Albemarle Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2020 Albemarle Corporation Earnings Conference Call. At this time, all participants 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 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your presenter today, Ms. Meredith Bandy, Vice President of Investor Relations. Thank you. Please go ahead, Madam.

All right. Thanks, Marcus. And welcome to Albemarle's third quarter 2020 earnings conference call. Our earnings were released after the close of the market yesterday, and you'll find our press release, presentation, and non-GAFA conciliations posted to our website in the Investor Relations section at albemarle.com. Joining me on the call today are Kent Masters, Chief Executive Officer, and Scott Tozier, Chief Financial Officer. Raphael Crawford, President Catalyst, Nessa Johnson, President Bromian Specialties, and Eric Norris, President Lithium, are also available for Q&A. As a reminder, some of the statements made during this conference call, including our outlook, expected company performance, expected impacts of the COVID-19 pandemic, and proposed expansion projects, may constitute forward-looking statements within the meeting of federal securities laws. Please note the cautionary language about forward-looking statements in our press release, and that same language applies to this call. Please also note that some of our comments today may refer to financial measures that are not prepared in accordance with U.S. GAAP. A reconciliation of these measures to GAAP financial measures can be found in our earnings release and the appendix of our presentation, both of which are posted on the website. Now I'll turn the call over to Kat.

Thank you, Meredith, and good morning, everyone. On the call today, I will cover a high-level overview of results and strategy and highlight additional actions we're taking to improve the sustainability of and to grow our business. Scott will then review third-quarter financials, provide updates on our balance sheet and cost savings initiatives, and review our outlook. At Albemarle, our first priority is the safety and well-being of our employees, customers, and communities. Thanks to the courage and dedication of our employees, we've been able to safely operate our facilities throughout the pandemic to meet customer needs. Our cross-functional global response team continues to meet regularly to assess pandemic-related risk and adapt protocols as necessary. Protocols including restricted travel, shift adjustments, increased hygiene, and social distancing remain in place at all locations. Our recent focus has shifted from managing the immediate crisis to building in flexibility to adjust for regional differences and changing conditions. Today, looking at our non-essential workers around the globe, most of North America remains on work-from-home status. Asia and Australia have returned to work sites. Most of Europe returned to work sites over the summer but have now gone back to work-from-home given rising COVID-19 cases and rates. And finally, in Chile, improving COVID-19 rates and falling cases have allowed us to trial a soft reopening approach at a worksite at reduced capacity. As we all know, the situation is challenging and continues to evolve. I'm grateful to our team for their continued vigilance and commitment to working safely and productively. Turning to recent results. Yesterday, we released third-quarter financials, including net income of $98 million, or 92 cents per share, and adjusted EBITDA of $216 million, down 15% from prior year. Our adjusted EBITDA results surpassed the high end of our Q3 outlook by 14%, thanks to better-than-expected performance in lithium and bromine and the exceptional cost-saving results across our businesses. We currently expect full-year 2020 adjusted EBITDA of between $780 and $810 million, lower year-over-year based on reduced global economic activity due to the global pandemic and reduced lithium pricing as expected going into the year. Scott will go into more detail on our outlook for the rest of this year and talk directionally about next year. In late 2019, we launched an initiative to achieve sustainable cost savings of over $100 million per year by the end of 2021, with about half of that, or $50 million, to be achieved in 2020. Earlier this year, with the onset of the pandemic-related economic slowdown, we accelerated those initiatives, giving us line of sight to $50 million to $70 million savings in 2020. Implementation has been even more successful than we expected, and we are on track to deliver about $80 million in savings this year and to reach a run rate of more than $120 million by the end of 2021. We plan to turn this two-year project into an ongoing culture of operating discipline and continuous improvement with additional cost and efficiency targets. Our strategic approach to sustainability is another facet of this operational discipline and a key area of focus for Albemarle. Since we spoke last quarter, we have published our Enhanced Sustainability Report, which expands on the four key quadrants of our sustainability framework and sets the baseline for our environmental performance and increased disclosures. Now we are working to establish sustainability goals and targets and continue to make progress in each quadrant. This week we also published our Global Labor Policy Report, in alignment with international label organization conventions and our human rights and global community relations and indigenous peoples policies, both consistent with UN guiding principles. These policies will be available on the sustainability section of our website. I'm proud to say that Albemarle generates more than 50% of our revenues from products that help reduce greenhouse gas emissions or promote greater resource efficiency. As our lithium business grows, an even larger proportion of our business will contribute to global sustainability. In summary, we are concentrating our efforts where they matter most so we can continue to create sustainable value for our customers, investors, and stakeholders. Our growth projects at La Negra and Kimberton are key to increasing our battery-grade lithium conversion capacity in line with long-term customer demand. La Negra 3 and 4 – is an expansion of our lithium carbonate capacity in Chile. The project is expected to reach mechanical completion in mid-2021, followed by a six-month commissioning and qualification process. La Negra 3 and 4 allows us to add carbonate capacity at the very low end of the cost curve. Kimmerton, our new lithium hydroxide conversion plant in Western Australia, is on track to reach mechanical completion by late 21 with a six-month commissioning and qualification process to follow. Kimberton is core to growing our hydroxide capacity in line with expected strong long-term market demand. And with that update, I'll turn it over to Scott for more detail on our recent results. Thank you, Kent.

