Albemarle Corporation

Good day, ladies and gentlemen, and welcome to the Albemarle Corporation second quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will follow at that time. If anyone should require operator assistance during the call, please press star then zero on your touchtone telephone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Dave Ryan, Vice President of Corporate Strategy and Investor Relations, You may begin.

Thank you, and welcome to Albemarle's second quarter 2019 earnings conference call. Our earnings were released after the close of the market yesterday, and you'll find our press release, earnings presentation, and non-GAAP reconciliations posted on our website under the Investors section at www.albemarle.com. Joining me on the call today are Luke 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 about our outlook, expected company performance, planned joint ventures, as well as lithium production capacity and demand may constitute forward-looking statements within the meaning of federal securities laws. Please note the cautionary language about forward-looking statements contained in our press release. That same language applies to this call. Please also note that our comments today regarding our financial results exclude non-operating, non-recurring, and other unusual items. Gap financial measures and reconciliations from those to the adjusted numbers discussed today may be found in our press release and the appendix of our earnings presentation, both of which are posted on our website. Now I will turn the call over to Luke.

Hey, thanks, Dave. Good morning, everybody, and thanks for joining us on the call today. In the second quarter, excluding currency impacts, Albemarle grew revenue and adjusted EBITDA by 6% and adjusted diluted EPS by 20% compared to the second quarter of 2018. Volume and pricing contributed to the year-over-year growth in lithium and bromine, while pricing was up year-over-year in catalysts. Scott will go into more detail on our quarterly performance and outlook for the rest of the year in a minute. I want to focus my comments on why we are adjusting our lithium capital expansion plans to significantly reduce capital expenditures in the medium term. The potential impact of EV subsidy changes in China, possible shifts in cathode chemistry, excess inventory held in spots along the supply chain, and the current oversupply of lithium carbonate in the market has caused some caution in the energy storage value chain. All of this has put downward pressure on price, and we expect to see this pressure on carbonate pricing continue in the near term. But we also expect supply-demand dynamics to tighten in 2020. We have always stated that we would add production capacity to meet demand, As you can see on page 8 of our earnings presentation, Albemarle has decided to delay all work related to planning, engineering, and construction of approximately 125,000 metric tons of previously announced additional conversion capacity. We anticipate that these changes will reduce our capital expenditures by approximately $1.5 billion over the next five years, and allow Albemarle to become free cash flow positive in 2021. As part of this strategic pivot, we recently announced amendments to the transactions with MRL. The joint venture will now be owned 60% by Albemarle and 40% by MRL. Albemarle will pay $820 million in cash and contribute a 40% interest in the 50,000-ton lithium hydroxide facility currently under construction by Albemarle in Kemerton, Western Australia. This facility is still on track to be commissioned in stages, commencing in the first half of 2021. We had previously announced that the first phase at Kemerton would be a 75,000 metric ton hydroxide facility, but we are scaling the total capacity back to 50,000 metric tons at this time. The Washington mine will still have the ability to to support at least 100,000 metric tons of lithium hydroxide. However, any additional conversion capacity expansions in this joint venture will be based on market dynamics, and we would expect a lower capital intensity per metric ton of capacity. This transaction still unites the mining expertise of MRL with the lithium expertise of Albemarle, and the modification accelerates the joint venture's ability to bring lithium hydroxide to the market. Albemarle will continue to have responsibility for marketing all of the product produced by this joint venture. In China, our 20,000-met-ton Xen-U2 lithium hydroxide facility continues to ramp production and is on pace to reach the full capacity run rate by year-end. With several large customer qualifications complete, we continue to anticipate meaningful sales growth, by this facility during the second half of 2019. In Chile, our two existing operating units in La Negra remain on track to produce close to 40,000 metric tons of lithium carbonate this year. The 40,000 tons of La Negra III and IV remains on schedule for completion in the first quarter of 2021. Based on what we're seeing in the carbonate market and to better manage our cash flow, we have decided to delay all work on the solar yield improvement project at this time. This will likely limit our ability to operate LINEGRA 3 and 4 at nameplate capacity initially and will delay our ability to build a safety stock of concentrated brine for a rain event or similar issue. However, we are confident we will still be able to meet our commitments to our carbonate contract customers. While we are pulling back on previously announced conversion capacity expansions, I want to point out that Albemarle has access to the best lithium resources in the world, the Solardi Atacama, Greenbushes in Australia, and upon closing the MRL transaction, Wajana. No other lithium company can match the quality, size, or diversity of those resources. Albemarle will be cash flow positive in 2021, and our balance sheet will get stronger and stronger as we grow EBITDA and operational cash flow over the next few years. This will give us the flexibility when market conditions dictate to build or buy additional conversion capacity that will use feedstock from the world's best lithium resources. In closing, as we promised we would do, we are adjusting our capital expansion plans to respond to market conditions. We will still be able to meet all of our commitments to our contracted customers, but reduce capital expenditures significantly in the medium term, allowing Albemarle to be free cash flow positive in 2021. We have access to large, high-quality, low-cost lithium resources and the financial flexibility to build or buy conversion capacity in the future if doing so creates value for our stakeholders. In short, we're well-positioned for and excited about the future. With that, I'll turn the call over to Scott.