Albemarle Corporation (ALB) Earnings Call Transcript & Summary

Thanks everyone for joining us today. My name is Arun Viswanathan. I'm the chemicals and packaging analyst here at RBC and delighted to have both Kent and Scott from Albemarle Corporation here with us this morning. Obviously, a lot of change going on in the world right now. So a lot of uncertainty, but maybe we can just start, maybe Kent, if you have some opening remarks, I'll turn the floor over to you, and you can provide us with those, and then we can go into Q&A after that.

Okay. Good morning, everyone. Thanks to Arun and RBC for hosting us today, and thank you all for your interest in Albemarle. So for those of you who aren't familiar with Albemarle, we're a global specialty chemical company and a market leader in 3 businesses: lithium, bromine and catalysts. All 3 have strong underlying trends. Lithium is the largest, the fastest growing and the business that gets the most attention. In 2021, lithium demand was nearly 500,000 tons, and we expect this to grow to 1.5 million tons by 2025. This is driven primarily by strong electric vehicle adoption rates. Last year, EV production was around 6.3 million vehicles, nearly double the 2020 production level, and this trend is expected to continue with EVs growing at a compound annual growth rate of approximately 25% per year through at least 2030. And I'd like to highlight 2 key messages. Albemarle is well positioned to take advantage of profitable growth opportunities in both lithium and bromine, and we have the financial flexibility needed to execute on our growth plans. So a little more specific on those 2 messages, just some detail. We serve high-growth end markets driven by electrification and digitization. We're vertically integrated expanding and leveraging our low-cost, world-class lithium and bromine resources. Based on our projects in development, we will more than double our lithium conversion capacity by the end of this year with options to more than double that again over the next 3 to 5 years. Resource and derivatization capacity in bromine businesses are increasing, and we are introducing new products to the market in the bromine business. We have potential lithium resources to leverage in North America at our Kings Mountain facility in North Carolina and our bromine operations in the Smackover Formation in Arkansas. And then from a financial standpoint, we plan to finance our growth through strong operating cash flows, active portfolio management, which we have a history of and that includes our ongoing strategic review of our Catalyst business and our strong balance sheet supported by investment-grade credit rating. So Arun with that introduction, I'll turn it over for the Q&A.

Great. Thanks, Kent. I appreciate those comments. So maybe I could start off with some recent results. The Q4 results were pretty good, all things considered. You offered an outlook for '22 was also constructive. Obviously, the stock market has their own reaction, though. However, it was quite negative. I think that we saw that across the board, but definitely, it was unusual just given some of your results and guidance. So what do you think happened there? And if you could share any thoughts of what you heard, that would be great.

Yes. So I -- we agree with you. We thought they were good results. We were a bit surprised by the reactions and a lot of the analysts and shareholders that we've spoken to were a bit surprised by it as well. We beat our previous guidance, and we raised guidance for '22 from what we had previously indicated. But there are several things. I think we got caught up in kind of the broader market was down, technical trading got involved early. I think there were some expectations given the way spot prices looked that our guidance might be even higher than we had forecast. And I think there was some concern around margin compression, and there are some kind of technical issues in that -- I'm not sure there are technical issues, but our headline numbers from -- are down from the previous year. But if you kind of take out a couple of special items, so 2 of those items is worth highlighting. Given the way spodumene prices have moved, our joint venture in Australia, we're paying more for spodumene, but we're basically paying it to ourselves. And the way we include joint venture income, we add that back to our EBITDA line, but it's tax-affected. So there's a $200 million impact there on our EBITDA line just because taxes moved from one line to another. So we're not paying more tax. It's just -- it actually shows up in EBITDA, which I know EBITDA is supposed to be before taxes, but we've traditionally done that on an adjusted EBITDA basis in JV income. And our JV income has gone up so much because of the spodumene pricing that actually, it's a pretty big drag there. And then the other point is we're starting up -- we're in the process of starting up 2 new facilities, which are -- which basically doubles our capacity. And those plants will not be fully loaded this year. There will be a ramp over them. So they're unabsorbed costs that are not loaded by volume, which will go away over a year's time, and that's about a $100 million impact. So if you adjust out those 2 things, our EBITDA margins are in line with our guidance that we've given at Investor Day -- and given, I think, in the previous Investor Day for kind of a mid-40s EBITDA target, and we're more or less right in line for that if you adjust for those 2 items.

