Albemarle Corporation (ALB) Earnings Call Transcript & Summary

Good afternoon. My name is David Begleiter of Deutsche Bank's U.S. chemicals equity research team. Thank you for joining us for Deutsche Bank's Virtual Global Industrials & Materials Summit. I'm very pleased to have with us today the team from Albemarle, led by Meredith Bandy, Vice President, Investor Relations and Sustainability; and Sharon McGee, Vice President, Investor Relations and Corporate Development. Unfortunately, Scott Tozier, CFO, had last minute personal emergency and will not be able to attend the webcast. Meredith will have some prepared remarks to open with, and then we'll jump into the Q&A portion of the session. So with that, Meredith? And if you would like to ask some questions, you can submit them through the web portal via a chat box on the left-hand side of the screen. So with that, Meredith, it's all yours.

All right. Thanks, Dave. And thanks to Deutsche Bank for hosting us today. Very sorry that Scott couldn't join us, but we're very happy to be with you all. I just want to begin by saying that I hope everybody on the line is safe and healthy. At Albemarle, our first priority is, of course, the safety and well-being of our employees, customers and communities. So whether it's COVID-19 crisis, the recent Chilean earthquake or hurricane season on the Gulf Coast, we're focused on operational preparedness, making sure we have the right protocols in place so that we can operate safely and effectively. And so far, we're very thankful that to date, our sites continue to operate without material impact from these events. Obviously, we're also managing the economic impact of COVID-19. So we'll talk about things like we're committed to maintaining our investment-grade rating. We're committed to our dividend. We're accelerating the previously announced $100 million of sustainable cost savings, and we're also introducing some short-term cash management tactics, things like reducing and deferring capital spending, cutting SG&A, managing our working capital, and we've shored up our balance sheet to ensure that we have the liquidity and the financial flexibility that we need through the cycle. So we've drawn down our revolver and term loan. We recently renegotiated the covenants on that revolver as well. We can talk about that. At the same time, I wanted to remind everybody that, of course, Albemarle has market-leading positions in all 3 of our businesses. So for example, in lithium, we have access to 3 of the largest, highest concentrated resources in the world. We're vertically integrated from resource to specialty products. And we offer our customers high-quality secure supply of a wide range of lithium products. Similarly in bromine, low cost, vertically integrated, diversified across a variety of industrial uses. And then in catalysts, we're positioned in that business to benefit from tightening fuel quality specifications and growing prosperity in the developing world. So we have the right strategy in place to capitalize on these leadership positions, and we'll modify that execution based on the current market dynamics that we're seeing. So with that background, I'll turn it over to Dave to start the Q&A.

Thank you for that, Meredith. First off, maybe just on some current business trends. How are demand trends in May, Meredith, versus April? And what do you see here early June?