Good morning, everyone. Albemarle generated third quarter net sales of $747 million today. a decrease of about 15 percent compared to the prior year, and in line with our previous outlook. This reduction was driven primarily by reduced prices in lithium, as expected coming into the year, and reduced volumes in catalysts and bromine related to pandemic-related economic weakness. Gap net income was $98 million, or 92 cents per diluted share. The non-gap adjustments this quarter were primarily related to restructuring for cost savings and discrete tax items with adjusted earnings of $1.09 per diluted share. Lower net income was primarily driven by lower net sales, partially offset by cost and efficiency improvements. Corporate and SG&A costs were lower versus the prior year due to these cost savings initiatives. As Kent stated, adjusted EBITDA was $216 million, a decrease of 15% from the prior year. The success of our short-term and sustainable savings initiatives, as well as timing of equity income from the TALIS and JV, helped us improve margins and beat the midpoint of our Q3 EBITDA outlook by about 20%. Turning to slide 8 for a look at the EBITDA bridge by business segment. Adjusted EBITDA was down $38 million over the prior year, reflecting lower net sales and lower equity income. partially offset by cost savings initiatives and efficiency improvements. Lithium's adjusted EBITDA declined by $31 million versus the prior year, excluding currency. Pricing was down about 17%, partially offset by cost savings. Lower pricing reflects previously agreed battery-grade contract price concessions for 2020, as well as lower market pricing in technical-grade products. Lithium EBITDA margin benefited from cost savings and the timing of Taliesin JV shipments to our partner, Tianqi. Bromine's adjusted EBITDA was down about $10 million, excluding currency. The decline was primarily due to lower volumes as a result of the pandemic-related economic downturn, partially offset by ongoing cost savings. Likewise, catalyst-adjusted EBITDA declined by $30 million, excluding currency, primarily due to lower volumes offset by cost savings and efficiency improvements. Fluid catalytic cracking, or FCC volume, improved sequentially but remained down compared to the prior year due to lower transportation fuel consumption as a result of travel restrictions. Hydro-processing catalysts, or HPC volumes, were also down compared to the prior year due to normal lumpiness of shipments and softness related to lower oil prices and reduced fuel demand. Our corporate and other category adjusted EBITDA increased by $15 million, excluding currency, primarily due to improved fine chemistry services results. We ended the quarter with liquidity of about $1.5 billion, including just over $700 million of cash, $610 million remaining under our revolver, and $220 million on other available credit lines. Total debt was $3.5 billion, representing net debt to adjusted EBITDA of approximately 3.2 times. Our commercial paper is supported by our revolver, which is not due until 2024. And so that leaves about $670 million of short-term debt to be restructured or repaid over the next year. We expect to repay the 2021 debt maturities out of cash on hand, assuming continued economic recovery and cash inflows from divestitures. However, we are also working with our banks on a delayed draw term loan to backstop those 2021 maturities. If the economic recovery or divestitures are delayed, we'd be able to refinance the short-term debt using this new delayed draw term loan. As Kent highlighted earlier, our 2020 Sustainable Cost Savings Initiative is on track to achieve cost reductions of about $80 million this year. That's 60% above our initial estimates. We expect to reach run rate savings of more than $120 million by the end of 2021, up 20% from the previous outlook. We continue to expect our short-term cash management actions, such as travel restrictions, limited use of external services and consultants, and working capital management to save the company about $25 to $40 million of cash per quarter this year. Next year, we expect some headwinds as some of these temporary cash savings reverse. Finally, we are narrowing our expected range of 2020 capital spending to $850 to $900 million, based on timing of spend. Our two major capital projects, La Negra III and IV in Kemerton, remain on track for completion in mid-2021 and late 2021, respectively. They will begin generating sales revenue in 2022, following a roughly six-month qualification period for each plant. Turning to our outlook, This quarter is a transition from quarterly to annual outlook. Our next quarter we expect to return to our normal practice of giving annual outlooks. As we approach the end of the year, we currently expect to deliver full-year 2020 net sales of around $3.1 billion at the midpoint of our range, adjusted EBITDA of between $780 and $810 million, and and adjusted diluted earnings per share of between $3.80 and $4.15. Lithium's Q4 adjusted EBITDA is expected to increase 10% to 20% compared to Q3 2020 as battery-grade customers continue to meet planned volume commitments. Bromine's Q4 EBITDA is expected to be similar to Q3 2020 Stabilization in electronics and building and construction continue to help offset weakness in other end-use markets, particularly deep water drilling and automotive. Finally, Catalyst Q4 EBITDA is expected to be down between 20% and 30% sequentially, primarily due to HPC volumes and mix. FCC demand is expected to continue to recover from with increased travel and depletion of global gasoline inventories. But Q4 is expected to be particularly weak for HPC catalysts, in part because of normal lumpiness, but also as refiners continue to defer HPC spending into 2021 and 2022. As we look beyond this year, visibility remains challenging. However, we are seeing signs of improvement or at least stabilization in our businesses. EV sales remain a key driver for the growth of our lithium business. Global EV sales were up 90% in the month of September compared to the previous year. September represented a new monthly record of EV registrations led by European EV sales. The rest of the world continues to rebound from the pandemic-related slowdown earlier this year, with year-to-date global EV sales up 15%. The fourth quarter is also typically a seasonally strong quarter for auto sales. And similarly, IHS market expects global EV production to increase by 20% to 30% in full year 2020, and by nearly 70% in 2021. Our bromine business supplies a diverse set of end markets and is generally driven by a broader consumer sentiment and global GDP. Consumer sentiment continues to improve in most regions, albeit still below pre-pandemic levels. Analysts now expect global and U.S. GDP to be down about 4% in 2020 before rebounding next year. Finally, in Catalyst, after the sharp drop-off in March, U.S. miles driven has rebounded but remains well below normal levels. Similarly, refinery capacity utilization has improved from earlier this year but remains well below typical levels. Refinery utilization rates in the mid-70% range are a challenge for an industry designed to run efficiently at utilization rates of 85% or higher. Given recent shifts in demand and refining economics, we don't expect to see pre-pandemic levels until 2022 at the earliest. Forecasts and leading indicators like these help gauge the outlook for our end-use markets. However, a variety of factors, including supply chain lags, contract structure, inventory changes, and regulatory impacts can cause our results to differ from the underlying market conditions. Now let's turn to slide 13 for our current view of 2021. In lithium, we expect full-year 2021 volumes to be relatively flat as our plants are effectively sold out given current volume constraints. We expect to see volume growth in 2022 as La Negra 3 and 4 and Kemerton come online. Full-year 2021 lithium prices are expected to be down slightly due primarily to lower average realized pricing for carbonate and technical grade products. Discussions with long-term battery grade customers are underway. It's too early to say what changes will be made to those contracts for 2021. Lower average market pricing and higher inventories may pressure pricing. At the same time, many of our customers remain concerned about security of long-term, high-quality supply. which speaks to the strong demand growth theme for electric vehicles. In bromine, we expect full-year 2021 results to improve slightly, assuming continued economic recovery and ongoing cost savings. Our bromine business was probably the least impacted of our businesses during 2020, and that's part of the reason we expect a fairly modest improvement in 2021. And in catalyst, we expect 2021 results to continue to improve from the very low levels seen in 2020, but to remain well below 2019 levels. Near-term, catalyst results are challenging as reduced refinery capacity utilization and lower oil pricing continues to pressure our customers' margins. In the longer term, this business is well-positioned in growth regions like the Middle East and Asia, and poised to benefit as refineries shift production to chemicals.

