Albemarle Corporation (ALB) Earnings Call Transcript & Summary

Great. Thanks for joining us. My name is Arun Viswanathan. I'm the chemicals analyst here at RBC. And we're delighted to have the team from Albemarle here. We have Netha Johnson who runs the bromine business as well as contributes on IT and cost savings plans within the company. And we also have Meredith Bandy and Sharon McGee from Investor Relations. So what we're going to do is, Netha has some prepared remarks at the outset of the presentation here and then we'll go through the different segments in Albermarle. But why don't I go ahead and turn it over to you, Netha? You can just provide us an update here as well. Thanks.

Thank you, Arun. So -- and good afternoon to everyone on the call today. As most of you know, Albemarle is a global specialty chemicals company with market-leading positions in all 3 of our core businesses. Our bromine business is access to some of the world's best low-cost resources and is vertically integrated and diversified across our customers and markets. Our Catalysts business is positioned to benefit from tightening fuel quality specifications and growing prosperity in the developing world. And finally, our lithium business has access to some of the largest, highest concentration resources in the world. It's vertically integrated from resource to specialty products and offers our customers high quality, hence the secure supply of a wide range of products. At a high level, our Albermarle strategy has not changed since Investor Day last year. We will continue to grow and invest in our lithium business. And we will fund this growth with cash generated from our bromine and Catalysts business. We will also maintain a disciplined approach to capital allocation and actively manage our portfolio. And finally, we will do all of this with a sustainable approach as our foundation. The biggest difference today between our Investor Day 2019 is that the COVID-19 pandemic has really pushed out our lithium growth by 1-year and is really impacting cash generation from our other 2 businesses. So as a result, we are broadening and accelerating the integration of our operational discipline throughout the company. Specifically, we're focused on 3 things: manufacturing excellence, business excellence and capital projects excellence. The goal for Albemarle is really to drive continuous improvement across our organization and position Albemarle for future success. And with that background, I'll turn it over to Arun for questions and answers.

Yes, thanks for that intro. Netha, I really appreciate that. Maybe we can just start on what you just ended with there, which was some of the accelerated cost reductions. Could you just try to help us understand what the differences between some of the short-term initiatives and maybe some of the ones that are a little bit longer and how that translates into different metrics that we follow, whether it be free cash flow or EBITDA? Anything you can share on the cost savings plans would be great.

Absolutely. And as COVID has impacted our businesses, we immediately introduced some short-term savings. And what that is, typically restrictions on T&E, limited use of professional services and consultants and actively managing our working capital. And that gives us a run rate of about $25 million to $40 million a quarter. Now we can continue this as long as it's needed, but over time, this gets more and more difficult. So we've also implemented a sustainable cost-saving program. And this is more about the structure of our company and how we do business. And when we say sustainable, we really mean these costs should never come back into the organization. So we committed over 2 years ending in the year 2021 to have $100 million of sustainable cost-savings projects. And we're so far, we are ahead of schedule and should generate actually $50 million to $70 million of gross savings this year. So we've been able to move faster on that time line and our execution has been really swift in this project. So we do expect a run rate for over $100 million by the year-end 2021. And it's possible we could actually achieve above the $100 million total, but it's a little bit too early to tell right now. But these are very important because this has become the way we do business. And as we said, these are sustainable, meaning these costs, $100 million will not come back into the organization.

Helpful. Thanks for providing that detail. And then similarly, I guess, you noted some lower working capital, but you also did reduce CapEx in that $850 million, $950 million range. How do you look at capital, I guess, over the next couple of years? I know that it's evolving and definitely a little bit of uncertainty in the market. But maybe you can just remind us of how you guys are -- your priorities on capital allocation as well as maybe if there's anything you can help us on midterm CapEx and when that gets back to more normal levels from the $850 million to $950 million that you're looking at for '20?

