Albemarle Corporation

Good day, ladies and gentlemen. Welcome to Auburn Morrill's first quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If anyone should require operator assistance during the call, please press star then zero on your telephone keypad. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Dave Ryan, Vice President of Corporate Strategy and Investor Relations. Sir, you may begin.

Thank you, and welcome to Albemarle's first 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-gap reconciliations posted on our website under the Investors section at www.albemarle.com. Joining me on the call today are Luke Kassam, Chief Executive Officer, Scott Tozier, Chief Financial Officer, Raphael Crawford, President Catalyst, Netha Johnson, President Bromine Specialties, and Eric Norris, President Lithium. As a reminder, some of the statements made during this conference call, including about our outlook, expected company performance, production volumes, expansion projects, and our proposed lithium hydroxide joint venture may constitute forward-looking statements within the meaning of the 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 reconciliation of these measures to GAAP financial measures can be found in our earnings release and in the appendix of our earnings presentation, both of which are posted on our website. Now I will turn the call over to Luke.

Hey, thanks, Dave, and good morning, everybody. In the first quarter, Albemarle delivered adjusted diluted EPS of $1.23. Lithium volume in the first quarter was negatively impacted primarily by the rain event in Chile and delayed customer qualifications. Importantly, however, lithium pricing in the quarter was up 3% versus prior year. Catalysts and bromine specialties grew adjusted EBITDA by 5% and 12% respectively, excluding divested businesses. Both businesses benefited from increases in volume and price. Turning to our strategic projects, we continue to make progress on our lithium hydroxide joint venture with Mineral Resources Limited. We have made the necessary regulatory filings and, based on the current feedback, continue to expect the transaction to close in the second half of 2019. During April, we signed an interim marketing agreement with MRL that allows Albemarle to market any spodumene concentrate that is produced at the site prior to the closing of the joint venture. Our new 20,000-met-ton Xenu-2 lithium hydroxide facility continues to ramp production according to our original schedule. We are shipping from this expansion to customers who have completed their qualification process and have additional qualifications underway. We are on track for full qualification of ZenU2 material by all targeted accounts by the end of the third quarter of this year and expect to achieve a nameplate capacity run rate by year end. In Chile, we expect to produce close to 40,000 metric tons of lithium carbonate from our two existing operating units in La Negra in 2019, despite the impact on production from the rain event in the Solar de Atacama, which occurred in the first quarter. Due to delays in the delivery of certain equipment, we now expect to commission the 40,000 metric ton lithium carbonate plant LINEGRA 3 and 4, late in the fourth quarter of 2020 or in the first quarter of 2021. This will be followed by a typical four- to six-month customer qualification process that would put the first meaningful sales volume around mid-year 2021. In spite of this slight delay, we are confident in being able to meet our volume commitments under our long-term agreements for lithium carbonate. In the solar diatacama, we have commenced a capital investment project, which is expected to improve our lithium yields in the solar. Major equipment has been ordered. Earthworks should commence during the second quarter, and we're on track to commission the project in the second half of 2021. This project will allow us to increase our lithium yields by as much as 30% without increasing the amount of brine being used. further ensuring the sustainability of the Solardi Atacama, and increasing the flexibility of our operations. In Kemerton, Western Australia, work has started on our lithium hydroxide complex. Earthworks are well underway, and contracts have been awarded for the major and long lead time equipment, as well as for the engineering, procurement, and construction management for the project. The first phase will encompass three trains of 20 to 25,000 metric tons capacity apiece and expected to be commissioned in stages during the second half of 2021 and continuing into 2022. Finally, the expansion of Taliesin, our spodumene joint venture in Greenbushes, Australia, remains on schedule to start up in June of this year. This expansion will result in the capability to produce about 160,000 metric tons on an LCE full year run rate basis with Albemarle's annual share being up to 80,000 metric tons. This spodumene will feed our China and Australia conversion plants. Taliesin will tailor operations to meet the raw material demands of its two partners. Turning to demand for lithium for a minute. During the first quarter, global sales of electric vehicles were up almost 60% compared to 2018. Full battery electric vehicles contributed outsized growth, increasing 75% year over year. All of this is against a backdrop where year-on-year global automotive sales declined by 6.5% during the same quarter. Reasonably, Europe set a record for EV sales in March, ending the quarter up 23% versus prior year, with most of that growth coming from the full electric segment. U.S. sales were up 11%. First quarter EV sales in China were more than double what they were during the same period of 2018. In addition, battery production remained strong. The Chinese National Bureau of Statistics reported reported that full year 2018 and first quarter 2019 lithium ion battery production increased 13 and 8% respectively compared to the prior year. Year-on-year, the production of NMC cathode batteries was up more than 25% during the month of March alone. Overall, these demand signals are in line with what we see from our customers under our long-term agreements, which support the continued secular growth in electric mobility and electric storage and the underlying strength of our businesses. With that, I'll turn the call over to Scott.