Thanks, Scott. Thanks, Scott. Economic conditions are improving, but uncertainty remains, particularly if additional COVID-19 impacts lengthen the time to a full economic recovery. We have the playbook established and know how to manage through subsequent waves of COVID-19 as necessary. At the same time, we are confident in the long-term growth prospects of our core businesses and continue to focus on controlling what we can control. That means, first and foremost, focusing on the health and well-being of our employees, customers, and communities. It also means building operational discipline and sustainability into all aspects of our business, including manufacturing, supply chain, capital project execution, and the customer experience. We remain confident in our strategy, and we will modify execution of that strategy to further position Albemarle for success.

All right. Before we open the lines for Q&A, I'd just like to remind everyone to please limit questions to one question and one follow-up to make sure that we have enough time for as many questions as possible. And feel free to get back in the queue for additional follow-up if time allows. Thanks, Marcus. Please proceed with the Q&A.

Thank you. At this time, I'd like to remind everyone, if you would like to ask a question, please press star and then the number one on your telephone keypad. Again, that's star and the number one. We'll pause for a moment to compile the Q&A roster. Your first question comes along of Bob Crute with Goldman Sachs.

Good morning. This is Tom Glinsky on for Bob. First question is, you're guiding flat volumes in 2021 for lithium, even though the battery chemicals market should be growing nicely next year. I guess this suggests that you're going to be losing market share. First, are you okay with that? And then second, if other producers capture that incremental volume in 2021 and get through the challenging qualification process with the customers, Do you expect to regain that market share in 2022 and beyond, or is there a risk your competitors maintain that? Thank you.

Tom, it's a function of our projects and when they're coming on and the capacity is coming on and who has that capacity to capture growth. So there's not a lot we can do about that at this point. We're on our plan to bring that capacity on, but likely demand will tick up before we have that capacity. So we will lose a little share, but we expect that that will move back to us as we get that capacity on as the market continues to grow out into the future.

Great. That makes sense. And then I guess higher level, looking at 2021, Considering the moving pieces between price down in lithium, volume flat, but capturing some incremental cost savings, do you think you can grow segment EBITDA next year, or is EBITDA going to be flat to down? Thank you.

Well, frankly, it will depend on how the market develops over the year. Without having volume, we'll have some cost savings to offset inflation. And those pieces, but we'll be around flat unless we get a material change in pricing.

Got it. That makes sense. Thank you.

Your next question comes from the line of David Bigletter with Deutsche Bank.

