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spk00: Good morning and welcome to the Q2 2021 Albemarle Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I will now like to turn the conference over to your host, Meredith Bandy, Vice President of Sustainability and Investor Relations. Please go ahead.
spk01: Thanks, Operator, and welcome everyone to Albemarle's second quarter 2021 earnings conference call. Our earnings were released after the close of market yesterday, and you will find the press release, earnings presentation, and non-GAAP reconciliations on our website under the Investor Relations section at albemarle.com. Joining me on the call today are Kent Masters, Chief Executive Officer of and Scott Tozier, Chief Financial Officer. Raphael Crawford, President Catalyst, Natha Johnson, President Brumine Specialties, and Eric Norris, President Lithium, are also available for Q&A. As a reminder, some of the statements made during this call, including outlook, guidance, expected company performance, and timing of expansion projects 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 and earnings presentation. That same language applies to this call. Also note that some of our comments today refer to non-GAAP financial measures. Reconciliation to GAAP financial measures can be found in our earnings release and the appendix of the presentation, both of which are posted on the website. And finally, as a reminder, Albemarle will be hosting our 2021 Investor Day the morning of Friday, September 10th, webcast live from our Charlotte offices. Registration for the webcast is also available on the investor relations section of our website. And now I'll turn the call over to Kent.
spk20: Good morning, and thank you all for joining us today. On today's call, I'll highlight quarterly results and our recent strategic achievements. I'll also introduce the new operating model we are implementing to support Albemarle's growth strategy. Scott will give you more detail on our results, outlook, and guidance. Our businesses continue to execute well as global markets improve. Second quarter net sales were $774 million and adjusted EBITDA was $195 million, both of which marked a slight improvement compared to the second quarter of last year. Note that we closed the divestiture of FCS on June 1st, so second quarter 2021 included only two months of FCS results. Excluding FCS, net sales increased 5%, and adjusted EBITDA was up 13% compared to last year. In our financial release issued yesterday after the close, we revised our guidance for the year in part to reflect higher lithium performance, but also supply chain disruptions for our bromine business. We've also updated full-year guidance to reflect the sale of FCS. Scott will walk you through those changes in more detail in just a few minutes. We continue to execute on our next wave of growth projects to capitalize on attractive long-term fundamentals in the markets we serve. We recently completed construction of La Negra III and IV as planned, and we are progressing through the commissioning stage. Finally, I want to briefly describe the operating model we are launching to drive greater value, improve performance, and deliver exceptional customer service. And you see that on slide five. Our operating model, which we call the Albemarle Way of Excellence, or AWE, serves as a framework for how we execute, deliver, and ultimately accelerate our strategy. AWE is based on four pillars. Sustainable approach includes responsibly managing our natural resourcing and engaging with our stakeholders. High performance culture includes focusing on safety leadership and fostering an agile, engaged corporate culture. Competitive capabilities means we are ensuring we have the right talent, resources, and technologies. And finally, operational discipline is about embracing lean principles and operational excellence across the organization. The operating model helps us connect our strategy with day-to-day initiatives, prioritize projects, clarify resource allocation, ensure accountability, and drive efficient and profitable execution. We will discuss the operating model in more detail at our upcoming investor day on September 10th. Now turning to slide six, we've completed construction of Leningrad three and four in Chile and are in the commissioning stage. We expect commercial production from these two trains beginning in the first half of next year, ramping to 40,000 tons of lithium carbonate per year by 2024. This brownfield project allows us to increase existing capacity and leverage our world-class brine resource in Chile, just one of the avenues of growth that we have as an established lithium producer with a global footprint. We also continue to progress our Kimmerton conversion facility in Western Australia. To mitigate risk related to the tight labor market and COVID-related travel restrictions in Western Australia, we have modified our execution strategy to prioritize Kimmerton 1 over Kimmerton 2. Kimmerton 1 remains on track for construction completion by the end of the year. We now anticipate completion of Kimmerton 2 by the end of the first quarter next year, a delay of about three months. These delays and higher labor rates have also increased capital costs. It's been a difficult situation in a labor market that was already tight, but we have been able to maintain the schedule for Kimmerton 1 with only a three-month delay for Kimmerton 2. We continue to expect commercial production for both Kimmerton 1 and 2 during 2022. Importantly, we are making progress on our Wave 3 lithium projects, and we'll provide further details at Investor Day in September. Site selection is underway, and we are negotiating with the authorities to include investment agreements. We're also expediting investments in bromine to meet increasing demand. We completed the first well at Magnolia ahead of schedule and under budget. Unfortunately, we're unable to take advantage of that additional capacity in the second half due to shortages of chlorine in the supply chain. We also have two projects in Arkansas that are currently in the select phase. These projects are designed to increase production capacity of clear brine fluids and hydrobromic acid. A third project to increase the capacity of our brominated flame retardants is in the evaluate stage. I'll now hand the call over to Scott, who will provide an overview of our financial results for the quarter.
