Albemarle Corporation (ALB) Earnings Call Transcript & Summary

All right. Good afternoon, everybody, or morning, depending on where you are. I'm Bob Koort. I run the chemicals equity research effort here at Goldman Sachs. I'm joined today with Tom Glinski, who helps me cover our featured guests at the moment, which is the Albemarle company. We've got Kent Masters, who's the CEO. We've got Scott Tozier, CFO; and Meredith Bandy, VP of IR and Sustainability. And I think David Burke, the Director of IR as well. The format, as we've been doing most of the day is to have about a 30- or 35-minute Q&A session. Tom and I will be asking questions. Clients can certainly ask some themselves either through the webcast or e-mail us, and we will ask them on your behalf. And of course, we will prioritize our clients' questions. But before we get into the Q&A, I'm going to turn it over to Kent, who's going to have a few opening remarks. Kent?

Okay, Bob, thank you, and good morning or good afternoon, everyone, depending on where you are. So just a quick introduction to Albemarle. I don't know what the background that you have on us. So we're a global specialty chemical company with market-leading positions in 3 core businesses: lithium, bromine and catalysts. So we offer a broad range of reliable, high-quality products from geographically diverse conversion facilities to support customer demand and market growth. We have access to resources that are the largest and most concentrated in the world. Our focus is on driving low-cost operations, sustainable production and disciplined capital expansion that will provide strong returns. So this is an exciting time for Albemarle. Following our equity offering in the end of January, maybe early February, we are now on the front foot with capital to invest in a growth story. The market is there. The demand is there. We have a nice position in the market. Now we can accelerate growth to really keep up with that demand that's happening. Our strategy has not really changed from over the last few years, but our real -- our focus now is on execution. We believe that the strategy is laid out and the markets are growing and in good position, and we're really focused on execution. So first is about profitable growth. Our expansion plans are based on executing high-growth projects at progressively lower capital intensity. We're able to do that because of either the geographies we're in, the experience that we have or being able to do brownfield expansions on previously greenfield sites. The second is to maximize productivity. We have a very strong productivity program around operational discipline across the organization, and we're kind of streamlining our back offices so we can grow off that without adding increased cost as we go forward. The third is about investing with discipline. So we allocate capital to highest return opportunities. As I said before, we're trying to drive capital intensity down, which increases our returns to our projects. We continue to assess the portfolio for opportunities to create additional value. We've had a history of that, of selling businesses that we felt that they were not part of the portfolio. But at the moment, we've got those 3 core businesses just gone -- arranged -- signed a contract to sell our FCS business, which really gets us down to our 3 core businesses that I described, and we're happy with that portfolio at the moment. And then last but certainly not least, we're very focused on sustainability across the entire portfolio, really for 2 reasons around ESG investment and kind of the right thing to do from a manufacturing and a corporate standpoint, but because that's really part of our value proposition with our customers. We are enabling our customers' sustainability ambitions. So whether that's in catalyst for clean fuels or lithium for mobility around electric vehicles, it's a key part of our value proposition. And therefore, we really rolled it into our strategy. So we're doing sustainability because it's the right thing to do, but it's a key part of our value proposition with our customers. So Bob, I think that's the intro I wanted to make, and then we can go to Q&A.

Perfect. I recognize that half your portfolio is non-lithium. But as you can appreciate, we've got a very long list of clients interested in the lithium aspects, particularly. So I think we're going to start there. And Kent, I know you're on the Board before you became the CEO, and you lived through the last boom and then what was a bust of sorts. And now, we're ascending back on a boom in lithium. So maybe you can just characterize what's different about the market today than maybe the last upcycle in '17 and '18 that was shorter lived?

Yes. I would say it's probably the maturity of the market, right? So we -- it's a much big -- it was forming at the time. It had momentum, and it really took off. But demand for electric vehicles, in particular, is -- that's kind of -- I can't say it's maturing because it's kind of big cycle. So we're still early in those days, but it's a much bigger market than it was before. And that's really driving the industry. I think before, we -- maybe we got a little ahead of it. It slowed down a little, and the industry had excess capacity. I think now, there's a big enough base that it changes that dynamic, and I think the industry has to work hard to keep up with it.

