Albemarle Corporation (ALB) Earnings Call Transcript & Summary

All right. Thank you, and welcome to Albemarle's 2020 Sustainability Webcast. Our latest sustainability report was released yesterday after market close, and you'll find the report and ESG data download posted on our website under the Sustainability section. Presentation materials for this webcast are also available on our website under the Investor Relations section at albemarle.com. My name is Meredith Bandy. I am the Vice President of Investor Relations and Sustainability at Albemarle. Joining me on the call today are Kent Masters, our Chief Executive Officer; and Scott Tozier, Chief Financial Officer. After our presentation, we'll have about 15 to 20 minutes for Q&A. [Operator Instructions] Turning to the second slide. As usual, some of the statements made during this call, including our targets, expected company performance and proposed projects, may constitute forward-looking statements within the meaning of federal securities laws. Please note the cautionary language about forward-looking statements contained in this presentation. That same language applies to the webcast. Turning to the next slide. Please note also that some of our comments today refer to financial measures that are not prepared in accordance with GAAP. A reconciliation of these measures to GAAP financial measures can be found in the appendix of this presentation. And now I'll turn the call over to Kent on Slide 4.

Thanks, Meredith, and thank you all for joining us. Today, we'll discuss the progress Albemarle has made implementing sustainability initiatives and how supporting global efforts to create a more sustainable world links to our overall corporate strategy. Our sustainability report provides an overview of select sustainability topics, management approach and recent performance. Today, we will highlight 4 key updates in our 2020 report. First, we have set our initial environmental targets related to greenhouse gas emissions and freshwater use. Second, we have launched a new climate strategy to help us meet our climate goals. Third, we are aligning our efforts with global standards, including the UN Global Compact, and we are aligning our own sustainability framework with the widely referenced U.N. Sustainable Development Goals. Finally, we are advancing important initiatives to achieve our long-term sustainability goals, and we'll talk about what our stakeholders can expect from Albemarle in 2022 and beyond. Now on Slide 5. For those of you who may be new to our story, Albemarle is a global specialty chemicals company with market-leading positions in 3 core businesses: lithium, catalysts and bromine. Lithium is our largest and highest growth business. However, all 3 have strong long-term growth prospects and healthy margins. And we are accelerating growth, particularly for lithium and bromine. If you turn to Slide 6. All 3 businesses are also driven by increasing sustainability requirements and regulations across a broad range of end markets. Our sustainability goals and objectives are focused on positioning Albemarle's operations for long-term success and helping our customers achieve their sustainability goals. Albemarle generates about 50% of net sales from products that enable reduced greenhouse gas emissions or increased resource efficiency. This includes net sales from refining catalysts and lithium used in energy storage. Our refined catalyst enables refiners to produce more product from each barrel of oil, reducing waste, improving efficiency and removing contaminants like sulfur and nitrogen from transportation fuels. In fact, we estimate that our catalyst avoids the emission of about 10 million tons of sulfur each year. Our lithium products enable the reduction of greenhouse gas emissions, primarily through the adoption of battery-powered electric vehicles. Our bromine business also enables safer electrification. For example, brominated flame retardant save lives by preventing fires related to electronics used in homes, industry and transportation. Now to Slide 7. Earlier this year, we incorporated sustainability more explicitly into our long-term strategy. Our strategy is founded on 4 key components. Most importantly for our discussion today is to advance sustainability by improving the ESG performance of our own business and helping our customers obtain their sustainability ambitions. Sustainability also plays a role in other aspects of our strategy, for example, to grow profitably by executing high-return growth projects that proactively lower capital intensity. This approach allows us to grow profitably while meeting customers' demand for sustainable products. To maximize productivity by driving continuous improvement across our businesses, including operational efficiencies from reduced energy and water intensity; and to invest with discipline by allocating capital to our highest-return opportunities while managing risks, maintaining our investment-grade credit rating and supporting our dividend, all of which provide business resilience through the cycle. On Page 8, we've updated our sustainability framework to align with the strategy in the current environment. This framework is based on the materiality assessment we completed in 2019 and includes 3 key pillars: first, natural resource management to be good stewards of the environment and to use resources and materials responsible; people, workplace and community to take care of our colleagues and communities; and sustainable shareholder value to foster the conditions necessary to create durable, long-term value. Over the past year, the COVID-19 pandemic has increased our focus in areas like business and financial resilience, particularly around supply chain management and business continuity. We have also increased our focus on diversity, equity and inclusion in the workplace, in the supply chain and in our communities. The Albemarle Foundation has always been proactive with dollars and outreach to the under-resourced in our communities and is well positioned to continue our efforts with regards to racial and social equity. For example, more than 70% of our multiyear educational initiative in Charlotte, North Carolina, was distributed to minority-led organizations. This sustainability framework also aligns with the work we're doing internally to launch our new operating model. Our operating model, which we call the Albemarle Way of Excellence, defines how we align, execute and deliver our strategy. I'm excited to share