spk18: Thanks, Kenton. Good morning, everyone. I'll begin on slide seven. We generated net sales of $774 million during the second quarter, which is a slight increase from the same period last year, driven by stronger sales from our lithium and bromine segments. Higher sales, as well as strong operating margins, resulted in an adjusted EBITDA of $195 million, which was 5% higher year over year. Gap net income of $425 million includes an after-tax gain of $332 million related to the divestiture of our FCS business to WR Grace. Adjusted EPS, which excludes the gain on FCS, was 89 cents for the quarter, up 4 percent from the prior year. Let's turn to slide eight for a look at adjusted EBITDA by business. Excluding FCS, second quarter adjusted EBITDA increased by 13%, or $22 million, compared to the prior year. Higher adjusted EBITDA for lithium and bromine was partially offset by higher corporate costs related to incentive compensation and foreign exchange movements. Lithium's adjusted EBITDA increased by $19 million, excluding FX, compared to last year, primarily driven by higher volumes as customers under long-term agreements continued to pull orders forward, and we shipped higher spodumene volumes from our Taliesin joint venture. Adjusted EBITDA for bromine increased by $16 million due to higher volumes and pricing. End market demand continues to be very strong. Following the winter storms experienced in Q1, we have very limited excess capacity or inventory to meet that additional demand. Catalyst adjusted EBITDA declined just $1 million from the previous year. CFT volumes were down due to shipment timing. FCC continued to be impacted by a change in the order patterns from a large North American customer, although the FCC demand trend was generally higher. This was partially offset by excellent PCS results which benefited from a favorable customer mix. Slide 9 highlights the company's financial strength. Since the beginning of the year, we have taken significant steps to strengthen our balance sheet. The strategic decision to divest our FCS business added cash proceeds to the balance sheet and reduced our leverage ratio to 1.5 times. That transaction further demonstrates our ability to drive value by prudently managing our asset portfolio. Our strong balance sheet and investment grade credit rating gives us the financial flexibility we need to accelerate profitable growth and continue to provide a growing dividend. Turning to slide 10, I'll walk you through the updates to our guidance that Kent mentioned earlier. And there are several key changes from our previous guidance. First, higher net sales guidance reflects higher lithium sales volumes and improving catalyst trends offset by our lower bromine outlook. Adjusted EBITDA guidance is the same, reflecting higher net sales offset by higher corporate costs and foreign exchange expense. Guidance on adjusted diluted EPS and net cash from operations is improving from an expected reduction in interest expense and tax rates. The timing of working capital changes is also expected to benefit net cash from operations. And finally, we see capital expenditures trending toward the high end of our previous $850 to $950 million range based on the tight labor markets in Western Australia, as Kent discussed. In the far right column, pro forma revised guidance ranges are adjusted for the sale of our FCS business on June 1st this year, removing the guidance on FCS for the rest of the year. I'm turning to slide 11 for more detail on the GBU's outlook. Adjusted EBITDA for lithium is expected to increase by 10 to 15 percent over last year, an improvement from our previous outlook. Lithium volume growth is expected to be in the mid-teens on a percentage basis, mostly due to higher tolling volumes, as well as the restart of North American plants at the beginning of the year and improvements in plant productivity. Our pricing outlook is unchanged. We continue to expect average realized pricing to increase sequentially over the second half of the year, but to remain roughly flat compared to full year 2020. We also continue to expect margins to remain below 35 percent, owing to higher costs related to project startups and incremental tolling costs. Margins should improve as the plants ramp up commercial sales volumes. Our outlook for catalysts hasn't changed since the first quarter report, with adjusted EBITDA anticipated to be lower by 30 to 40 percent. We are more optimistic as fuel markets continue to improve globally. Lower year-over-year results are primarily related to the impact of the U.S. Gulf Coast winter storm in the first quarter and the ongoing impact from the change in customer order patterns in North America. Finally, for bromine, we now expect mid-single-digit year-over-year growth in adjusted EBITDA, which is down from our previous outlook. due to a force majeure declaration from our chlorine supplier in the U.S. Like many industrial companies, we are experiencing increased costs and supply disruptions for raw materials, but it is partially offset by price and productivity improvements. Results are expected to be lower in the second half as production is constrained due to the chlorine shortage. We are accelerating our expansion plans in bromine However, we have been unable to take advantage of this new capacity yet due to the chlorine disruption. Looking ahead to 2022, we expect sales and EBITDA increases for all three businesses. Lithium results are expected to improve on the higher volumes as the new plants ramp up. Bromine results are expected to rebound from short-term supply chain disruptions and the winter storm impacts. And catalyst results are expected to rebound strongly from 2021 levels, assuming continued improvements in global transportation fuel demand. And with that, I'll hand it back to Kent.
spk20: Okay, thanks, Scott. On slide 12, we continue to execute on our strategic objectives for 2021. First, we are growing profitably. Construction is complete at La Negra. and we are commissioning this project with commercial volumes expected in the first half of next year. Both Kimmerton trains are expected to contribute volumes in 2022 as well, despite the restructuring of our execution plan at Kimmerton. As previously discussed, we are making progress on our Wave 3 lithium projects and expediting investments in bromine to meet increasing demand. Second, we are increasing productivity. we are on track to achieve at least our targeted $75 million in productivity improvements this year. We expect to continue to build on these improvements as we implement our operating model and build a culture of continuous improvement. Third, we are maintaining our disciplined approach to investments and continue to optimize shareholder value by actively managing our portfolio of assets, including the recently completed FCS divestiture. Finally, All of our efforts are being driven with sustainability in mind. In our annual sustainability report published at the beginning of June, we disclosed initial sustainability targets, including plans to reduce greenhouse gas emissions and fresh water use. We are also working closely with customers, investors, and ESG rating companies to make sure they are up to speed in all these developments and have a full appreciation for our efforts. So with that, I'd like to open the call for questions.