It seems to us, you've got an unequaled quality to your business in terms of your upstream mining. Obviously, it's low cost and diversified. And then downstream chemicals -- specialty chemicals, similarly diversified, geographically dispersed. As you think about growing the enterprise, you've done it both organically and through acquisition, can you talk about what drives those build versus buy decisions?

Yes. I think it -- I mean, really, we're well positioned from a resource standpoint, and we do spend a lot of time talking about diversification, making sure we're in the right geographies, and we're not some geopolitical risk, but also just the type of resource that it is. But we're in a good position from a resource standpoint. So that's probably -- we're good to the back end of the decade on resources. And so now we're focused on building out that conversion capacity. And so make versus buy on conversion, frankly, that -- we could -- if we would be able to accelerate the growth if we could buy something that we really wanted in the right location. So I think it really is a make versus buy, but you got to find the right asset. So it will probably buy us 2 years at least, maybe 3, depending on where you are and what kind of the quality of the asset. So -- and we would look at that from a conversion standpoint. And I guess we use the same profile on resources. But on a resource standpoint, as I said, we're kind of good to the back end of the decade. We're still looking for additional resource. Now we've not really looked so hard the last few years, but now we're starting to bring that resource or that effort back to the front because it will take us a while to get it if we have to develop it ourselves or we can buy one. So again, it's just -- it's a make versus buy. I think the difference between resources and conversion assets is there's a timing issue. If we can bring on more conversion assets today, we can grow faster. I mean, we are sold out. And as we bring on La Negra and Kemerton, we'll have growth for us in the next couple of years, but we need to run after that. And if I could do an acquisition on a conversion asset today, getting up to speed quickly, I can add growth in the -- I could add additional growth next year.

Kent, I would also add that an important part of the strategy is to remain to the left side of the cost curve. Like many materials businesses, it's going to go through cycles. We don't know how all those play out. But for us to be on the left-hand side of the cost curve means that Albemarle can win in any of those cycles. And so with both resource, whether you buy it or develop it yourself, that's a key part of what we do. And a lot of our operational excellence focus now is making sure our conversion facilities in our factories are driving that cost productivity as well and becoming world class from a cost perspective.

And maybe detailing that, Scott, the industry is relatively young. The expansion efforts by the industry have been riddled with challenges in terms of meeting spec, meeting time schedules, that sort of thing. Albemarle has had its own challenges in a few places. Can you give us some confidence about the schedule you've got now for Kemerton and La Negra, maybe give us an update on those projects? What markets are they serving? How important is that, and some more specific timing on when we start to see that flow into the income statement?

Sure. So La Negra III and IV, we'll start with that because that comes on first, is the doubling of capacity in Chile. So it will add 40,000 metric tons of lithium carbonate capacity. It's all battery-grade oriented. So it's not serving the technical grade or specialties market. Expectation is that we'll actually go into the commissioning process and the qualification process in the middle of the year, so coming up here shortly. That process typically takes around 6 months before you're able to qualify that product with your customers. And then we'll start to have revenue in the first quarter of 2022. Typically, it's going to take -- at least we -- how we think about it is the most optimistic view is it can ramp to full capacity over a 2-year period, so a 24-month cycle there. And so we'll get roughly half of that volume in 2022. Kemerton, it's about 6 months behind La Negra III and IV. So Kemerton I and II will add 50,000 tons of lithium hydroxide capacity. That is part of the MARBL joint venture. So 60% of that will accrue to Albemarle's benefit. Similarly, it goes through that 6 -- roughly 6-month commissioning and qualification period before you start to ramp up. So it won't be until the middle of 2022 that we'll start to see commercial volumes there. But I think it's -- we're basically sold -- we're sold out in 2021 from a volume perspective. So any upside from a volume perspective is relatively limited unless we have the ability to get -- squeeze a little bit more out of the assets. We announced last week that we're going to do some tolling, some lithium carbonate to help there as well since the economics are there. But volumetrically, going forward, we'll see nice growth in 2022 and 2023 from those projects.

