Albemarle Corp (ALB) — Q3 2022 Earnings Call Transcript

All right. Thank you, Alex, and welcome, everyone, to Albemarle's Third Quarter 2022 Earnings Conference Call. Our earnings were released after the close of market yesterday, and you'll find the press release and presentation posted to our website under the Investor Relations section at albemarle.com. Joining me on the call today are Kent Masters, Chief Executive Officer, Scott Tozier, Chief Financial Officer, Raphael Crawford, President of Catalyst, Netha Johnson, President of Bromine, and Eric Norris, President of Lithium, are also available for Q&A. As a reminder, some of the statements made during this call, including our outlook, guidance, expected company performance, and timing of expansion projects 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 and presentation; that same language applies to this call. Please also note that some of our comments today refer to non-GAAP financial measures. A reconciliation to GAAP financial measures can be found in our earnings release and the appendix of our earnings presentation. Lastly, I would like to highlight that in January, we plan to host a webcast to provide our full-year 2023 guidance and new five-year targets for our restructured businesses. With that, I will turn the call over to Kent.

Thanks, Meredith, and thank you all for joining us today. On today's call, I'll highlight our third-quarter results and achievements. Scott will provide more detail on our financial results, outlook, balance sheet, and capital allocation. I'll then close our prepared remarks with an update on our structure and our strategic growth projects. We had another excellent quarter as Albemarle continues to benefit from the demand for lithium-ion batteries driven by the energy transition. This, plus growth in bromine, drove a strong third quarter. We generated net sales of $2.1 billion or more than 2.5 times the prior year period. Third-quarter adjusted EBITDA of $1.2 billion or approximately 5 times the prior year period continued the trend of EBITDA increasing significantly, outpacing sales growth. We are tightening our previously raised 2022 outlook and reaffirming our expectation to be free cash flow positive for the year. Scott will review the key elements of our outlook in his remarks. In October, we completed the acquisition of the Qinzhou lithium conversion facility in China. This, along with the mechanical completion of the Kemerton II lithium conversion project in Australia, has us on track to more than double our lithium conversion capacity this year. In response to the growth opportunities ahead of us, we announced during the quarter a new segment structure that is expected to take effect in January of 2023. We are realigning our core lithium and bromine businesses into Albemarle Energy Storage and Albemarle Specialties. Additionally, we completed the strategic review of the Catalysts business. After our work, we determined that the best course was to hold the business as a separate entity with a separate brand identity. Going forward, this business will be known as Ketjen, after the founder of the refining catalyst business, a call back to the business' proud history of innovation and sustainability. Now I'll turn the call over to Scott to walk through our financials.