spk01: Operator, we're ready for questions now.
spk00: Thank you so much. If you have a question at this time, please press the start and 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. We ask that you limit yourself to one question and one follow-up. Your first question comes from the line of PJ Juca with Citi.
spk10: Great. Good morning, Kent and Scott. Congrats on finishing La Negra 3 and 4. Now that it's done, are you looking for new hydroxide conversion capacity either in China or elsewhere, and would you consider, you know, building a conversion plant in the U.S.?
spk20: So, good morning, P.J., and thanks for that. So we've completed construction. We're still commissioning, so still a little bit to go at La Negra. And then as you see in the plans that we have, the phase three is mostly about hydroxide capacity in the near term. So Kimberton will be coming on in the next year. And then the next wave of investments at the moment are focused on China. And we do look for acquisition of conversion capacity projects But it's a bit of a challenge just to find the assets that we want and that are for sale. So you kind of have a meeting of a mind there. But we're also in parallel. We're progressing our plans to do greenfield projects as well. And if we were able to find an acquisition, we continue to progress the greenfield plans that we have. So if we did an acquisition, that doesn't mean we stop our greenfield plans and projects, but we would just do them in parallel. And then the last part about the U.S. So, I mean, we will look at the U.S., but it's not in the next year or so, right? So there's time. And our view is most of the cathode capacity that's being built and will be producing for the next several years is going to be in China or at least Asia. And so we have time before we have to see if we need capacity in North America or Europe.
spk10: Okay. And then the next question is, I want to go back to comments that you had made, Kent, I think on the last call about sort of market segmentation of customers that, you know, some customers will have a long-term contract, some will have more market-related contracts, especially customers like those who negotiated prices down in 2019. I was just wondering if either you and Eric could add some color on this sort of market segmentation of customers. Thank you.
spk20: Sure. So yeah, I don't know if we can add much more than we talked about previously, but we're, you know, in the past we had kind of a long-term contract formula and it was, we were trying to use that strategy for all of our customers. And, and what we've learned is that not all customers want to buy that way. So we're trying to segment on how they want to buy. And actually we think it's, it's good for us as well. So we're, we have longer-term contracts that look more like a fixed price. Ideally, we want those contracts to move with the market, but slightly with the market, but it looks more like a long-term contract. On the other extreme, we'll have contracts that look more like spot. It's probably not a one-year contract, probably more than that, but it moves with the market or closely with the market. It still may be dampened a bit, and then you'll have some in the middle. Where that shakes out from a portfolio standpoint, until we settle all that with our customers. I can't tell you, but for lack of anything else, it's probably a third, a third, a third is kind of how we see it now.
spk13: Thank you.
spk00: Your next question comes from the line of John Roberts with UBS.
spk16: Thank you. On the delay at Camerton 2, if you're having delays, is the entire industry having significant delays here? I mean, we've got the car companies accelerating their demand plans here. Is the supply actually going to undershoot what the industry needs?
spk20: Well, I can't speak to the other projects, but I mean, if you're building in Western Australia, the availability of labor, the tightness is extreme. And Western Australia is kind of famous for a labor market that gets difficult if you're doing large projects just because of the resource industry draws all of the resources if their prices go up, and their prices have gone up significantly. Florida State Iron Ore is probably the biggest example, and they're drawing all the resources away. That's always been an issue in Western Australia, but today we have COVID, so they've locked down not only Australia but state by state, so we can't move Not only can we not get resources from China or Thailand or even the U.K., we can't get resources from the east part of Australia. So we're kind of stuck with what's in western Australia. And I think that will affect anyone doing a big capital project in western Australia or Australia. I'm not sure that it applies, say, in China, for example.
spk16: And then when cattle announced its sodium ion battery, all the lithium stocks popped, including Albemarle. Is sodium ion something that we need to pay more attention to?
spk08: Hey, John. Good morning. It's Eric. Sodium ion, as you may know, isn't a new chemistry. The CATL's innovation is in a matrix that may make it more effective. It is a chemistry that is lower energy density, heavier material. So it's applicable probably for the very low end of EV ranges and maybe grid storage. I think one of the attractiveness components of it is sodium is abundant, right? So it may alleviate at that low end of the market, give an alternative if lithium supplies become tight as they have been in the past year or so.
spk16: Thank you.
spk00: Your next question comes from the line of Bob Court with Goldman Sachs.
spk02: Thank you very much. Good morning. Kent, I was wondering, you mentioned that, you know, when an anchor is complete, it takes six months to commission. Is that a function of just the qualifying process? And can you inventory production while you're doing that and then have a nice, you know, buffer of inventory to start selling from as soon as the qualification is complete? Or is it a function of making sure the process works properly?
spk20: It's both. So we're commissioning and qualifying in parallel. So we do early commissioning to get qualification samples, but the plant's not been operating at rates, so then it takes us time to get it to operating at rates. So kind of the long pole in the tent, so to speak, is the qualification process, but we're commissioning during that same time, and we run them in parallel to save time. So I think the answer is both.
spk02: Okay. And on Wajna, we've seen some pretty spectacular spot prices out there, some north of $1,000. When do you turn that on, and do you imagine that would ever feed the Kemerton plants, or will you feed Kemerton through Taliesin for the foreseeable future? Thank you.