And then, obviously, your question about confidence, about we can bring these on. So -- and La Negra is very -- we're close on La Negra. Kemerton is a little bit behind, as Scott had said. But the capability we've built from executing on these plants is -- I mean, the capability is tremendous now compared to where we were 3, 4 years ago. And we built that methodically. It's taken us some time. We've stumbled a little, as you said. But we've really built very strong execution capabilities in the organization. And not only just executing and building plants, but doing it in [ parkland ] places. So we've got it in Chile. We've done it now in Western Australia, and we're learning through that. So that, to me, gives us confidence that this next wave of projects that we take on, that we really have capability that's unmatched in the industry to do that in these unusual places.

Yes. It's interesting. You have gotten the ends of the earth and executed on projects. We see a lot of junior guys trying to develop stuff more locally in North America where, of course, you guys produced some a little bit out in Nevada, used to produce in North Carolina, but way back when, found it was way cheaper to do it in Chile. So I'm curious, if you had endless funds, would you be developing those North American assets more aggressively or redeveloping them? Is there going to be a drive to local sourcing and maybe reducing the dependence on China as a supply source in the industry? What are your thoughts about that?

We spent a lot of time making sure we have that diverse base for both manufacturing and for resources, and there will be a push for localization. And -- but as Scott mentioned, we pay attention to that cost curve, and we try and stay on the left side of that cost curve. But there will be -- there's a push from the market, primarily driven by the OEMs, to localize that supply chain, but you need a decent resource to do that. So you'll see us -- we will invest in North America. We've got, as you said, the Kings Mountain facility we have here, and we have the resource there that we can expand. It's going to be a little different than doing it in Chile or Western Australia. The -- North America -- at least the eastern part of North America's not used to mine operations. But -- so that's -- we're expecting that to take us some time to get it permitted and get it up and operating, but we -- that's in the back half of our next wave, our Wave IV plans. So we expect to do that. And then maybe there are other resources in North America. Then the other option we have is we're thinking about using carbonate, bringing it into either Europe or North America, converting it to hydroxide locally to kind of semi localize the supply chain, if you will. We think that's probably part of the strategy, but we also want to develop the resource locally if we can find a resource that we believe is competitive. Kings Mountain is one of those, depending on the cost to execute projects in an environment like the eastern part of the United States.

And Kent, I'd also add that Albemarle is the only company that has an operating facility or mine in North America in Silver Peak, Nevada. And late last year, we announced that we would be doubling the capacity of that, small numbers, kind of that 4,000-ton level, but at least that's a first step in terms of additional capacity in North America. .

I wanted to ask briefly about Wodgina. You guys made that acquisition a few years ago, and I guess it was on the cusp of a market downturn. Some thought maybe at the time, it was to help make sure there was a disciplined entry of spodumene into the market. And of course, Wodgina has not started up commercial production. So wondering if you can just give us a post audit of your view on that deal, timing, price paid. And then secondly, when you might actually start to crank that mine up?

Yes. So I'll talk about the strategic part, the quality of the assets, and Scott can talk about the post-audit aspect of it. But I think you -- it was a good investment. It's a great resource. And we think it's well positioned, we just don't actually need it at the moment. So from a cost saving standpoint, we've shut it down. We operate from Talison. That's all we -- we don't need the additional resource at the moment. And we're not interested and running it just to sell spodumene into the market. We want to -- basically, we're protecting our reserves until we can build those conversion assets and then take advantage of it. So I would say when we -- so we don't need it for Kemerton I and II, but when we do our next plant, so either an acquisition in China or a greenfield that we do in China, I would expect us to start Wodgina associated with that asset, depending on -- we're looking at assets from an acquisition perspective, but you got to have a meeting of a minds, you got to find an asset you want and then have a deal with the buyer. It is a -- Wodgina's a great asset. I'm glad we have it. Again, as I said before, it puts us out toward the end of the decade from a resource standpoint. And it's a great fit with the expansion -- from a hard rock standpoint, the expansion we have. But we're not interested in selling spodumene. We want to convert that into finished product, either carbonate or hydroxide -- or primarily hydroxide because it's [indiscernible].