Yes. So we're still -- we gave guidance for the second quarter, and we're still comfortable with that guidance. We didn't give a fairly wide range. So I think we gave an EBITDA range of $140 million to $190 million, and we're still seeing everything to be largely in line with that range. So for example, in lithium, what we have seen so far is that business has been holding up. Our customers -- we were down year-over-year as we had expected because our customers entered the year with some higher inventories. Also our customers, meaning the cathode and battery producers, were behind in their production. So they've been working through some of this downturn to catch up on production. And so we haven't seen a lot of that battery-grade change come through yet. We'll wait and see how it occurs as we're managing OEM automakers coming back online and getting back into production. We are starting to look at some of the EV production forecasts are ticking up a bit from a trough. So still very low levels and lower than what they had been going into COVID-19, but looking better than they had been maybe a few weeks ago. So that's very positive. And of course, we're also monitoring some of the incentives that are being put in place around the world, which could potentially be positive for EV demand as well. Ultimately, it will just depend on what consumer behavior is and how willing consumers are to go out and purchase a new electric vehicle in this type of environment. So that's sort of where we are for lithium. On the catalyst side, Dave, I know we've talked a lot about in the past, the FCC versus the HPC. So the FCC market, we did see was impacted right away because of the stay-in-home orders and the reduction of miles driven, reduction of transportation and fuel demand. And we are starting to see a little bit of a trough in that area. I know you're watching some of the same things we are in terms of refinery capacity utilization has ticked up a little bit, in terms of, obviously, oil pricing starting to stabilize and come up off of the bottom, some of the inventories coming down a bit as well. So we are seeing signs of trough and even a recovery in some of those markets, although still well down from pre-COVID-19 levels. On the HPC side, it's a bit of a different story where based on previous downturns, what we would typically expect to see is that refineries would run at lower levels, and they would be able to push some of those HPC turnarounds into the future. We haven't seen that yet. But we would expect probably to start to see that with some of the HPC being pushed from the second half of 2020 into 2021. That's our expectation based on previous levels. And then in the bromine business, we guided to that to be down about 20% in Q2. Some of that is just depending on the logistics, which we're managing around in bromine. Some of that is the start of seeing some of the COVID-19 downturn. We are several steps back from the customer, consumer rather in bromine. So it takes a while for that to work through the supply chain. And we're expecting to see that come down a little bit in the second half and probably more so in the -- sorry, second quarter and more so in the second half. Now having said that, there, again, some of the forward-looking indicators we're looking at are starting to stabilize. So homebuilders' index is starting to stabilize. Some of the GDP expectations are obviously down significantly versus pre-COVID, but have started to stabilize. So we're hopeful that we'll start to see that rebound after a few quarters, most likely.

Very good. Thank you for that update. Maybe just back to lithium, Meredith. On pricing, you did grant some 1 year pricing concessions of down, I believe, roughly 15% to many of your battery material customers. Given the weak demand we're seeing right now in the marketplace, what's the potential for these customers to realize price reductions of more than 15% in 2020?

Yes. That's right. So in late '19, we had negotiated with a lot of our battery-grade customers for 1 year pricing concessions. And we had said it was down in the mid-teens, so that's where that 15% is coming from. That's still what we're seeing and what we're expecting. All else being equal, when you get to the end of the year, those concessions expire and you go back to the normal contract. Obviously, given the current environment, we're going to have to see what ends up happening going forward with those contracts. Those contracts are going to probably continue to evolve over time as that market evolves. And so it's too early for us to say beyond this year what we'd see in pricing, but it's something we're working through with our customers right now.

In terms of more industry-type pricing or even spot pricing, when do you think we'll see prices bottom? And where do you think pricing is versus the marginal cost production right now?

Gosh, I mean, we are still seeing weakness in China with a very different price than we're used to seeing or having in our business. We do think that pricing has stabilized somewhat otherwise. I mean we might be near -- at or near trough. We think we're also at or near marginal cost of production for the price. Now how long that stays the case, it's probably more difficult for us to say.

Got it. Meredith, you touched on your long-term contracts. I believe you have a bad 12 to 15 battery material customers on these long-term contracts. Can you discuss the changes you're trying to implement here to these contracts to lessen the volume and price volatility going forward?

Yes. So we are obviously a specialty chemical company. We look at the lithium business as a specialty chemical business. And as such, we feel like the long-term contracts are best for our customers and for us. It offers a lot more security of supply and offers less volatility in price. And we still think the long-term contracts will be really important part of our business going forward. But we do think that's going to evolve as our customers evolve as well. For one thing, for example, you're never going to have 100% on the long-term contracts because you have to have the ability to flex and make sure you can fulfill those contracts if anything happens in any of your plants, if there's any other issues that you run into. And we do have about 10% of our battery-grade customers are on spot today, and we'll continue to see some amount of spot going forward. We think we'll continue to have at or above 50% of our contracts continue to be on long term, and then some of them are going to be sort of a mix of the 2 with more or less volatility depending on customer needs. And there would be like a lot of other industrial contracts where you have pricing mechanisms that can move up and down over time. That doesn't currently exist in the lithium market. So we're examining different ways that we could introduce that for the lithium market. And it's something that we're socializing with customers now. We would expect that to, as I said, continue to evolve over time as these contracts mature.

