Albemarle Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter and full year 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 one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. 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 fourth quarter and full year 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, and Scott Tozier, Chief Financial Officer. We also have Raphael Crawford, President Catalysts, Netha Johnson, President Bromine Specialties, and Eric Norris, President Lithium, who will participate in the Q&A portion of the call. 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'll turn the call over to Luke.

Thanks, Dave, and good morning, everybody. On today's call, I'll provide a recap of our 2019 strategic accomplishments and address the 2020 milestones that we'll be focused on to ensure we deliver on our vision. Scott will give you an update on the financials, our cost savings program, and our full year 2020 guidance. Despite a challenging back half of 2019, we grew fourth quarter and four-year revenues, adjusted EBITDA, and adjusted earnings per share year over year. That reflects our ability to address a dynamic market and to deliver solid results across our businesses. In addition, we achieved an adjusted EBITDA for the corporation margin of 29%. 2019 was another strong step toward our long-term visions. As you can see on slide six of our earnings presentation, we made significant progress on a number of strategic milestones. Importantly, we made significant improvements in our safety program. Lithium reduced its injury rate by 50% from 2018. Catalyst achieved its lowest recordable injury rate in four years, and bromine surpassed two years with no lost time injuries. Our OSHA injury rate in 2019 puts us in the top quartile of our peers. 2019 marked our 25th consecutive year of dividend increases, and we are now included in a select group of companies that comprise the S&P 500 Dividend Aristocrats Index. We've demonstrated our commitment to return cash to shareholders through increasing the annualized dividend from $0.10 in 1994 to to $1.47 in 2019. That's a 22% CAGR, and we'll continue that commitment well into the future. In 2019, we also conducted a materiality assessment to identify sustainability topics that support the execution of our strategy and ensure Albemarle maintains its strong financial position in a responsible manner for decades to come. As you can see from page eight of the investor presentation, we're focusing on four key areas, people, natural resources, community engagement, and our sustainable business model. In 2020, you'll see us establish baselines and long-term targets for improvement. We look forward to updating you on our progress. Consistent with our efforts to manage the portfolio and maintain a strong balance sheet, we announced last quarter our intent to divest the fine chemistry services and performance catalyst solutions businesses. The process for both businesses is going well. Our first priority for the use of proceeds from these transactions will be to reduce debt. Also last quarter, we announced a program to capture sustainable cost savings. This program is well underway, and we expect to deliver $50 million in savings this year and reach a run rate of over $1 million in annual savings by year-end 2021. The new ERP system we implemented last year will enable this program with better real-time visibility into all of our operations. Scott will provide more detail about the program in his session. To support our lithium growth plans, we continued to make progress on major capital expansion projects during 2019. We successfully commissioned our Xenu-2 lithium hydroxide unit in China with the startup and operating teams exceeding their 2019 targets and reaching full nameplate operating rates in less than 12 months. We also increased our lithium carbonate production in LINEGRA 1 and 2 by about 5%. The LINEGRA 3 and 4 lithium carbonate expansion in Chile is on schedule for commissioning by the first quarter of 2021. Finally, the Kemerton lithium hydroxide unit in Western Australia is targeted for commissioning during the latter half of 2021. We also continue to develop our best-in-class lithium resources. The Taliesin Joint Venture completed Phase II of the Greenbush's expansion in the fourth quarter, bringing their annual capacity for chemical-grade spodumene to approximately 160,000 metric tons on an LCE basis. Albemarle has rights to half of that production. In addition, Albemarle secured access to world-class watching the spodumene mine through our marble joint venture. This joint venture has the resources and ultimately will have the conversion assets to annually produce 100,000 metric tons on an LCE basis of battery-grade lithium hydroxide. Keep in mind that we are currently using less lithium than 25% of our available lithium resources, which gives us the ability to respond quickly to support the lithium demand growth for at least the next 10 to 15 years. Turning to our long-term lithium contracts, currently about 90% of our battery-grade carbonate and hydroxide volume is under contract. To date, we have reached agreements with all but one of our contracted customers on one-year price concessions for 2020, which results in a mid-teen percentage price reduction compared to 2019, with technical and battery-grade carbonate seeing higher reductions and hydroxide being generally lower. Otherwise, the basic structures of our long-term agreements remain unchanged. We will continue to manage these agreements to evolve with the individual needs of our customer. Each customer has unique value drivers that are critical to them. We remain committed to leveraging our world-class resources and low-cost conversion processes to meet the growing demand and deliver a differentiated value proposition to each customer. As we outlined at our investor day in December, while we are slightly adapting some aspects of our execution our strategy remains largely the same. Invest in growth and focus on cash generation in lithium through smart investments and our advantaged resource position. Maximize the earnings in cash of bromine and catalysts through sustainable cost savings and investments in systems, people, processes, and operational excellence. Assess our portfolio for opportunities to divest non-core businesses, and acquire or build lithium conversion assets at a lower capital intensity and take a thoughtful and disciplined approach to capital allocation while preserving financial flexibility. By executing that strategy, by 2024, Albemarle should generate revenue in the range of $4.7 to $5.3 billion, a five-year CAGR versus 2019 results of 6% to 9%. adjusted EBITDA of $1.5 to $1.8 billion, a carrier growth of 8% to 12%, adjusted EBITDA margin between 32% and 36%, a 300 to 700 basis points improvement, and $1 billion of annual sustainable free cash flow. In December, we also outlined the many inputs we used to build our lithium demand forecasts. These inputs include historical and forecasted technology advancements, cost projections, OEM model announcements, and a number of other factors. We continue to see the advancements of these variables, which further reduce impediments to wide-scale consumer adoption, namely range anxiety, infrastructure, and cost parity. the global average range of new EV models launched is expected to exceed 200 miles, with some models exceeding 300. To support mobility, there are now almost 1 million public EV charging connections globally, and the number will continue to expand, especially in Europe and China. And cost improvements through technology and scale are also accelerating. In their most recent survey, Bloomberg New Energy Finance reported that the average cost for a lithium ion BEV battery pack was in the range of $150 per kilowatt hour in 2019. The $100 per kilowatt hour milestone is now within reach in the 2022 to 2024 time period, well ahead of estimates just a year or two ago. In fact, Upfront purchase parity predictions are also being pulled forward into the 2022 timeframe. All of these trends are consistent with the projections of our model, leaving us even more confident in our demand expectations. I remain very confident in the lithium market demand we will see over the next four to five years and in Albemarle's ability to seize that opportunity. Albemarle has the best lithium resources in the world. Converting those resources into battery-grade carbonate and hydroxide cost-effectively will be absolutely critical to support that demand growth. Remember, there is no EV revolution without lithium. With that, I'll turn the call over to Scott to provide greater detail on fourth-core performance and full-year outlook.

