Albemarle Corp (ALB) — Q4 2022 Earnings Call Transcript

All right. Thank you, Glenn, and welcome, everyone, to Albemarle's fourth quarter and full year 2022 earnings conference call. Our earnings were released after the close of market yesterday, and you will find the press release and earnings presentation posted to our website under the Investors section at albemarle.com. Joining me on the call today are Kent Masters, Chief Executive Officer, and Scott Tozier, Chief Financial Officer; Raphael Crawford, President of Ketjen; Netha Johnson, President of Specialties; and Eric Norris, President of Energy Storage are also available for Q&A. I'll note that today's call will be limited to 30 minutes, shorter than our usual quarterly updates since we just held an in-depth update about three weeks ago. The replay of that webcast is available on our website. As a reminder, some of the statements made during this call, including our outlook, guidance, expected company performance, and timing of the expansion projects may constitute forward-looking statements. Please note the cautionary language about forward-looking statements contained in our press release and earnings presentation; that same language applies to this call. I'll 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. With that, I'll turn the call over to Ken.

Thanks, Meredith. Good morning, and thank you for joining us today. I'll start by highlighting that our fourth quarter results were exceptional, with close to triple the net sales from the same period in 2021 and adjusted EBITDA up more than 400% year-over-year. While rising lithium pricing contributed to these results, we also saw significant increased volume growth. Scott will go into the financial details for the quarter and the year. We are confident in our assessment of the market opportunity for our essential elements and equally confident in our ability to seize that opportunity. We anticipate net sales growth of 55% to 75% for 2023. Our strategy is not just to maintain but to build on our global leadership in both Energy Storage and Specialties, and we continue to invest in both capacity and innovation to make that happen. Now I'll turn it over to Scott for details.

Great. Thanks, Kent, and good morning, everyone. Let's start on slide 5 to quickly review the fourth quarter 2022 performance. Net sales for the fourth quarter closed at approximately $2.6 billion, up 193% from last year, driven primarily by our Lithium segment, but we saw increases in bromine as well. Net income attributable to Albemarle was $1.1 billion for the fourth quarter. Diluted EPS for the fourth quarter was $9.60, which was a record for Albemarle. In fact, it easily beat our previous full year EPS record of $6.34 back in 2018. Turning to slide 6, fourth quarter adjusted EBITDA was over $1.2 billion, up almost 5.5 times year-over-year. This $1 billion increase was primarily driven by higher lithium prices and increased volumes. As you can see on the slide, this high quarterly result also contributed heavily to our full year increase in adjusted EBITDA of nearly 300%. Our Bromine segment was up slightly, and as expected, our Catalyst segment came in lower in the quarter as higher sales volumes and favorable pricing were offset by a plant shutdown due to the winter freeze in Texas in December. Full year 2023 guidance is unchanged from our strategic update in January. We continue to expect strong sequential sales growth in 2023. Remember, we have assumed flat year-end 2022 lithium pricing throughout 2023. We expect our adjusted EBITDA to be approximately 20% to 45% higher than 2022, with positive trends in all three businesses. Additionally, we expect net cash from operations to rise between 10% and 25% over 2022. This means we expect to remain free cash flow positive this year even after increasing our growth investments. On slide 8, we expect to see net sales increase sequentially quarter-to-quarter as our volumes ramp up. We project that our adjusted EBITDA will be evenly split between the first and second halves of the year. As a result, we anticipate that margin rates will moderate as we progress through the year, and I'll come back to that in a moment. All three of our business segments are looking at healthy growth rates during the year, reiterating what we detailed in our January event. Since our webcast in January, a lot of the questions we've gotten are around margins and capital expenditures. So I'll provide some additional color and time on those two items, and then Kent will provide a market update. So let's turn to slide 9. Energy Storage EBITDA margins were 65% in 2022. In 2023, a lower impact of spodumene inventory and increased impact of our JVs is expected to normalize our 2023 margins to around 46% to 47%. Most of that roughly 20 percentage point decline is due to spodumene inventory lags. It takes about six months for spodumene to go from our mines through conversion to our customers. Last year, we saw dramatic increases in pricing for lithium and spodumene. Due to that time lag on spodumene inventory, we realized higher lithium pricing from our customers faster than higher spodumene costs. As a result, we had unusually strong margins in 2022, particularly in the second half. Lastly, our EBITDA margins are impacted by tax expense at our Talison joint venture. Talison income is included in our EBITDA on an after-tax basis. If you adjust Talison results to exclude this, margins would be about 8% to 10% higher in 2023. Let's turn to our capital expenditures outlook on slide 10. We are investing with three goals in mind. First, to add conversion capacity and remain vertically integrated; second, to invest in new product technology to support battery advances; and third, to build and maintain our world-class resource base. To meet these goals, we expect capital investment to increase from about $1.7 billion to $1.9 billion in 2023 to about $4 billion to $4.4 billion in 2027. About half the increase in capital expense relates to geographic diversification to support customer demand for regional lithium conversion and supply. In 2023, we're investing in our conversion capacity in Meishan in Qinzhou. As the EV market develops in other parts of the world, we will continue to invest. We are planning investments in North America and Europe, where we estimate capital intensity to be more than double. By mid-decade, we expect to invest more in technology to produce advanced energy storage materials for next-generation batteries. Lastly, we expect to invest in additional resource development. Across our capital spending, about 5% is linked to sustainability, including improvements to new and existing facilities. These investments are expected to generate strong returns, allowing us to continue to invest to support our customers while generating significant free cash flow. With that, I'll turn it over to Kent for a brief market update and closing remarks.