Thanks, Kent, and good morning, everyone. I'll start on Slide five. Diluted EPS for the third quarter was $7.61 compared to a loss of $3.36 in the prior year period. As a reminder, last year was negatively impacted by a settlement of a legal matter. Adjusted diluted EPS for the third quarter was $7.50, 7 times the prior year EPS of just over $1.00. This overall performance was driven by strong net sales and margin improvement for the total company. Albemarle generated third-quarter net sales of $2.1 billion, up 2.5 times year-over-year, due to ongoing momentum in the Lithium and Bromine businesses. Adjusted EBITDA margins improved from 26% to 57% this year. Let's turn to Slide six for more details on adjusted EBITDA. Third-quarter adjusted EBITDA was up $1.2 billion, nearly a 450% increase year-over-year. This strong growth continued to be driven by higher lithium EBITDA that was nearly $1 billion higher than last year. In fact, lithium's Q3 EBITDA was more than double what we generated in all of last year. This record performance for the Lithium segment was driven by higher realized pricing, which was up nearly 300% and higher volumes that were up 20% versus the prior year quarter. Lithium adjusted EBITDA margins of 74% were more than double the previous year. Margins are expected to moderate in Q4 and into next year for several reasons. First, a spodumene shipment from Talison originally expected in the fourth quarter occurred in Q3, resulting in a $100 million benefit in equity income. This benefit is not expected to reoccur. Second, margins benefited from the timing of spodumene shipments and the rapid rise we have experienced in spodumene and lithium prices. It takes up to six months for a ton of spodumene to navigate our supply chain from the mine to the customer. This has given us above-average margins in 2022, particularly in Q3 because we are selling at higher lithium market prices, but cost of sales is based on lower-priced spodumene held in inventory. Note, we would not expect this benefit to repeat in 2023 unless we see a similar rise in spodumene and lithium prices from current levels. And third, as the MARBL joint venture starts to generate revenue and earnings, we anticipate some margin rate reduction. This is because the MARBL joint venture is being reported under a distributor model. Under this structure, Albemarle reports 100% of the revenue but only our pro-rata share of earnings. We would expect overall, a return to more normal Lithium margin levels in the mid-50% range in Q4. Bromine was also up compared to the prior year, primarily due to higher pricing, up 18%, and volumes up 10%. However, we are beginning to see softness in some bromine markets, which I'll talk about in a few minutes. Catalysts EBITDA declined versus the year-ago quarter as higher sales volumes and pricing continued to be more than offset by cost pressures, particularly for natural gas in Europe and raw materials. Moving to Slide seven. We are tightening our ranges from the increased 2022 outlook we provided last quarter. This reflects the continued strength in execution in our lithium business and more modest growth in bromine, while our Catalysts performance is in line with our expectations. We have narrowed the ranges for the full-year 2022 guidance as follows: net sales of $7.1 billion to $7.4 billion, more than doubling versus last year; adjusted EBITDA of $3.3 billion to $3.5 billion, reflecting a year-over-year improvement of nearly 300%; and adjusted diluted EPS of $19.75 to $21.75, up about 5 times from 2021. We still expect to have positive free cash flow for the full year. And assuming flat market pricing, we expect to continue to generate positive free cash flow in 2023, even with continued growth investments. The security of supply remains the number one priority for our customers, and we continue to partner and work closely with them to meet their growth requirements. Let's look at the next slide for more detail on our outlook by segment. Lithium continues its stellar performance. We maintain our expectation for the lithium segment's full year 2022 adjusted EBITDA to be up more than 500% year-over-year as strong market pricing flows through our index referenced variable price contracts. Pricing growth is expected to be 225% to 250% year-over-year resulting from our previously renegotiated contracts and increased market pricing. We also continue to expect year-over-year volume growth in the range of 20% to 30%. The current guidance range for the lithium segment reflects the potential upside for spot price improvements and the potential downside of volume shortfalls for the remainder of the year. For Bromine, we are slightly modifying our full year 2022 EBITDA expectations with year-over-year growth at the lower end of our recent outlook of 25% to 30%, but that's still above the outlook we had earlier in the year. The modification in our expectations reflects emerging softness in some end markets, such as consumer and industrial electronics and building and construction. The slowing in construction is a natural consequence of higher interest rates. Full-year volume growth is also projected to be at the lower end of previous guidance for a 5% to 10% volume increase. For Catalysts, we expect full-year EBITDA to be down between 45% and 65% year-over-year. We noted earlier that this market is being affected by significant cost pressures primarily related to natural gas in Europe affected by the Ukraine war, certain raw materials as well as freight, and is partially offset by higher sales volumes and pricing. We are beginning to realize some price increases associated with natural gas surcharges and inflation adjustments, and those are expected to ramp up in Q4 and going into next year. Turning to Slide nine for an update on our lithium pricing and contracts. This slide reflects the expected split of our 2022 lithium revenues. Battery-grade revenues continue to make up approximately 85% of our Lithium contracts. Our revenue and contract mix are unchanged from last quarter. We remain committed to long-term contracts with our strategic customers, and most of our volumes are sold under two to five-year contracts. The market index structure of our contracts allows us to capture the benefits of higher market pricing while also dampening volatility. It also means that neither Albemarle nor our customers are too far out of the market. From the beginning of the year to today, market indices are more than 100% higher on average, moving from about $35 per kilogram to over $70 now. After holding at these levels for the last six months, indices recently ticked up again, thanks to healthy EV-related demand, particularly in China and North America. If price indices remain where they are, we would expect to realize healthy double-digit percentage price increases in 2023. Slide 10 shows the expected lithium sales volumes, including technical-grade spodumene and tolling sales. In 2022, as I said, we are looking at volume improvement of 20% to 30%, largely due to the expansion at La Negra, additional tolling, and some Qinzhou volumes. Volume growth in 2023 is expected to be north of 30% as La Negra, Kemerton, and Qinzhou continue to ramp plus additional tolling volumes. Based on current project timelines, we see room for further upside in 2025 from additional conversion assets such as our greenfield plant in Meishan. Turning to Slide 11. Our strong net cash from operations and solid balance sheet support continued organic growth and our ability to pursue acquisitions that complement our growth strategy. Our balance sheet includes $1.4 billion of cash and available liquidity of over $3 billion. Since last quarter, net debt-to-adjusted EBITDA improved to approximately 0.9 times and should end the year between 0.6 times and 0.7 times. These levels give us excellent flexibility. During October, we upsized and extended our revolving credit facility to reflect our larger scale and position us well in case of market turbulence. Over 90% of our debt position is at a fixed rate, which safeguards us against the impacts of a rising interest rate environment. Knowing that the economy is on everyone's mind, let's turn to Slide 12 for more on the macro environment. We expect all three GBUs to grow in 2023, even in the turbulent market environment. But it's going to look different for each of our businesses. For example, in lithium and bromine, our vertical integration and access to low-cost resources helps control our cost structure. While approximately 45% of our costs come from raw materials and services, 20% of those relate to our own spodumene. We continue to expect strong demand for lithium driven by the secular shift to electric vehicles, including OEM investments and public policy support. We are watching to see how rising interest rates impact luxury vehicle sales in the short term, but we expect EVs to continue to grow and gain market share just as we saw in 2020 during the peak of the COVID pandemic. Of the three businesses, Bromine and our Lithium Specialties demand is likely the most leveraged to global economic trends in consumer and industrial spending, automotive, and building and construction. At the same time, they benefit from having diverse end markets, meaning they can allocate production to higher growth or higher margin end markets as needed. Bromine and lithium specialties also tend to rebound quickly after a recession. Finally, Catalysts demand is closely linked to transportation fuel demand. In a typical recession, Catalysts is relatively resilient. Think about it this way. Oil prices generally drop in a recession, and that drives higher fuel demand, which equals higher catalyst demand for refining. And typically, the Catalysts business would benefit from lower raw material costs in a recessionary environment. Before I turn the call back over to Kent, I wanted to briefly reiterate our capital allocation priorities to support our growth strategy as seen on Slide 13. Investing in high-return growth opportunities remains our top capital allocation priority. We remain committed to strategically growing our lithium and bromine capacity in a disciplined manner. For example, the Qinzhou acquisition we just closed allowed us to accelerate growth and meet our return hurdles. Maintaining financial flexibility and supporting our dividend are also key priorities. As we saw during the COVID pandemic, maintaining an investment-grade credit rating and a strong balance sheet are key to executing our growth strategy and weathering temporary economic downturns. Now I'll turn it back over to Kent.