Hi, this is Dohan here for Dave. I guess first, just pricing, given some industry pricing have bottomed and even some carbon in pricing started to recover, I guess if you can just elaborate a little bit more on your pricing weakness on carbonate in 2021, and do you expect that to bottom during the year, or would that be like a 2022 story?

Yes, I'll make a comment and then let Eric give you a little bit more detail or his perspective. So, I mean, that's the magic question. It looks like when you look at the indices out there that it's at least bottomed, if not starting to tick up a little bit, but we probably need to see that a bit more to have more confidence. But we're anticipating that that turns up during 21, and the question is when during 21. So, Eric, you want to add something? Okay.

Yes, I can add specifically relative to carbonate. When we look at where the growth is coming in the coming year, if we look at what's happened this year, it's more of a hydroxide growth story. Carbonate is therefore not enjoying as much of that. There is some growth in China. China is where we see more of these low prices and it's a more oversupplied market. So it is the magic question, as Kent referred to. We have on some reported indices seen it ticking up. Others see it flat. Even from the price reporting groups that report price around the world and in China specifically, it's murky and well below marginal cash costs. The price of carbonate has gone well below what we thought it would have gone six months ago. It is trending up. In one report, we'll have to see. Our view would be that given the supply dynamics I talked about and the growth being more driven on the hydroxide side, that a clear movement above marginal cast costs for the spot prices of carbonate is more likely a 2022 event. Not that it couldn't happen in 2021, but it looks more favorable in 2022. Hydroxide, however, will be different, we believe.

Thanks. And then on catalyst, it looks like the recovery is a little bit slower than expected. So since you're vetting, I mean, sales should be up slightly in 21, I guess. What kind of, you know, improvements are we talking about? And then just given the, you know, if we Say the current pace of recovery until it stays, do you expect that we can achieve the same level of EBITDA in 2022 as 19 level?

So I... I'll comment, and Rafael can also comment. But I think a lot of that depends on demand and the view of when driving comes back, when travel comes back, and it's really about fuel demand and refinery utilization for us. So our view, we don't see us getting back to 19 levels until into 22, probably very late 22, to be back to that both from a fuel demand utilization and from our perspective as well.

This is Rafael. I think that's right, Kent, and when we look at the outlook, there's a few things that play in. One is the impact of the pandemic and when the fuel volumes recover to 2019 levels, and that's a volume component, and the other is refining margins. So there's a lot of pressure on refineries right now. The total value of refined products from a margin perspective has gone down, and when that recovers, That's going to be dependent on volume, but also on utilization, industry capacity. So we wouldn't see that returning, as Kent said, until sometime 2022 timeframe. Okay.

Thank you.

Your next question comes from the line of Mike Harrison with Seaport Global Securities.

Hi. Good morning. Good morning. Coming back to this idea that lithium volumes are sold out for next year, if there is some additional demand pickup or if some of this oversupply or inventory gets worked down, could that put you in a position to drive higher pricing? And can you maybe also comment on whether you have any flexibility there to move more volume or to maybe accelerate some of your production if you do see demand picking up?

Yeah, so, you know, if the market gets tight and the supply is not there, I mean, prices should move up. I mean, we kind of expect to see that around hydroxide, less with carbonate. And it's difficult. I mean, we had delayed our projects a bit when the pandemic hit because we just didn't know what things were going to look like. And as soon as we got some visibility, we kind of tried to pull those back as much as possible. And we haven't lost much time on that, and we haven't really lost our capital estimates are still kind of the same range as well. But it's really not possible for us to pull it more forward than our current plans. We wouldn't be able to accelerate now to impact when those projects are coming on stream. So I from our perspective, I don't think we're going to have extra capacity than what we are anticipating. We may be a little early with the projects, earlier than our plans, but it's not going to be dramatic.

I think everybody's kind of focused on what's happening here in the U.S. from a political standpoint, but can you maybe talk about Chile and whether some of the political news there could impact your relationship with the government or your rights in the Atacama?

Right. So, well, you know, I mean, you know what's happening there. So they voted to redo their constitution. That's a pretty long process that they have in place to do that. And so far that's all been without too much turmoil. So we don't. We have to wait and see what that Constitution looks like. We don't really expect it to impact our rights in the Atacama, but I guess that's something we'll have to wait and see. I don't think it would be – I mean, it's not in Chile's interest to start changing how they work with the international community. Chile's got a great reputation following the rule of law and having a strong economy in South America. It's kind of the example, so I don't think they want to change that, but it's something we'll have to watch very closely as that plays out.

All right, thanks very much.

Your next question comes from the line of Vincent Andrews with Morgan Stanley.

Thank you, and good morning, everyone. Just wondering, you know, you talk about sort of 60% of your assets you're going after with the two new projects that are going to come on. What about the other 40%? Can you talk sort of from a medium-term perspective, you know, what's it going to take for you to go after those assets? how much money it would require in CapEx spending, and, you know, at what point will you start talking about how you'll go after that and how you'll finance it?

Vincent, I'm not sure I'm clear on the question. So to go after the other 40% of the asset?

Yeah, I guess my question is, you know, when should we anticipate the other 40% coming online and how much will you have to spend to do it?