Thanks, Luke, and good morning, everyone. In the first quarter, Albemarle generated unadjusted U.S. GAAP net income of $134 million. Net sales grew 6%. and adjusted diluted EPS by 4%, excluding foreign exchange and divested businesses compared to 2018. Adjusted diluted earnings per share was $1.23 for the quarter, which is up a penny compared to 2018 pro forma results, including the currency impact. Earnings growth in bromine and catalyst segments contributed about $0.10, and a lower share count contributed about $0.06. The gains were mostly offset by lithium, which was about 9 cents unfavorable, and foreign exchange, which is about 4 cents unfavorable, driven primarily by the strength of the U.S. dollar. Corporate costs in the first quarter were $36 million, driven in part by negative currency expense and planned increases in professional services. We did not expect the first quarter spending rate to continue, but given first quarter costs, and our updated view on the rest of the year, 2019 corporate costs are now expected to range from $120 to $130 million. Net cash from operations was about $55 million, down from last year, impacted by lower EBITDA, lower dividend payments from our joint ventures, and higher cash taxes compared to the first quarter. Operating working capital ended the quarter just under 28% of sales, an increase from the fourth quarter of 2018, primarily due to increased inventory of spodumene in the lithium segment in preparation for the ramp of the Xenu-2 expansion in China and increased inventory in catalysts in preparation for orders in the second half of the year. Capital expenditures during the first quarter were $216 million, on track with expectations. With the ramp of spending on Kemerton, continued build-out of La Negra, and the early stages of the Solar Yield Improvement Project, we continue to expect full-year CapEx to range between $800 million and $900 million. Now let me move on to the business performance. Lithium ended the first quarter with sales of $292 million and adjusted EBITDA of $116 million. On a year-over-year basis, pricing was up 3%, benefiting from our long-term agreement structure. Volume, however, was down 3% versus prior year, primarily due to the impact of the rain event in the solar. The adjusted EBITDA margin was solid at 40%, and reflects a higher mix of carbonate sourced from toll manufacturers. Bromine specialties generated sales of almost $250 million and adjusted EBITDA of $79 million, up 10% and 12% respectively, compared to the first quarter of 2018. Adjusted EBITDA margin improved slightly year-on-year to about 32% as a result of higher sales prices and operating rates, partially offset by increased raw material prices. The increased volume was primarily driven by sales of clear brine fluids used for completion of offshore oil wells and sales of certain brominated derivatives used in the production of polymer resins. The market for flame retardants remained solid, particularly in electronics. First quarter catalyst sales of about $252 million increased by 8% to compared to 2018, excluding divested businesses. Adjusted EBITDA was $60 million, up 5% from 2018. Growth was driven by our refining catalyst products due to order timing of hydro-processing catalysts and low single-digit price increases in fluid catalytic cracking, or FCC catalysts, partially offset by a slight volume decline in FCC. Looking forward to the rest of the year, lithium remains a volume story. Global demand remains in line with our expectations. As we discussed last quarter, we are starting to see some excess lithium carbonate in China coming from the non-integrated spodumene converters. This is pulling short-term carbonate pricing down. And for now, we've decided to forego some opportunistic sales of tolled lithium carbonate in China until pricing improves. Our strategic customers in general continue to reflect healthy demand based on their current order pattern and continue to meet volume and pricing commitments under the terms of our long-term agreements. Adding all this together, we now expect year-over-year volume growth of 15,000 to 20,000 metric tons and adjusted EBITDA growth rate in the high teens. Note that we expect the second half to be notably stronger than the first due to the Zinu production ramp and the brine improvements in Chile. Bromine had a strong start to the year, and the current backlog of orders is healthy. With our improving outlook for the second half, we now expect full-year bromine-adjusted EBITDA growth in the mid to high single digits on a percentage basis. Our full year flat outlook on catalysts is unchanged. Shipments continue to be weighted to the second half, with third quarter expected to be the strongest of the year. In rounding out commentary on our businesses, the fine chemistry services business, which is reported under the other segment, is beginning to show signs of recovery. We remain cautious However, we believe this business now has the potential to deliver full-year adjusted EBITDA of around $25 million. For the total company, we are reaffirming the full-year guidance. We expect pro forma net sales growth in the range of 9% to 15%. We expect overall corporate adjusted EBITDA margins of around 30%. And this would result in adjusted diluted earnings per share of between $6.10 and $6.50, a pro forma growth rate of 16% over 2018 at the midpoint. We expect the second quarter of 2019 to be about equal to the second quarter of 2018 and the second half to be stronger than the first. As always, normal fluctuations in our business could have an impact on those quarterly results. I'm excited about our progress in growing lithium capacity and earnings and the efforts of bromine and catalyst to generate increasing cash flow to fund that growth. These efforts, which are consistent with our strategy, continue to position us to benefit from the tremendous growth in the lithium market for decades to come. Now I'll turn it back over to Dave.