Understood. You discussed lithium volume trends. Can you just again touch on what you -- how you expect the second half to trend for lithium? And maybe that's the first question.

Yes. I mean, we've -- as you know, we took out the full year outlook. And we did give Q2 outlook. And so what we said for lithium is that we would expect lithium to be down year-over-year, but up slightly sequentially. And that it was probably too soon to say what the second half would look like because a lot of it does depend on how much the production comes back. We see most of the auto manufacturers are coming back online, but maybe not necessarily at full production run rate. And also what is the consumer behavior. So we see incentives in place that could be very positive for the electric vehicle market. For example, I think, in France and Germany, we have the Cash for Clunker type programs for electric vehicles. We were also talking earlier about some of the local incentives like Beijing has additional license plates that are available for electric vehicles. So some of those are positive, but it just depends on what the actual consumer behavior is.

On the Chinese programs, can you talk about the incentives they have for the purchases? Is it just the license plates or other things you can highlight here?

No. I'll turn that over to Sharon, but I think one of the things when we came into the year, Beijing was talking about cutting a lot of their incentives by a significant amount. And now they've sort of rolled some of that back. So they're not going to have the same cuts to the incentives to the electric vehicles that they thought they're going to have. But Sharon, maybe you want to talk more about that.

Yes. I mean, so last year, the cuts were almost 50% in incentives when you went into 2019, and they were supposed to be, again, similar for 2020. They are reducing the incentives for when you purchase a vehicle. But it's only about 10% to 20% instead of the initial that they planned, and they've also extended those so that they don't end this year. They've extended on out into 2022. In addition, we are seeing local -- so the national government is encouraging the local governments to add incentives there as well. So we've seen several of the cities add additional license plates for -- specifically for EV. So as Meredith mentioned, for example, Beijing has issued a draft where they would offer another 20,000 license plates for electric vehicles, and that's compared to their normal full year allowance is around 60,000. So I mean, that's significant for that city, and then we're seeing it across several other cities in China. But again, it comes back to -- even if the incentive is there, what are the consumers going to do? Are they going to feel comfortable enough to begin to purchase, et cetera? So that's really what we have to watch.

Very good. I also believe you referenced in an earlier call that you expected the global EV demand curve to be pushed out by roughly a year. What gives you the confidence it will only be a year pushout? And could it be longer if oil prices stay at these lower prices?

Today, in our perspective, is -- the oil prices aren't really driving the EV purchases at this point. Now eventually, when EV and combustion engine vehicles get to an equal price level, price parity when you go out to buy automobile, then oil pricing could have more of an impact. But today, more of it is driven either by a regulatory perspective or simply a consumer choice that they want to have less of the carbon footprint themselves. So it's more of the regulatory driver from our perspective that's going to impact EVs through this year, through next year, in particular.

Yes. And I would just add, in terms of the 1-year push out of the demand curve, obviously, the demand curves, as you well know, are fluid and the situation is changing. But all we've done, it's not necessarily a specific Albemarle decision. It's more like of the third-party research. We're looking at of our own research sort of an amalgamation of those thinking that it will be about a year. There's not like a precise where we guarantee it will be 1 year, but just looking at a variety of the third-party data sources and things we're hearing from our customers.

That makes sense. And it's a good segue into a couple of questions on lithium capacity. You decided to slow walk your 2 large lithium projects, reason might be obvious. Can you just discuss the rationale behind that decision? And when would you expect to resume normal activity at these 2 sites?