Thanks, Luke, and good morning, everyone. Apple Mall generated unadjusted U.S. GAAP net income of $90 million during the fourth quarter, bringing full-year 2019 net income to $533 million compared to $694 million in 2018. Increased charges for the marble acquisition during 2019 were a factor, However, 2018 benefited from a $170 million gain on the sale of the polyolefins and components business, creating a difficult comparison. Full-year 2019 adjusted earnings were $6.04 per diluted share, an increase of 63 cents or 12 percent over the prior year on a 2018 pro forma basis. Our businesses delivered about 58 cents per share of that growth. 2019 also benefited from a favorable tax rate and from our 2018 share repurchase program. The gains were partially offset by currency impacts, higher depreciation in lithium, and increased corporate expense. Net cash from operations was $719 million in 2019 alone. an increase of just over 30 percent versus the prior year, driven by the strength of the businesses, a reduction in lithium working capital, and improved working capital across the rest of the company. Capital expenditures in total ended 2019 at $852 million, after approximately $90 million in expenditures shifted into 2020 based on invoice timing. As Luke mentioned, All our major growth projects remain on track, and we will continue to update you on their progress throughout the year. In November 2019, we closed the note offerings on the equivalent of about $1.6 billion, which we used to pay the Marble Joint Venture cash payment and restructure the short end of our maturity curve. As a result of the bond offerings, we were able to reduce our annual average interest cost by 70 basis points to 2.7%, and get our investment grade ratings reaffirmed by all three agencies. We closed 2019 with a net debt to EBITDA right on track at 2.4. Now, let me move on to the business performance. During 2019, Bromine delivered sales of just over $1 billion and adjusted EBITDA of $328 million, a year-on-year growth of 9% and 14% respectively. Four-year adjusted EBITDA margin was strong at 33%. Although there is continued weakness in the automotive sector, the other markets for flame retardants and bromine derivatives remained healthy, supporting year-on-year volume growth, and elevated prices. Volume growth was supported by the tetrabrome expansion in Jordan that came online in mid-2018. Pricing continued to be buoyed by constrained production of elemental bromine by Chinese competitors. Full-year catalyst sales were $1.1 billion, and adjusted EBITDA was $271 million, approximately flat compared to 2018 excluding divested businesses. Refining catalysts provided mid-single-digit percent adjusted EBITDA growth, excluding one-time insurance settlements that were received in 2018. Strong sales volumes in HPC and low single-digit price increases in FCC helped to offset lower FCC volumes. During the fourth quarter, lithium volumes were up 27% compared to the fourth quarter of 2018. Average pricing was flat in the quarter, and customer mix hurt sales by about 5%. Increased tolling to meet customer commitments and the negative customer mix resulted in adjusted EBITDA margins of 34%. For the full year, Lithium generated net sales of $1.36 billion, an increase of about 11%. Adjusted EBITDA was $525 million, down by about 1% compared to 2018. And the full year adjusted EBITDA margin was 39%. During 2019, we grew lithium LCE volume by 14% versus the prior year. Our average prices remained flat under a backdrop of an overall industry prices being down 28% to 30% year-on-year, demonstrating the strength of our customer relationships and contract structure. As we mentioned at our investor day, the lithium market has been more volatile than we expected, so we are adjusting our approach. We have access to the world's lowest-cost resources in both bromine and lithium. But to succeed in a volatile marketplace, we need to have low-cost operations and business processes as well. As Luke mentioned earlier, our sustainable cost savings program is well underway. We have identified over 70 discrete projects, assigned project ownership, and instituted a tracking dashboard. We have included $50 million of anticipated sustainable savings in our 2020 guidance. About 40 percent of the savings will come from selling and administrative costs. For example, we have identified savings of more than $10 million that we can achieve through the reduction of outside services. About 40 percent will also come from reduced factory spending and operational efficiency. For example, an operational excellence project at one of our production facilities is expected to generate $6 to $7 million in savings this year. And the last 20% of savings will come from supply chain activities like procurement and logistics. For example, one program will consolidate the number of freight forwarders that we use across the globe. We are confident in our ability to achieve this milestone in 2020, and reach our targeted run rate of $100 million by the end of 2021. And we'll provide periodic updates on our progress throughout the year. Execution of our capital projects continues to be a focus in 2020. Due to the timing of payments that push from 2019, capital spending in 2020 will be higher than previously anticipated. You can expect total CapEx of between $1 billion and $1.1 billion, with over 70% of that dedicated to lithium growth. We are certain that our businesses will continue to perform at a level that generates the cash needed for this growth plan. Net cash from operations is expected to range between $700 and $800 million in 2020, up modestly from 2019, Due to lower working capital, free cash flow is expected to remain about the same as 2019. Note that on page 18 of our earnings deck, we have provided some additional data points on our forecast that may be helpful when you're doing your models. Now let me turn to our business unit outlook for 2020. I'm going to begin with the coronavirus and the impacts from that. Our thoughts are with the families who have been impacted by this virus. For Albemarle, we've had zero confirmed cases among our employees. We are diligently managing the situation