From a resource standpoint. Okay. Correct. Yeah, okay. So we have access to those resources. So it's just about building conversion capacity. So we've kind of started that process. So La Negra and Kimerton is part of that. So we're building that out. We'll sell those plants out, and then we'll layer in additional capacity to go after them. And that's our strategy and our plan longer term. We haven't necessarily laid out a CapEx program publicly over time. But that's the plan is we build capacity and then we sell it out and then we reinvest.

Sorry, as a follow-up then to the earlier question about market share, how do you think about the medium term in terms of not, per se, having a suggested timeline for that other 40% of production versus how fast you think the market's going to grow? Do you think you'll be able to bring that 40% on in conjunction with market growth, or is it possible that it will lag?

Well, we'd be layering in that capacity. So what we're trying to do is kind of get it just right. We add capacity as the market grows and bring that on as it's required. It's a matter of how well we execute and how well we forecast the market, but we think we can. That's what we're trying to do.

All right. Thank you very much. I appreciate it.

Your next question comes from the line of John Roberts with UBS.

Thank you. Nice progress on the cost savings efforts. Debt backstop indicates some uncertainty here in the divestment process for fine chemicals and catalyst additives. Are we expecting one buyer for both or two, and do you think both will be announced before year end?

Hey, John, this is Scott. So we're expecting that we'd have two different buyers for those two different businesses. Discussions continue favorably on both of those. A little bit too early to call exactly when we'd be able to announce a deal on either one of them, but obviously we're pushing hard to do that. The backstop is also related to economic uncertainty, and so I think we've just got to get through the winter period and the increase in COVID cases and whatever the government reactions to this are. to fully understand kind of where we end up in 2021. And it's really just a safety valve for us in case things go the wrong direction. And the banks have been very supportive of us and our story, so really appreciate their contributions.

And then you mentioned in the third quarter the benefit of a timing of Taliesin shipments to Tianqi. Was that a catch-up from 2Q? it doesn't sound like it's a pull forward from the fourth quarter given the strong fourth quarter guidance.

Yeah, you got it right, John. It was really a catch-up from the Q2 shutdown that they had. And just from an accounting perspective, when Tianqi takes more product, we end up getting that equity income immediately. So it helps our bottom line. Great. Thank you.

Your next question, Councilman Aran. with RBC Capital.

Great. Thanks for taking my question. Good morning. Yeah, congrats on the results. Definitely nice to see the cost reductions playing out. I just wanted to ask about the contracting side on lithium. You know, I think you had offered concessions to some of your customers this year in 2020. Did you find the need to extend those concessions into 2021? Could you just maybe comment on the contracting environment out there?

Thanks. Well, we're in the process of having those discussions with our customers. I mean, you're right. We made concessions late 19 for the 2020 period. They were one-year concessions. Market price is lower than it was at the time we made those concessions today. And so we're having discussions about what those contracts will look like for 2021 at the moment. It's too early to kind of give any too much guidance on exactly what that looks like because we're having those discussions today.

Okay, I appreciate that. And I guess on that note... I imagine that you may be extending or rolling over maybe three-year contracts that you signed up in 2016 or 2017. Is that going on? When do you expect to do that? And I guess, would you expect to revert to the prior price umbrella on those contracts, or is there potential for those negotiations to result in pricing closer to market levels at this point.

Eric, do you want to talk a little bit about the contracting strategy?

Sure. So to answer that first part of that question, Aaron, we don't have any contracts, any major battery-grade contracts that turn over next year. It's not until the following year in 2022 that we have one that does turn over. That being said, it might be worthwhile to discuss what we're trying to do, right, with our contracts. Just as a recollection of what we shared in the past, we're moving from what previously was a singular fixed-price contract for all customers to a more segmented approach and really putting that into – I would put it simply into three buckets. One is there will be a group of customers that, as we talk in the future – and we've actually had some new customers come in. So we have some brand-new LTAs, one we've signed during the quarter that is prospectively for the Kemerton volumes when they come online. So that first category are people that really want very little volatility in their price, and as a result, we are looking at or negotiating a fixed price with them that's well above current prices and favorable investment economics for us. There's a second category that may want to have a little bit more volatility, but not quite so much. They don't want to have a nosebleed price when the market recovers, and we're insisting on a floor so that we can earn favorable reinvestment economics over that pricing cycle. So that's that second category. And then there's a third that will be price buyers. Now, our aim, and the way this is shaping up, is that we expect about once we have moved from this old contract structure to the new, and this price concession we gave this year is that bridging process. between the two contract structures, is to have about 20% in that price bucket and about 80% in the first two buckets. And it's that 80% that drive our capacity expansion. What they commit to us to in these long-term contracts is the basis for our adding capacity over time. And any excess is what we would then sell into the price market. So we don't build for that price market, and we don't commit very long to that price market. That's the strategy. Where we are today, quite encouraging, we're starting to see as the second six months of the year has come about, and you're looking now at a 2021 that has a very strong, we believe, demand curve associated with it. We're starting to see that already in Europe. We're already 15% up year-to-date. With that, with those positive signals coming through the channel, we're seeing more and more customers coming to us and wanting to to talk with us about long-term contracts that have favorable reinvestment economics to us or transitioning their existing legacy contracts to that new structure I just described in a way that allows favorable reinvestment economics for us. And that is absolutely paramount because I think a lot of the rest of the industry that's still buying on price is not appreciating the fact that at current prices no one's going to expand and there isn't going to be sufficient lithium for them. And so having more and more customers, including automotive OEMs, become aware of the need for reinvestment economics on behalf of the lithium supply industry is starting to turn the tide. 2021 will be, because of the pandemic, it's going to be a bit of a transitional year. We're still working through that. That's why there's some uncertainty. And, of course, we talked about the weakness already in carbonate. But maybe that's helpful additional context to your question, Aaron. Very helpful. Thanks a lot, Eric.