spk20: Yeah, so we'll see how that goes. I mean, our plans are to feed Kemerton from Taliesin, and then as we either bring on other capacity or do an acquisition, we would use Wojana for that, and our strategy about selling spodumene hasn't changed.
spk00: Your next question comes from the line of Edlin Rodriguez with Jefferies.
spk11: Thank you. Good morning, guys. Quick one on Bowman. So you've talked about the clothing issue you have in there. When do you expect that to correct itself?
spk20: So I'll start, and I think I can add a little bit. I think there's a broader issue in the chlorine space, but our suppliers have some equipment failures, and we expect that to last. They're telling us a couple of months, right? So they've got a short-term fix. We hope we'll get us back up to some higher rates, and then the permanent fix is going to take kind of, I think they told us, two to three months.
spk13: Yeah, I mean, if we look at the... As we look at the broader chlorine market, we think there will be opportunities to get it back in balance by Q4. We're hopeful for that.
spk11: Okay, makes sense. Another one, like in terms of M&A, like you've done the FCS deal, so you've monetized that. Like when you look at the rest of the portfolio, like is there anything else in there that you think might be better with somebody else, you know? Can you talk about the rest of the portfolio, what you're seeing in there?
spk20: Yeah, so we were looking at our PCS business, and we ran a process, and we didn't get the pricing we wanted for it. So it's performing well, and we pulled that. That is no longer for sale, and we're running as part of the portfolio. We're running as part of our catalyst business. So we'll hold on to that. And then for the broader part of the portfolio, the three primary businesses, bromine, lithium, and catalysts, We see those as core businesses, so that's kind of our fundamental portfolio, and now PCS is part of Catalyst. Okay. Thank you very much.
spk00: Your next question comes from the line of Joel Jackson with BMO Capital Markets.
spk07: Hi. Good morning, everyone. My first question, I'll follow up on spodging. Yes, we've seen pretty interesting surges in spodging prices in the last bunch of weeks. I know there's lags on contracts and stuff, but... I think if we also, it seems like conversion margin, proxy conversion margins have been extremely strong. So are those, as carbon hydroxide prices have been really strong. So do you see the spa gene price increases more of a lagging indicator? Or do you think that they're setting off and could be another run up in spot prices, spark, lick and dribble prices?
spk20: Look, I'll make a broad comment. Let Eric try a little bit of detail. It's hard for us to project where the market is going. And we see prices, both spodumene and carbonate and hydroxide prices being up. The only place you really have visibility of spot prices is in China for the carbonate and hydroxide. You see that. You see the same numbers that we do. Those have not fully translated into the contract prices, but we do see contract prices moving up. Spodumene has gone up, come back down a little bit. I don't know that we're in what you would call a super cycle or headed toward that, but I do think prices will be higher than they have been in the last couple of years.
spk08: I think your question reflects this. This is a China market phenomenon. The China market is very dependent for its growth on imported spodumene. There is a shortfall of available supply to meet demand given the rapid growth post-pandemic, particularly in carbonate in China. In that regard, maybe spodumene is a bit of a lead because it's the short supply, but I think what we expect to happen is more supply to come into China from other parts of the world. We've seen prices go up and stay up with demand. It's hard to say what's going to happen with spodumene prices. From an animal perspective, the way we take advantage of that is we don't sell chemical-grade spodumene. We sell especially spodumene for the glass market. But for us, it's tolling. So you've heard us talk about looking at tolling opportunities, and that's part of our improved guidance. And for that, we're able to participate in that spot price market, which is, as I've said earlier, very favorable.
spk07: Thank you for that. So my follow-up would be just looking out to 2022 for LCE volume increases. I think you talked about maybe gaining about 30,000 tons uh, LCE volume for next year with the different expansions ramping on. Cambridge in two is delayed a few months. Um, maybe you've been pushing it a little more tolling now this year. It is about 30,000 tons still the right number to think about for next year.
spk08: So Joel, I mean, I think it's, you have to break it down. First of all, I don't think we've said 30,000 tons. We've talked about ramp rates on plants. So, um, The Kemerton plant with a startup in the early part of next year, there is a three-month delay to the second unit. We've talked about getting to full run rate capacity by the end of the second year in that facility. Similarly, in carbonate, you'd see a phenomenon that is somewhat like that. I would say our run rate for carbonate by the end of 2022 will probably be at the 30,000 run rate basis at the end of the year. As that ramps, it's a little bit different ramping brine versus spodumene because brine is obviously a harvested material versus a fixed input. But that roughly should, between those two, should be able to calculate sort of our guidance. The change would be a slight delay at Kemerton and any year-on-year growth that we can achieve in tolling. And that's going to be harder for us to predict now because it's a function of what's available in the market for us to toll with.
spk20: Yeah, it's also a function of how fast we ramp up, right, so how well commissioning goes. And then there's, you know, when you'll commission, you'll be able to make product, but at lower rates, and that will ramp up over time, and it's how well we do in that ramp curve. And it's hard to speculate on that. Thank you.
spk00: Your next question comes from the line of Arun Viswanathan with RBC Capital Markets.
spk17: Great. Thanks for taking my question. I guess I just wanted to get your thoughts. We've had some, you know, differing news, I guess. Maybe you can just provide your color on spodumene, carbonate, and hydroxide. You know, spodumene, obviously, there was some oversupply in years past, but it seems like most of that is slowly working itself out. Maybe you can just characterize supply and demand in each of those areas. Thanks.