Thanks, Scott. Before we look at the growth projects, I wanted to update you on the separation of our Catalysts business and the reshaping of our core portfolio. We are realigning our core lithium and bromine businesses into energy storage and specialties and expect this to be effective in January of 2023. The restructuring is designed to allow for stronger focus and better execution on our multiple growth opportunities. Energy storage will focus on lithium-ion battery evolution and the energy transition. Albemarle specialties combines the existing bromine business with the Lithium Specialties business to focus on diverse growth opportunities in industries such as consumer and industrial electronics, healthcare, automotive, and building and construction. Following the strategic review of the Catalysts business, we determined that the best course was to hold the business as a separate entity with a separate brand identity. This structure is intended to allow the Catalysts business to respond to unique customer needs and global market dynamics more effectively while also achieving its growth ambitions. The business will be named Ketjen, referencing the business' original founder, which draws on our entrepreneurial heritage, our Catalysts business. This business will continue to be managed by Raphael Crawford. Additionally, we have established an advisory board for Ketjen, with Netha Johnson acting as Chair. Its primary purpose is to provide thought leadership and strategic advice to Ketjen senior management. These changes reflect Albemarle's focus on growing our business, our people and our values by being agile and providing innovative solutions that anticipate customers' needs and meet the markets of tomorrow. So, looking at Slide 15. As one of the world's largest producers of lithium, we are well positioned to enable the global energy transition. We are focused on building the structure and capabilities to deliver significant conversion capacity around the world. We are investing in China, Australia, and North and South America and anticipate production up to 500,000 tons per year on a nameplate conversion capacity by 2030. And we are off to a great start. When you look at where we were just a year ago at 85,000 tons compared to our expectation to end 2022 with 200,000 tons of capacity. Now a few recent highlights around that capacity. In Chile, the La Negra III and IV conversion plant has completed commercial qualification, is now generating revenue and running as expected. We are looking at a variety of options to enhance our Chilean operations to accelerate sustainability and potentially expand production. For example, as discussed in our sustainability report, we are progressing options for renewable energy and desalinated water projects. Albemarle and our predecessor companies have operated in Chile for more than 40 years. Our current contract with CORFO runs through 2043. By continuing to advance sustainability, we can continue to be the partner of choice, sharing the benefits of lithium production with the community and earning the right to grow our operations in the future. In Australia, the Kemerton II conversion plant has successfully reached mechanical completion and has entered the commissioning phase of the project. Kemerton I continues in qualification, and we expect to produce qualification samples by year-end. We are also making progress with engineering on our Kemerton III and IV project as we started placing orders for long-lead time equipment. In China, besides the acquisition of the Qinzhou lithium conversion plant, construction is progressing to plan at the 50,000 ton per year Meishan lithium hydroxide facility. Our ownership stakes at the Wodgina and Greenbushes lithium mines ensures we have access to low-cost spodumene to feed these conversion facilities. And finally, in the United States, the expansion to double production at Silver Peak is progressing ahead of schedule. At the Kings Mountain mine, studies continue to progress positively. We announced two weeks ago, we have received a $150 million grant from the U.S. Department of Energy to partially fund the construction of a lithium concentrator. We're proud to partner with the federal government on this project. To leverage our Kings Mountain lithium mine, we plan to build a multi-train conversion site in the Southeast U.S. This Megaflex site is designed to handle mineral resources from Kings Mountain and other Albemarle sites as well as recycling feedstock. We continue to expect the mine and the conversion site to be online later this decade, most likely in 2027. With our best-in-class know-how to design, build and commission both resource and conversion assets, Albemarle is well positioned to enable the localization of the battery supply chain in North America. The recently passed U.S. Inflation Reduction Act, or the IRA, is designed to encourage domestic EV supply chain investment, among other objectives. The law includes manufacturing and consumer tax credits for sourcing critical minerals like lithium in the United States or in free trade agreement partner countries like Chile and Australia. The solid bar indicates 2022 expected lithium production in the United States and free trade agreement countries, both from Albemarle and other lithium producers. Compared to forecasted U.S. EV demand for lithium by 2030, there's a 400,000-ton gap between today's supply and the supply needed in 2030. The bar on the right indicates how Albemarle's planned expansions in the U.S., Australia, and Chile can play a key role in increasing U.S. lithium supply and assisting our customers with increased demand for electric vehicles and localized supply. Now moving to our last slide, let me sum up the key points on our growth strategy. First, a strong outlook. For 2022, we're projecting revenue at double 2021, adjusted EBITDA at nearly 4 times 2021, and cash from operations at 4 times 2021. And we expect continued growth into 2023. Second, financial flexibility to fund profitable growth and maintain our credit rating while still supporting our dividend. Third, a strong operating model that should power us through the current macro-economic turbulence. Fourth, high-return growth projects are underway in both lithium and bromine. In total, Albemarle is well positioned to deliver growth and build long-term shareholder value. This concludes our prepared remarks. Now I'll ask Alex to open the call for questions. And we'll go from there.