Operator, we are now ready to open the lines for Q&A. But before doing so, I'd 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.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. And our first question comes from Robert Court from Goldman Sachs. You may begin.

Thanks. Luke, I was wondering if you could talk. There's been, I guess, some angst around what's going on in pricing in China. You guys alluded to maybe doing some less tolling and opportunistic sales. Can you talk about your contract integrity of sales in China and then outside of China and maybe just review for us once again the balance and approach on that contracting in lithium? Thanks.

Yeah, I'll let Eric talk a little bit about what he's seen specifically in China, and then at a high level I'll talk a little bit about the contracts.

So, Bob, this is Eric. In China, we are seeing pricing falling to what we would consider the cash cost of high-cost non-integrated spodum converters. So that price is one which, when we take talisman rock and convert it through a toller to carbonate, the economics just don't make sense. And so as Scott alluded to in his prepared remarks, that's the volume we're pulling out of. That's the opportunistic volume. That volume was either one of two kinds. It was either a variable price piece to an existing customer where we have a fixed price contract already in China, and we have several of those, or it was to a new prospective account that we would be developing for future growth who we do not have a contract with, that is, of course, anchoring their expectations on that price.

So if you look at our long-term, I think this quarter has been a quarter that shows the strength of our long-term agreements. We've had the fixed pricing and the minimum volumes that we've had in the contracts. All of our customers have held to those. They've taken their minimum commitments, and they've held to that minimum pricing floor that we had. As you can see, our pricing was up 3%. year-over-year when a number of other lithium companies were talking about price being down year-over-year. So, again, this strategy is one that we thought through to kind of shave off the highs and the lows and to get a quality return on what we're invested. So we feel good about that strategy, and they're long enough now that we have these contracts, the bulk of our carbonate, spoken for under these long-term contracts through the end of 2021, and we have the bulk of our carbonate spoken all the way through, I'm sorry, and the bulk of hydroxide, I apologize, Bob, spoken through the end of 2025 at prices. So we feel very good about where we are and our ability and the respect and the legal significance that are given to these contracts.

And then, Luke, if I might ask, you mentioned or Eric, you mentioned that you thought maybe a non-integrated producer in China is at great even. You've pulled some of your own tons out of that market through the tollers using Taliesin, which is, I believe, far and away the lowest cost. So does that mean we should start to see what you expect to see, some of these non-integrated independent companies pulling back production? And is what they're selling in that market different than what you're selling from a quality standpoint, or is it fungible? Thanks.

Let me answer the last question first. It's kind of all over the board. It depends on the converter and their track record. So, you know, some is higher quality carbonate, some is lower. But to your point around cost structure, yes, once you remove toll or margin, right, because obviously the tolls we work with are earning a profit, the Taliesin converted product is going to be the lowest cost product in the marketplace, no doubt. With a toll or margin, though, that's what gets us close to being – not profitable at current market prices and why we have pulled out. It is possible, certainly, that this could have a constraint on high cash cost producers. We'll have to wait and see.

I think one thing is, remember, our margins, what we've committed is we're going to have overall 40% margins. And there are plenty of people, there's some people out there in China who are willing to operate at cash cost and making cash. We're not. and the people that we've committed to and that have committed to us through the high pricing, through the low pricing of whatever the market may bring, we're going to be consistent with those prices. We're going to meet our commitments, and they're meeting their commitments as well. So we feel good about it. Perfect. Thank you.

Thank you. And our next question comes from John Roberts from UBS. You may begin, Steve.

Hey, guys. This is Josh Spector on for John. Just a question if you could provide some additional information around the delay in qualifications in U2, I guess particularly what impacted the first quarter, just trying to mesh together kind of what you guys saw relative to competitors and some of the cathode producers in terms of timing and longer-term versus nearer-term impacts.

Hey, Josh. This is Eric Norris. I'm going to refer to a comment Luke made. Qualification times for a company like ourselves that has, using an existing plant or expanding a new brownfield next to it, has an established track record with a cathode producer, that's a four- to six-month qualification process. We brought GINU2 up in a sort of November-December timeframe. So we were always bucking up against that timeframe, right? And we were able to get certain customers qualified in time to get the product out by the end of March and make that fine in the quarter, and others we didn't. So it's really just playing against the clock.

And I think that also speaks to the confidence that those long-term customers have in the relationship we have with them is they cut actually in the first quarter, cut some of their at least one or two of them did cut that qualification time a little short. So we got that volume in for a piece of their work, but not for all of it. So I think we were trying to be a little more aggressive, thinking they could shorten the qualification time across the board. And just at the higher end quality for those long EV batteries, they weren't able to do that or weren't willing to do that. But we've done that. it continues on schedule for qualifications, and there are no issues. It was just a matter of we thought we could get it tighter than what the traditional qualification would have been.