I would also add just we partnered with Mineral Resources, a company that is well experienced in Australia in hard rock mining, not just lithium, but iron ore as well. So it's a skill set that we did not have in the company. I think having that partnership helps us understand how to best operate our mining assets. Just a post audit, Bob, I would say, timing is everything. And if you could have picked the timing to do it, we probably wouldn't have done it in 2019, knowing what was going to happen in 2020, obviously. But that was the timing at MRL that set for their transaction. I think, ultimately, we're going to find that it's going to be a very valuable asset for us, particularly given the focus on hydroxide in the marketplace as the European and North American markets continue to push on battery technology and needing that high-performance hydroxide. So...

Great. A question on your pricing approach. It seems like it's evolved, and the industry has been pretty dynamic. Prior to the last peak, there was a lot of desire, it seems like a 2-way desire, yourselves and your customers, to lock in long-term contracts and had set prices. And then that sort of went to the wayside, and I'm sure some of the customers saw the price implosion and didn't want to have to pay higher. But now we're going back up again. And so talk to us about how your approach and how the market approach has changed towards pricing, and what we should expect in terms of your ability to realize this uplift in pricing that's happened in the short-term market recently.

Yes. So yes, I think the key term in there is long-term contract, right? So things go up. They come back down, but it's a long-term contract. But it is evolving from our perspective, and I think the market is probably evolving a little bit as well. So what we hear from our customers -- and we're dealing with kind of -- we're trying to deal with strategic long-term players, but what we're hearing more and more of is they want supply. They want to lock it up, they want guaranteed supply. And historically, we gave volume commitments and then locked in the price but not realizing where the market was going to go. So we're adjusting that -- where we still have the long-term contract, but the prices can be more variable with the market, moving with the market, usually dampen to some degree through an algorithm or a formula, probably not justify the term algorithm. But there's a formula that would move with the market. We don't know exactly what benchmark we'll use, but we're kind of agreeing with customers now that their pricing will move with the market and to be dampened against that. And then depending on their view of security of supply and long term, depends on how much it might move and what those prices are. So it's still -- we're negotiating that. We're usually getting a floor and a ceiling on that, cap on it with a floor, but there's a pretty wide range. And we would anticipate -- we've been talking with our customers about this shift for probably a year now at least, but we didn't want to negotiate this when the market was in the bottom. So we kind of held off. We extended those price reductions we gave off of those long-term contracts to either the end of this year or the middle of this year for most of our long-term customers. So I think we'll be able to move a little bit in the middle of the year. And then after the end of the year, we'll move more to these new type contracts, and those will fluctuate with the market but dampen from an actual market.

Guys, it's Tom Glinski from the team here. So I guess moving more towards some of the market dynamics, one thing that's been commonly discussed over time is just incentive pricing. And the numbers thrown out is usually $10 to $12 per kilo. And we're knocking on the door of that now just because of the tightening we've seen in China, now spreading across the globe. So I guess just from here, how are you thinking about the risk of a growing list of junior producers announcing new projects and bringing capacity to market over the next 3, 5, 7 years?

Do you want to take that? So Tom, I would say that the market growth continues to accelerate. And so we actually need more competitors in this space in order to serve the battery demand that's out there. Our Wave III growth strategy will double our capacity in a period of 5 years. That's only enough for us to maintain our market share. And so similar story as you look at Ganfeng and you look at SQM and their expansion plans, it's going to be difficult for the major players to keep up if this growth story continues the way that we're projecting. So ultimately, I think what you'll see is that some of the junior players won't have the balance sheet to do what they need. They'll have to consolidate. I think we saw one of the first moves toward that in order to give themselves the financial flexibility to grow. But underlying all this is that tremendous growth in electric vehicles and the battery demand that's there. So...

Got it. And you touched on this a bit there. But just considering the tightening we've seen recently, and I'm assuming a decent amount of junior producers that weren't economic, call it, 6 months ago, will now be making money, say, in the back half of 2021. So do you think there still is a meaningful wave of consolidation to come as we move through the upcycle? Or do you think that may be behind us now, and that opportunity might have been missed during the period of the depressed lithium prices?