Great. That's very helpful. And then I guess just that reminds me, I do think that you're right, the spodumene situation is a little bit potentially misunderstood. And then the start-up costs also seem relatively material at that $100 million. So before we move on to the other question, I just wanted to ask, so when you think about '22, do you think folks are at work -- and you also had the comment that people were expecting potentially higher guidance. So is it also the case that when you think about '22, if spodumene were to go back down, which obviously is potentially unlikely, but -- and then once you get through the start-up facilities, could your EBITDA be potentially $300 million higher? Is that -- I don't want to necessarily have people think that, but maybe you can just flush that out a little bit more.

Yes. So I think -- I mean, spodumene is going to, I think, move with lithium pricing. So for us, it's the market. We're going to pay more for spodumene, which will give us that dilution at the EBITDA level. And if it moves down, I assume the lithium prices would be moving down with it. So I think it's just -- we have to get -- I think we just need to understand how that dynamic flows through our P&L. And I think the start-up costs, I mean they're going to be there this year given the ramp that we see. So that $100 million drag will be there, but it will go away over time. Now we will be starting up new facilities because we're in this growth mode, and we will probably every year be starting up new facilities. We may miss one next year, but if we stage them right, we'll be starting up a new facility every year. But there'll be less of an impact because this year, we're starting up as much capacity as we operate. I don't think that will ever be the case again. It might be 25% a year after, probably less than 25% and then less than that because our portfolio grows. So that's going to diminish over time, will become less of a story. I think the spodumene prices stay where they are, then that's going to always flow through our P&L. But again, we're not paying more taxes, and it's not less profit for us overall. It just shows up as an anomaly at the EBITDA level.

Great. That's very helpful. And then you also noted that maybe there was a little bit of confusion on the EBITDA margin line and the compression. And obviously, you addressed that with spodumene and the start-up costs dynamics. But when you think about going forward EBITDA margins, how should we think about how those evolve? Do you want to get back up into the north of high 30s? Or where do you think those margins end up over the next several years?

Yes. So I think our -- what we've said in the past still holds at mid-cycle pricing. Now you can debate what that is, and that view has probably changed a little bit. But we think we're in the mid-40s when you adjust out some of these. So the $100 million fadeaway over time because it's less of an issue for us. And then if spodumene price is there, there's going to be a drag on that. But if you adjust for that, we're in the mid-40s. Our target is mid-40 EBITDA levels.

And Kent, I would just add to that. Our productivity programs in the company have really ramped up. And with the inflation environment that we're in right now, we're really fighting productivity against inflation. So there's not a lot of benefit there. I think in a normal inflation environment, you actually see some contribution coming from those productivity actions.

Great. Thanks, Scott. So just following up on that then. Obviously, you've had good growth in lithium and bromine. Bromine has remained quite strong as well. I think catalyst is now coming back. I would like to discuss catalysts and if there is any oil impact a little bit later maybe. But I guess just to finish off this point on the margins then. So you've had the growth, you've had also some cost savings and efficiencies and productivity, as you mentioned, Scott. And so when you think about the margins, I guess, maybe in '23, is there anything else that you'd call out as potentially causing a drag? Or is it mainly just the transfer pricing on spodumene, the start-up costs? Anything in the other businesses that would -- that's important to call out.

No, I don't think so. I mean the other businesses, bromine is relatively stable. Their productivity actions are really offsetting inflation, a little bit of cover from pricing. I think in catalyst, the thing that we've got to watch out for is the natural gas, in Europe in particular. So Dutch natural gas is at, I mean, all-time highs, and they're a big user in the plant there. So that's a challenge for them, at least in the short term, depending on how long that lasts. And then I think the downstream impact on commodities, particularly metals is potentially going to affect them again, like in the short term. As we move into 2023 for lithium, I think you'll see a tailwind from margin perspective as we fill out those plants. It'd just be a question then what that spodumene tax effect is. But again, that's just a geography on the P&L.

Great. Well, okay. Then I guess, you could also just touch on the other hot topic these days. Is there anything notable with Russia and Ukraine exposure that we should keep in mind as it relates to Albemarle?