So this, in your view, in terms of what you're seeing for the higher quality hydroxide product, are you seeing any customers push back some of the order timing or any indications of different demand patterns? It seems like what you said was in you. You expect to be at full rates later this year, which seems to be, I think, a bit different from what we're hearing from others.

Yeah, so nobody's pushing back on their order patterns from what we had expected for this year for our major customers. And what we said that we were ramping toward a full capacity on a run rate basis. So, in other words, we won't produce 20,000 metric tons out of ZenU2 this year, but by the end of the year we'll be operating at a run rate basis that would equal 20,000 tons if we ran for the full year. There's a little bit of difference there, so you understand what I'm saying?

Yep, got it. Makes sense. Thanks, guys.

Okay, man.

Thank you. And our next question comes from Kevin McCarthy from Vertical Research. You may begin.

Yes, good morning. Luke, nice to see the positive 3% on lithium pricing. Can you talk to what you're seeing with regard to mix, and what is your level of confidence that you can sustain the positive pricing throughout the course of 2019?

Kevin, so this is Eric again. Our volumes are, as you know, under long-term contracts. So the vast majority of our carbonate volumes and nearly almost all of our hydroxide volumes are under long-term contracts with fixed prices, and they have a floor associated with them. So our mix is going to be representative of the production mix we talked about. It is going to be close to 30,000 tons roughly of hydroxide and 40,000 tons of carbonate that we're putting into the market on a rounded basis. And our confidence of being able to sell that at current prices that we are seeing in the first quarter is very high going forward.

Kevin, if you remember, on the last call we said that we thought pricing for lithium for the full year would be flat and inflationary. That's still what we expect. what you're seeing, that 3% in the first quarter. Some of it is that some of the price increases in 2018 didn't hit all the way in the first quarter. They were staggered through the year. So you've seen a little bit of that also in the first quarter of 2019. But we still expect them to be flat inflationary for the year.

Great. And then secondly, I was wondering if you could – discuss or elaborate in terms of what you're seeing on the evolution of cathode technology. There's been some discussion that the move to high nickel systems is taking a little bit longer than anticipated. Are you observing that? And if so, does it have any appreciable impact on your business, either positive or negative?

So, Kevin, we can't account for what other folks' projection would be about demand and a mix of demand. things are unfolding as we thought they were, and we discussed them in the last conference call. We are seeing a 19 unfolding, largely as we predicted a couple of months ago, and we are seeing no pullback from the forecasted high nickel demand that we anticipated to see. Now, it's fair to say that that's largely an NCA market, and secondarily on the NMC side is 622 market, which has a partial amount of hydroxide in it, but NCA, as you know, is all hydroxide. We've never put a big bet near term on 811. We think it's an attractive chemistry long term. But there's quite a few processing technologies that need to be put in place to improve the economics of manufacturing 811, which we anticipate will take a number of years to put in place.

That's helpful. Thank you very much.

Thank you. And our next question comes from Lawrence Alexander from Jefferies. You may begin.

Hi, Adam Bubis on here for Lawrence. As you talk with your partners in the value chain, I was wondering how do you see stationary storage evolving? Are the specs any less rigorous than electrical vehicles, and how do potential volume commitments differ?

So you mean for grid storage, energy storage systems? This is Eric speaking. Yes. Just to clarify. Yes. Look, we see a market that, and we forecasted this a couple of months ago, that there's maybe a 60,000-ton market going forward, and it is not a big part of what is sold today. It is included in and part of the long-term contracts we do. The Koreans and the Japanese, and I believe the Chinese as well, although I can speak more directly to the first two, have volumes of our product that are sold and used in grid storage applications. And so we'll monitor it carefully. It's an intriguing market, but we don't see it being the driver that the EV market will be.

Okay, thanks. And my second question, I was wondering what your view on bromine derivatives was, and if demand stabilizes in Asia, should margins expand?

Yeah, I'm going to turn that to Nethil.

Good morning, Adam. This is Matt. What we're seeing is basically stable demand for flame retardants through the second half of the year, but really an increased opportunity for our clear brine fluids in the oil and gas market based on our offshore rig count increasing. So what we've done and projected our guidance forward is we've basically removed the risk we had in the second half and projected that going forward to the big single digits for the full year.

Okay, thanks. Very helpful.

And our next question comes from Joel Jackson from BMO Capital Markets. You may begin.

Hi, this is Robin on for Joel. Thanks for taking my questions. So my first is, so we've seen publicly available export data out of Chile that's showing sequential carbonate price reductions in the past couple of months. I know you mentioned in your prepared remarks that there's some carbonate price weakness from spodumene supply pressures, but can you talk a little bit about the Chilean export price dynamic and how that might impact Q2 lithium you've done specifically?