Yes. Yes, exactly. So given that push out of demand and given the fact that we want to make sure that we are preserving liquidity for the -- through the cycle, that was the decision to slow walk those 2 projects. Actually, we've reduced capital across the whole business, right? So relative to our previous capital expectations, we've taken out about $150 million of capital this year, and that's a delay or deferral primarily. So that will come back over time. But about half of that $150 million is coming out of La Negra and Kemerton. Those are the 2 largest capital projects as you well now. And they're in different stages of their development. So the changes there are somewhat different. So I think in La Negra because it's nearing the end of completion, what we did was we sort of accelerated getting the peak construction teams off site and then sort of slowing down that commissioning project and the tie out. So that's -- it hasn't -- neither one of these have stopped. There's so -- progress is still ongoing with both of these projects, but it's just changing the way we're doing it. And then at Kemerton, because we were just about at an inflection point of maximizing the largest amount of construction on site, what we did is we decided to slow that down and we'll wait until everything is delivered and on site, and then we'll start construction. So it will slow it down by about 3 to 4 months, but it will also make it a little bit less -- lower risk because we'll have everything on site, and it will be a little bit more efficient. So net-net, it shouldn't impact the cost much, if at all, but it will slow it down by about 3 to 4 months. So La Negra now, we think, will be finished around mid-2021; and Kemerton, we think, will be finished around late 2021. Now given -- as the situation evolves, we can always choose to either accelerate or maybe even make a harder stop on both of those projects if we need to. It's not something we would want to do because we do expect to need that conversion capacity to meet customer demand.

Understood. And then you've also expressed interest in potentially acquiring a portion or all of Tianqi's interest in the Talison JV. Can you just discuss where you stand on this? And also, would you be willing to increase your ownership without gaining true control here?

Yes. No, thanks for that question because we certainly do get a lot of questions on that. So what we would say is that, obviously, Tianqi is our partner at Talison, and so we are very interested in that process. We would caution people probably that the process is maybe not as formal as some reports would suggest that it is. It's something that we talked about because there are some -- there's some debt due for our partner there that they need to figure out how to restructure. So we watch it with interest. If there was an ability to do something, we would be interested in doing it, but that doesn't necessarily mean that we'll have that opportunity.

Understood. That's very clear. Meredith, you mentioned also earlier some class actions pulling some of these savings into '20 from '21. Discuss where are these savings coming from. And what's the cadence of realizing these savings over the course of the year?

Yes. I mean, they're really coming from across the business. I think probably we have a slide on that in the presentation that we posted with you also on Slide 12. So probably 1/3 would be in lithium, and then the rest sort of split between corporate bromine and catalyst. And it's all sorts of things in terms of operational efficiency, in terms of improving supply chain, sourcing and in terms of raw material usage and efficiency. And then obviously, also the corporate overhead. So -- gosh, I don't even know sure how many projects probably are there also.

There's over 70 projects, individual projects for this program.

Yes. So it's lots of different projects that are coming together. Obviously, we're fortunate because when we went into the downturn, we had already identified those projects and already started working on them. So some of it's just placing greater emphasis and just moving faster on projects those had already been identified to be done. So we had said, it's $100 million total. We still expect that to be the case. And then we have said $50 million this year. And now we're expecting $50 million to $70 million to be realized this year as we've just been able to move faster on some of those projects than we had originally anticipated.

Got it. And you also mentioned some short-term cash management actions around variable and fixed costs. Can any of these become permanent longer term?

I mean, what we would say is that a lot of them can be done for a long time, but the longer you do it, the harder it gets to maintain. So it's things like, well, obviously, for example, currently, there's very little travel. So travel and expense budgets are completely slashed, right? And in the current environment, that's fine, and we can continue to do that. Longer term, we can certainly keep that very tight, but we would expect travel and expense budgets to have to come back into SG&A over time. So it's things like that. It's things like drawing down inventories, which you can certainly do, but there's a limit. Obviously, you can't take the inventory down below 0, so you can draw down inventories. And typically, you would want a healthier inventory in the chain. You wouldn't want inventories to be that tight. So things like that, that we can do for an indefinite period of time, but the longer you do it, the harder it gets to maintain.

Got it. Maybe switching a little more to the portfolio and capital allocation. First, on the Q1 call, you noted out the divestiture of the Fine Chemistry Services and Performance Catalyst businesses were being slowed due to COVID-19 travel restrictions. With restrictions now being lifted, can we expect that these divestitures to be completed this year? Is that a reasonable expectation?