more about this initiative with you in the coming months and in greater detail at our Investor Day this fall. On Slide 9. Over the past 2 years, we've accelerated our sustainability efforts to continue to build and maintain our industry-leading positions. As you can see, sustainability is not new to Albemarle but rather a continuation of many years of work. For example, we set baseline data and initial targets for environmental metrics like greenhouse gas emissions and freshwater use. We've invested in technologies to reduce freshwater use and improve resource yields in environmentally sensitive areas, including the Salar de Atacama, one of the driest places on Earth. In terms of community engagement, in Chile, we signed collaborative agreements with local indigenous groups, including the Council of Atacameños Peoples, which represents 18 indigenous communities that live around the Salar. These agreements are based on the UN Declaration of Human Rights principles encompassed in the Indigenous and Tribal Peoples Convention, which recognizes indigenous people's right to self-determination. We are honored to partner with the indigenous communities at the Salar. For instance, Chile was hit especially hard during the pandemic. This year, several of our communities dedicated Albemarle funds for COVID-19 relief, including testing services, health care and contact traceability. Over the past several years, we've invested time and resources to build our financial and business resilience, including improving cybersecurity, implementing a single ERP system and completing a successful, sustainable, cost-savings program. During the COVID-19 pandemic, these investments proved their worth. We were able to continue to operate throughout the pandemic. We also generated operating cash flow, maintained our investment-grade credit rating and improved our balance sheet. We are especially proud of our progress on safety. The success we've seen in improving safety is a road map for the success we plan to achieve in other areas of sustainability. In 2016, we launched our Journey to Zero safety campaign to create a common safety culture across our organization. In 2019, we set the initial target for top quartile occupational safety performance relative to our American Chemistry Council peers. I'm proud to say that we achieved that target in 2019 and again in 2020. Now our revised target is for top decile occupational safety performance relative to those same peers. We are well on our way to achieving that goal as we continue to work towards zero harm at all of our operations worldwide. Today, it is a truism that a safe operation is an efficient operation, and I believe the same to be said about sustainable operations more broadly. Now on Slide 10. This year, in addition to our safety target, we have set environmental targets for greenhouse gas emissions and water use. These targets are meaningful stretch goals, but they are also achievable for Albemarle. Over the next 2 years, we will build the infrastructure needed to assess, measure and track progress against these targets and other material sustainability topics. These include executing a portfolio of projects to deliver improved sustainability performance. Our midterm goals are to reduce the carbon intensity of our catalysts and bromine businesses by a combined 35% by 2030, in line with science-based targets. Our catalysts and bromine businesses operate in true markets with long-term growth rates roughly in line with GDP. We are targeting these 2 businesses to realize greenhouse gas emission reductions, in line with the well below 2-degree Celsius requirements defined in the Paris Agreement. The lithium market is forecast to grow by more than 20% per year through 2030, driven by the adoption of electric vehicles and electrification more broadly. Against this background of high growth, the target for the lithium business is to expand our capacity in a carbon-neutral manner through 2030. We expect to meet these greenhouse gas emission targets through a combination of grid greening, efficiency improvements at existing plants, and in the case of lithium, design improvements at new plants. We also plan to reduce freshwater intensity by 25% by 2030 in areas of high or extremely high water risk as defined by the World Resources Institute. This allows us to focus our investments and efforts where it matters most. For Albemarle, this includes our lithium operations in La Negra and at Salar de Atacama in Chile and our bromine operations in Jordan. We expect to achieve our targets to reduce water intensity through efficiency improvements at existing plants and the new thermal evaporator installed at La Negra. By 2050, we plan to achieve net zero carbon emissions in our operations. We support the goals of the Paris Agreement to avoid dangerous climate change by limiting global warming to well below 2 degrees and are pursuing efforts to limit it to the 1.5-degree Celsius. Now Page 11. Let me talk about the climate strategy we just launched to support our targets. Reducing greenhouse gas emissions is not only the right thing to do, but it will also strengthen our competitive position, improve our operational efficiency and create value for our stakeholders. Reducing our carbon footprint is a multi-decade journey of continuous improvement. Albemarle's climate strategy lays out our plans for achieving our greenhouse gas targets. These include measuring progress and improving results. We are building the systems and processes to improve our business and meet our targets, enabling our customers' sustainability ambitions. We are partnering with strategic customers to improve supply chain sustainability. And collaborating with stakeholders by aligning with global frameworks to increase transparency and working with industry partners to develop sustainable solutions to climate change. All 3 of our businesses contribute to reduced CO2 emissions. Most notably, 1 kilogram of CO2 emitted in Albemarle's lithium production delivers more than 50 kilograms of CO2 avoidance per year when used in EV batteries. Catalysts and bromine also support greenhouse gas reductions. The use of our hydroprocessing catalysts enable refiners to operate at much lower temperatures, thereby reducing energy consumption, greenhouse gas emissions and improving yields. Bromine used in bromobutyl rubber extends tire life, reduces fuel consumption and minimizes CO2 emissions. Now let me turn it over to Scott on Page 12 for more detail on the climate strategy.

