Albemarle Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2019 Albemarle Corporation earnings conference call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star then 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your speaker today, Mr. Dave Ryan, Vice President, Corporate Strategy, Investor Relations. Sir, you may begin.

Thank you, and welcome to Albemarle's third quarter 2019 earnings conference call. Our earnings were released after the close of the market yesterday, and you'll find our press release, earnings presentation, and non-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 about our outlook, expected company performance, production volumes and commitments, as well as lithium demand, may constitute forward-looking statements within the meaning of federal securities laws. Please note the cautionary language about forward-looking statements contained in our press release. That same language applies to this call. Please also note that some of our comments today refer to financial measures that are not prepared in accordance with GAAP. A GAAP reconciliation can be found in our earnings release and the appendix of our earnings presentation, both of which are posted on our website. Now I will turn the call over to Luke.

Hey, thanks, Dave. Good morning, everybody. On today's call, I'm going to provide a quick recap on quarterly performance, but want to spend the bulk of my time on the long-term position we're taking and how the recent strategic decisions we've made support that view. Scott will provide more detail into our third quarter and full year performance. Excluding currency impacts, third quarter revenue grew by 14%, adjusted EBITDA by 12%, and adjusted diluted earnings per share by 22% year over year. Excluding currency impact, each of our GBUs delivered year-on-year EBITDA growth, increased volume across all of our businesses, and favorable year-over-year pricing in lithium and bromine contributed to that growth. With that, let me take a step back and set the stage for where we are today. As you know, the lithium market is dynamic. It offers a very strong future growth opportunity and the long-term secular growth trends remain fully intact. However, we are and will be dealing with the challenging market conditions for the next 12 to 18 months. Since late July, we have announced several significant strategic actions to successfully position our business for the long term. Last quarter, we announced a decision to defer work on approximately 125,000 metric tons of conversion capacity, freeing up about $1.5 billion of our $5 billion five-year capital investment plan. This will enable us to generate free cash in 2021 and is the right path to take based on current supply-demand dynamics and provides us with the financial flexibility to take advantage of any opportunities we see. Importantly, this decision does not affect current customer commitments. We are in the position to deliver on all committed contracts, and we have the ability to add capacity if current market dynamics improve. As you know, we have access to geographically diverse, high-quality, low-cost lithium resources, and the financial flexibility to build or buy conversion capacity in the future if doing so creates value for our stakeholders. As we will discuss in detail at our upcoming Investor Day in December, battery technology continues to advance. We expect carbonate demand to continue to grow, but expect hydroxide demand to be much stronger. To that end, we're focused on remaining an agnostic lithium producer. Whether our customers want carbonate or hydroxide or other lithium products, we have access to the world's best brine and hard rock and the industry-leading conversion expertise to deliver on their needs. And we remain committed to investing to maintain our competitive position and deliver a truly differentiated customer value proposition. When we shared our strategy in 2017, we told investors that we would take advantage of opportunities that accelerate and strengthen our long-term growth strategy. To that end, we announced last week the completion of our joint venture agreement with Mineral Resources, where we have a majority interest in a 60-40 ownership structure. All in, our investment of $1.3 billion consists of a cash payment of $820 million to MRL for 60 percent of the waging of mine and contribution of a 40 percent interest in our 50,000 metric ton hydroxide facility currently under construction in Kemerton, Western Australia. We believe our investment in this new joint venture named Marble Lithium will produce substantial long-term value. The JV provides access to a high-quality hard rock source, further diversifying our global lithium resource base, and strengthens our position in the long term by giving us the ability to increase capacity to support future market demand. With the combined operating expertise of Albemarle and MRL, the top-tier Wajna mine, and our market knowledge, we are well positioned to benefit from a rapidly growing market, which is increasingly emphasizing hydroxide. The joint venture supports our long-term view, but in the short term, we made the decision to idle production of the Wajna mine until market conditions support production economics. The returns for this project will still be very attractive. We anticipate that when the JV is producing lithium hydroxide at a rate of 100,000 MET tons annually, the return on invested capital will be a healthy 17 to 19 percent, or roughly 2X our cost of capital. Staying with lithium, I want to address pricing and contracts. As we commented in our preliminary earnings announcement, Current market conditions are challenging, and we're experiencing pricing pressures in China and on our technical grade products. To date, our pricing strategy under our long-term battery grade contracts have held. As you can see on pages 10 and 11 of our earnings presentation, Albemarle's third quarter lithium pricing was up slightly year over year, despite a significant year over year decline in market conditions. Recently reported China carbonate prices appear to have stabilized in the range of $7 a kilo. We expect that this price level is at or near the marginal cost of production and do not expect China carbonate prices to drop further in any material way. However, China carbonate at $7 a kilo puts pressure on pricing across the global lithium portfolio. including the fixed and variable pieces under our long-term agreements. We know that our long-term agreements are of great interest, concern, and focus, so let me broadly address the matter here. As we have been in the past, we are in active discussions with customers on our agreements. Those discussions involve price, volume, allocations between carbon and hydroxide, length of the contract, and the value that Albemarle offers for quality, security of supply, flexibility between carbonate and hydroxide, sheer volume of product needed, and the ability to meet the customer's growth expectations. It is obviously not in our best commercial interest to discuss contract negotiations publicly, so we are not going to do it. These are active discussions with many moving pieces. As the dust settles on these negotiations, will give you a better look at what this means for our annual outlook. Rest assured that we understand the value we bring to this supply chain, and we intend to capture our fair share in these discussions. Now, let me switch gears and talk a little bit about 2020. As a part of our strategy, we continue to assess our business portfolio. We have received multiple inquiries about our fine chemistry services and performance catalyst solutions businesses. So we have initiated two processes to pursue these opportunities. They are both profitable businesses with strong operating teams. So if we can come to agreement on an evaluation that we feel is appropriate, we will pursue a divestiture. If we are not able to secure a valuation that we believe to be appropriate or in the best interest of our stakeholders, we will continue to operate these businesses. we would expect both of these transactions to be 2020 events. In terms of how we see our portfolio performing in 2020 versus 2019, our preliminary view today is that we expect catalysts, bromine, and fine chemistry services to be essentially flat. There are some gives and takes in each, but right now, assuming no overall economic slowdown, these businesses should net to approximately flat. Lithium will be lower year over year due to pricing pressure across the portfolio and are not having new conversion capacity to drive any significant volume growth. We have initiated a structured program across the company to capture sustainable cost savings and expect this program to deliver over $100 million in sustainable cost savings over the next two years. Taking all this into account, our preliminary view is that our full-year 2020 EBITDA performance could be lower than full-year 2019 results by around 10%. In closing, we are taking swift actions to navigate the market challenges that we see in 2020 and emerge even stronger to capture the long-term growth opportunity in a profitable manner. We will continue to build on our strength in manufacturing excellence in bromine and catalysts, and we will transform processes for lithium, similar to our other businesses, to ensure best-in-class operations. We will continue to be conscientious in our asset management and capital plan and seek to be nimble in response to changing and dynamic market conditions. With that, I'll turn the call over to Scott.