It's not impossible, but we haven't said that it will be this year. We had originally said that we would expect them to be done this year. And we're still not at the point where we would say that. I mean, yes, restrictions are being lifted in a lot of places, but we still have very tight protocols in place at a lot of our sites. Even if work from home, for example, has been lifted, there's still a lot of protocols about who can be at site and maintaining appropriate distancing and hygiene practices at site. So while it's possible, one or both of them may be completed by the end of the year, we wouldn't want to guarantee that because we do still have a lot of protocols in place to ensure the safety of the operations.

Got it. Switching to capital allocation. Obviously, you have large CapEx needs next few years. But can you discuss your priorities? And really, how important is the dividend if things get tight and you still want to progress in your lithium expansion plans?

Right. So there's 3 primary focuses right now, which is going to be to maintain the investment-grade rating and to maintain the dividend and to keep a watch on those growth projects, which obviously, as we talked about, they've been slowed, but there's still a higher priority for us. We think that if the situation becomes worse in terms of the economic environment or -- however this COVID situation plays out, what we would potentially see is that maybe you don't need -- maybe it's not a year out for the growth projects. So you can push those harder, push them further out, push them harder than we had initially done. And you'd still be okay. You wouldn't want to do it because it's not very efficient. It makes them more costly. But you could potentially do that and you would still be able to meet your customer demand. And then that leaves you with the last 2, which are going to be the investment grade and the dividend. It is really a tough call to say which of those 2 would be the highest priority in an absolute worst-case scenario. We're not anticipating that we'd be in a position where we'd have to choose one of those two. But if we did, that would obviously be something that would have to involve a lot of discussion at the Board level.

Got it. There is a new CEO at Albemarle after a long tenure for Luke. Luke got a lot of questions around the portfolio what you can say is splitting up the portfolio from bromine and catalysts and lithium. So a couple of questions there. First, what's changed with the change in CEO? And what do you think the view is of the current team about potentially splitting the portfolio? And does lithium need to be cash self-sufficient for that to even be considered going forward?

Yes. So -- yes, so we do have a new CEO, Kent Masters, and he has been on the Albemarle Board since 2015. He joined Albemarle with the Rockwood acquisition, and he's also been the lead director on the Albemarle Board since 2018. So he was -- he worked very closely with Luke. He was instrumental in a lot of the long-term strategy that Albemarle has in place today. So we -- generally speaking, we would not anticipate a lot of changes to the long-term strategy for Albemarle. Now obviously, there's 2 things that are different. One is that we're in a very different environment. So in terms of the execution of that strategy, it's very different. Obviously coming in to this role, he's been very focused on managing the company through this current environment with COVID-19. So that's been the first priority. And then secondly, Kent by background is a chemical engineer. He's much more of an operator. He has a lot of experience with large capital projects. So during his tenure on the Board, he's been very focused on operational excellence. And I think that's something you'll continue to see in his role as the CEO. Both internally and externally, I think there's going to be a lot more about that at Albemarle. So those are sort of more big picture changes that we're looking at with the new management -- or not new management team, but new CEO in place. In terms of the portfolio, I think it's very similar, and -- he is a believer in the strategy that we're going to make sure that we can optionalize those assets as needed. We're going to optimize the cash flow from those assets, reinvest them into the lithium growth. At this point, he likes the portfolio that he sees, and he does not feel like lithium isn't still mature enough to stand on its own, which is very similar to what I think you would have heard from Luke in the past. But obviously, things change and the situation will evolve. And Albemarle will continue to look at the portfolio and what makes sense for the company.

Very good. And when will lithium do you think become cash self-sufficient?

Well, it's a great question. I mean, I guess, really what you're alluding to is at the Investor Day back in late 2019, the company had said that we would expect to be free cash flow positive in 2021.

Right.

And now that's become a lot less clear. Because on the one hand, we have a lot of cash savings. We have a lot of cost efficiency improvements. But it's not clear what the outside world is going to look like and the demand profile will look like. And it's not clear what the timing of that capital spend will be, how far out that will be pushed. So I don't think that at this point, we can give a time point of this is the date when we'd be free cash flow positive, aka lithium would be standing on its own.

