Albemarle Corporation (ALB) Earnings Call Transcript & Summary

Hey, good morning, everyone. I think we're live here. Very happy to have Albemarle here. We have Raphael Crawford, who's the President of the Catalyst business; and then Sharon McGee, who's the IR and then also, business development. I'm going to turn it over to the Albemarle team for some opening comments, and then we'll jump in with some Q&A. Thanks all for joining us today.

Okay. Thanks for joining. My name is Raphael Crawford, I'm the leader of the Albemarle Catalyst business. It's an honor and a privilege to be here today to present to you. I'm not going to go through our forward-looking statements slide. I don't know, Sharon, if you want to take us through that, but for reference, that's here. So let me kick off with what the Albemarle business is. So hopefully, today give you an overview of the Albemarle businesses -- we have 3 businesses within our portfolio, what our strategy is and a little deeper dive on the Catalyst business, which is the business that I lead. Happy, when we get to the end, to answer questions as it relates to Catalyst. Sharon McGee, who some of you may know, also is on the phone on video. She can help me if we get into questions beyond Catalyst. But hopefully, we can answer whatever questions you have during the session and beyond. Albemarle has a long history. Albemarle is a company that has an over 100-year history, all the way back to the Albemarle Paper Company, then to [indiscernible] to what we have today. And it's a portfolio that's evolved over time. Today, we have 3 businesses. We have a Lithium business, and we'll get to a little bit on the priorities around Lithium. Catalyst business, which is what I run, which is a mixture of refining catalysts and polyolefin catalyst, and a Bromine business. Combined, in 2019, these businesses ended with $3.2 billion in sales, roughly $1 billion in EBITDA. All are strong cash flow generators for the company. Next slide, please, Sharon. So let me give you an overview of our strategy at a high level. The important piece to recognize is that all 3 pieces of the portfolio are all critical to the delivery on the strategy. The first prong of the strategy is our growth strategy. This is around investment to grow our number one leading position in lithium. The Lithium business has the strongest -- our resource position and is deploying capital to have best-in-class conversion capability as well. So we're in a leading position. We want to grow that position in alignment with the major trends, supporting electrification of vehicles, grid storage and beyond. So that's the core growth platform for the business. In order to do that, prong number two is the maximization of our cash flow as it comes from the Bromine and Catalyst businesses. These are both strong businesses. They're growing businesses, and they have -- they kick off high free cash flow. And we intend to invest in those businesses on high-return projects to make sure that they continue to deliver strong growing cash flow in the future. The fourth prong on our strategy is about the portfolio. So certainly, on a continual basis, as a leadership team and with our Board, we're looking at what are the options for the portfolio, what fits, what would be a good addition. It's all part of the strategic process we go through as a company. And we've made moves in the past with the sale of the Chemetall Surface Treatment business. We're currently in process on divesting the PCS and the FCS business. All of that is part of our continual review of what is a strategic fit, what could be something that we bring into the company to bolster our strengths. And lastly, we're certainly investing. So we are investing in -- principally in the growth of our Lithium business, but we're doing that in a disciplined way. So we have a disciplined process to look at our investments, to maximize on the cash flow from those investments. And through all that, we do want to reiterate that we do -- we are committed to maintaining investment-grade. And we do continue to support our dividend. We are a member of the dividend aristocrats, and we intend to continue to support the dividend going forward. So let me give you the -- a snapshot of the Catalyst business and what that is. So the Catalyst business is a -- and just to be clear, what you're going to be -- what you see in the trailing 12-month financials is the whole business, including PCS. The comments I'm going to make are largely around the refining Catalyst business, which is after we make our divestiture of PCS, that will be the business that remains within our portfolio. The refining catalyst business is about high-performance technologies for refiners such that they can make clean fuels and maximize on the yields of the products that they want to make, given market conditions and emerging trends. It's a strong cash flow generator for the business. It's well-known and it looks to be like fully transparent, that 2020 is a challenging year for refiners and hence, catalyst producers. That being said, it's still a free cash flow-positive, EBITDA-positive business. So it was very resilient even when you're in an acute situation caused by a pandemic, it's still able to generate strong free cash flow. We do that through the technology we have, the relationships we have, in the way that we work with our customers to maximize on the value of their outputs from the refineries. Let me talk a little bit about where catalysts are used in the production of fuels. From a refinery...

Sorry, Raphael. Maybe, Sharon, if you can click on display settings, I think that you can change it to make a full screen on the presentation there. Yes, there we go.

There we go.

[indiscernible] guys.

