. We have flexibility for sourcing that not other producers have.

Hi, this is Matt Skowronski on for John. In your pre-announcement, you mentioned lower prices in China affected EBITDA in the third quarter. Where have prices moved from Q3 average levels and if prices remained at this level throughout 2020, what would the impact be?

Ask that question one more time please. I'm not sure I'm following you.

So you mentioned that Chinese prices were a cost to EBITDA in the third quarter; where prices moved from that level? If this remains throughout 2020, what would the impact be?

Yes, if you look at page 11, you will see that most of the decline seen in the price accelerated in the third quarter. So you saw a significant price decline overall in the lithium market in the third quarter. Prices continued to decelerate going into the fourth quarter.

That's your difference right there. In China, the small part of our business, but it is a factor, and that’s the impact it’s had on our P&L.

Thanks for that. And then you noted your bromine assets are operating at higher than expected volumes. Are these kind of normalized levels now?

Yes, I think we've been able to get some nice gains in our JBC expansion that we did last year, enabling us to run at a higher rate than we expected when we set the plan in place. That will be the new run rate going forward. We always do productivity enhancement and utilization increases, and we're very confident in our manufacturers' capability to get increased volumes from those manufacturing enhancements.

Thank you.

Good morning. I wanted to ask about the lithium environment. Do you think as you look into next year, what are some of the drivers you are watching to see if things are stabilizing or even potentially turning around? Is it just EV demand or macroeconomic growth? Or what else are you kind of looking for?

Hey, Arun, it's Eric here. I think the big driver for us isn't necessarily about demand. We feel fundamentally that while we've seen a pause in China, that's a pause and our long-term view for the global EV growth remains intact. Our focus is on supply and inventory that's in the channel. Based on our assessment, there is not a lot of new supply. Let's put it this way, the new supply coming in will not exceed the demand growth. So the question is how much product is still in inventory? There is probably at least six months of product in inventory, maybe more. So you're probably two to three times the level of inventory you should have, and that's the drag on price. We see that having an effect into 2020.

And on that note, how long do you think it would take to work through that, especially in the technical rates? I'm just a little surprised that there has been such an impact on EV battery grade lithium even with the oversupply in the technical side. So maybe you can just help us understand what the impact is there and why we're seeing that?

Yes, hey, this is Luke. What Eric was just talking about was overall that included battery grade as well as technical grade. We think there is an overhang of the supply chain for lithium derivatives overall. We think we're looking at 12 months to 18 months of trying market conditions, and we think that's about the time it's going to take for people to work it all out, that's our view today.

Lastly, is there anything else that the industry can do to accelerate that process of destocking? Have you been aware of any other potential shutdowns or reductions in production?

I can't comment on what other people are thinking about doing. I can tell you what we're doing - we're going to take control of what we can control. With the joint venture deal with MRL closing, we made the decision to idle those assets, because we don't need to bring any more spodumene to the market in these conditions. We'll take actions to ensure that what we can control, we will control.

Hi, good morning. Just looking at the landscape of inventory levels. It seems like spodumene is one of the areas where there is too much supply. Can you talk about your operations at Talison and maybe how we should think about the contribution from Talison in 2020 relative to 2019?

Yes, so Talison's contribution in '20 relative to '19, remember that Talison is a raw material supplier to GIC and Albemarle. Both from a technical grade perspective and from a battery grade perspective, we take that rock and convert it into our assets. It will be essentially that, volume will be similar or up slightly based on Tianqi’s bringing on a new client. I would expect it to be slightly higher than what we saw in 2019.

All right. And then on the catalyst side of the business, I was a little surprised to hear you say that HPC was expected to be a little bit lower in 2020. Can we go back and discuss maybe your updated view on IMO 2020 and the impact of that could have on HPC Catalyst growth over the next, what it's doing here in the second half of '19 and what your expectations are for '20?

Yes, sure. So we do think that IMO will have an impact on HPC catalyst demand in the low to mid-single digits. But I think when you look at the overall picture, more so than IMO, for our business, it's really the tightening of sulfur specifications around the world, which will be favorable. As Luke mentioned at the onset of the call, there are things that come with the timing of various refills, customers that could push us up or down in any given year, not an indication of weakness in the business, but more of timing in customer demand. Overall, we feel like tightening the sulfur specification regulations around the world, IMO included, is favorable for our business in the industry.

HPC is just a lumpy business, and what you have to do is look at the customer mix, product mix, and what the fills are going to be in any one period of time. So that's the only reason I say it could be down. It's got nothing to do with overall market demand, share issue, or price issue. It's just a matter of the fills that we expect today. If we were sitting here in 2018, we had more fills in 2019 than we expected - we did in '18. The team is working hard, and we may be able to move some orders up a little bit or get a better mix, so it's early but yes, people ask what an indication is from where we are today. It looks like HPC is going to be a little bit down and FCC is going to be up.