Thanks, Kent, and hello, everyone. Thanks for joining us today. Our team is executing our portfolio of projects to reduce our carbon footprint and achieve our climate targets, current projects focused on avoiding and reducing emissions, for instance, by improving heat integration and switching to green or renewable energy use. Over time, we also plan to evaluate emerging technologies and their benefits, like carbon capture and storage, and to identify potential forestation projects to neutralize or offset emissions. We are building these current projects into our annual and long-range planning processes. We're also improving our capital allocation processes to identify ways to improve sustainability as we maintain existing facilities and develop new operations by questioning the impact of these projects. Finally, we're in the process of evaluating the use of an internal notional value for the social and environmental cost of CO2 to balance traditional financial parameters in our strategic and capital allocation decision-making. Turning to Page 13. Strategic customers are turning to leading suppliers like Albemarle to grow their businesses responsibly and to ensure the sustainability of the supply chain. We are currently engaged with a number of customers on projects, including assessing Scope 3 emissions and creating life cycle assessments for our products. We're also partnering with customers through industry organizations like the Institute for Responsible Mining Assurance (sic) [ Initiative for Responsible Mining Assurance ], or IRMA. IRMA's mine site assessment offers objective, independent, third-party verification of industrial-scale mine sites against a comprehensive standard agreed to through a collaborative multi-stakeholder process. It's that multi-stakeholder model, including producers, consumers, labor, NGOs and communities, that is key for automotive OEMs like BMW, Daimler and Ford to achieve their sustainability goals and meet the needs of consumers and end users. Albemarle's Salar site was the first lithium mine in the world to complete the IRMA self-assessment and the first mine of any kind in Chile to do so as well. Later this year, we'll begin the third-party audit for the Salar site, and we plan to expand the IRMA certification process to other mine sites in our resource portfolio over time. Turning to Slide 14. We continue to engage with our stakeholders, including our employees, customers, suppliers, government partners, communities and the investment community, to affect positive change and minimize disruption as we progress on our sustainability journey. We are aligning with industry-leading standards, including the Carbon Disclosure Project, or CDP. CDP's global disclosure system is widely considered to be the gold standard of environmental reporting. We expect to begin reporting under CDP's system in the second half of this year. As we advance our CDP reporting, beginning in 2022, we'll also evaluate disclosure under the Task Force on Climate-Related Financial Disclosures, or TCFD. And finally, we'll engage with organizations like the Science Based Targets initiative to identify opportunities to improve our targets and climate strategy over time. As you'll see on Page 15, we're also aligning with other global standards like the UN Global Compact. As we announced on our first quarter 2021 earnings call, we signed the UN Global Compact, a voluntary leadership platform for the development, implementation and disclosure of responsible business practices. The largest initiative under the UN Global Compact is the implementation of the 17 Sustainable Development Goals. On Page 16. To determine the right subset of these goals for Albemarle, we engaged with employees and our Board for their diverse views through surveys, workshops and discussions. And the team identified the 9 key goals that best align with our business and corporate strategy, and they are: good health and well-being; gender equality; clean water and sanitation; affordable and clean energy; decent work and economic growth; industry innovation and infrastructure; sustainable cities and communities; responsible consumption and production; and climate action. We aim to maximize each goal's positive impact and minimize any negative effects in terms of economic, social and environmental conditions. One of the key accountabilities we have is to update the UN on our progress each year, which we plan to do with our annual sustainability report. Now I'll turn it back to Kent to review the next steps of our journey.