No. I do think that there'll be further consolidation, ultimately. Now the form of that's going to be interesting to watch because it's not exactly clear. So is that going to be the miners coming together? Is that going to be backward integration by the majors? You saw a recent announcement by Ganfeng on Bacanora in Mexico. Is that going to be the battery manufacturers trying to lock up resource by going that direction? So I think it's a question, but I think -- it's a question of how it happens, but I think, ultimately, it's going to be difficult for a small player to keep up with the demands of the increasing technology, the changes in technology that are coming on their own, right? So it's -- they're going to need to have a stronger presence in order to succeed. And I think the customers are going to expect that because they're looking for the security of supply. Difficult if you have a small mine to guarantee that. Either it's going to be a short mine life, it's going to be too small to be able to play a significant role at a customer.

Yes. There are different dynamics playing, depending on the strategy and the business, you're integrated or not, right? So you can play in the resource side, and that has its own dynamics. If you're in conversion, depending on spodumene prices. And those are probably consolidation opportunities over time, but they can carve out a business. But I don't know how they survive long term, and you would need a big balance sheet in order to do that.

Got it. And sticking on the capacity side, we've seen a number of projects be announced in areas like Europe -- on the raw material side, specifically, Europe. And we've even seen 1 or 2 in Africa, where I'd say the resource base seems relatively unproven. Just how are you thinking about the opportunity from a raw material standpoint in regions that haven't really been pioneered from a lithium standpoint?

Yes. So we spent a lot of time looking at where the resources are, and we're -- we -- I don't know whether we're lucky, we were good, but we pretty much tried to stay in a big concentrated resource. So even Kings Mountain here in North America, that's one of the better available resources in the world from a concentration and from a scale perspective. So we -- and we've looked at some of those additional resources, but we've been hesitant to take on a questionable resource. But it's a big investment. You're going to build out a supply chain around it. So we're pretty focused to make sure that we've got a cost-effective resource before we go after it. And that's why we're looking at some of these -- there's going to need to be local supply in North America and Europe to some degree. We're trying to find different strategies to satisfy that. Not to miss that some of the local resources are going to be the answer to that.

Got it. And I think this speaks to how young the industry is, but there's even debate around the direction of the cost curve longer term, if the cost curve will drift higher as more junior producers get added into the mix at higher cost relative to what we consider, say, the middle of the cost curve now or if the experience curve will allow people -- or producers to shift their costs lower. Just what's your higher level view on the direction of the market's cost structure over time? Do you think we'll move from 10 to 12 for incentive price to 8 to 10 over time, or the opposite?

Well, it's going to go in -- I think from a resource standpoint, it moves up because you're going to be going after lower quality resources and lower scale resources because we just have to do that because the really big good ones that are taken. And then from -- so that moves us on the higher on the cost curve. From a conversion capacity standpoint, from experience, from operating at scale, those costs will come down. So it's moving in both directions. I think overall, it's probably going to move up over time. But you got competing factors there where you get an experience curve on the conversion capacity, that should bring costs down, both from an operating and from an execution perspective.

I'd also add, Kent, that there's a question mark around technology and bringing technology to bear on both the extraction side as well as the conversion capacity side. It's something that a lot of work's being done in the industry to try to understand the best ways to do that, something that we focus on a lot. So we've actually got a project in Chile. We call it the Salar yield project that allows us to extract more bromine from the same amount of brine.

Lithium.

Sorry. Lithium. Sorry. Sorry. And so more to come on that. But at this point, there doesn't seem to be any big game changers out there at this point in time. But it is something that long term, we kind of be -- has to be dangerous to assume that cost just goes up ultimately. Industries always build the other direction long term. So I think in the next 5 to 10 years, it's an upward curve based on those resources.

It's interesting, Scott, what you're saying and your desire to hang out at the low end of the cost curve. You had a project in the Smackover in the -- in your bromine fields that didn't progress. You've got your idled mine in North Carolina that didn't progress. But there are junior guys trying to exploit the exact same reserve. So does it make sense at some point maybe to think about selling those assets since they're not going to bring your cost curve down, but maybe there's somebody else that's willing to invest there? Could you monetize those and reinvest in your lower cost, higher-quality assets?