Got it. Thanks very much.

Thank you. Good morning. Luke and Eric just on lithium volumes in 2019, what do you think there'll be, and do you expect any growth in your lithium sales volumes in 2020?

So our sales volumes in '19 - the growth is coming from the ramp-up of Xinyu II, which is now running at full rates. The 20,000 ton plant, the rest is coming from La Negra, though we haven't run as well as we wanted to in the third quarter. We expect favorable year-on-year growth in the fourth quarter of 1,000, a couple of thousand tonnes or so for the year.

If you look at 2020, I would expect that from a volume standpoint we'd probably see about 5,000 to 7,500 metric tons of growth that assumes we get additional growth and run La Negra at rates, without another way like we did in the first quarter. The brand is percolating down there, the way it ought to be, and they ran at October rates, which is the highest rate they've ever run. We've got to sustain that all into 2020, and then we'll get a full year of Xinyu II from what we ran this year. That’s how I get to about the 5,000 to the 7,500 or 8,000 metric tons.

Very helpful. And Luke, just on the cost savings, how much will be realized next year of $100 million and what's the breakdown between those three segments of the $100 million?

I don't know how much we're going to get in next year, because some of it is going to take a little bit of time. We'll update you in December; we will have more information at the Investor Day, and then we will roll out into our fourth-quarter earnings call. We'll give you more updates.

Thanks, good morning. I think you have repeatedly said that La Negra was on track to produce close to 40,000 metric tons of lithium carbonate in 2019. What is that number now going to be given the shortfall in the third quarter? And can you just give some color on what caused these operational issues at La Negra and what gives you the confidence they won't repeat?

We're running at about 38,000, is that about right, Eric? Between 38,000 and 39,000 metric tons for La Negra this year. We've taken some of the best process engineers we have from different segments to help with best practices. So I'm confident next year, we'll build from where we are, not have the hit and should be able to avoid the struggles with the Bromine because of the rain and things such as that.

I would just add that at this point, we're sold out. Everything we make, we can sell. If there is an uptime issue, we take things into consideration to use tollers to ensure that we meet demand.

Very helpful. And Luke, could you also explain how the tolling process works in Chile? Do you mean La Negra commitments with tolled brine-based carbonate, or spodumene-based carbonate? You've explained a lot in the past about how difficult it is to meet product specifications for battery-grade products. Are your toll volumes coming from the big five producers and thus meeting those specs, and if not, do you have to offer some kind of price concession given the lower quality toll product?

Overall, we don't take brine from anybody else until it is tolled. We don't give our brine to anybody else to toll for us. If we have a slowdown at La Negra, what do we lose? We take spodumene from Talison, and we have a third party generally in China tolling either to carbonate or hydroxide. We generally use that primarily to go downstream into our specialty businesses, and we continue to sell our carbonate directly to third party customers.

Good morning. Thank you for taking my call. A couple of questions if I may, you talked about the outlook for incremental volume growth that you're still going to get in 2020 without added capacity just from capacity ramp-ups that you've done over 2019, but I want to understand that the closure of the Wodgina mine doesn't impact the progression of capacity additions that you've outlined in the second-quarter slide when you took down the $1.5 billion CapEx expectation, right? I mean, in terms of hydroxide and carbonate capacity that’s still going to go online through 2022 as you've outlined in this slide.

That's exactly right, Dmitry.

Okay. And then on the divestitures, I found it interesting that you're getting inquiries on the Catalyst and the fine chemistry business. Obviously, the fine chemistry business has been around on the market for a while. On the Catalyst side, you mentioned pro forma catalysts being the subject of interest. Does that include the curatives and organometallics, or would that still be strictly the FCC, HPC Catalyst business?

Let me be clear, Dmitry. It is not the refining catalysts; it is not FCC and it is not HPC. The inquiries have been for the PCS portion of that business, which you are right, are the organometallics and the curatives.

Okay. You're looking at some of what I would call sort of orphan businesses, not necessarily contemplating yet the possibility of bromine or refining catalysts being used as a way to help you with the capital requirements in lithium?

Just like asking me which one of my children are favorable; I love them all. I wouldn't call it an orphan business, but I would say that they are quality businesses with good operating teams that can do much better if they have a focus and additional capital. With the competition for capital we have, they’re just not going to get it. So it's better value creation for our stakeholders for divestiture. If, and only if, the valuation is where it needs to be. So that's how I look at it.

Yes, hi, good morning, Luke. So in light of your Wodgina shutdown, can you talk about the spodumene cost curve? What's the cost of the marginal producer and where does Wodgina fall there? What signals are you looking for the start of Wodgina again?