No. Absolutely, Arun. As you mentioned, this capital forecast for this year is between $850 million to $950 million, and we've deferred about $150 million of capital out of this year. So if you look forward into 2021, our original CapEx was around $700 million. And if you add back in that deferred capital, we'll call it between $700 million and $900 million of capital for next year. And then once we get beyond 2021 and 2022, you will see a sustainable run rate, probably CapEx around the $500 million or so. So that's what we think is a sustainable run rate for the company. If you think about buybacks and dividend and deleveraging plans, our 3 highest priorities are: first, maintaining the dividend; keeping our investment-grade rating; and providing growth capital for our lithium business as well as our other 2 businesses. So we do have buyback authorization, but given the current free cash flow, and debt levels and their CapEx budget, we're probably, unlikely, to do a CapEx -- excuse me, stock buyback. As the years go on, we do expect our EBITDA to increase, and that will give us some leverage any -- excuse me, it give us some more flexibility in our capital structure. Did I miss anything Meredith?

No. I don't think so. I think that covers it.

Okay. Then maybe we can just move on into bromine then. Can you talk a little bit about what you're seeing in the market there? I know that there was some volatility, just given consumer electronic cycles. And it seemed like maybe there was -- you were slated for some pickup. But what's going on in bromine these days? Are you guys potentially more or less kind of encouraged post COVID here?

Yes. For us, our bromine business is generally a GDP-driven type business. And if you look at the comparison between the last downturn in 2008-2009 where the business went down approximately 30%, we fared significantly better during this downturn -- with down between around 15%. So the difference really is, some of our markets are tougher and like automotive, but some of our markets are doing well, like home, construction markets are doing very well. And then our disinfectant market is really doing well. And that's actually up 77% this year. So with our diversity, we're able to shift our businesses between that -- those markets and provide the product to the markets that give us the greatest value. So in terms of visibility going forward, our short-term visibility is really kind of limited. We can see out very clearly to around 30 days, kind of more murky around 60 and not much beyond that. But we feel pretty good about where we're headed. We think our Q3 guidance is exactly the same as our Q2 results. We feel good about that, and we think we'll see some stronger trends going forward as the markets start to recover. So we anticipate us still being a GDP, GDP-plus type business with EBITDA ranges in the high 20s to the low 30s.

Okay. Great. Appreciate the details there. And then similarly if we can just also talk about Catalysts for a brief period here. If you could just differentiate what you're seeing on the FCC and the HPC side? I know that we do have low miles driven maybe impacting HPC and refinery turnaround schedules. So yes -- so could you just elaborate on what you're seeing in both the FCC and the HPC markets?

Yes. I'll take that one. So as you know, we're in the Catalysts division is really [Audio Gap] miles driven, it's about general transportation fuel demand. And so we saw a pretty immediate reduction in FCC demand going into the COVID-19 pandemic, with the stay-at-home orders and a lot of the travel restrictions that we're seeing. And that's now starting to rebound. So I'm sure that many of you are following the oil markets closely, and you're seeing the change in the miles driven, from the refinery, capacity utilization taking up, that sort of thing. So very positive, but still below where we would expect to be at this time of the year. And of course, we had a pretty dismal summer season for the oil market. So we're recovering in FCC. We probably wouldn't expect that to get back to 2019 levels. And so maybe later next year, you see a lots of different forecasts of maybe its late next year or maybe it's 2022 and so on and so forth. But FCC is recovering. And then on the other hand, we have HPC, the refinery turnarounds. And so what we had expected to see going into this oil price shock was that a couple of quarters in, you're starting to see the refineries pushing back those turnarounds. And so -- and that's exactly what we're seeing now. So for the second half, we're seeing some of those turnarounds get pushed into 2021, late in 2022. It's very typical for this type of environment where the refineries are running at a lower capacity utilization, so they can push those turnarounds out, and it helps them save some cash or some cash in the near term. So those 2 things are currently sort of offsetting each other. The sequential being sort of in line with last quarter. We said we would be down 50% to 60% year-over-year, which is similar to what we saw in the second quarter.