to protect our employees and the local communities and are complying with all government and health agency recommendations and requirements. In addition to our Chinese lithium hydroxide conversion facilities in Xinyu and Chengdu, We occupy offices in several cities across China. Employees in these offices have been working from home and are expected to return next week on a limited basis. In lithium, we continue to operate safely but at a reduced capacity at our production sites and, in cooperation with the local government offices, are determining the next steps to resume normal operations. To date, we've experienced minimal order reductions from our customers and have been able to produce the quantities needed to fulfill orders. However, each business is experiencing logistics delays. The potential impact on deliveries to our customers and deliveries of raw materials to our facilities remains an area of concern. In lithium, there's a risk that the automotive OEM slowdown in China will have ripple effects and For example, the potential of inventory building up at the battery manufacturers could impact us later in the year. And our lithium hydroxide conversion plant construction at Kemerton in Western Australia relies in part on equipment sourced from China. The startup of the plant could experience delays given the uncertainty for Chinese equipment deliveries. To date, though, project construction has been proceeding as expected. In catalyst, our largest risk is lower FCC sales to customers who export fuel into China, to the degree that transportation within China continues to be restricted. And a secondary risk is that raw materials that we source from China, though we currently have sufficient inventory to cover our requirements well into the second quarter. In bromine, the primary risk is related to logistics caused by a shortage of drivers and and depends on the duration of restrictions on people movement to manage virus containment. Overall, we expect a weak first quarter in China, and depending on the continued length and severity of the outbreak, our operations could be further negatively impacted. 2020 will be a pivotal year for lithium. EV growth in Europe is expected to accelerate, driven by fleet-wide CO2 reduction targets. Growth in China is still uncertain. We saw the market begin to stabilize at the end of 2019 and expect growth to return in 2020. However, the impacts from the coronavirus adds a measure of uncertainty on how the year will play out. We anticipate the total lithium demand to increase by about 50,000 metric tons and inventories to begin to tighten as we go through the year. Our volume growth will be about 3 percent in 2020 and will be limited until we commission the LINEGRA 3-4 lithium carbonate expansion in early 2021. As Luke mentioned, we have reached agreement with all but one of our contracted customers and are sold out on battery-grade materials. Although the prior inventory buildup and additional supply availability put pressure on pricing for 2020 versus our prices in 2019, We believe that market pricing has stabilized. Unfavorable pricing will be partially offset by lower costs as a result of reduced tolling volumes, higher operating rates, lower royalties in Chile, and the impact of our cost savings program. Consequently, we expect a year-over-year decline in adjusted EBITDA of about 20%. For bromine, we expect 2020 adjusted EBITDA performance to be flat to slightly down compared to 2019. Demand for flame retardants and other bromine derivatives is expected to remain stable. However, slightly increased supply across the industry could put price pressure on the business in the second half. Operating in a sold-out position, meaning we have little to no headroom to make up any price degradation with volume growth. However, we will continue to optimize our sales into markets that provide us with the highest margins. We expect catalyst-adjusted EBITDA to be flat to slightly up year on year, with the second half somewhat stronger than the first. FCC catalysts are expected to benefit from strong demand and an improved product mix. However, our FCC units are also operating at full capacity, limiting our ability to benefit from additional volume upside. Clean Fuels Technologies, our hydro processing catalyst, is expected to be slightly down based on our incumbency mix and a lower year for distillates turnarounds and changeouts. Since we'll be operating bromine, lithium, and FCC catalysts at sold-out utilization rates, our operational excellence teams will be focused on reliability and productivity improvements to get the most we can from these assets. Driven by the pricing pressure in lithium and bromine, modest low single-digit volume growths in all divisions, and the high utilization of our manufacturing assets, we expect 2020 net sales to be 3.48% to $3.53 billion. Adjusted EBITDA should range between $880 million and $930 million, with an overall corporate adjusted EBITDA margin of around 26 percent. In total, this is expected to result in an adjusted diluted earnings per share between $4.80 and $5.10. With lithium sales and Catalyst HPC shipments weighted to the second half, we currently expect the cadence of earnings to ramp up through the year. Due in part to the impact from the coronavirus on global logistics on each of our businesses and lower lithium volumes while our customers make inventory adjustments, the first half adjusted EBITDA is estimated to be 15 to 20 percent below the first half of 2019. And Q1 could be down as much as 20% to 25% year over year. In closing, the actions we've taken give us confidence that as we head into 2021, we will deliver sustainable savings, actively report on our sustainability goals, and support notable volume growth in lithium and be positioned to achieve positive free cash flow. And with that, I'll turn the call 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 into 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 followed by the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, to ask a question, please press star and then one now. And our first question comes from Bob Cort from Goldman Sachs. Your line is open.