Thanks, Scott. Moving to Slide 17. I hope our discussion today gives you a good sense of the significant progress we're making on sustainability and underscores our long-term commitment to continuously improve our efforts. For the rest of this year and into 2022, our primary focus areas are, first, as Scott described, to build the project portfolio and related infrastructure to track progress and ultimately achieve or exceed our sustainability targets and objectives; second, to continue to partner with our customers on life cycle assessments, Scope 3 emissions, site audits and other projects to meet their sustainability goals and objectives; third, to progress our diversity, equity and inclusion strategy and set initial targets to measure our progress on this Herculean effort; and finally, to continue to improve reporting and transparency, including CDP reporting and evaluating disclosures under the Task Force on Climate-Related Financial Disclosures standards. On Slide 18, in summary, sustainability is a key part of our value proposition to stakeholders and is driven by Albemarle's 3 core businesses which are powering a sustainable future. With best-in-class resources and decades of experience in building and operating world-scale chemical plants around the globe, we are well positioned to help our customers grow responsibly. As an industry leader, we are committed to accelerating sustainability initiatives to minimize risk and pursue durable long-term value and to deliver strong financial performance and growth for our shareholders. And now we're happy to take your questions. I think Meredith is going to facilitate that.

Yes. Great. Thanks, Kent. [Operator Instructions] We do have several questions that have already come in the chat, so we'll start with a couple of questions from Laurence Alexander at Jefferies. Wanted to ask, what are the trade-offs associated with the greenhouse gas targets that we've announced? What would be the increased costs or the benefits related to these targets?

Okay. So I would -- over the long term, I think we'll have to be -- we'll be -- have to be aggressive by identifying projects to help us meet these targets. In the near term, there is some low-hanging fruit that has good financial returns, and then we'll be going after the low-hanging fruit first. And those, we've got a list of projects that we think will have good returns around that without getting into the sustainability metrics that Scott discussed, just kind of pure financials. And then the other piece is that this is really a key part of the value proposition to our customers. So our customers are asking for these sustainable products, particularly in the lithium business and the electric vehicle market. So we think it's a fundamental part of the business and actually gives us a competitive advantage if we could be kind of the first mover in this space.

And Kent, I would just add that these initiatives and our strategy around sustainability doesn't change our expectations on returns. And so as we're looking at new projects internally from an organic growth perspective, we continue to expect that those are going to generate at least 2x our cost of capital at mid-cycle pricing, including the sustainability projects overall.

A follow-up from Laurence is, has the ESG review led to any change in our lobbying activities? It looks like political contributions more than doubled last year.