Okay. Thanks, Scott. As China reopens, we expect moderation in EV demand to be short-lived, with medium and long-term demand remaining robust. We continue to expect EV sales in China to grow 40% year-over-year, an increase of nearly 3 million vehicles. Sales in China are seasonally weak around the Lunar New Year. We believe the latest phasing out of subsidies will have limited impact on demand. EV subsidies have rolled off on schedule since 2013 with only brief declines in sales. Continued municipal incentives and consumer preferences support a strong demand outlook for EVs. Our contract customers are not slowing down their ordering patterns, and early indications are both that cathode inventory and battery inventory in China are decreasing, which is a good sign for lithium sales. We're listening to our customers, and we'll be watching the data, so we'll continue to adjust our expectations as the year progresses. Our biggest challenge is managing the tremendous growth opportunity that is in front of us. We are leveraging our durable competitive advantages like our world-class resources, our global asset portfolio, and technical know-how to continue to grow. We are being absolutely disciplined about how we build our leadership position, particularly when it comes to scaling lithium production and conversion. We intend to accelerate growth profitably and in ways that align with customer needs. We are confident that electrification will continue to be a primary pathway toward a clean energy future, but we also recognize that the future for Albemarle is built on more than electric vehicles and done more than just our production capacity. Our strength in transforming resources into essential elements gives us outstanding leadership opportunities in four key areas: mobility, energy, connectivity, and health. We know that customer-focused innovations and sustainability are as essential to our future as our resource capacity as we work to fulfill our purpose of enabling a more resilient world. Now we'll move to Q&A. And Glenn, you're going to moderate that.

Yes. Hi, good morning, everyone. Just a long-term question. As you get ready for Kings Mountain site to potentially restart in, let's say, four or five years, I know you're doing a lot of community outreach and engagement today. But can you lay out for us the milestones in terms of permitting processes? After the IRA, do you think the process has gotten any easier? Thank you.

Okay. Interesting. So, I mean we are doing a lot of community outreach. It's not so much about the permitting process. It's just kind of how we're doing business when we go about a project like this. We expect to continue to do that throughout the life of the mine as we do that and other mines and other sites as well. We're just changing a little bit how we do that, learning from some of the success that we've had in the Lithium business, and we apply that to our other sites as well, whether we're mining there or not. As for the permitting process, we are hopeful that it may be a little bit easier and streamlined since the IRA, but we can't say that it's gotten that way yet. That's my view. Eric, do you want to comment on some of the milestones in permitting?