Understood. I know it's premature. But -- and last question, just on the cash flow here. What are you expecting from a working capital release of cash in 2020?

Yes. Sure. So we haven't given like a dollar figure on the working capital. But what we have said is that, generally speaking, working capital tends to run at about 25% of our revenue. So if revenue comes down, you would expect to see a working capital release in that order of magnitude. And in addition to that, as we talked about earlier, managing that working capital, actively managing that working capital is an important part of the short-term cost savings tactics. So we might be able to get a little bit more release than you would see just sort of naturally from that.

Got it. A little bit time. I just want to touch on the other segments, bromine and catalysts. How do you view the bromine business in terms of longer-term growth? Maybe first, with respect to the oilfield chemicals portion of the business is not as large, but still clearly sensitive to oil price swings. How do you see that portion of the business performing?

Yes. You want to take that?

Sure. Yes. So for 2020, Dave, we haven't seen an impact on that at this point. The clear completion fluids that we sell into the oilfield are used at the tail end of the process for offshore drilling. And so any projects that they are in progress on, they will continue to finish out. So I wouldn't expect to see much of an impact on oilfield for 2020. There could be -- if oil prices continue to be at this level, we could see something as we go into 2021. But keep in mind, for Albemarle, that's about 10% of the bromine portfolio is going into oilfield today. From a longer-term perspective, on bromine, we still continue to see that total portfolio as really a GDP driven type of business. So it's going to the cycle a bit with consumer demand. And really, that's going to be the main focus for that. It will be maybe a couple of percent in 1 year, maybe it's flat in another year. But we don't see a major growth tick up at this point for bromine as we look forward.

And Sharon, how do you view supply-demand fundamentals in bromine? And what's happened with bromine production in China?

Well, so bromine, kind of -- and that's one difference between this kind of downturn and the downturn we saw in 2009 that bromine supply is fairly balanced right now. We do see -- expect a little bit more volume coming on in availability in the second half of this year. A little bit of that would be from China. So we are seeing some bromine producers return once they have implemented proper environmental protections, although a lot of those producers will not be able to return into the market, and the ones that do return have a higher cost profile. But we're also seeing a little bit of additional volume coming in from other suppliers, including ourselves, including India and including even the other major producers. So not major tranches of capacity, but just some incremental that could be coming in, in the second half of the year.

And you mentioned perhaps some pricing pressure in bromine in the back half of the year. Where is it coming from? And would that persist into '21, do you think?

It's partially from customers who are just like we all are really working to control our costs. So there's some pressure from customers just looking at -- the procurement team really doing their job to help on cost. The other is a little bit more availability for some of the product lines that could have some implications on pricing for us as we head in that second half.

Very good. And maybe just quickly on catalysts, really, first on HPCs. Are you expecting some volumes to shift into '21 from '20 due to delays you're seeing here?

We are hearing customers talking about shifting their turnaround schedules from 2020 into 2021. And so yes, there is a probability that we could see some downside for us on HPC in the second half of this year as things get pushed out.

And on the FCC side, how quickly should demand come back as miles driven increase here?

FCC has a pretty short response time. So when things go down, we see that very quickly within a matter of a couple of weeks and -- the same when things return. We are seeing some positive signs out there right now with miles driven increasing slightly, some of the refineries are starting to increase their production rates. However, it's still significantly below the pre-COVID levels, but we aren't beginning to see that uptick. And that should follow through on the FCC side of the business, fairly proportionately.

And just on FCC pricing. How is FCC pricing in 2020? And what's the potential for some FCC price increases going forward?

With the crack spreads where they are right now and refineries being running less than full, we'd see more challenges in those kind of pricing as you look out in 2020 than we would have thought at the very beginning of the year.

Understood. So with that, I think our time is up. Very complete. Meredith and Sharon, thank you very much for your time. And thank you all for dialing. Have a great day.

Thank you.

Thank you.