Yeah, so I'm not sure what data you're looking at out of Chile, but what I would say is the way we go to market, that's a transfer price from Chile, from our Chile entity to a U.S. entity that then turns and sells to the product. So you ought not view the Albemarle export data as a final product that we sell to the customer at that price. Okay, so then if we look at carbonate longer term, what we've said is in Asia there's been some pressure on carbonate pricing in the first quarter, largely due to some excess spasming that the converters have over there that they're able to convert and they're willing to sell at a lower price than what we've seen over the last couple of years. That will... over time, dry up. The market will continue. As we've always said, the market will be relatively balanced through here to 2025, but there'll be pockets where you have oversupply, pockets where you have undersupply. And what we're seeing right now is a pocket where, particularly for carbonate, in many of the non-EV uses, we're seeing some downward pressure because of this excess carbonate. But I think long-term The market's going to remain in balance. And, in fact, some of that carbonate is going to have to convert to hydroxide demand or we will not have enough hydroxide capacity to meet the demand for these battery makers on that chemistry over the long term.

That's helpful. Thank you. Just a quick follow-up on that. Are you able to provide Q2 lithium EBITDA guidance on a year-over-year basis? Yes.

No, not more than what Scott said in his prepared remarks.

Okay, no problem. And just one last question from me. Can you give us an update on the construction timeline at Regina? It seems like the first line is on schedule and commissioning now. Are the second and third lines still expected sometime this summer? And can you elaborate on the market agreement that's now in place and how that might – impact ALBs received volumes from Wadena for this year? Thank you.

Well, there's a lot of questions for one follow-up, so let me try to address the marketing agreement. What the marketing agreement says is that we have the right to sell spodumene that's produced out of that site during the full year. MRL was on schedule on train one. We will get qualification samples out. We're in the middle of marketing some of that spodumene, and we will sell that spodumene at attractive prices, but we are certainly not in a position or thinking about operating that wide open and then sell it. We're going to sell it to meet the demand, and that's it. Thanks very much.

And our next question comes from the line of Alexey Afram from Nomura Inc. Let me begin.

Hey, good morning. This is Matt Skowronski on for Alexey. If you were to see a downturn in demand for hydroxide, would you consider slowing down your investment?

Yes.

Thank you. And you mentioned that your outlook for bromine is driven by improving demand in second-half conditions. How good are your visibility into the orders, and what kind of gives you confidence that this pickup will occur? Is it flame retardants? Is it anything else?

Nathan?

This is Nathan. We have pretty good visibility into our orders. We analyze our backlog extensively. And we're essentially sold out. So we're in a good position to feel good about the orders we have and our ability to produce and deliver those orders. What we had in there was just a slight risk to baseline economics in the second half that we removed, which improved our outlook for the year.

Thank you.

And our next question comes from the line of PJ Jivkar from Citi. You may begin.

Yeah, hi. Dan Jester on for PJ. Just another one on bromine, if we could dive in a little bit deeper. It sounds like the mix of sales is going to change a little bit as the year progresses. How does that affect the margin outlook? Thanks.

This is Nessa again. I don't know if our mix is going to change per se. We had risk built into the second half based on the economic conditions we were seeing. Those are looking a little bit better now, so we removed that risk. But our fundamental sales mix shouldn't change throughout the year. Margins should be as we forecasted. Gotcha.

Thank you. And then on Catalyst, you've had a little bit of margin pressure over the last couple of quarters. Can you just comment what's driving that and how you think 2019 evolved? Thank you.

This is Rafael. We're looking at 2019 to be essentially flat year over year on an adjusted EBITDA basis. There certainly are mixed effects that occur from year to year depending on how much hydro processing versus FCC business. I would say on the whole, the business is strong, continues to follow the macro trends of need for chemicals, fuels, and clean chemicals and fuels that we feel confident in the future outlook for the business.

Thank you very much. Thank you. And our next question comes from the line of David Biglitter from Deutsche Bank. You may begin.

Thank you. Good morning. Luke, just on the carbonate excess in China, how long do you think this will last? Is it a matter of months or quarters or something like that?

Yeah, it's hard to say, David, because it depends so much about how many third people are out. But I would expect that you're going to see it through the year. I think you're going to see it through the year. My bet is it's going to start, you're going to see pricing start picking up toward year end. But it's very, very difficult to say. It depends upon so many third parties and what they may be doing, and you can't control all that. So that's what I would say. Eric?