spk20: Okay, and again, I'll start. Eric can fill in where I missed things. But I think, you know, in the past, the industry is growing, right? So as the industry grows, you bring on capacity. It's a smaller percentage of the industry. So I don't think we're going to have those periods of oversupply, undersupply as tight as they were in the past with the extremes showing up in pricing. So I think that applies across industries. for hard rock as well as kind of the salts, conversion capacity for the salts. I think as the industry gets bigger, each addition is a smaller percentage of the total industry and it has less of an impact. That said, where we are, I mean, spodumene is tight, and I think that the conversion capacity as the growth rates that we see, which you kind of see as an indicator, EV sales is the forward-looking growth curve for lithium- Those are pretty tight, and you've got to make investments, and you've got to be good at executing those projects and commissioning them and then ramping them up to full capacity, which is, you know, we think we're good at that, but we're in the process of proving it.
spk08: And I would just add, Arun, that today, as we sit here today, all three are extremely tight. If we had more carbonate that we could produce and sell, we could sell it readily. Same with hydroxide. We don't have the disadvantage. We have the ability. We have idle capacity on the spodumene side, so we are not feedstock limited. That's a strength we have going forward. What we're limited on is our ability to get conversion capacity in the ground quickly, and that's part of our plan for next year. As to the long term, my guess would be that our view would be, I should say, that hydroxide will probably see the higher rate of growth going forward off a smaller base, Carbonate has done well in the near term based upon the LFP trend for lower-end vehicles, particularly in China, and we see that starting to take root in some other regions as well for the low-end. But the key to high EV penetration is higher energy density, and the key to that is hydroxide and ultimately potentially solid-state chemistries. So that's going to require a heavier burden on hydroxide. We see that being the tighter market on a long-term basis going forward.
spk17: Great, thanks. And just wondering if there's any concern from elevated logistics costs for the next little while. Also, maybe you can just address if there's any concerns on the container shortage issue. Thanks.
spk20: Well, I think across all of our businesses, the supply chain is a challenge and a concern. So ocean-going freight, probably the biggest, but well, You know, chemicals supply chain in the U.S. is hitting us, and particularly chlorine at the moment, but it's tight in a number of chemicals. But ocean-going freight is a big concern for us and something that we are working pretty hard to try and manage. We spend a lot of time trying to streamline that supply chain, digitize it so we have much better visibility on it. So we're making progress on that, but it's still a concern. Okay, thanks.
spk00: Your next question comes from the line of Vincent Andrews with Morgan Stanley.
spk06: Thank you, and good morning. If I could just ask you, in roaming, it doesn't sound like in either your sort of electronic sales or your auto sales that you're seeing any real volume issues from the shortage of microchips. So is that just something that it's either being offset by other parts of the business or it's just not an issue either, you know, year to date or into the back half of the year? Yeah.
spk13: Yeah, Vincent, from where we sit in the supply chain, we're not seeing that at all from a demand side. Our demand in those areas have been steady. Okay, great.
spk06: And if I could just ask, you know, you have the analyst day coming up and you're also concurrently working on, you know, the wave three projects and looking to move forward with those. I mean, should we be expecting, you know, a material update on those at the analyst day or are those two events unique?
spk20: So a material update. It depends on the definition. So we'll give you progress on where we are, but we're still in the planning phase. We're not moving dirt on any of the projects yet.
spk06: Okay. So no FID. We shouldn't be expecting any FID decisions then?
spk20: No. I mean, we're progressing as we go, and we'll tell you the plans that we have, but it's not at a – we will not have a final investment decision in a month.
spk06: Okay, very good. Thank you so much.
spk00: Your next question comes from the line of David Begleiter with Deutsche Bank.
spk19: Thank you. Good morning. Eric, a couple of questions for you. Just on lithium pricing in Q3, is your guidance for that pricing to be up year over year in Q3?
spk08: Yes. The second half, we were down 10%. To recount a little history here, to put it in perspective, we were down 10% across the board in the first quarter, 4% in the second quarter, and we're staying flat for the year. So we'll be up year over year. Another way to think of that is our lowest price point over the past 24 months, including the rest of this year, so over 2020 and 2021, we expect to be the fourth quarter of last year. And ever since then, we sort of bottomed and are seeing as spot prices move up for that small amount of our businesses exposed to that, such as battery grade in China or tech grade, and as concessions to contracts given during the height of the pandemic roll off, we see those prices rising into the second half of this year. And given the tightness in the market, we expect into next year as well.
spk19: Very good. And also, there's been some progress on a DLE project near your operations in southern Arkansas. Can you discuss the viability of a DLE project for you guys in southern Arkansas going forward?
spk08: Well, yes. So I'll say that for us, we continue to look at Magnolia brines where we operate our bromine operation as being a spot where we could process lithium in DLEs, a potential for technology for that. DLA, it's a bandied about term. Most often here in the US with many of the projects, what they're talking about is absorption resins. And so it's a mechanical operation. For extracting brines, it's a mechanical operation as opposed to an evaporation effort, such as we do in Chile, that you would only apply if you have to apply, meaning you apply it to resources that are of lower quality or have higher impurities present, which is generally true with both oilfield brines, which is what we have in Magnolia, or geothermal brines. So it's more capital-intensive. It actually also consumes a lot more water and energy, so it has some drawbacks from it. We're studying what alternatives we could deploy to a resource like that that could include absorption that optimize those factors of cost and sustainability. Given where we are with our high-quality resources and what we can do in the near term to drive our growth in the next five years, we'd put that as a resource later in the decade that we would consider for that, given those technical challenges and given its cost profile.