I guess, P.J., good morning. I think that the first step would be permitting towards the latter half of this year. We've been in feasibility work on environmental and sustainability sides to prepare for that permit. We have a permitting strategy that can get all the details on here, but I’d say leverage is the fact that it’s a brownfield site. So, we're optimistic that even though there's, as Kent said, there's tension and attention on the permitting process, that this particular mine, given its brownfield history, will hopefully have a rapid review. We’ll continue to monitor that closely and update you accordingly.

Yes. But even though we're not formally filing for permits this year, we've been working on gathering data for that process for almost two years. The data necessary for those permits takes some time to compile, so it’s a lengthy process. And even though we haven't formally filed yet, we've been working on that for a couple of years.

Thank you. I'll pass it along.

Thank you. Good morning. Eric, just on lithium spot price in China, it's not a major focus of ours. We have seen continued softening over the last few weeks. What do you make of that?

David, I would say it has a lot to do with what Kent described in his remarks. We've come out of 2022 with remarkable growth, exceeding expectations in terms of EV production. When the decision was taken to reopen the economy, the virus spread rapidly, which stalled consumer demand at a time when seasonally, it was weak due to the Lunar New Year. I think much has been made about the subsidies rolling off, but those have been rolling off for several years. Some have been extended at the provincial level, with some of the more meaningful subsidies at the state and local level. We don't think that's a big issue, and we've seen initial spikes in demand before subsidies come off, a drop when they roll off, and then a rebound in demand. Our projection, along with our customers' view, is that in the second half of this year, we'll see growth of close to 40%. In the meantime, companies are buying under contracts, not venturing into the spot market and are bringing their inventories down due to the post-holiday uncertainty, but we expect that to be short-lived with a demand rebound later this year.

Very helpful. And Scott, just on the full year guidance, thank you for the first half, second half split. Any further thoughts on the Q1 versus Q2 split in EBITDA?

Yes, I would expect that Q1 would be stronger than the second quarter. It's really driven by that inventory lag that we're seeing ultimately as well as the strong prices in the fourth quarter that carry into the first quarter. Ultimately, I think the first quarter is a bit stronger than the second quarter.

Excellent. Thank you very much.

Thanks very much. If lithium prices remain flat in 2023, is it the case that your equity income from Talison would remain at that 332 level all the way through 2023? Is Talison making as much spodumene as it can make, or is there room for it to move up in 2023 and 2024?

Yes, I'll take the equity income question and maybe, Eric, you can take the production question. We'd expect if lithium prices stay flat, we'd actually expect the equity income out of Talison to increase. If you remember, the transfer price out of Talison has historically been on a six-month lag, but it's now shifted to a three-month lag. The increases that happened last year will start to flow through in the first half of 2023. So, I'd expect it to be higher. Eric, do you want to talk about production?

Yes. And Jeff, regarding production, CGP1, the first line has been running for years now at max rates. CGP2 came online recently and is ramping. There is a possibility for that to run at slightly better rates; there's some productivity initiatives to address bottlenecking that could help with that, although it is currently running close to capacity. There's also additional lithium coming from tailings reprocessing adding to production. It's higher year-on-year, and there's potential for it to increase slightly if those productivity initiatives are successful.

Okay. Great. And you spoke of your first half and second half lithium EBITDA as being comparable. Given that there's so much more production coming out of Chile, why would that be the case? Shouldn't your volumes be stronger in the second half of 2023?

Yes. They'll definitely be stronger, based on the production out of Chile, but also the ramping up of lodging and conversion there. Plus the additional volume that Eric just talked about with Talison. Of course, prices are up, but we're assuming flat prices throughout the year based on how we exited 2022. You also need to consider the cost impacts I talked about on the call. So, you've got the spodumene inventory lag that self-corrects this year. With Wodgina ramping up, you have a margin rate impact there due to the fact that we report 100% of the revenue and only half of the EBITDA.

Okay. Great. Thank you so much.

Hi. Good morning. I was wondering if you could dig in a little bit on the European strategy. It seems clearly, in China, you've acquired and built conversion capacity. And in the U.S., it looks like things are really centered at Kings Mountain. Could you talk a little bit about Europe in terms of how you're thinking about how this evolves? I know it's early, but is this an area where we would see you bring material from either Chile or Western Australia? And then do you envision yourself partnering or doing more of a greenfield project when it comes to supplying on the continent?