The best cost position in the world from spodumene rock is Talison. If you follow the purity of the rock and lack of foreign substances there, then followed by costs is where Talison is the premier. If you take Talison out of the picture, then Wodgina is right up there on the cost curve with the low-cost producers out there from a quality resource and size perspective. Remember, we weren't planning to sell that spodumene; we were going to use it to convert it to lithium hydroxide and when we look at the market today, we think it's best to treat Wodgina the same way we treat Talison as a raw material source for the MARBL joint venture.

Sure, thank you for that. And then, if you were to divest your Fine Chemistry and Performance Catalyst business, is the long-term goal for Albemarle to become a pure lithium company? Or is it just to keep the dip refining catalyst business and bromine in the portfolio? So that's the cash generative business that can fund the growth of Lithium.

Yes, we believe lithium will be cash flow positive in 2021, '22 kind of timeframe, inclusive of service and its debt, if you had to do so. Right now, our goal is to drive shareholder value. We see bromine and catalysts as good solid businesses with high EBITDA margins that provide cash, and we will consistently as we always have a look at our portfolio, but for the foreseeable future, we like where we are after these two divestitures.

Thanks so much, guys. As you're looking at the landscape of battery manufacturers and considering your strategy, can you talk about consolidation in the industry? Folks that may be distressed, how you expect to handle that sort of situation?

What we are seeing, and I've talked about before, continues is a shift of power decision-making around Lithium and battery materials used in a battery to battery manufacturers in sales and in some cases the OEMs getting more engaged. When we look at how we do business going forward, that is the group that we speak with collectively, and we have many of our contract relationships already there. Cathode players form the balance that's where there's more stress in the value chain. There is a lot more fragmentation, and I think you will see some consolidation over time; but it's hard to say at what pace that would occur.

Great. And then on the policy side, obviously the situation in China from a sell-through perspective has been a major disappointment, particularly in the second half of this year. What are you hearing in terms of potential for stimulus in China for vehicles? And is that point if anything?

What we interpret as what's going on is a pause. It's a shift in policies to intend the development of an industry that is part of the grand plan for China. We have no doubt about Chinese intent and where they want to go. Specifically, we're hearing that the drive towards higher energy density batteries and full battery electric vehicles is where they want to go. We recognize that, in the past couple of months, it's been a pause, it’s been a little slow, but we view that as simply a natural pause in the road to what will be significant growth. We're certainly seeing that in the global EV space in Europe today.

Good morning, everyone. Obviously, both lithium industry players have responded to the softening price dynamics with you and others delaying or canceling capacity expansions, but with the amount of lithium carbonate sitting in the supply chain that needs to be consumed, are you concerned there's going to be more room for prices to fall going forward as the industry destocks?

As we said on the call, we have $7 a kilo price in China right now, we think that's about where their cash costs of conversion are. I have seen a hard time them going much lower than that.

Okay. And as the shift to high nickel cathodes accelerates, you're seeing the growth in lithium carbonate slow. Do you expect the price spread between the two to widen?

The demand growth for carbonate remains strong, and the demand outlook for hydroxide is much stronger. Today, the workhorse of the industry is 6:2 chemistry, which we make with carbonate for hydroxide. We see hydroxide, because of the growth we see in the hydroxide market getting tight, but today, I don't know that we would forecast any major change in spreads between the two.

Okay, thank you.

Yes, good morning. Luke, one of your industry peers announced a new contract with LG earlier this week. As you consider your contract strategy given all that has transpired with lithium prices, are you generally disinclined to enter new long-term contracts? Or are there perhaps isolated opportunities that look attractive?

We're talking to everybody, as I said. We're in negotiations under our existing long-term agreements and for new long-term agreements, both with OEMs and additional battery producers. What that tells me is that there is a need for a security of supply from companies like Albemarle. We know our value, and we're not inclined to enter into agreements today at a $7 a kilo price for carbonate; it doesn't make sense for us. We think the market is going to move up, and we know the value we bring. Customers understand the value we bring. We’re inclined to enter into agreements that will drive value for our stakeholders.

Okay, fair enough. And then second, with regard to your potential divestitures, how would you characterize the aggregate level of EBITDA there? And as a clarification, is that amount of EBITDA included in your 2020 guidance comments or are you contemplating a decrement or step down related to a mid-year divestiture?

The combined EBITDA is in the $55 million to $60 million range; we have not assumed that we sell those businesses in our guidance at this point in time. We just started the process, as we talked about, and we need to see if we’re going to get the value for those businesses that we expect. If not, we’ll hold them; if we do, we’ll transact.

I'd like to thank everyone for joining us this morning and for your questions and participation. As always, we appreciate your interest. This concludes Albemarle's third quarter earnings call. Thank you.