spk20: Yeah, and I would just add, so we didn't, that wasn't included in our phase three But it's something that we look at. We're looking at the technology. We have access to the brines, and we have the operation. We're already kind of pumping the brines around. So we'd be in a good position to leverage it if we think that we get the technology right and we believe the cost position is right. But it's something that comes probably in Phase 4 if we get that technology right.
spk19: Very helpful. Thank you.
spk00: Your next question comes from the line of Jeff Zakakis with J.P. Morgan.
spk04: Thanks very much. In your Taliesin operation in equity income and lithium, sometimes you earn 30 million and sometimes you earn 15 or 16 million. What's the difference between the two? And we've had some 15s and 16s. Are there any 30s to come?
spk18: Jeff, this is Scott. So the equity income in Towson is affected by two things. One is the volume that's being shipped both to ourselves as well as to Tianqi, our partner. And, of course, that has been either flat or rising over time. The bigger impact that you're seeing through the equity income is coming from the transfer price, which is affected by the spodumene market price that's out there. So when that price is high, you're going to see a higher equity income. When it's lower, you'll see a lower equity income. And generally, that's going to track on about a six-month lag to the market indicators that are out there. So as we talked about in some of the prior questions, because the spodumene price is higher or going higher right now, you should expect in the second half that that equity income would also track to that.
spk20: You should just keep in mind, though, that then our input cost for conversion goes up when that price goes up. It doesn't matter so much to us because it washes through, but it's the difference between equity income and what shows up in the lithium P&L.
spk04: Then for my follow-up, I think over the past several years, if you had to describe the contractual terms of your long-term lithium contracts, I think you would have said that they were above market. Given the changes in the lithium market and its tightness or snugness, is it now the case that your long-term contracts are more comparable to current prices?
spk20: It depends on what you're calling current prices. So if you're talking about spot prices in China, which is what everyone can see, that's probably correct. But I think if you were to think about contract prices over time, contract prices outside of China that different suppliers have, it's probably in line or above those, I would say. Probably still above those.
spk04: Okay, good. Thank you very much.
spk00: Your next question comes from the line of Ben Callow with Bayard.
spk12: Hey, thanks. Good morning, guys. Thanks for taking my question. Just maybe two on the lithium front and then one on bromine. On lithium, you know, you get this question a lot, but just on recycling, we saw Redwood Materials raise a large sum of money. I want to understand how you see the players in the recycling as they either work with you or are competitors to you as number one. Number two, you know, on the Tesla call, and I think before that, Musk was talking about, you know, the LFP and the increase there. I just want to understand, and I think you talked a little bit about this, but how you You make investments into carbonate versus hydroxide with that background, looking like there's a large increase in demand for LFP. And then on bromine, just, you know, how comfortable you are around the timing of the expansion. I think it's really chemical expanded already earlier, so just wanted to see how strong you think that market is, you know, for bringing on new capacity. Thank you very much, guys.
spk08: Hey, Ben, this is Eric. On recycling, recycling is happening around the world. And so the companies you're referring to are largely here in the US. There's a set of companies similarly in Europe. It's a regional business model because of the collection and nature of different regulations around the world. As a global player, we're engaged with all of these companies. We view them in almost every case as a partner, not a competitor. And we bring process technology and know-how that's What we deploy in some of our existing virgin brine operations, it could be a partnership approach to helping to remove the lithium and or take a byproduct that comes out of their operations, which is lithium-rich. And so that's the way we work with them. You have to remember a lot of these companies got set up, and Europe is ahead on this, largely to go after the nickel and the cobalt, not lithium. Lithium is usually the byproduct of the recycling operation. That's where we fit in. And so as we look at trying to partner with our customers and drive their success from a sustainability standpoint, we view this as an important part of the value mix we bring is helping them recycle the lithium and recycle it back to them for their continued growth. On the Tesla side, we view what Tesla has described as generally very consistent with our market outlook. It's going to continue to shift. and I think expand, meaning the size of the EV market, which by 2025 might be at one level, but by 2030 I think you're going to have a larger proportion of vehicles that are electrified. There's some news out about some intentions around that here in the U.S. today. And for the lower end, LFP is the applicable technology. I mean, it gives you a lower range. We still believe, though, that for the mid and the higher range, you're going to need, in order to get, you need higher energy density to get the range. And you can drive good cost if you can get good technology and get the cost per kilowatt hour down. You'll get the kilowatt hours up per unit weight. So that's the mix we see, and it's very consistent with the way Tesla is approaching the market as well. Turn it over to Nessa for bromine.
spk13: Hello, Ben. If you talk about the timing of our bromine expansions, I think we feel really good about the markets that we participate in and their projections over the next few years. And we're really just executing the company's strategy of building capabilities to accelerate lower capital intensity, higher return growth. And for us, what we're doing it at is the magnolia. And that's a great place for us to do it because we have great jurisdiction. We've been there for over 50 years. We know the asset well, and we can produce every product that we make out of that facility. So that leads us to have high confidence in those projects and the timing of execution, and we feel really good about the plan there and their ability to deliver what we want out of those expansion projects.
spk12: Great. Thank you very much.
spk00: Your next question comes from the line of Matthew Dale with Bank of America.