Yes. Good morning and some good information here. Kent and Eric, you just built Kemerton I and II conversion plants in Australia, La Negra III and IV, the Qinzhou plant in China that you just bought. So, you have a good handle on the cost to build a conversion plant. What's your estimate to build a comparable conversion plant in U.S. versus Australia versus China? And do you think the costs are as much as 10 times higher in the U.S. than China to build a conversion plant?

Good morning, P.J. No, it's not going to be 10 times. Building in the U.S. will be more expensive than in China. However, we've successfully built in Australia and are currently building in China, so we have a solid understanding of the costs. We expect that North America will be comparable to Australia, and it might be around twice as expensive as China, but certainly not 10 times.

Okay. And then we know that there is going to be huge demand for lithium hydroxide in the U.S. You have the IRA now and availability of funding and grants. Why wouldn't you go ahead and announce several sites than just rather than building just one mega site? And the reason I say that is that the time, as you know, takes to permit these facilities and build, why not get ahead of the curve if you want to meet that gap that you show on the chart between now and 2030?

Yes, we are building quite aggressively and require both resources and conversion assets. While we are balancing these elements, we are adapting to the market dynamics. We might be slightly behind, and having three or four facilities in the U.S. doesn't seem feasible given our resource capabilities. Our plan is to develop a large facility at the conversion site in the U.S., and possibly another facility of similar scale, but we first need to secure the necessary resources.