I would just add, David, that we haven't talked a lot about supply. Supply, our expectations, if you compare them where we were three months ago on supply, are very different. South America production is going to be nearly flat year on year once you consider the broad impacts of rains that impacted all producers, we believe. Some have probably talked about it, including ourselves, and SQM's outlook for production this year. You then turn and look at the other side of the world and spodumene production. It's taking longer for some to get to market, and we'd expect that the economic values being achieved by the time it's converted to a carbonate salt is not sufficient to drive a lot more interest in putting more capacity in the market. So it will last the year. I'm not going to contradict Luke's comment at all. But I think we need to look at, on a long-term, on a multi-year basis, the impact of supply and what we see. And therefore, we see supply going out beyond this year being a lot more balanced with demand.

Very good. And just on looking at Wajinda, Spajamin, how should we think about that being marketed in relation to perhaps some of your additional talents and volumes as well being marketed in China? Yeah.

Yeah, so remember, Taliesin, we do not market that rock in Taliesin except for the technical grade. And so that would go into things like glasses and ceramics and things such as that. And Tianqi markets within China, and we market outside of China for that technical grade. But all battery grade has to be converted by the partners. So we don't – Taliesin is not – does not sell – spodumene rock to be converted into battery grade by either one of the partners anywhere in the world. It is simply a raw material source for Tianxi and Albemarle.

Thank you very much.

And we're going to market the wudge and the rock to meet the demand. If the demand's not there, we won't run the plant. So if demand's there, we'll run it to meet that demand that we can sell and get a profit on it.

Very good. Thank you. And our next question will come from the line of Ben Callow from Baird. You may begin.

Hey, thanks, and good morning. So first, can you talk about maybe just conversations and out years and how that looks, particularly in carbonate for new contracts? And then I want to talk about capital allocation. First of all, maybe you could talk about where you stand on your buyback and what your thoughts are there. And then second, just with the agreement with MRL, how you're viewing valuations out there in the private market. It looks like public markets hate lithium right now. But I'm wondering what the implications are in the private market for either new project startups that need capital or any type of M&A activity out there from a private market perspective and what that does to supply and demand. Thanks.

Okay, first of all, from a buyback standpoint, our buyback is already closed out. We closed that last one that we did out. It was closed out last year, right, Scott? Yeah, that's correct. At the end of December, we finished that buyback, so we're complete. Okay, and then I'm going to ask if you'll talk about carbonate to his question for the year and the contracts.

So, Ben, help me clarify. What was your specific question? How does carbonate look versus our contracts for long-term work?

As you look out to 2022 and beyond, you know, how are those discussions going? Are they active or are people pausing to look at how the market is? And how do you look at pricing there, too? Okay.

So let me first point out something you didn't ask, which is through 2021, and we've got the charts we've put out over the past few quarters, we are 80% contracted out through that period of time on carbonate, which hits our target exactly. Okay. I'll be candid. There are not a lot of discussions in the current market about a contract. We don't have any contracts that need to renew, that are going to renew this year or next of any material size. And as a result, given what pricing is and given the expectation of how we think the supply-to-mountain relationship will play out, we'll engage in those discussions in due course, but not imminently.

And then you asked about valuations. What I would say is if it's a resourced The valuations, even in the private side, the ask is still pretty steep from a resource standpoint where there may be some opportunities or in a conversion assets. And then you look at that as a, obviously we've got some capital projects as a build your own versus buy. But from a resource standpoint, some of the valuations, some of the better valuations, I'm sorry, some of the better resources, I apologize, are still have pretty high valuations.

Got it. Thanks.

And our next question will come from the line of Chris Kapsch from Loop Capital Markets. You may begin.

Yeah, good morning. So if you look at lithium pricing, there's been, maybe not historically, but more recently, there's been a premium for hydroxide pricing vis-a-vis carbonate pricing. And that premium has been compressing. I'm just wondering if you could comment on what do you think the influence is there, how do you see that playing out, and does that affect your business and outlook?

Well, Chris, this is Eric. So from our – let me start with the last question first. From our standpoint, you know, and I indicated earlier, we are largely completely – nearly sold out for hydroxide. So that is not going to affect our pricing this year. or for years to come, we believe. Our pricing is fixed at prices that are just a bit higher, as we witnessed in the first quarter, than last year at this time. And we expect them to be largely flat for the balance of the year. And if the market improves, there might be an opportunity for us to increase some of these contracts, but we have the floor in all of these contracts. So I asked you a question about what's going on in the broader market. Look, there are different kinds of quality of hydroxide, right? The hydroxide that's sold broadly for the grease applications or even for certain lower energy dense applications like LFP may not be of the same standard quality that's used in the high nickel chemistries. And we see that as a result. If you look at some of the relationships with the large – battery producers, that's where only a few people can play in these high nickel chemistries, including Albemarle. So there's a two-tier market. The compression, though, of the spread back to what we consider more normal spread of about $1.50 to $2, which has happened between carbonate and hydroxide, has been largely brought about as there being some excess hydroxide from other producers that aren't under long-term contract. It's largely in China that's driven that back in line.