Potentially, I would argue that Kings Mountain actually is on our Wave IV list of projects. So it is one of the top resources globally in terms of spodumene in concentration at cost. It just -- it's going to take some time and effort to get it up and moving. As Kent said earlier, being on the eastern side of the United States, very little mining has happened here. So educating the governments around the permitting and just working through that process is going to take some time. But the resource is there. We know how to get at it. We know how to convert it. So that one, I would fully expect would belong here. The Magnolia brine, you're right, this is something that we started prior to acquiring Rockwood as a way to get into the lithium market. And at the time, our focus was trying to be able to compete with then FMC, now Livent, and SQM and struggle to find the appropriate technology to be able to extract the lithium out of that brine source at a good enough cost base. I think as we move forward, and that cost curve moves up, that becomes viable again, and we'll have to -- we'll relook at it.

That makes sense. You guys have done a good job of keeping your optionality open in terms of battery chemistries, the ability to pivot towards hydroxide or towards carbonate. And it seems to us, at least the market got a little surprised over the last several years of LFP and the ascendancy of that cathode technology. So just curious, as you sit here today, how do you see the higher growth that was expected of hydroxide, but the greater growth from an absolute base in carbonate, how do you see that playing out over the next 5 or 10 years? And how does it affect your strategy in the Albemarle business, particularly?

Yes. So I mean, we -- I would say we've been -- the industry has been a little surprised by that because we -- carbonate was the chemistry of choice earlier on hydroxide for the higher performance batteries. And then now, I think what we're seeing is the automotive companies segmenting the market and seeing them, there's a place for the lower performance batteries, kind of more like an urban vehicle where you don't have -- you don't need to range. Now Tesla is talking about selling that into North America, starting Canada. So there is a place for that. And just because we've got that focus on diversity, we have both the carbonate and hydroxide molecules, we think we can -- we'll play in that. I mean, overall, it's still probably -- the growth -- its overall electric vehicles that we see, and there's a mix between hydroxide and carbonate, and we have the footprint that we can play in both of those. So it is interesting. And then you've got the technology change as that moves. What's the next key chemistry, ultimately, the kind of Holy Grail solid-state battery, that's a different chemistry again. So we're trying to make sure we're in a position to satisfy that when it comes. I don't think it's a matter of if it comes, but I think when it comes. .

And Scott, I know in the last cycle, you guys were well into the 40s on your EBITDA margins in lithium and expected to sustain them in the 40s. Obviously, we had a little bit of a downturn. Now the momentum is returning, but you're spending more, I would assume, to keep up with that growth. What should we think about as mid and long-term margin levels that are appropriate for your Lithium business?

Yes. I think 40% -- 40% to 45% continues to be the right mid-cycle target for us, ultimately, from a mid-cycle through the pricing. I think what -- the depth of this price cycle kind of pulled us off of that. In fact, if you took it at the bottom, we have a path just through cost efficiencies to get back to 40%. So ultimately, I think as you continue to add conversion capacity on top of what we already have, you'll see our margins start to drift up even above that 40% to 45% range. But just mathematically, today, at mid-cycle, kind of thinking about that $13 carbonate price, we'd be in that 40% to 45% range.

Bob, you're on mute.

Yes. Kent, I think maybe you wanted to have a chance for some closing remarks because I believe our time is coming to a close, unfortunately.

Okay. All right. That's great. Well, I think we covered a lot. And hopefully -- we didn't get into bromine or catalyst too much, but we do have 3 elements to the business. And the bromine business particularly has shifted a little bit. So historically, we would have thought of that as a GDP minus business maybe or a GDP business more recently. Now we're thinking of it is GDP plus, and that's really accelerating off the digitization of things. So electronics in more and more things, like cars, like refrigerators, doorbells, whatever it is. The more computer chips there are, you need more bromine for fire retardant. So that business has really performed well through this downturn, and we expect that to continue to happen. . Lithium, I think we've talked a lot about that growth profile. And our catalyst business is down a bit now from the pandemic, but we still think that's a very good business that's kind of traditional specialty chemicals because we sell on innovation and value-add it for our customers. So it's -- it is an exciting time for us. We have capital now. We're investing, and we're looking at a very strong growth profile.

Excellent. Guys, appreciate your time. All the clients that listened in, thank you. And everybody, have a great day.

Thank you.

Thanks, Bob. Thanks, Tom.