spk09: Thank you. So as you ramp Taliesin to meet Camerton demand, what do you expect your partner to do? I know they have their own kind of hydroxide plans. Those have been pushed a bit. Do you expect talisman output to increase by the 50,000 metric tons you're going to need or will it be closer to 100,000 metric tons? And how do you see that timeline playing out? Can you move as fast as you think you'll need if, you know, it's a joint discussion versus, you know, your singular desires, I guess?
spk20: Yeah, well, it's definitely a joint discussion. It's a JV discussion. And I think we'll optimize the supply. So the product at Taliesin, our portion or half of that with Tianqi, that's ours. But we have JV product at Wojana. They have their own product in other parts of Australia. And we'll swap product to kind of optimize economics. I think the way you would think about it is Taliesin goes to feed our portion and some other product feeds their portion at Kimmerton. However, physically, it probably won't work that way. We'll swap product to optimize the economics.
spk09: Oh, I guess I meant more what you expect Tianqi to do versus Negres on that portion. I apologize.
spk08: This is Eric jumping in. We can't predict what Tianqi is going to do. They have some public statements out there around their Quanana facility, which is, really very, in terms of its potential over time, similar in size to Kemerton, at least our first investment in Kemerton. And the JV is owned by the two of us, so it produces a budget to what we need. So you really need to talk about what's on the ground. There's CGP1 and CGP2. We feel with CGP2 being fully ramped, we'll meet the needs of what we have invested in and allow us to ramp at Kemerton. And if they don't have the need... On their side, they won't take their share, right, is how it comes down to it. So that's how it works. We're always entitled to at least 50%. It could be of what's available. It could be more if they don't need to take more and vice versa on the other side.
spk09: Okay. If I could just follow up. So the new pricing approach you talked about, I understand it's still in the works, but Theoretically, I guess if you were to look over the last cycle, maybe peaks in 2018 and trough more in 2020, can you provide some context as to how much you realize price would have been higher in 2018 had you... chosen this path versus how much lower you would have been in 2020? Like how much higher are the peaks and how much lower were the troughs? I would imagine some sort of analysis has been done to kind of get a sense for if this was a net winner or loser over time.
spk20: Yeah, so we've not done analysis that we can share about what our price would have been under the new model, but you're right. It would have been higher toward the peak and lower during the trough, which is the point. We're trying to move a little bit more with the market but not expose ourselves fully to the commodity price. But I don't have the numbers to share with you exactly what it would be. And the other part of that question, which we don't really know the answer to, is how the portfolio, what does it look like? How much of that spot-type pricing will we end up with versus that long-term contract pricing? Because during the last peak and bottom that pretty much were all on the long-term contracts.
spk08: I think it's also important that in the last peak and bottom, there were no automotive producers involved at all in the cycle. There are now, and there's a lot more demand now. And a reference of a remark Kent made earlier that given the size and maturity of, we've only gone through one cycle before, really, since the dawn of the EV, and now we're moving through the next part of the cycle. It's going to look different. It probably won't have the same volatility it did before. We don't know, but I think the size of growth and supply additions is such that it's going to change with time. The pricing structure we're putting in place is going to continue to evolve. We have contracts that fit the structure, so we know it works. We have customers paying fixed prices. We have customers who we're only going to give them a year commitment and they'll want to ride the wave, and at that point, that wave is going up. So how it settles out over time, we'll have to continue to dimension for you, but we're at the early stages.
spk09: Understood. Thank you.
spk00: Your next question comes from the line of Mike Sisson with Wells Fargo.
spk14: Hey, good morning. Nice quarter. Just curious what your thoughts on the lithium demand situation whether percent or tons in 22 is expected to be for the industry.
spk08: Yeah, it's a question, Mike, that I may have to go back and look at our demand model because we do have a model we put out, and it's still consistent with what we think today, and that was some months ago earlier this year we did that. We're seeing a much bigger demand year in 21 overall this year than last because of the post-pandemic recovery. The overall market growth is 25% plus, so we're going to be at least in that order magnitude for 2022, I'd say, on a year-on-year basis.
spk14: Got it. And then I know there's some timing in terms of getting the volume on for Wave 2, but when do you think roughly you'll have all the capacity available to sell? Is it 23, 24, 25? Just curious on the... when you'll be able to sell it all.
spk20: And when you say the capacity, you mean La Negra and Kimmerton? Yes. Okay, because our plans, we're going to be building plants over time. It's going to be ramping up over time. But La Negra, between La Negra and Kimmerton at full rates, ramped up, selling everything, 24 for the full year. For the full year, great.
spk00: Thank you. Your next question comes from the line of Chris Cash with Loop Capital Markets.
spk05: Yeah, good morning. Just a slightly more nuanced follow-up on this discussion around the increased volumes implied in your guidance. And so I surmise most of that is coming from more volumes from via green bushes and that spodumene being converted downstream to via tollers. First, is that an accurate characterization? And then with that in mind, Eric, I'm pretty sure you've stated in the past that you don't rely on toll conversion for battery grade chemicals, but only for technical grade lithium products. But in this case, it seems like the extra volumes are carbonate feeding into the LFP cathode market. So, just wondering if that also is accurate and if that's the case, should we be thinking of these carbonate grades via tollers as you know, just, or maybe just the LFP market being more of a technical grade market. And then finally, just, you know, it seems like this is part of the market you'll address once La Negra is ramped next year, but will you then fade the, you know, the current toll relationships that you're leaning into currently to opportunistically address these volumes?