I'll take that one. So our -- because of the election cycle, it may look like our political contributions doubled. But I think if you look back over time, we're pretty much right in line. We are, after the January 6 riots at the Capitol, have put political contributions on hold and are reviewing our approach with those. We're also engaging with governments around the world as they look at both sustainability as well as other initiatives around indigenous peoples and communities to make sure that we -- we're well connected into what's happening there.

All right. So our next question is coming from David Begleiter at Deutsche Bank. How water-intensive are lithium operations in Chile? How impactful is it on the local community?

Right. So I'll take that. So in Chile specifically, actually, the processing, buying from the Salar in the way that we're doing it, using solar power is the least water-intensive, particularly freshwater-intensive method. We actually don't use freshwater in processing lithium at the Salar. We do use some freshwater in La Negra in the conversion facilities, but we -- and there's some freshwater used at the Salar for mainly drinking water in our camp and then for washing some equipment. But there's actually no freshwater used in processing lithium at the Salar itself, and we're a very small user of freshwater there. And then the kind of a little broader question around the brine. We've developed geological models around the Salar and the brine that we pump to make sure there's no impact from the brine that we pumped on the freshwater pools. So we've got years, 20 years or so of data around this that we've shared with the government in Chile and other associations. And there is no indication that the brine that we're pumping impacts the freshwater lagoons in the Salar.

Kent, just an additional point of information. We obviously recognize that Chile is a high-risk area in terms of freshwater usage. And as a result, during our expansion at La Negra, you hear us call it La Negra 3 and 4, we actually invested over -- or investing over $100 million for a thermal evaporator to be able to double our capacity without increasing our freshwater use.

Okay. So next question comes from Ben Kallo with Baird. Ben asks, some of your competitors plan to produce green lithium. How does Albemarle looking at production compared to others on sustainable lithium?

Yes. So I mean we're pretty focused on this. And I mean we'd like to at least differentiate between brine and hard rock. So the brine production, to our knowledge and today, is the most sustainable from, say, Salar de Atacama. And as we process at La Negra, from a sustainability standpoint, the greenest lithium that is made today because of the solar power that is used at the Salar as we described that. Hard rock processing that we do at the mining in Australia then the conversion that we do in China is not as quite as sustainable. We've made a lot of efforts in greening the power grid, improving water usage there, a number of things that we've been able to do to improve that, that the -- I believe and I think it's been documented that the brine processes that we use at the Salar de Atacama and then the conversion in La Negra is the greenest commercial operations today.

A follow-up from Ben, how does Albemarle think about recycling? And I think you're specifically thinking about lithium, and there's probably other areas in the segment as well.

Yes. I'll take that one. Recycling is going to be an important part of the battery supply chain. As batteries become more and more important to the automotive industry, used cars, obviously, are going to end up needing some place to put those batteries. So recycling is going to be very important as an end use. And so we're actually working with various innovators as well as customers to look at the most effective ways to recycle, particularly the lithium stream that comes out of the recycling. And so we believe by the end of this decade, it's going to become a meaningful part of the supply for materials into new batteries that we'll be able to take our virgin material, combine it with recycled material and create new batteries. There's only places, though, that recycling is important, too. So in the manufacturing of batteries, there are waste streams that come off of that, that can be recycled within our plants. There's ways to increase the efficiency of those plants to be able to use more of the lithium that goes through that process. And as a good example of that, where we've got some great experiences in Magnolia, Arkansas, with our bromine business, which they have a very high utilization of the bromine molecule that they get out of the ground due to multiple recycling streams that they have in that plant. And in fact, their efficiencies are above 95% in terms of their usage, so very good recycling of that material as well.

Yes. And we also think that kind of the core processes we have in conversion of our raw material are the same process you'll need in recycling lithium, so we think there's definitely a role for us to play in that particular process as those streams become available.

Okay. So a couple of questions from Joel Jackson at e-mail. So Joel asked to please discuss C-level compensation linkage to ESG initiatives.

I'm sorry, say again?

Executive compensation as it's linked to ESG.