Thanks, Ben. So let's -- if we step back, worldwide, there are 600 FCC units and 3,000 hydroprocessing units. FCC units are used within a refinery to determine the final product slate. So they're there to decide whether you're going to make heavies, lights, gasoline, diesel. It's sort of the -- it's the dial that one can use within a refinery to determine that product slate. Hydroprocessing units are used in a refinery to either clean up a intermediate stream, so something heading to another part of a refinery, or to clean up a final product like gasoline, diesel, jet fuel before it leaves the refinery and heads to the merchant market. Albemarle is present in 2/3 of the refineries worldwide. We have a leading position in FCC, we have a leading position in hydroprocessing. We work through -- around the world with refiners to enable them to achieve their profitability goals through the use of these technologies. So stepping back a little bit at the key trends that impact our business. Starting on the left, the trend -- the forward-looking trends on EVs are really what drives our growth outlook for lithium. So the 2020 has been a challenge with COVID. So there's been -- there was a dip earlier in the year. But if you look at monthly EV sales, September was 90% higher year-over-year, which is a dramatic jump and certainly leading into the next 2 years as being growth years for EV sales. Auto production is also starting to recover and looks like it will rebound in 2021. In bromine, the bromine molecule is used in a wide array of applications. The largest application is flame retardants, but also in construction applications for polyurethane foam insulation, for oil drilling and making tires. So it's very much tied to GDP and consumer confidence, all of which are seeing a rebound. The bromine business, given its diversity of its businesses and locations, it's been very resilient through the pandemic and we'll look to strengthen going forward. On the Catalyst business. The Catalyst business is very sensitive to a few factors. And this is a question that we often get and I'd want to address that with you because I think it's relevant. There's a few things that play into the success of the Catalyst business, but fundamentally, it's about the margins generated by the refining industry. That is tied to a few metrics. One of them would be utilization. So utilization of refineries is somewhere in the mid-70s right now, it likes to be in the -- above the mid-80s for sort of optimal profitability, 80s and 90s. So it's a challenging time for refiners. That is affected by how much capacity there is. There's some new capacity coming online as well as consumption, with miles driven being impacted from state homeowners, that's had a negative impact on refining utilization. Oil prices also play into this, but mostly when it relates to integrated refiners, that meaning who has an upstream and a downstream component. During periods of low oil prices, it puts profitability constraints on integrated refiners, which leaves them to want to defer capital, which can also impact catalyst producers. That being said, the trends underlying the catalyst industry are still favorable. It may take a little bit of time to recover from a low point that's pandemic-induced, but if you think about overall trends globally on growing middle class in Southeast Asia, greater chemicals output from refineries, the need for clean fuels is increasing, not decreasing. All of that plays into a growing demand for Catalyst over time, even if you're going to see a bump that's related to the pandemic. So the Catalyst strategy is really built around strengthening the business to -- sorry, expand its potential beyond dependency on our traditional markets in our catalyst -- this is our catalyst strategy for Albemarle. And I'll tell you that if I step back, this strategy is exactly the same as what we presented back when we did our Investor Day, I can't remember it was that, November, December last year, but we just did one. And if you look at this, it's the same. And we've really thought long and hard about this in the context of like what did the pandemic mean to us? And does that mean we should change our strategy? And if nothing else, I think we have to just accelerate our strategy. It's not about like the strategy being -- needing to have wholesale change. But the things that we need to do have to go faster. So in our business, the key strengths of our business are about value creation for refiners and some of the strengths we have in our partnerships as well as chemicals output from refineries. That is much more important today than I would say it was even a year ago, as the world looks at perhaps a -- the next couple of years as being a more challenging environment for refiners. We need to differentiate ourselves even further on technology that is maybe counter to the trend on transportation fuel. So meaning max olefins is about making more chemicals from a refinery versus fuel. So the market for chemicals is still increasing, and the demand for plastics will still continue to increase even if you see bumps in the fuels market. Second leg of our strategy is arout presence in growth markets. So the growth markets being Southeast Asia, Middle East. Our presence there has become even more important. A lot of the accelerating shift towards electric vehicles, which again is positive overall for Albemarle. But that shift towards electric vehicles, that shift towards higher fuel efficiency, a lot of that is happening in western economies. And East of Suez is where all the growth is occurring in terms of new refineries and new capacity. So being present there, we have a direct selling channel, which is unique amongst our competitors or we have our own people in-country around the world. We don't use third parties and agents. That is a model that will benefit us as we grow in emerging geographies. And then lastly, it's about talent on our overall operating performance to maintain our margin profile. Let me just dig a little bit deeper, just briefly on crude to chemicals. Again, it's a question that we receive often is like, what does that mean? Where is that headed? Crude to chemicals is really a term used for maximum chemicals output from a refinery. Today, somewhere between, let's say 10% to 20% of a traditional refinery is chemicals. The future that the industry is looking at for -- particularly for new build-outs is something that's 40% to 60% chemicals output. The reason is that as we reach peak transportation fuel demand, it's an alternate use for refined products for crude oil that has more value going forward. There's much more margin in the chemicals output than there is in the fuel output. And going forward, that's a more sustainable approach. We have the FCC light technologies that will fit into that portfolio. It's not done alone. So we work with partners on developing the advanced technologies to like further improve our output. But we certainly have the platform to enable us to participate in that market going forward. Also, the reach of our business benefits us as that trend to crude to chemicals manifests. A lot of that trend is happening, as I said, East of Suez, it's in Middle East, Southeast Asia. We have tremendous reach into areas. We have local sales offices in Vietnam, Thailand, Singapore, Malaysia, Indonesia. We're there present on the ground with our own people, closest to the customer, that enables us to participate in the growth as it comes. Let me touch quickly on sustainability of our catalyst business. Sustainability is an extremely important platform for Albemarle as a whole. It's fundamental to the products we produce as well as to the way we operate. So when we look at our business model, what the Albemarle Catalyst business is able to do is to make clean fuels and to maximizing the yield of oil. So it's to be able to get more out of a natural resource, the less waste and reduce sulfur, reduce contaminants from our fuel for a cleaner environment. We're very community-engaged. The Albemarle Foundation is something that's been with Albemarle for a long time -- supports our communities. I'm in Houston. Here in Houston, we do a lot with the communities in Houston around our sites, a lot of engagement and it's something of pride with our employees. Over 90% of our employees in the Houston area contribute personally to the foundation and/or donate time to the foundation to make it successful. On the top left, safety is always important. We have a tremendous safety record within Catalyst over a year without any lost time incidents in the Catalyst business. We strive for an inclusive diverse workforce. We just hired an [ IND ] VP for the company, the first time that we've had that role within Albemarle, and we feel really encouraged by the direction that we're going in for talent and an inclusive, diverse and equitable workforce. And lastly, on resource management. I do want to highlight that in Amsterdam, which is one of our large sites, we have a plan for dramatic greenhouse gas reduction. It's in alignment with the trends within Europe, it's something that we think is a model for how we can do things across our business. So with that, let me just wrap it up with reiterating. We have leading positions in Catalyst, Bromine and Lithium. The Catalyst business has great long-term prospects in terms of our ability to grow coming out of the COVID crisis. We certainly have the right technology, the right people, the right operations to be successful in the future. And we think that we're working on things that don't just generate value for our company, but also are contributing to a more sustainable world. And all of these businesses that we have are strong cash flow -- strong operating cash flow generators, to be clear. We certainly have a capital plan that enables us to continue to grow in lithium, and we support that with a strong balance sheet and cash generation. So Ben, thanks for having me on this call today.