Kent, I'd add too, we're progressing our direct lithium extraction work in Magnolia, Arkansas. And so, as that comes to maturity, you could expect a conversion facility in that area as well?

Yes, it's a good point. And that's probably will be a little smaller facility just because of the resource from the direct lithium extraction. But that is a slightly different time frame than the conversion facility in the Southeast.

Right. Just quickly, what was the size of the Megaflex facility? Thank you, and I’ll pass it on.

What was the question? What is the site? We have southeast...

Yes, the size. No, the size. The size, yes.

We are planning a conversion facility with a capacity of 100,000 tons, which will be developed in phases. Approximately 25% of the material will come from recycled sources, while 75% will be sourced from virgin materials.

Thank you.

Good morning, everyone. So, I wanted to, I guess, tap a little bit more on the equity income side of the equation. If I were to just look at what IGO reported as it relates to the equity income and the internal transfer pricing, can you help us kind of square how that kind of runs through your numbers, how that impacted the 3Q margins, and maybe the puts and takes as we bridge to 4Q?

Yes. If you review IGO's report, you will see the complete equity and net income for Talison for the quarter. It's important to note that for Albemarle, when we purchase spodumene, we need to hold that profit in inventory until we sell it to the final customer. This is essentially the adjustment that reconciles the figures. To understand this better, consider the six-month supply chain I mentioned earlier; if you compare the figures from the first quarter of this year to those from the third quarter, the difference reflects the inventory adjustment.

Understood. And can I ask how you're thinking about future investment in China? I know you have Meishan and I remember when the Tianyuan acquisition was initially announced, there was talk about potentially debottlenecking that facility. But how do you balance the lower CapEx in market size with kind of what feels like growing geopolitical risk to the region?

Yes, that's a good question. We are looking at lower capital needs, especially since it requires roughly half the capital to operate in China. The Qinzhou acquisition has been beneficial for us, and after we have some operational experience, we will consider expanding it, which is likely. Additionally, we are working on the Meishan project and have also been considering a project in Zhangjiagang as demand increases. China remains the largest lithium market globally, and its growth is substantial. We are seeing demand rise in North America and Europe as well, so we're focused on balancing the opportunities while minimizing risks. Currently, our plans include the Qinzhou acquisition and the development of the Meishan project. We intend to expand the Qinzhou facility but will wait until we gain some operating experience before making any changes to the design for the expansion. This is something we constantly reassess based on current circumstances.

Thank you and good morning everyone. The lithium volume guidance for this year is 20% to 30% and you posted 20% year-over-year in the third quarter, 18% in the second. So, is it fair to say if you're trending towards the lower end of this guidance for the full year at this point?

No, we should be probably in the middle of that guidance range. So, as we're ramping up volume at La Negra, you should see improvement to that growth rate in the fourth quarter. I don't know, Eric, if you have any more.

Aleksey, I'd just add that, that has always been the case, is that because of the nature of the ramp of our plants, both La Negra, Kemerton, Qinzhou coming into the full, we've always been back half loaded. The challenge we had in the third quarter was on the production side, mostly in tolling in China due to rolling brownouts in the region and how that impacted operating rates of our tollers' ability to toll convert. As we go into the cooler time of the year where we don't expect and have not seen those, obviously, now with the weather being warmer, we expect higher production rates on the tolling side plus the continued ramp-up these plants as Scott referenced, that our owned plants. So, we'd expect to get into the middle of that guidance with a strong volume performance in the fourth quarter.

Very helpful. Thanks. And just pretty fresh news. The Canadian government is forcing some divestments of lithium assets there. Are you potentially interested? And if not, do you have any thoughts on this development? Does it matter for the lithium industry in general?

Yes. I mean, I don't know if we have specific thoughts on it, but we are always looking at lithium assets. We were kind of combing the planet for lithium assets. So, if they're interesting, we would be looking at them, but nothing to say on those particular assets today.

Great, thanks for taking my question. Congrats on the good results here. Just wanted to, I guess, maybe ask you guys to elaborate on some of the market movements you're seeing. You noted there's been some recent strong demand in EVs is moving prices higher. What's kind of the outlook as you look into the next couple of months? And could you also comment on potential elasticity impacts on EV demand, if there are any? What have you observed as far as demand trends kind of accelerating or decelerating on price increases?