Yes. So I think there are a few things we should talk about. We don't have big exposure to Russia or Ukraine, we did sell -- we have historically sold a little bit of catalyst there and maybe some other products, but it's pretty small, not that material, and we stopped shipping there as soon as the invasion started. The big impact that Scott was referencing is the natural gas and our facility in Europe, in Amsterdam. So we're -- those prices are kind of extraordinary at the moment, and it's driven by this Ukraine crisis. That's a pretty big impact to us. Now our customers' demand is actually up, excluding Russia. So oil prices are up, everyone wants to refine as much oil as they possibly can. So they're looking for more catalysts. And we've got this cost issue because of natural gas prices, which we believe is short term, but that's something we have to manage through. And it's material. I mean the prices are extraordinary.

Right. And just given that positive demand environment then is it -- is there maybe a lag in raising prices, but do you fully expect to recover those higher natural gas costs?

Well, I think -- yes, that's going to be -- that's a challenge that we have because we do have some contracts that have passed through some materials we typically sometimes natural gas, but we have a mix between U.S. facility and the facility in Amsterdam. So I'm not sure we can pass all that through in the very short term. In the longer term, I don't expect it to be there, but if it were there, we would have to pass it through.

Okay. Well, maybe we can go back to lithium then. And as you noted, the price evolution over the last couple of years has been quite volatile. I think I saw Chinese spot prices above $50,000 a ton a week or 2 ago. I would imagine that there's even greater volatility now? Or maybe you can just update us on what you're seeing out there. What is the new mid-cycle? I mean before I used to think about a 7,000 low and 20,000 high. And again, now maybe we're double that. I don't know. But is that what you're hearing from your customers? Maybe just provide some color on the pricing environment.

Yes. So that's -- I mean that's the real question, right? So I think in our guidance and our plan for this year, we think there may be upside in pricing, but we probably have volume downside, but we've got to bring on our plants as we have planned to do and even including plant that we don't own yet, going through the acquisition in Xinyu. But I mean the pricing is the real question. It is -- I mean the spot prices in China, which is probably the most visible price out there. It's, I think, up around 70,000 that necessarily translates to our contracts. We do have some of our business on spot in China, probably about 10% of our battery-grade business operates on that basis, and we're up in that -- we'd be in that range for that 10% of the business. The international contracts. We have moved towards something that indexes more, that indexes to the indices. I'm not sure that's the right way to say it, but they are tied to. They're not tied directly, but they move with those indices. It's usually not the China spot price. The only thing that's China spot is Chinese business, again, which is about 10%. But about half of our business now is tied to some indices, and it will move over time. And if that -- if prices stay where they are today or go up, there would be upside to our guidance, and even if they stay where they are or just come down modestly, if they drop significantly in half or even less than that or more than that, then that would be to the downside of our guidance. But that's kind of where we're operating. We have about 40% of our -- this is our battery business, energy storage business, which we call it. About 40% is still tied to the longer term -- they're not -- we call them fixed price contracts, they're not really fixed price. They're fixed for either 6 months or a year, and then we adjust off of those. But there are -- and we're trying to move away from those contracts. We've been doing this now for a couple of years, and we've gotten it to where of our battery material business, 10% is kind of spot China, 50% moves off these indices and 40% is on the old traditional contracts.

Great. That's helpful. And can we just talk a little bit about why these prices have inflated so much? You obviously discussed spodumene a little bit. I think maybe it's worth also discussing the downstream and the conversion operations. We've heard about disruptions of capacity coming on, especially in China. We've heard about logistical challenges, maybe we'd also talk about whether if that's important. But what do you think is going on? Obviously, demand has been very robust as well. And all of those factors are those structural factors that would lead to higher kind of mid-cycle pricing, is that what gives you the confidence to move more of your contracts to a variable structure? Or how do you think about the kind of the medium term on pricing?