Thanks very much. Luke, I wanted to ask about the contracting approach. I guess you characterized it as a one-time concession in 2020. Can you talk about that? maybe why you took that avenue as opposed to maybe just repricing every year. And then secondly, I think you talked about range, which would seem to suggest, again, a trend towards hydroxide, but maybe there's been some more news about LFP and some other cathode types gaining some momentum. Can you just talk about how you see that developing over the next couple of years?

Thanks. Yeah, I'll take the first one, and I'll turn it over to Eric to talk a little bit about the hydroxide versus carbonate. I'm assuming you're talking about the LRP that they talked about with LFP. I'm sorry, I'm thinking about a long-range plan here, the LFP that Tesla announced with CYT. So I think the idea on the contract is that, there's a situation that is occurring today that we want to address. But we believe that that dynamic will change over the next three to four years and needs a long-term contract. So it doesn't make any sense for us to reset that contract for five or six years when we think we've got a short-term disconnect here between supply and demand. So we thought it was in our best interest to address the concerns that the customers had today and yet keep the overall structure of those contracts where they are. Now, that's not to say long-term we might not see modifications of our plan of the contracts, but this is why you have a long-term contract. You set those prices. We've got a short-term issue. We address it short-term. and then it goes back to the way the contract was and we have to renegotiate in 2021, we'll do the same thing again. So that's why, Bob, we took that approach as opposed to just set – it doesn't do us any good to set the price when the market's low. I mean, that doesn't make any sense at all. So we were trying to preserve the integrity of those agreements while – adjusting to the marketplace for the short time, for that short window that we see that there's an issue. And with that, I'll turn it over to Eric to talk a little bit about your question on the LFP. So, hey, Bob, it's Eric here.