Okay, that color is helpful. And then my follow-up is one of the things that's contributed to the angst, if you will, has been the unexpected magnitude of the Chinese subsidy change for EVs. And obviously that subsidy has been known to be going to zero in the relatively near term, but nonetheless that seems to have influenced some patterns. I'm just wondering how you see that influencing your business. There's some discussion that this – This change gives a longer tail to LFP. I'm not sure that was ever going away, given the relevance in e-buses for LFP and so forth. But maybe you could just comment on effects from the changing Chinese EV subsidies. Thanks.

Right. So, again, I would agree with you that it might favor longer some of the chemistries other than high nickel chemistries. With the more rapid drop in subsidizing some of the longer range vehicles, we might see more movement to cost, to LFP, to getting range with larger, less dense energy batteries. So that's a possibility. In our case, if you look at our product mix, that's neither good nor bad news, right, as long as the growth is there. And the first quarter illustrates that the growth is still there. We play in carbonate and hydroxide. And then finally for us, we have always noted that our mix of business is more biased outside than inside China. So while it does impact our business, this growth in EVs in China certainly, we are more tied to what happens globally with electric vehicles. Thank you.

Thank you. And our next question comes from the line of Colin Rush from Oppenheimer.

You may begin. Thanks so much, guys. You know, as you look at the rapid evolution of battery chemistries, what are you seeing in terms of needs for incremental R&D spend for your internal efforts to keep up with the chemistries that folks need?

Yeah, this is Luke Samuel. I think where we are in our spending today is about where we need to be. We're not going to invent the next batteries. What is important for us is to understand where our customers are going so that we can take where they're doing and be sure that we have either the lithium metal, the lithium carbonate, the lithium hydroxide, or whatever other derivative lithium might be to apply to their situation. So it's more or less of a development and more of an application. And we've, over the last three or four years, built up that expertise. so that we're able to meet those demands. And I don't see our need to increase R&D any further than the kind of levels that we have it today in order to successfully meet the changing and evolving demands of the markets.

Great. And then just on the contracting, has anyone come back and tried to renegotiate prices lower and had to be put off or refused to take volumes at this point?

we're constantly having conversations with our customers. So I'm not aware of anything where a customer has come back and said, we need to sit down and have a discussion about price right now. I'm just not aware of that in this quarter. Maybe a small customer around the edge. It's certainly the major customers know. Certainly the major customers know. Thanks so much.

Thank you. And our next question comes from Mike Sison from QBank. You may begin.

Hey, guys. In terms of 2Q, I think you noted, you know, earnings be flat year over year. Can you maybe give us directional feel for the segments? And then what do you think needs to happen to get that better second half?

Yeah, this is Luke. Let me take the second question first. The better second half is easy. From a lithium standpoint, it is Zinu full qualifications and ramping that production up. And it's the chili brine, having the better brine, getting through that rain event, having enough brine to feed the plants to operate at high capacity. It's operating. Can we operate Zinu a little better than we have in the forecasts? And then it comes down to continued strength of bromine. We've got another well coming online in bromine. And then we've got big orders. You know the hydro-treating catalyst business is a little bit lumpy business. And if you look right now, the third and fourth quarter are big quarters for hydro-treating catalysts. Right now, we believe it's going to be a really big third quarter because of that. But Those HPC orders always have a tendency to slide a little bit, so it's the second half. But that's what gives us confidence in the big second half. It's not a lot of price built in across our portfolio for those. It's really all about the additional volume, the additional qualifications, and the way the order patterns are set in HPC catalysts.

Great. And 2Q, just by segment.

Scott? Yeah, Mike, this is Scott. So as you look at Q2, we're expecting that bromine, catalyst, even fine chemistry will be sequentially similar to Q1. And the growth that we see sequentially is really all coming from lithium. And so that's kind of how you look at it. And the big driver there, if you look on a year-over-year basis, while catalyst is going to have this big Q3, On a year-over-year basis, it's actually going to be down in the second quarter. So you'll see, you know, growth, you know, that's a dynamic that you've got to take into account as well.

Got it. And then just as a follow-up, you know, you rattled off some pretty strong growth outlooks or early first quarter for global sales for EVs. Can you maybe give us your thoughts for the full year and what you see or what you're hearing in terms of global EV sales for 19 versus 18?

Yeah, I would expect the EV sales to continue on the trajectory that you've seen from 16 to 17 and 17 to 18 and 18 to 19 is what I would see. We don't see any evidence from the order pattern of our big customers or from what we're seeing in the models that are being rolled out by the EV makers, by the automotive OEMs that are going to change that direction. You're still going to see continued growth in the EV sector in 19. I just don't know what that number is going to be, but I think you'll see a continuing trend of what we've seen in the past.

Great. Thank you. Thank you. And our next question comes from the line of Jim Sheehan from SunTrust. You may begin.