Thank you very much. And thanks for the Catalyst details there. If it's okay, can we jump in a little bit on lithium, so I think that's always top of mind. Could you talk just maybe about the current supply/demand state and what you guys are seeing in pricing? I know that you had a strategy to have longer-term contracts. And so is that still the same strategy? And where are we with those contracts?

Yes. Thanks, Ben. So that is the strategy. It's been our strategy on Lithium for, I probably want to say like 4, 5 years, we've been working on long-term contracts as a point of creating stability. The long-term contracts give us -- create stability for us, for customers and also give us confidence in the investments that we make in expanded conversion capacity. We're in the midst of contract negotiations right now, there's sort of like an annual cycle to that to some extent. But most of the contracts are about 3 years in length. The contract negotiations happen now. Roughly 90% of our Lithium business is under long-term contracts and 10% goes off of the spot. And I'm talking about the battery-grade, sort of like the big volume business that we have, which is tied to the growth trends that we see. So we certainly feel like the long-term strategy approach is the right approach. It's not without some challenges. When prices are decreasing or increasing, it's part of a conversation with customers, as to how do you want to adjust those contracts, that everybody is treated fairly and partnering during good times and bad times. But overall, it's net positive for the company.

I guess, in your business in Catalyst, it's a pretty rational group of players there versus Lithium. And could you contrast your strategy to not expand as much as you can on lithium right now? You have some of the best resources out there, I think you guys would say. And so why not expand more rapidly and grow share at this time?

Within the lithium business or the...

Yes. Within lithium.

Well, I think like we're taking a measured approach. I mean, when we look at our capacity, we certainly have enough resource capacity within Lithium to support future growth. So between Kemerton in the solar, smaller asset in the United States, and then what we could be doing with Wodgina. We have the resource capacity and I think we're being mindful of our cash spend relative to the growth. So it's a tight rope, right? You could be expanding faster, but before you leave yourself out there more with a higher rate of spend relative to your cash generation. I think we've -- looking at the happy balance of -- there might be times that we get tighter than what we would otherwise be. But generally speaking, we feel like we've got the right balance between cash generation and growth. And I think we're mindful of that.