With regard to LFP or lithium iron phosphate cathode, as you may know, the China market has used that as a workhorse for a variety of applications for some years now, and that supply chain is well developed in China. As you, I think, also know, and we've talked about, the development of high nickel chemistries, which would shift from carbonate, which is used in iron phosphate predominantly, to hydroxide for high nickel, that tends to be a range-driven technology, get higher energy densities to provide higher driving ranges. And that's a phenomenon that appears to be most prominent outside of China with large established global automotive OEMs and also Tesla. What Tesla has announced recently is the adoption, it appears from the press releases, of working with iron phosphate to provide a compromise of reduced range for a lower cost. That market we view being a China market today. We still believe in the U.S. and in Europe, and for that matter, other developed countries like Japan, that range is an important consideration for the adoption rates we're seeing. But the reason we've talked about the value we have as a player in both carbonate and hydroxide is that we can play in both opportunities. I think the Chinese subsidy changes or the reduction of subsidy changes has maybe strengthened the movement to LFP because it's not giving an incentive to move to higher range. And I think the characteristics of the Chinese consumer support potentially a lower range, lower cost vehicle, and that's the market that I think Tesla sees.

Yeah, this is Luke. Just one other thing. If you go back and look to our Investor Day presentation we did in December, we were still talking about carbonate production doubling between now and 2025, going from about 195 to about 410, and hydroxide going from 70 to 525. So we believe carbon is going to continue to grow. We think there's going to be a higher growth in hydroxide. But we do have the flexibility to go either way. There seems to be some scraping on the phones. I'm not quite sure what that is. But, Operator, could you check on that, please? And we'll go to the next question.

Thank you. Our next question comes from PJ Juvicar from Citi. Your line is open. Thank you. Please check that your line is not on mute.

So the one-year price concession you talked about is 15. What happens after that? Do we go back to the old price or does it remain from current levels? And just in terms of timing, this negotiation happened before the coronavirus hit or was it after?

So it's a one-year amendment. So in 2021, it goes back to the original agreements, and if we have to negotiate from there, in some instances we will, but you go back to the original agreement. The discussions took place before and during the coronavirus.

Great. And just one quick question on bromine. You mentioned that, you know, you're seeing some – because of increased supply. Can you just sort of elaborate on that?

Yeah, I'm going to let Neth handle that, please.

Yeah, if you look at the import data of people who are importing bromine into China, you can see from the data very clearly that there's more supply going into China than what we had last year. So we expect that trend to continue, and we'll see that supply increase into that market, which will put some pressure on pricing. Thank you.

Thank you. Our next question comes from John Roberts from UBS. Your line is open.

Thank you. And, Luke, I know you have at least one more quarterly call coming, but good luck with your treatments and thank you for your service. And could I ask, do you have any covenant issues if you don't get the divestments off okay?

Oh, Scott? No, we'll be okay. We're monitoring that carefully, but given our outlook and, you know, given even a lower risk or a higher risk type of scenario with coronavirus, we'll be okay.

Okay. And then there's been a lot of news recently about stationary storage. Are we reaching an inflection point where that could actually start to become material? Eric?

John, this is Eric. So I would reference the Investor Day presentation where we talked about the demand that's there. It's still a small part of the demand picture. It's growing rapidly. That said, I see the same news you see about being continued push towards these sorts of installations. So we're watching it closely, but we still don't view that as being quite the mover of For our strategy and driving the capacity growth that we see and the volume contracts we have with our customers, it doesn't look – it's still EVs that really drives that equation for us. Thank you.

Thank you. Our next question comes from Joel Jackson from BMO Capital Markets. Your line is open.

Hi, good morning. So for my two questions, first one, thank you for the update on how coronavirus may be impacting your business. When you set your guidance here for 2020, what did you assume were the impacts from coronavirus in the first half year, second half year? I understand all the uncertainties here, especially around OEMs and auto sales in China. Thanks.