This is Eric. As of the end of September, global EV sales are up 75%. This follows a softer early part of the year, particularly in China, due to lockdowns and supply chain issues. Currently, the automotive industry's focus has shifted more towards supply chain challenges rather than demand concerns. As supply chain issues start to ease, automotive vehicle inventory levels remain low. We anticipate ongoing strong growth throughout the rest of this year and into next year, so we are optimistic about these trends. Regarding the economic factors affecting purchasing behaviors, we have observed that during COVID and other economic downturns, EVs tend to act more like luxury items, maintaining volumes in line with strong long-term trends and supportive government policies. However, we will monitor how interest rates might influence this situation. A significant portion of the mid-to-low end market is in China, and with the country recovering from COVID lockdowns, we are seeing positive momentum there. We will keep an eye on the economic impacts and rising interest rates globally to assess their effects on demand, but so far, we do not anticipate any negative impacts, nor does history suggest we should expect one.

Okay, great. And then just on the upstream resource side, we've been hearing reports that in some of the recently announced projects on the spodumene side may be difficult to move ahead just because of the increase in price and the capital that's required to develop those projects. Is that something that you're observing as well? And if so, what impact should that have, I guess, on spodumene and downstream hydroxide markets, if any?

To clarify, you said the increase in price was affecting projects. So, you're referring to the capital cost to build the facilities for such a plant?

Yes, we've noticed an increase in spodumene costs, which is affecting both capital and acquisition expenses. This has led to some recently announced projects being delayed, at least according to what we've been reading.

Yes, I think the effects of inflation are impacting our capital costs. These factors emphasize the significance of our scale and global procurement strategy in reducing costs. For smaller companies that are less experienced with capital execution, it could definitely have an effect. However, these are longer-term impacts rather than short-term. As of now, we haven't noticed a change in market sentiment due to this issue. Demand remains robust, and the current balance of supply and demand suggests that these factors would only exacerbate the supply-demand situation, thereby supporting strong market prices for lithium. We will continue to monitor the situation, but there may be some validity to the concerns you raised regarding potential long-term impacts.

Ultimately, it's another example of how lithium projects take time and effort and challenges to get through it. That's not an easy thing to go through.

Thank you. Will the Megaflex plant produce hydroxide, carbonate, or both? Will the production train focus on specific types of feedstock and then alternate, or will it maintain a continuous blend of mixed feedstocks?

Yes, you're ahead of it, John. I think it will run as a blend, designed around Kings Mountain, incorporating other resources and recycling. It's going to be quite flexible, which is why we're calling it the Megaflex. There will be flexibility around it, but it's not designed for a specific case. We aim for flexibility in our design so we can operate on multiple resources.

So that's where John, just to add. The know-how and process technology advantages we have come into play as we design that. To go back to the first part of your question, the initial trains were targeting hydroxide at the moment. We're looking at a 50,000-ton plant and considering what we've built in China and Australia. We're taking the learnings from the best and developing that into a plan for execution here. We'll monitor the carbonate market development very carefully. With the recently passed IRA, it’s possible that more LFP capacity could come into the U.S., specifically cathode capacity. If that happens, there could be justification for future trains to be carbonate. We'll need to keep a close watch on that.

Okay. And then on the newly combined bromine and lithium specialty segment, it's going to be back integrated to resource and bromine. But I assume you're going to purchase lithium from the energy storage segment? How will that transfer pricing be handled?

Yes, John, we're still working through that. Likely, it will come through at cost, but we haven't sorted through all the details yet. So, we'll let us share that in our January meeting.

Thank you, good morning everyone. Are you still looking to potentially change your relationship with Mineral Resources or the JV terms? And could you also provide an update on the Wodgina restart? And do you think that as debottlenecking opportunities or potential to operate sort of above prior nameplate?

We are continuing discussions to optimize our joint venture. These conversations are ongoing, and we will inform the market as soon as we have any updates. Wodgina is currently operational with two trains, and we are exploring debottlenecking opportunities and the possibility of adding a third train in the future.

Yes, good morning. Now that you've had a few months to digest it, would you comment on what the economic impact of the IRA would be on Albemarle in terms of direct and indirect influences? And do you think it will influence how you allocate capital beyond the Megaflex project?