Your next question comes from Lawrence Alexander with Jefferies.

Hi, could you give a sense for your current thinking around inventory management, how much of an inventory build you need to do next year to prepare for the growth curve you expect in 2022 to 2023?

Okay, so I'm assuming you're talking about lithium. That's where all the inventory questions come from. I wanted to qualify that. So next year, I mean, inventory is probably in the channel. We don't think it really changed much from what we said in the last quarter. And we're saying demand has picked up and it feels better, but we don't have data to say that inventory is any less than it was last quarter. So that still has to be worked off. But given the demand profile we see in 2021, and our limited capacity, we don't expect to build inventories there. We would expect actually we'll work those down and then be working off of what we would consider kind of standard inventory in the channel. So we don't see it building, at least from our perspective, through 2021. We see us working inventories off.

And then for bromine, given the trends in the end market, what negative factors do you see keeping the bromine improvement next year at fairly modest?

Natha, you want to make a few comments on that?

Sure. I think that the biggest impact for us is the overall macroeconomy. You know, we tend to be driven by global GDP, so that's really the limiting factor for us is how fast this thing is going to come back, and is it going to come back in a stable, consistent way, or is it going to be lumpy? And right now, it's just a little bit unclear how that recovery is going to take place across the globe in 2021.

Thank you.

Your next question comes from the line of Joel Jackson with BMO Capital.

Hi, this is Robin on for Joel. Can you provide some more order of magnitude around the guidance of the catalyst EBITDA you expect next year? Is it reasonable to be about halfway between 2020 and 2022, or is it more likely to be above or below that level? Maybe you can just kind of walk through some of the key building blocks to get there.

Hey, Robin, this is Scott. Let me make a quick comment, and maybe Rafael can give some additional color to it's really going to depend on refinery utilization rates as well as transportation fuel demand. And given what we're seeing in projections right now, it's likely in the bottom half of that range that you just gave versus the top half. But maybe, Rafael, you can add some more color as to what you're seeing.

Hi, Robin. I think that Scott characterized it correctly. But over the next six months, I think we'll have a much clearer picture as to what that recovery will look like as we see demand recovery, we see margins progress at refineries, we'll have a better sense of that. But I want to at least give you a sense, Robin, that while it's going to be a challenging 2021, better than 2020, the business is still very focused on the right steps to return to growth in the future with a focus on chemicals, with a focus on refineries east of Suez where demand continues to grow. So while we have a challenge, we also have good strategies to establish us for long-term recovery and growth.

That's helpful. Thank you. And just as a follow-up, I apologize. Did I hear correctly earlier in the call that it was mentioned that lithium EBITDA will be closer to flat for next year? I assume the cost savings or lithium's portion of the cost savings is is offsetting that slightly low pricing. Is that right?

Yes, Robin, this is Scott. I think you have it about right. It's really a little bit early to call exactly what the number is going to be, but lithium EBITDA should be flat to maybe down a bit, just given the dynamics that we're seeing. Okay, thank you.

Your next question comes to the line of PJ Jovkar with Citigroup.

Yes, hi, good morning. So it looks like, you know, you have some limited capacity growth and you might lose some share next year. You know, why couldn't you build inventories in full queue here to sell so as not to lose share? And then secondly, you know, some of your capacity is still idle, like the Wajina mine. And what does it take for you to start that back up?

Ken, would you like to go ahead?

Yeah, I'll start. So first, a question about inventories. I mean, there's a limit on inventories on hydroxide, and they're a little more than normal in the channel. And we've actually shut down some facilities to manage that a little bit because there's a life on hydroxide. So you want to be careful about how you manage those inventories. And we'll work through those inventories the next year, so we'll be able to probably sell more than we'll be able to make. So we are doing that to some degree, but we're limited by kind of the life of hydroxide, and that's where that extra demand comes from. The other question on Wojana, so our limitation is on conversion capacity. So Wojana is not producing, but that's because we don't have capacity to convert that. So Kimerton gets us going in that direction, and then we have to manage between Wojana and Taliesin about what resource we use there. But we're limited more on conversion capacity, so we'd be needing to add additional conversion capacity to take full advantage of our resources. Okay.