Yeah, so I think, Joel, that's the big point is that it is really difficult to know exactly how this is going to play out. You know, every day there's a new data point out there in terms of is it getting worse, is it getting better, you know, You know, China is trying to get back to work and how long that's going to take. So it's difficult to know. I think as you look at our first half, there's certainly a component of coronavirus that's built into that. So particularly in the first quarter, you know, with the expectation of EBITDA overall being down between 20 and 25 percent, part of that's coronavirus, part of that's inventory adjustments happening within the lithium business. So As we get out further in the year, we're just going to have to continue to adjust and keep you updated.

But suffice it to say that while we're looking at coronavirus is it is a delay. It is causing the first half to be weaker. We were already talking about a weaker first half to begin with. It's making it weaker, but we're not projecting now for it to have an impact on the full year.

Okay, so just my second question was first going to be a follow-up. So then it sounds like what you're saying is impacting first month of the year, and it sounds like you're expecting then – to all come back to in the second half of the year. And then my second question would be inventory situation right now for feedstock and for the chemicals. How is it looking right now both for Albemarle and for the industry? And, you know, what are you seeing in terms of closures or curtailments for some of the spodging players, some of the conversion plants in China? Thanks.

Well, are you talking specifically about lithium or across our portfolio?

Yeah. I'm talking about for both Albemarle and what you see in the industry for both feedstock, spodumene, and also for the chemical things.

So to date, we have not seen an input on the raw materials for us. We've been able to secure the raw materials that we need to run in the first phase. Quarter, as we referenced on our calls, we've had lower run rates in China than we had anticipated for our lithium, but it hadn't been an issue to date of getting raw materials in our other businesses. We have seen some, and if you listen to the calls, and I know you have, you've seen a number of chemical industries companies talking about the ability to get raw materials. But we're pretty well okay for that from a raw material standpoint right now. We don't see there's an issue from where we are and the kind of time frames they're talking about on the coronavirus. I do think one of the issues that we don't know about is as, you know, if you look at the automotive OEMs, some of them are not running today, but some of the batteries are. are running today, both inside and outside of China. So what remains to be seen is for the full year are the automotive OEMs going to run fast enough to soak up the inventory levels in that lithium that we would expect over the year, or is there going to be a ripple effect later in the year, which would put our full year kind of some downward pressure on that. We've got contracted volumes, so we don't expect it to be a significant risk, but that's one of the things that we're going to really keep our eyes on is what is the real impact, not only on our products, but on our supply chains, particularly in bromine and in lithium, as these end product OEMs either ramp up or ramp down during the course of the year. That's the biggest unknown issue that we'll face, and we're not a tier one supplier. We're further back in the chain, so that causes the ripple effect to be even more.

What do you think of the inventories for spodumene, carbonate, and hydroxide right now in the industry? Thanks.

Overall, hey, Joel, it's Eric. Overall, we would say that we're about six months inventory across the supply chain. And so as you look at that, it's probably closer to four months for refined lithium, and the additional couple months is excess spodumene. The excess spodumene that's in inventory now, a great deal of it is not economic at current prices, meaning it's not at 6%. It's not of the grade to be able to cost-effectively be converted at current spot prices. So that is what we'll watch very carefully this year. We expect demand growth of 50,000 tons, so it's going to be an overhang for the year. Supply growth, as you referenced in your question, has already been curtailed. We see very little supply growth year over year. It's going to be stocks and the drawdown of those stocks will be important to the stabilization, and we'll look for that over the next 12 months and give you updates as to what we think that means for pricing later in the year as we approach 2021.

Thank you very much.

Thank you. Our next question comes from David Begletter from Deutsche Bank. Your line is open.

Thank you. Good morning. Luke, you mentioned that one customer had not agreed to the, I guess, down 15% in lithium. How large is that customer, and what's the expectation for those negotiations?

So, Dave, you know the answer to that question. I'm not going to get into a conversation about a specific customer. Our expectation, obviously, is we're going to meet and find a resolution that meets that customer needs and meets our expectations. And if not, our position is we've got a validly enforceable contract.

Understood. And on the non-barrier grade, technical grade lithium, what's your expectations for pricing in 2020 versus 2019?

For technical grade lithium?

Correct. Okay.

Yeah, so if you look at both carbonate and, as I said on the call, the technical grade carbonate will be down more than that mid-teens average that we talked about, as I said in our prepared remarks. It is down more than that.

I actually meant the non-battery grade lithium.

Oh, my apologies. I'll turn that over to Eric.

Yeah, I think Luke said it, but let me summarize it. So as Luke said, on the battery grade side, Carbonate is probably down a little more than hydroxide. And on the technical grade side, all technical grade products are down a bit more than battery grade. And so in specialties, mixed, very mixed. It's not as price sensitive an area, although there is input lithium materials in that business, and that does have a mild effect on price. So that would be the least affected.