So, has it been a couple of months? I don't know that it directly impacts our economics, but it's changed the market a bit. There’s more demand for local supply in the U.S. as well as supply from countries with free trade agreements with the U.S. Fortunately, we are well positioned for that, and we had plans for the Kings Mountain facility and conversion in the U.S., which we are now accelerating as quickly as possible. We already had plans in place before this situation arose, and it just makes it more critical now. While I can’t directly translate this into our P&L, it does drive demand toward North America and encourages localizing supply as much as possible, which I believe will boost EV demand in North America.

Yes. In addition to the consumer incentives that are being implemented, there is a manufacturing tax credit that we stand to benefit from. The specifics are still unclear since the regulations haven't been published yet. This tax credit accounts for 10% of manufacturing costs for battery materials, which translates to around $10 million for a full facility. Another consideration is the minimum income tax, also referred to as the new AMT. While this will not have an immediate impact on us, a potential minimum tax of 15% could affect us in the future.

And finally, Kevin, that's an immediate topic you asked. I'll just add that it has an impact on purchasing behaviors. We're seeing a real not surprising interest for those who have U.S. based production to preferentially put a premium in their view on sourcing from free trade countries or from the U.S. itself. So, we'll be carefully sort of segmenting our customer base and looking at how we create the right value for ourselves and for our customers in terms of how we go to market and bring that and price that product in the marketplace.

So, that's really helpful. I appreciate the color and then as a follow-up, Scott, I think you mentioned in your prepared remarks that lithium prices on a realized basis could rise at a double-digit pace in 2023. Can you elaborate on that? What are you assuming in terms of market pricing vis-a-vis the uptick that you referenced in October? Maybe you could just kind of talk about where we're tracking in terms of low double digits or substantially higher than that and what you're baking in?

Yes. When I mentioned that it's based on current market indices, there are two significant factors as we look ahead to next year. The first is the annualizing effect of what we saw in 2022. The second is that Eric and his team are continuing to transition fixed price contracts to index reference variable contracts, which will also benefit us. While we haven’t given specific guidance, we are discussing healthy double-digit price increases for next year. This is expected to contribute to another strong year of growth for Lithium, and we are seeing positive results across all three of our businesses, even in light of potential slowdowns.

Thanks, take my question. So just on the lithium contracts and some comments you made earlier. So your index references contracts used to be labeled a three to six-month lag. Now they're about three months. You talked about moving more fixed price over to those types of contracts. I guess the duration continues to get a bit shorter. I'm just wondering, should we expect that duration to approach less than three months, say, one month at some point in the future? Or is three months kind of the right range that you're finding customers want to two and four?

Josh, to answer your question, we expect a three-month lag going forward. This change comes from transitioning from a fixed contract with reopeners up to six months to a full index that looks back three months on a rolling basis. This standard allows us to take advantage of rising prices while minimizing the impact on the customer. That’s our strategy for managing the portfolio in the future. Additionally, as Scott mentioned, we anticipate that some of the fixed contracts in that 20% category will decrease as we move into next year.

Okay, thanks. And just on the DOE grant that you guys received. Is there a potential for you guys to receive more than one of those? I don't know if there's a limit per company or something else we could consider about additional support if you were to build additional facilities in the U.S.?

Yes. So, that was a particular program. So, we wouldn't expect to get anything additional out of that. There was a process we went through and applications. We got that particular grant. So, if there are other programs, we could do that. But under this existing program, that was it.

Thank you, good morning. Eric, just on Kemerton I and Kemerton II, what are you expecting for production output next year from these two units?

I believe that when we present our investor outlook for January 2023 and beyond, we will provide more details. For now, I will stick to our usual guideline, which states that it typically takes up to two years to reach full nameplate capacity. You can anticipate that the ramp-up will begin with a six-month delay for customer qualification after commissioning. Within the first year, we expect to achieve about half or so of the capacity of each plant. To put this into perspective, we expect to start sampling for qualification of Kemerton I this quarter, and we hope to begin sampling for the second train in the first half of next year, at which point you can apply the guidelines I mentioned.

Very helpful. And just on the recent spike in Chinese spot prices, how sustainable do you think this is over the next few months? And thoughts on the spot prices for next year?

It's very challenging to predict. However, I believe that the recent increase can be attributed to a recovery in demand specifically in the Chinese market. This has led to some moderation in prices earlier this year, but they have since risen again. It's difficult to determine where prices will head from this point. Looking ahead to next year, we anticipate a tight market that is undersupplied, which should support strong prices. However, providing a specific estimate for Chinese spot prices is quite difficult.