Just to add, Ken, this year, PJ, we are selling all the hydroxide that we can make, so we are sold out this year. In fact, we've made the concessions we talked about on price, and the leverage for that is we're getting the volumes this year that we planned. That's the reason for the upward guidance for the fourth quarter. So we're getting what we intended, and in fact, we'll be up year over year on volumes overall, and we expect the industry to be down. So this will be In that regard, a solid year for lithium. As you go into next year, I can't hit it. It's conversion capacity. In fact, our ratio of mining capacity to conversion capacity, mining potential to actual conversion capacity is about four to one. So it's about more conversion assets. And we're being, as we talked about, in terms of managing our cash flow and managing our profitability, very disciplined about how we bring that conversion capacity to market. Next year will be a flat year, but we'll have significant capacity we bring on in 2022 and be in a position as we ramp those plans to recover any lost ground we have with our customers. As I earlier said, we've also started to draw up new contracts with customers for that volume in that year.

Thank you for that color. You know, it's interesting. You're saying conversion capacity is the bottleneck. Um, Maybe related to that, can you talk about what's happening to conversion capacity in China? I know they, at some point back in 15, 16, they were constrained and they overbuilt. Where do we stand on conversion capacity utilization in China? Can you just give us some update there? And also, could you take some of your volumes into the Chinese third-party conversion?

Thanks. Eric, you want to come in?

Yeah, sure. So in China, as you know, these Chinese converters, I assume you're talking not about our integrated competitors, such as Tianqi and Gangshan. You're talking about other non-integrated producers. Those that do not own a resource. They're dependent upon economics, right? And they're a net buyer. They have to buy their rock. Many of those mines have been curtailed, Altura being the latest victim. of low market prices they've been able to operate. So supply for rock has dried up, and they've been sustaining themselves through available inventory. That's one factor. Another factor is they themselves at current carbonate prices are breakeven at best, and most are operating at a loss as we see the price in China, spot price in China below marginal cash costs. So it's a pretty challenging economic picture for those producers. In a market recovery, we expect that capacity to come back, and China's going to remain a very healthy market for lithium into the future. So I think there's going to be a place for those producers. In terms of R going in, as you know, we're looking in terms of growing our capacity. We've talked about buying versus building capacity. We still are evaluating that approach, and that remains a viable expansion route for us. That's the way we got the capacity we have today, the basis for how we got our current Chinese conversion capacity. we are less inclined, particularly for hydroxide, which is the growth part of the market, where there's a lot of process know-how, quality differentiators to teach a toll producer how to do that. That's proprietary know-how that we would be concerned we'd lose if we were to toll. So our bias would be to acquire.

Great. Thank you.

Your next question comes from the line of Mike Stinson with Wells Fargo.

Hey, good morning. Nice quarter. As I recall, you've got, I think, $40 million in carbonate coming on, I guess, in 22, and 50 in hydroxide in 22. How much of that is already sort of contracted out, and how long do you think it will take to sell those out?

So your numbers are right, although it's not going to turn on day one at those capacities, right? So there's a ramp in our manufacturing processes to get us up to those full capacities. So they won't come on when you just turn a switch. Unfortunately, it doesn't work like that. And Eric, do you want to talk about kind of the ramp of sales versus production? Sure.

Yeah, so we're, I mentioned earlier, Mike, that we are on the, particularly on the hydroxide side, which is the title market, we are entertaining. First of all, we already had long-term contracts, actually long-term contracts that had earmarks, if you will, against that capacity when it came on. And now we are having additional contracts. We signed one recently, as I said, during the quarter to increase that utilization of that plant. And we're in negotiation with still others. So I don't think I'm at liberty yet to share the details of exactly how much, but I would say a significant portion of the Cameron capacity is well-assured from a sales standpoint. On the carbonate side, a little different. Most of the carbonate market is increasingly in China. As you know, the China market is a much shorter-term contracting market. We have been very diligent to maintain relationships with our existing capacity, out of a number one and two, relationships and ongoing volume relationships or sales to a number of leading Chinese producers with whom we are talking about growing our business. We are talking with them about committed volumes. The nature of contracting though is different with those. So it's going to be a little different with carbonate in terms of we'll be closer to bringing that to market before we have firm prices for that volume. though remember that we're at the low end of the cost curve, so it's still a very attractive business, notwithstanding the fact that it won't have some of the same long-duration contracts that we see on the Kemerton side. Right. Great.

Thanks. And then a quick one on Catalyst. Any thoughts on pricing for SEC heading into 21?

Rafael, you want to comment? Yeah.

Sure. Mike, this is Rafael. I think pricing in FCC has been challenged in 2020 for non-contract volumes. So non-specialty, non-contract volumes have been under the most pressure in response to decisions by refineries to look for perhaps less specialty catalysts in order to help their near-term economic pain. Going into 2021, I think that the trend would continue. I mean, I think we'll continue to see pressure on non-contracted volumes, but where we create differential value, namely in areas like high propylene yield, I think we'll continue to hold on to price and remain strong in that area.

Great. Thank you.

Your next question comes from the line of Chris Capash with Loop Capital Markets.