Thank you. Thank you.

Thank you. Our next question comes from Jim Sheehan from SunTrust Robinson Humphrey. Your line is open.

Thank you. In Catalyst, your outlook for, you know, flattish earnings in 2020, can you describe what impact IMO 2020 regulation is having and what is the underlying growth you're seeing in that business, excluding the IMO 2020? And also, what is your outlook for FCC pricing in 2020?

Hey, Jim, this is Raphael. So to give you a view, as Scott and Luke have indicated, we're expecting a fairly strong year on FCC Catalyst and a slightly weaker year on HPC Catalyst. The reason for that, as explained in Investor Day, is that HPC Catalyst is about change-outs, and the change-outs happen to be smaller in 2020 distillates than they were in 2019, and that's an area of strength for our business. Overall, the industry will see IMO 2020 as a tailwind. For our business, higher diesel production to blend to be able to meet the sulfur specs is favorable. It might not be as favorable as it is for others because our business is is weighted more towards distillates than it is towards resid, and resid is the area that will benefit the most from IMO 2020. Again, it will be positive, perhaps not as positive as it could be for others, but we have a very strong business in distillates and in specialty catalysts for hydroprocessing, and the trends in the industry are favorable overall for the long term in that business. It's a little bit too early on FCC pricing. We did have positive pricing in 2019. It's too early to say in 2020. Crack spreads are a little narrower than they have been, so that could have an impact. But our business is about value creation for our customers. We continue to do that, and where we can get value pricing for that value creation, we will.

Thank you. And on the $50 million in cost savings for 2020, could you just discuss how those savings will be realized by segments?

Yeah, Jim, this is Scott. So as you look at this kind of a split out, roughly you're going to get about two-thirds of that savings in the lithium business, about 10% in catalyst and bromine, and the remainder is going to be in the corporate functions is how it will play out in 2020. Thank you very much.

Thank you. Our next question comes from Jeff Zakowskis from J.P. Morgan. Your line is open.

Thank you very much. You said that you thought that global lithium demand would grow about 50,000 tons in 2020. How fast do you think it grew in 2019? And wouldn't 50,000 tons imply about a million incremental electric vehicles for 2020, or how How big is the component tied to electric vehicles and how do you calculate it?

Eric? Hey, Jeff. This is Eric. So, yes, the growth of 50,000 tons was a similar growth rate last year. The issue last year was we had a lot of excess supply and a lot of excess inventory. A lot of our customers didn't buy. They didn't actually buy that, or a lot of people in the market didn't buy that volume. They actually drew down their inventories instead. But their real consumption was in that same order magnitude. For us looking forward then, yeah, it does imply a significant growth in electric vehicles. Our view on 2019 was that production was about 2.6 million electric vehicles. And we're looking for that number to be close, you know, go up to three and a half to four. So it's over a million electric vehicles and growth. Most of that's going to be driven out of the European producers, automotive producers.

Okay. And then in your financials, your equity income in the lithium business drops sequentially from maybe roughly $30 million to $15 million. What's going on at Taliesin such that the equity income is dropping so sharply, and how do you see that for 2020?

Yeah, Jeff, I think you're referring to the fourth quarter. And the equity income for Taliesin and in the lithium business is largely driven by the volume that's being taken by both Tianqi or Albemarle. out of that joint venture. And so we did see reduced shipments, primarily going to Tianqi in the fourth quarter, expecting that it will be roughly flat to slightly down as we go into 2020 overall.

Flat to down from the fourth quarter or year over year versus the previous year?

Year over year.

Okay, good. Thank you so much.

Thank you. Our next question comes from Mike Harrison from Seaport Global Securities. Your line is open.

Hi. Good morning. Good morning. On slide seven, the assess box there, can you give us an update on the opportunities that you're seeing to acquire lithium conversion assets as opposed to building additional conversion capacity, maybe how you're thinking about that? buy versus build strategy today versus how you might have been looking at it a few quarters ago?

Yeah, it's the matter of pricing. I think the reduced price that we've seen of carbonate in the marketplace and the inability to get some of the spodumene rock as a raw material supply has brought some prices down to a level where that it appears to us you could have a lower capital base than if you build your own and you'd be in the market a whole lot sooner. So for us, it all comes down to is there a price at which, when you look at our all-in cost of acquiring, modifying where necessary to meet HSE standpoints and converting from either carbon dioxide or what have you, What's that return on capital? How will we lay that out versus what's the return on capital and the timing for building? It's a mathematical equation for us, and you've got to negotiate it and be able to close it as well. So that's how we're looking at it, and there are opportunities out there. Because of our tolling relationships, we're familiar with many. So we are in active evaluations.