Yes. I mean the driver -- I mean it's a supply-demand, right? And there is, it's a tight market and prices have moved up. It's been led in the China market which tends to operate on a spot basis, and that's transferring into the international contracted market as well. So in the near term, I mean, it looks like the market is going to be tight. And so we think prices are moving up. We moved away to the indices -- away from -- the way we were originally contracted for a couple of reasons. One, when the market went so far down, we actually had to come off and give concessions to those contracts. And we talked a lot about that with our investors. But it kind of felt like that we're not going to get the protection we want when the market is down, we should get the upside when the market is up. So that's really the driver for moving away from that. Part of that was because of, at the time where we were selling in the value chain. So a lot of our contracts at the time were cathode makers, we were selling to them and they could either buy from someone else or the battery makers they were selling into weren't willing to accept the higher costs. So we either lost business or made adjustments. And we did that, but we've moved away to be more market index now. That's really the driver for that. And long term, I mean, it's a new market at this scale. It's been around a long time, but the EV market has really changed the dynamics in lithium. And I think the market is evolving, and I think we're just going to have to ride that a little bit. I don't know that I can predict it. It feels like the market is going to be tight for at least 5 years if not 10, if the growth rates for the EVs are what we anticipate. And there are other means, so will lithium limit that. We think the market can keep up. Depending on the forecast keep rationing up, that may change. But there are other materials too, that are key that could limit, which is copper and nickel, as an example.

Great. That's all very helpful. And then I guess, I just -- I also wanted to provide you -- before we get that. Just real quickly on the FY '22 guidance then, I think you've given a growth projection for 65% to 85%. And it sounds like there's maybe some drivers in there. It sounds like volume may be a little bit questionable, just given the start-up and then -- but price may be a little bit better than you thought. So are those the main 2 drivers that would put you at the [Indiscernible] end of that range? What else should we kind of consider? Is there anything on the cost side just given a lot of the inflation that we've seen over the last month or 2?

Yes, Arun, you're right. The guidance that you referenced is really our lithium business versus the total company. The key drivers to the upside pricing, as Kent mentioned, if price continues to stay at the levels that they are, there is upside there. And then the downside risk is really the volume and from the start-ups of the 3 plants. So we've got 2 greenfield or 2 plants that we've built ourselves. So Kemerton I primarily and then also La Negra III and IV that are both in start-up. And then assuming we're successful with the Qinzhou acquisition in China, will -- that plant is actually in commissioning right now. We'll have a start-up process with them as well. So 3 plants that are starting up always a question, are they going to be successful or not? And we've got examples in our own portfolio. Xinyu started up, there Xinyu II expansion started up faster, higher quality than we expected. La Negra II was slower and slower to start up. So always a big question mark. So it's just a watch out for us.

Great. That's very helpful, Scott. And I kind of touched on the other area I wanted to talk about, which is some of your projects. I guess what about any expansions if there's any updates beyond this wave? I think there's been some prevailing thoughts out there that most producers were favoring hydroxide, and maybe that's switching to carbonate. What are your thoughts on, I guess, longer-term expansions beyond here and if there's any difference between brine and spodumene opportunities that you have?

Yes. So we can -- there's a couple of questions in there. So just about our projects, and Scott talked about the current ones. And then the 2 new projects -- the 2 new greenfields in China, Meishan, Zhangjiagang, those are progressing, and we still think those start up at the end of 24, mechanical completion at the end of '24, so sales from those in '25, and then what we are seeing the market, what we call Pivot West. So China is still growing, and there's very good demand there. But there is a lot of announcements around battery makers -- OEMs, battery makers and starting to be cathode suppliers in the West, and they will need supply of battery materials, lithium being the one that we're most interested in. And there is a lot of interest in local supply as much as possible. So we are looking at expansions in North America. We talked about we have a mine at Kings Mountain in North Carolina that we own and we qualified that. We think that's -- trying to understand that, but that's kind of a 75,000 ton per year LCE facility that we could add conversion capacity to manage that, and that's something we're looking at. It was in our Wave 4 program we laid out with our equity offering and then we kind of confirm that at our Investor Day. And we are looking at that and looking to accelerate that. And we're also looking at other opportunities in North America, and we're looking at Europe. But we don't have a ready resource for Europe like we do at Kings Mountain. And then we also have a resource at our bromine facility in Arkansas, the brine where we process bromine, there's lithium in those brines. It's going to require some technology that we don't have today, to process that. But I believe, over time, it's further out in Kings Mountain, but I think we'll be able to bring that to market in time.