So I'll start with that. Eric can fill in a little bit. So we're moving from China to North America. We have a resource strategy and a program for North America, where we're investing, and we will have a similar program in Europe. We don't have the resource base in Europe that we have in North America, so we envision a combination of some local resource, which we don't have at the moment, and bringing some resource in from Chile and Western Australia, where the large resource bases currently exist. We need to work out a strategy for how we bring that in the most economical and sustainable way, and that will be part of the strategy with the assets that we establish in Australia. Eric can talk more about partnering.

Yes. So Stephen, it would be a greenfield site, as there are no brownfield sites for such capacity in Europe today. We've gone through a site selection process and looked at numerous countries but haven’t narrowed it down enough yet to make an announcement. That said, we are looking at a plant modeled intentionally after what we've done here in North America, processing various feedstocks such as carbonate or spodumene from Australia and having the ability to recycle. We see this strategy as an opportunity for partnership, whether with an OEM or other producers in the battery supply chain in the region. We're actively exploring this and will share further updates soon.

Appreciate the color. Thanks. If I could just put in one follow-up, I appreciate the comments off the top in terms of the CapEx outlook. One of the questions that we fielded heavily is it's clear that this CapEx outlook is in regard to the current environment—you referred to the year-end 2022 environment for pricing going forward. It's important to realize that you're not obligated to spend this $4.4 billion in 2027. One clarification: Is that a peak for CapEx based on the Project Q you're looking at, or could CapEx come down in 2028 and 2029 based on that cadence of project spending?

Yes. You're right. We're not committed to it, so we’ll look as things evolve. That's our best view for the next five years. Any capital we’ll invest in 2027 will be aimed at the 2032 market. It's difficult to predict beyond that as we don't want to go past the five-year forecast we published. It could level off depending on market conditions; we'll have clearer visibility in five years than we do today. Additionally, the CapEx program will likely balance resource-oriented investments, given it has been focused on conversion in the near-term due to having resources.

Thank you.

Great. Thank you so much. Can you give a bit more incremental information on how we should be thinking about the ramps at both Kemerton and Qinzhou, along with any brief updates on your additional capacity options, especially in the United States throughout the balance of the decade? Thank you.

Okay. So, Qinzhou is operating and will ramp up, which includes some make rights we need to accomplish. Even though we're operating today, we'll have to take it down to perform these make rights to achieve additional volume. There is potential for expansion at Qinzhou, but that's not a project we're currently executing. We want to ensure we're at full operational capability, which we target at 25,000 tons over the next year. Kemerton is producing today, but we aren't selling that product until we obtain customer qualifications. Originally, the strategy was to execute both trains simultaneously, but we have adjusted due to labor challenges during the pandemic. Consequently, we're sequencing commissioning; Train 1 is operational, while Train 2 is about six months behind it. Typically, we plan ramp-up over a two-year period, which remains our rule of thumb. Is there any other part of your question that I missed?

Yeah. Just any updated thought process on your additional projects you could explore in the U.S. over the next few years?

Nothing new since the last call we had a few weeks ago. We're still evaluating site selection for a conversion facility at Kings Mountain or Silver Peak, which has expanded and is operating at that higher rate, with a bit more ramp-up to do at Silver Peak. The other project would be Magnolia, but that is further out. We're making progress there and planning that project, but we have not initiated from a final investment decision standpoint yet.

Very helpful. Thank you so much.

Thank you. I think your guidance is based on the December 31st realized price, but I just want to clarify, the equity income within that guidance is based on prices rising through the first quarter because of the lag, and then for the remaining quarters of 2023, the equity income has a flat price after the lag is recovered?

On the equity income, it actually goes up in the first half, through the first half, sequentially. We expect to see volumetric increases as well.

Okay. And then any update on the negotiations with Mineral Resources on the MARBL JV?

Not a real update. Scott mentioned that we continue to talk with our partners, and we expect to be able to announce something soon, but nothing to share today.

Okay. Thank you.

Thank you. As you heard today and during our January webcast, we feel we have the right strategy, the operating model, and the people to meet this opportunity and manage our business successfully to grow today and well into the future. Thank you for joining our call and your interest in Albemarle.