Okay. That's helpful. Thanks, Meredith. And then I guess we could switch over to lithium. Since I know that it's a large part of the company, obviously, and we haven't spoken about it yet. So I guess within lithium, I guess, is it a fair characterization to say that price that you're going to be finding a bottom here in August? Just kind of maybe could you elaborate on what you're seeing from inventory standpoint and maybe some demand trends? Let's just start -- maybe we can start with demand inventories and maybe some your outlook on pricing.

Go ahead, Meredith.

Sure. Sorry. Thank you. Yes. So the phrase that we've been using for lithium is fragilely optimistic. So we are seeing probably, some of the spot pricing you would see in China that's starting to stabilize, not picking up certainly, but stabilizing. So that's been slightly positive. And then also the EV sales that we're seeing out of China is starting to recover. So that's also a good thing. And of course, European EV sales has been pretty strong throughout. Surprisingly, I guess, strong, given what we have seen COVID-19, but that's really regulatory driven. So month-by-month, we're seeing a little bit better and better out of the EV side of the equation. But then that's a little bit delayed in terms of its impact on lithium. One, because just in a normal market environment, where we are in the supply chain, you'd expect to see whatever happens with the EVs, we sort of get hit with 1 to 2 quarters later that works its way back through the supply chain. And then also because we entered this year with slightly higher-than-expected inventories, it also sort of mutes the impact of the recovery in EV on the lithium market.

And could you elaborate on that inventory position? I mean we have so many different reports, but did inventories kind of get longer in the last couple of months, just given some of these COVID impacts? Or how should we think about the inventory position? And how long it will take to get back to kind of more normal levels?

Yes, sure. There are a lot of different sources and lot of general reports you hear in it. And it kind of depends on the material you're looking at as well. So what we've said is, we [Audio Gap] and that's probably about 3 months higher than normal, maybe 3 months is the regular inventory level and maybe 6 months or so, we came into the year. And then with ongoing impacts from COVID-19, we think that has extended somewhat, probably about 5 months above normal here. And again, this is in the refined products for both [Audio Gap].

Okay. That's very helpful. [Audio Gap]The different parts of the lithium market, you noted some recovery in EV, strong sales in Europe, but are you still seeing weakness in some of the other areas, whether it be specialties or your lithium or anything there to keep in mind?

Great. So yes, for our lithium business, as you know, Arun, is about 60% battery grade. And Battery-grade is really driven by EV, which has not been too badly impacted. I mean some of specialties is somewhat in the health care or Ag business where it's more countercyclical. But technical grade, we have seen some softness in demand due to just the general economic downturn. And we're continuing to see that. We don't -- we haven't given a specific time frame for when that might start to come off.

Okay. And so back on the battery side, then, what we are hearing, I guess is, it appears that there are some relatively positive reports coming out from some of the OEMs as far as continued investments on the EV side and potentially reopening their fleet with a greater concentration on EV. So I guess, what are you hearing from your customers? Have you been, I guess, hearing that as well? And just from an overall kind of OEM standpoint, would you guys feel encouraged by the demand environment? Or is it somewhat soft out there?

I guess we probably say we're cautiously optimistic on the demand environment. I mean, certainly, if you look at a traditional automotive OEM I mean, I see autos are down significantly year-over-year, whereas EVs are still growing, albeit much lower than we would have expected coming into the year, but there's still very good growth expected in the EV side. And then there's also been continuing regulations that are positive for EVs in Europe, certainly. But even in China and other parts of the world, just trying to see some regional impacts of regulation to help support that market. So yes, I definitely think we're also hearing this positive reports. It will remain to be seen how the customer actually shows up and what the customer behavior is and what the sales are. But month by month, the sales are looking better and better.

Okay. And then maybe I could ask a question or 2 on the contracts as well. I know last year, or maybe even earlier this year, there was some commentary around maybe altering the contract structure from a -- on a short-term perspective to give customers some concessions that would bring their prices closer to spot market prices. How should investors think about that as it impacts -- for 2020, you put out dollar guidance, but just curious on how people should think about that as you look forward and potentially renew some of those contracts? Is there -- is that just a 1-year adjustment? Or how should we think about those changes to the contracts?