Arun, I'd just add, I mean, the question that you asked around carbonate versus hydroxide is one that is developing. And it's one that we have to -- we're watching carefully because we want to make sure you build the right capacity at the right time. In Albemarle, we produce both. So we have the diversity of supply that we can supply either carbonate or hydroxide, but it's really the new capacity. And I think the question is, what are those batteries going to be as the automakers and the battery makers figure out what the best technologies are for the various levels of vehicles that are out there. We do believe that hydroxide continues to be tighter than carbonate over time, although that's been moderated a little bit because of the recent shift toward lithium-iron-phosphate batteries in the low end of the market overall. And again, we're looking at that and trying to make decisions as to what type of capacity to build. So...

Great. Thanks for that. And then again, just to go back to an earlier thought I had was just on the cost side. Anything to call out there? I mean, you mentioned some cost pressures and catalysts, but what about in lithium and bromine? I know that, again, there's water, there's some other resources that are used there. Anything on the royalty side that we should be aware of? Or how are you thinking about how costs evolve over the next year or 2?

Yes. For lithium, it's limited in terms of the cost pressures that they have. I think that's one of the benefits of being backward integrated into the resource. So there's some pressure on the logistics costs, as you might imagine, with high oil price translating into higher fuel costs. I think that's manageable in the short term for lithium. Otherwise, it's basic labor and energy costs in the areas that we operate. Just as a reminder, the commission rate in Chile is based off the end market price of carbonate. And so as that price goes up, there is an incremental cost that we have to pay to CORFO. So just as a -- just to put some perspective on that for 2022, as we talked about in our guidance, price in lithium up 40% to 45%, that translates into about $100 million of additional royalties. So we still benefit significantly from that price increase, but some of that does go back to the Chilean government. Bromine, again, input costs there, chlorine in the United States continues to be relatively high cost compared to history. And again, energy and transportation or logistics costs are where they're focused. They've got really good -- they've got a good productivity program that they're acting on to try to offset most of that. So...

We're coming up here in a couple more minutes. But I guess I just wanted to address a couple of things. So it sounded like on the last call, you guys did -- you mentioned the resource investment, and you just mentioned that again as far as the benefits of being backward integrated. So are there further opportunities to get more of a resource position in your different geographies? That's one question. And then I guess lastly, if you think about that and you think about your portfolio, and you think about the strategic review with catalysts, how do you see kind of cash use priorities playing out over the next couple of years?

Yes. So let me do the broader question, Scott can talk about use of cash. So I think from a recent -- I mean we're in a good position from a resource standpoint, gets us towards the back end of the decade with the growth rates we see in our aspirations from a share standpoint, but we need resources beyond that to continue to grow, and we're looking for those. But I mean, given where prices are today, those are very expensive resources compared to the one I guess the ones we own are valued highly today, but much different than what we think for them at the time. But we're also looking at our existing resources to see if there's additional resource there. So we're -- at Wodgina, we'll look to see. We anticipate maybe there is -- we would be able to get more resource from that facility. Same thing at Talison. We've mentioned Kings Mountain, which we could bring on, and then the brine in Magnolia plus Silver Peak. So there are -- we can get additional resources from our existing operations, and we're looking at those. They're not likely to be massive, probably incremental, but we do think we have -- we can have upside to that. And we're always looking for new resources, trying to identify those and bring them on. So we're in the market for those on an everyday basis, just recognizing that given where lithium price is on those resources is very expensive today.

From a cash perspective or capital allocation perspective, our focus, as you've heard us talk about, is investing for growth, both from an organic perspective as well as inorganic. So that's our primary focus. We did just announce a small increase in our dividend. So we'll continue to support our dividend. And as we move forward with our investments, we do expect to lever up in order to fund this growth. I do not expect that we'll exceed the range that we've set from a long-term target perspective of 2 to 2.5x net debt to EBITDA, given our current plans. And so that's the current plan. I think that's really showing the benefit of the strong balance sheet that we've had and continue to have in maintaining that investment-grade credit rating, that's been so beneficial to the company.

Great. Well, thanks. We'll leave it at that. Thanks to Kent Masters and Scott Tozier from Albemarle for presenting here today at our RBC Chemicals and Packaging Conference. We look forward to continued dialogue here throughout the day, and we'll see you again very soon. Thanks again.

Thank you Arun.