Thank you. Good morning. In terms of the earnings shortfall that you announced, I think, on March 28th, you listed three buckets of clauses for that. Could you give us the size of each of the buckets, please?

Yeah, this is Scott, Jim. So as you look at the – I'm going to put them into two buckets, because the first one is the rain event in Chile. And so about 50% of the shortfall was coming from that, and 50% was coming from the qualifications, the qualification delays. If you remember, we actually had qualification delays on Zinu 2, as well as on the tolled carbonate that we talked about. And you can split those about 50-50 as well. So that's kind of 25% from tolled carbonate delays, 25% from Zinu 2 delays. 50% from the carbonate out of Chile.

Great. And on CapEx, you talked about your expectations for this year. What do you expect CapEx to look like in 2020 and 21?

Yeah, it's going to be roughly the same. We'll give you an update on that, but if I was modeling out right now, it would be roughly the same, assuming that we still have the good demand that we are seeing. If we don't have that demand from the customers, if we've got issues with customers, we will certainly pull it back. But as of right now, the demand we're seeing from our customers would necessitate those investments and would give us the return on those investments as well. Thank you.

Thank you. And our next question comes from Mike Harrison from Seaport Global. You may begin.

Hi, good morning. I was wondering if you can give a little bit more detail on the lithium yield increase project in Chile. It sounds like you're moving forward on that. I believe last we heard you had had some success kind of at the lab or pilot scale, but maybe there were some concerns in scaling up to the commercial level. So what's changed there? And are you confident that that technology is going to be ready for prime time?

Yeah, this is Luke. We're very confident. It worked at the lab quite well. It also worked in pilot scale from brines in the solar that we ran it through. It's not new equipment. It's known equipment. There's not any, you know, specially made pieces of equipment or things like that. So we feel confident in our ability to execute this project. It allows for us to achieve about a 30% increase in the yield of the lithium from the same amount of brine being pumped in the salar. So it's good for the salar. It gives us a lot of unit flexibility and preservation of capital going forward. So that's the best place in the world to make lithium derivatives. So we're excited about that ability, and we're moving forward. We expect to commission that sometime in 2021, I believe.

All right, and then I was also wondering, well, if you can talk a little bit about what you're seeing in HPC demand ahead of the IMO 2020 regulations kicking in. Are you starting to see some ability to capture additional hydrotreating capacity? Is that really what's driving the Q3, Q4? Or can you maybe just talk about what the ramp looks like during this year?

Sure, Mike. You know, that's a piece of it. We're We generally see a tightening of sulfur specs around the world beyond the efforts of the IMO, but there is a part of Q3 which is really our customers gearing up for the increase in demand for low sulfur diesel fuel for blending, low sulfur fuels in general. So to that end, we are starting to see a positive impact for HPC because of IMO 2020. As Luke had mentioned, it is a lumpy business. So some of what we're seeing in growth in Q3 is a function of just timing of rebeds from existing customers and the opportunities that we have.

Thanks very much.

Thank you. And our next question comes from Arun Viswanathan from RBC Capital Markets. You may begin.

Great, thanks. Good morning. Just wanted to ask about the MRL investment. Could you characterize kind of the return profile there and if it has changed at all given, you know, some of the pricing action that you've seen?

And if you don't take that into account today, I guess. Yeah, well, this is Scott. So as you look at, you know, one of the impacts around the returns is going to be the spodumene sales that we have in the short term. And obviously with the pullback in spodumene pricing, we'll see a little bit of an impact there. Fortunately, hydroxide is the big driver returns. I mean, that dynamic hasn't changed. That's going to be all marketed under our long-term contracts. So we still feel very good about the returns.

Yeah, this is Luke. From an MRL standpoint, this is a great partnership to combine the mining expertise they have with the lithium hydroxide expertise that we have. And we're not buying this for this quarter or for the next quarter, but for the next 20 years to be able to drive the returns. And we're still confident in those returns over that period of time, and we feel good about the deal.

Okay, thanks. And just as a quick follow-up question, If you think about what's gone on in China, has there been any impact on demand, I guess, shorter term from destocking or any kind of macro concerns or pressures?

Hi, it's Eric. That's a good question. As you know, China is a very opaque market and hard to tell. My theory, and I discussed it with my business team, is there's probably a level of stocking only because we can look at prior years and see that there was a high level of buying above demand, we believe, for free stocks. In a market like this, if you're running a business for cash, you have all that working capital on hand, you may exhaust it. It's just a theory. hard to know for sure, and may be part of the aggravating factor as to why prices are where they are. But that's just a theory at the time being and hard to prove.

Okay. Thanks. Thank you. And at this time, I'd like to turn the call back to Dave Ryan for closing remarks.

Okay. I'd like to thank everyone for your questions and participation in today's conference. We always appreciate your interest. And this concludes the third quarter earnings call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.