spk08: There are a bunch of questions there, Chris. Let me go to the first one, which had to do with, help me here. I was stuck on the LFP, which had something before that. What was that? What was your first question, Chris?
spk05: Yeah, so the tolling volume.
spk08: Oh, our volume. Yeah. Yep. Sorry. Senior moment there, I guess. If you look at our produced volumes, we're going to be fairly flat first half to second half. maybe slightly better in the second half because we have a little bit better production. We have some better production in Chile in the fourth quarter seasonally just by a tad. What the real difference is in our volume first to second half and our volume growth year over year is the first half, second half is the increase tolling. Year over year is tolling because we did none last year. as well as plants come back online and efficiencies in the plants, better operation in the plants year over year. So there's a bit of difference between first half, second half, and year over year there. On what we're using that carbonate for when we toll it in China, it's going into the LFP market. I don't know what we said years ago, but what we said more recently is that the carbonate market, the tolling network is able to produce sufficient battery grade quality to supply the LFP market for batteries in China. So that's where we are selling that material currently. And then now I'm going to ask you to help again. The last question was?
spk05: Well, yeah. So since you're addressing that market via the tolling relationships currently, when you ramp La Negra next year, will you fade those relationships or do you still intend to participate via tolling? Obviously this has mixed implications given, you know, the higher feedstock costs and the fact that tollers need to make a margin in So curious if you'll fade those tolling relationships, or maybe would there be a bear hug like you've done in the past with tolling partners that you're comfortable with?
spk08: It'll be a bit of both. Our strategy for a lot of what we produce out of LINEGRA's growth, LINEGRA 3 and 4, is to put it under a contract commitment of some form. That might be for a price buyer only a year, and for a performance buyer it might be a couple of years, but that's our strategy for that volume. Our strategy for the toll volume is either to use it as a bridge to build a customer relationship to when we have Onega 3 and 4. So some of those customers we're currently selling toll volumes for, we will take advantage of selling Onega 3, 4 to as well. But in today's market, which is particularly tight, is also opportunistic to playing what is a pretty tight market. And there we're really playing on a spot basis. So while we have higher costs to produce this toll volume, we're taking advantage of currently higher spot prices than contract.
spk05: That's helpful. Thanks a lot.
spk00: Okay, and our final question comes from the line of Kevin McCarthy with Vertical Research.
spk03: Good morning. Thank you for squeezing me in. I wanted to ask about your catalyst business. If we look at margins in the first half of the year, in broad strokes, they're running maybe half of historical levels, yet in the prepared remarks, I think you indicated you anticipate a strong rebound in the business. So I was wondering if you could flesh that out in terms of what you're seeing in your refinery catalyst order books and, you know, when might we expect those margins, you know, to get back to historical levels? Might that be as soon as 22 or more likely 23 or later?
spk15: Hey, good morning, Kevin. This is Raphael. Just to respond, there's been a series of effects. I mean, in the first half of the year, we certainly had an impact from the winter storm. We have residual impact from the pandemic. A lot of that pandemic impact was a downtrade of high-performance catalysts to maybe more workhorse catalysts. That has an effect on margins as well as on our mix. Looking forward, I think we would see recovery. I mean, some of our best products, what we're known for, for example, is our high-performance hydro-processing catalysts. As the market's recovering, as change-outs start to occur at a faster clip in 2022, we're going to start to see that come back. Again, we have great partnerships for great performance catalysts, those are at a higher margin that will improve our mix. And I think it's that mix impact going into 2022 that you'll start to see that improvement in our margins. We already see it today, Kevin. We have customers that are, they down traded to lower performance catalysts when they were under margin pressure. We just had a customer meeting this week with a large North American refiner who was telling us that because they're starting to operate at higher rates, They're needing to run under more severe conditions. They need higher performance catalysts. Those command higher margins for us. So we think it's a favorable trend. It will probably start to materialize in 2022 where you'll start to see that. Thank you for that.
spk03: And then secondly, if I may, for Eric, in a prior answer, I think you alluded to the news out today that the U.S. is now targeting 40 to 50 percent of new auto sales as EVs by 2030, although I thought I read that it might be non-mandatory. So just curious about your view on that. Is it incrementally, you know, accretive to your demand outlook in any way, or are the U.S. automakers already tracking the similar levels? What do you think about the potential market impact of that announcement?
spk20: Yeah, so this is Kent. You know, it's early news. It's just out today, and I don't, from my understanding, it's not mandatory. It's kind of something that's trying to lead legislation to something maybe like that. So I'd say it's early days, and I'm not, you know, and it's probably in the ballpark of what the car companies are already thinking. Maybe it's a little more aggressive, but it doesn't shift the model from our perspective, I don't think. I think our view would be that's neutral.
spk03: Thank you very much.
spk00: And now I would like to turn the call over to Kent Masters for closing remarks.
spk20: Thank you, Carol, and thank you all again for your participation on our call today. As you can see, we have a lot to be excited about at Albemarle, and we see extraordinary opportunities for growth. We are implementing a comprehensive operating model that will enable us to execute on our objectives effectively and efficiently. We look forward to discussing this in greater detail during our Investor Day on September 10th, and we hope you will all be able to join us then. Thank you, and that concludes our call today.
spk00: Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may now disconnect.
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