All right, and then in terms of lithium customer mix, you mentioned that that was a negative in the fourth quarter. Can you talk about how that plays out during 2020? Is that something – is mix something that maybe improves as we get later in the year? Maybe we get some additional hydroxide demand growth?

Well, hey, Michael, it's Eric. I would say it's – we have – 2019 had a lot of moving parts to it. In 2020, we're going to have an equal amount of growth in production out of Linegra and out of Xenu for hydroxide, and at the same time, a big reduction in toll lines we sell into the marketplace. As Luke said, Scott said, we've contracted out 90% of our business. We endeavor each year to try to keep the mix fairly constant so we don't have swings from period to period. The simple fact of the matter is that we tend to produce a lot more carbon at the end of the year than the beginning, so there's sometimes some product mix factors and some customer mix factors. I don't know. It will probably be similar throughout the year, but, you know, again, we try to manage it so it doesn't cause these swings as best we can, but I think it will be fairly similar.

All right. Thanks very much.

Thank you. Our next question comes from Colin Rush from Oppenheimer. Your line is open.

Thanks so much, guys. You know, can you talk about what's going on with your customers in terms of potential consolidation and how you think about that, not just in 2020, but as you move into 2021, 2022, with some of the production schedules that you're getting from the OEMs?

Yeah, if you're looking at – you're talking, I'm assuming, about lithium and the battery producers. What we've said is that we've seen the decisions moving from the cathode producers to the battery producers and then in some instances all the way to the OEM. So we've seen those big battery producers making the purchasing decisions and the volume decisions and then allocating some of that volume for in-house production and then some of it to – be directed towards certain of the cathode producers. So we are seeing that. That will, in effect, consolidate the decision makers about these purchasing decisions and who you're contracting with down to a lower number. I think long term, as you look across the spectrum, you're going to see a consolidation even further of battery producers. You're going to have The Koreans and Chinese and the Japanese are going to consolidate into the bigger producers. That's being typical of what you've seen in other industries, and I don't think this is going to be any different.

Okay, and then, you know, we're seeing OEMs with, you know, various challenges in terms of getting into production and ramping up production on EVs. It's a different manufacturing process. Can you talk a little bit about the CapEx plans and your ability to modulate OEMs the spend this year and early next year as you see those schedules adjust? Because obviously there's a fair amount of variability there.

Yeah, so I think, you know, on carbonate, if you look at carbonate, we've got LENEGRA 3 and 4. That's going to come online by the first quarter of 2021 and will be commissioned. You know, most of that spending is already done, so it's kind of hard to do anything there. On Leningra, I'm sorry, further at Leningra, we have the ability, we have the plans where, if necessary, we could expand that. But it would be kind of a two- to three-year process at Leningra for a carbonate plant. If you're looking at hydroxide, from a Kimmerton standpoint, we believe we're on track for the second half of 2021 for a start-up. it will be difficult to rattle that back much because of the cost we've got in there. And anything else we build is going to be a lower capital intensity, so that's why we're looking at a build versus buy in an area like China. You could probably get it done in China from start to finish in about two years. We have teams in our engineering department. working right now on taking the plans and the designs that we have and building a lower capital intensity and a lower operating cost, looking at what our opportunities are there so that the next asset that we build from a hydroxide conversion standpoint, we will build more efficiently, more cost-effectively, and operate it with lower cost than the ones we have today. We've got to continually drive that down. In addition to that, I know you can take, as you know, take carbonate and convert it to lithium hydroxide. We also have teams looking at what is the most cost-effective way. If the market goes that way, what is the most cost-effective way? Would we build that in close to our carbonate facilities? Will we convert that? convert the carbonate somewhere else. What is the best way to do that? And the idea of modularizing that is a concept that we're looking at, but we need to be prepared to pull the trigger on that if and when the market calls for that. Again, that would take, you probably, if you're building it in China, it's probably 50% of the capital and probably a year off the timing to get it built, to get it permitted, and get it up and running. Excellent. Thanks, Gus.

Thank you. And that does conclude our question and answer session for today's conference. And I'd like to turn the call back over to Dave Ryan for any closing remarks.

I'd just like to thank everybody for their participation today and for your questions. As always, we appreciate your interest. This concludes Albemarle's fourth quarter earnings call. Thank you.

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