Good morning. Thanks, take my question. I wanted to just talk about IRA compliance. You highlighted, obviously, the fact that you have active production and conversion in free trade agreement countries. I just wanted to confirm whether it's your view that would you be selling qualifying materials from Kemerton or La Negra into the United States? Or would Kemerton be feeding U.S. customers? Or is that predominantly going to be feeding the Chinese market?

The answer varies by plant. Starting with hydroxide and Kemerton, the intention for Kemerton has been to supply a wide global market and utilize our assets in China for the Chinese market, even before the IRA and recent geopolitical issues arose. As geopolitical conditions have shifted and the IRA has emerged, we are shifting towards a strategy focused on individual countries or regions. Therefore, China will serve the Chinese market, while Australia will supply Asia, Europe, and North America. We believe this is the most efficient approach. In contrast, the carbonate market is primarily in China, and we do not have carbonate assets in China at this time. A significant portion of what we produce in Chile goes to China. As the IRA develops and demand grows in the U.S. and Europe, although it's currently quite small, this could alter our dynamics and increase the necessity for us to source more from Chile or other carbonate origins moving forward.

I appreciate the color there. Perhaps my follow-up, there's a lot to ask here. But with the January update on your '23 outlook in the context of some of the U.S. expansion, the Megaflex site, Kings Mountain, you highlighted, I think before, Kent, that you'd aim to have these perhaps online in '27. Is that specific to just the Megaflex site? Or would that include Kings Mountain as well? And do you expect to have a capital program for those assets envisioned in 2023, perhaps even in January with this announcement and start beginning the permitting process next year?

Yes. So, I mean we'll have capital. We'll definitely have capital in the '23 plan around those facilities. And the date, the '27 date is mine and conversion optimistically. It all depends on the permitting process and the schedule, but that's the thinking.

Good morning. You have some insight into the pricing trends from January and February as we move into the first quarter. Can you share whether February pricing is higher than January, and whether January prices were better compared to December on a realized basis?

Well, I mean, Joel, I'd say where the indices are today, that you'd have to say that they're better than what they were a quarter ago. However, recognize that there's room for movement either up or down from that depending on how those indices move.

You mentioned earlier that if spot pricing remains constant, 2023 pricing would increase by double digits. Could you provide some insights on what spot prices would need to do throughout 2023 for your realized price in 2023 to match that of 2022? It appears to be a linear decline in a hypothetical scenario. What would be necessary to achieve flat pricing in 2023 compared to 2022?

I got to think through the math there because there are a lot of different contracts with different caps on them that we've got to account. I don't know, Eric, have you got a gut feel for it or I have to get back to Joel.

We may get back to you, Joel. The factors are that we've been adjusting prices throughout this year, and that has been integral to our growth and strategy, contributing to some of the positive expectations along the way. We will make a small shift from fixed to variable pricing next year, but most of that transition is complete. If we take our current situation and project it into next year, we are looking at a significant increase. That's the point Scott is making. Therefore, we would need to see considerable decreases to reduce that average compared to 2022. We need to do some modeling to determine if we can provide you with more precise guidance.

Great, thank you so very much. Got two fairly simple ones for you today. The first, just any quick update on your preliminary thoughts on a China EV subsidy in '23 and onwards?

I'm sorry I missed...

Oh, right. Yes. Well, I don't know that our crystal ball is any better than anyone else's. I mean, China has been easing its subsidies recently, and that has not reduced demand. Demand is up over 100% year-on-year and is now accelerating in the second half of the year. I don't know if they need to accelerate, but they certainly have a lot of capacity in the country that could support that from a battery and cathode perspective. It's hard to say what the industrial policy will be, sorry.

You mean qualified, you mean? Yes. So, we've been actually tolling through the facility. So, the acquisition took us a little longer to get some of the approvals than we anticipated. So, we sold our spodumene through it. So, we've qualified that product already. Thank you, Alex, and thank you all again for your participation on our call today. Albemarle is a global market leader with a strong track record of financial and operational performance. We have a clear strategy to accelerate profitable growth, and we play an essential role in meeting the world's sustainability challenges. We are proud of what we have accomplished, and I am personally thankful for our outstanding employees as we reshape our business for even greater success going forward. Thank you.