Yeah, good morning. Thanks for taking my question. So sort of a follow up on Eric's comprehensive comments about the shifting approach to the contracts and really, I guess, against the context of some of the anecdotal commentary about hydroxide versus carbonate, it seems like the oversupply is still a little more acute in carbonate versus hydroxide. And then you obviously have this tension about some customers wanting near-term pricing relief and others maybe more focused on concerns about longer-term supply. I'm wondering if those conversations reflect this bifurcation hydroxide versus carbonate. And if you could take it a little bit further, as this plays out, is it more likely in the context of those buckets that you described, Eric, more likely that the hydroxide guys are going to fall in this bucket where They want, you know, fixed prices, security of supply, and the carbonate customers are more likely to be willing to, you know, play some of the volatility.

Sure. Any advanced comments, Kent, before I dive in?

No, go ahead.

Okay. So I think the reflection of, you know, everything I've described and you asked, Chris, is both there is a difference between carbonate and hydroxide. More of the carbonate market going forward will be in China. And to date, I don't see the same approach to security of supply in terms of contracting with us or with anybody for that volume. Rather, I see that the market tends to be content to go for short duration on the bet that resources will continue to come online, conversion capacity will continue to come online, and there'll be sufficient capacity. And there's also a bifurcation based on who's buying, right? More of the purchasing decision is moving closer to the point of use, so it's moving to the battery producers and the automotive producers. And they, given the investments they are making in the length of supply chain, whether it be carbonate or hydroxide, tend to want longer the surety that they're going to have it because of the size of investments they're making. Not everybody's doing that, but increasingly... more are and more are becoming, I think, appropriately aware of the need to do that. So it's also who we're contracting with. And in these long-term contracts, it plays a factor in that.

Okay. Thanks for that. And then just as a follow-up, you've – I think it was the last quarter you characterized the inventories that you saw in the supply chain. Any update on that and also just any changes to the timeline on the idling of your hydroxide conversion facility in North America? Thanks.

Yeah, so we have – so first of all, I'll just reiterate what Kent said. Look, it is imperfect, the science of assessing how much inventory is in the channel. We can survey our customers, and we do, and that gives us a basis for understanding that. We obviously don't know what our competition holds, and some have held quite a bit. If we look at things net-net, the overall month of inventory in the channel is still about the same as it was three months ago, five months of excess, roughly speaking. Though I think that's shifted, there's probably more carbonate than hydroxide now. So carbonate has built up a bit and hydroxide has drawn down a bit. Again, we are probably wrong about that, but directionally correct. It doesn't feel that different. It feels a little bit better because I think that's the pull on hydroxide, but not too different. I'm sorry. You had a second part of your question, Chris?

The timeline of your idling of your hydroxide conversion.

We are in the process of restarting the Kings Mountain Hydroxide Facility now. Employees are returning. That's sooner than we thought, and that's based upon the improvement we're seeing for demand next year and some of the earlier questions around can you please try to get more volume next year. So we're ramping that plant up. It's a small plant, so it has a very small impact to the overall volume growth, but we're starting that up. And Silver Peak, which is the feedstock plant that feeds that hydroxide plant with the carbonate feedstock, will restart on schedule beginning of the year of 2021. Okay.

Your next question comes from the line of Colin Rush with Oppenheimer.

Thanks so much, guys. Can you give us a sense of how mature the conversations are on the financing side? It sounds like things are going pretty well and there's some pretty meaningful opportunities to reduce your cost of capital going forward, but just curious how far down the road you are with that.

Yeah, no, we're well advanced in those discussions, so feel comfortable about where we're headed.

Excellent. And then, you know, I think the lithium market has been pretty well belabored. But I'm just curious if you're seeing any consolidation in terms of battery OEMs, you know, given where we're seeing capacity additions. It looks like there's going to be, you know, a handful of folks that really stride out here. And if there's any consolidation kind of below that with some of the cathode producers, you know, as you look out over the next three to five years.

Eric? Yeah, sure. Thanks, Ken. So on the battery OEMs, I don't be interested to see what you see, Colin, because we don't see that. In fact, I've seen the opposite. You've seen new players come into the market, not very recently, but companies like Northvolt come into the market for Europe and many other multinationals who have played around this space in the past, I think looking to come in to support the growth of the European market. So I see I see more players coming into the market on the battery side, not less. And some of that's being supported and driven by the automotive OEMs who I think want more, you know, they want some negotiating leverage, right? They want more options or they want more localized options in the case of Europe. On the cathode side, it is constantly changing, right? This is part of the market that has, as I said, is not necessarily as directly involved in the purchasing decision as much anymore, right? is being told what to make either by the automotive OEM or the battery maker, so they're losing some of their power in the decision channel. And so I do expect some change and consolidation. I can't point to any obvious ones now, but there's disruption. There's people gaining share and losing share, and so I think we'll continue to see evolution in that part of the channel. And also some backward integration. You have some battery makers now building their own in-house cathode capabilities.

That's super helpful. Yeah, I'd love to have that conversation offline. Thanks, guys.

At this time, we have no further questions. I will now turn the conference back over to Ms. Bandy.

All right. Thank you all for your questions and your participation in today's conference call. As always, we appreciate your interest in Albemarle, and this concludes our earnings conference call.

This doesn't close today's conference. You may now disconnect.