Q4 2019 Earnings Call
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Ladies and gentlemen, please standby your conference call, we get momentarily. Thank you for your patience simply standby.
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Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter and full year 2019, Albemarle Corporation earnings Conference call. At this time, all participants' lines are in listen only mode.
After the speakers presentation, there will be a question and answer session to ask a question. During this session you need to press Star then one on your telephone.
Please be advised to today's conference is being recorded if you require any further assistance. Please press star then zero.
I'd now like to hand, the conference over to your Speaker today, Mr., Dave Ryan Vice President corporate strategy Investor Relations, Sir you may begin.
Thank you and welcome to all morals fourth quarter and full year 2019 earnings conference call.
Our earnings were released after the close of the market yesterday, and you'll find our press release earnings presentation, and non-GAAP reconciliations posted on our website under the investors section at Www Dot Albemarle Dot com.
Joining me on the call today, our Lukas Sam Chief Executive Officer, Scott Tozer, Chief Financial Officer.
We also have Raphael Crawford President catalysts, not the Johnson, President bromine specialties, and Eric Norris, President lithium who will participate in the queue in a portion of the call.
As a reminder, some of the statements made during this conference call about our outlook expected company performance production volumes and commitments as well as lithium demand may constitute forward looking statements within the meaning of federal securities laws.
Please note the cautionary language about forward looking statements contained in our press release that seem language applies to this call.
Please also note that some of our comments today refer to financial measures that are not prepared in accordance with gap a GAAP reconciliation can be found in our earnings release in the appendix of our earnings presentation, both of which are posted on our website.
Now I'll turn the call over to Luke Thanks, Dave and good morning, everybody on todays call I'll provide a recap of our 2019 strategic accomplishments and address the 2020 milestones that we'll be focused on to dish to ensure we deliver on our vision Scott will give you an update on the financials our cost savings program.
And our full year 2020 guidance.
Despite a challenging back half of 2019, we grew fourth quarter and full year revenues adjusted EBITDA and adjusted earnings per share year over year that reflects our ability to address the dynamic market and to deliver solid results across our businesses. In addition, we achieved.
Adjusted EBITDA for the corporation margin of 29%.
2019 was another strong step toward our our long term vision as you can see on slide six of our earnings presentation. We made significant process on a number of strategic milestones.
Importantly, we made significant improvements in our safety program lithium reduced its injury rate by 50% from 2018 catalyst achieved its low lowest recordable injury rate in four years and bromine surpassed two years with no lost time injuries or Osha Andrew.
Sales of 19 puts us in the top quartile of our peers.
2019, Martin our 25th consecutive year of dividend increases and we're now included in a select group of companies. They comprise the S&P 500 dividend aristocrats index, we demonstrated our commitment to return cash to shareholders through increasing the annualized dividend from 10 cents.
It's a 1994 to $1.47 cents in 2019.
Thats, a 22% CAGR and we'll continue that commitment well into the future.
2019, we also conducted the materiality assessment to identify sustainability topics that support the execution of our strategy and ensure Albemarle maintains its strong financial position in a responsible manner for decades to come as you can see from page eight of the invest.
The presentation, we're focusing on four key areas people natural resources community engagement and our sustainable business model in 2020, you'll see US established baselines and long term targets were improvement we look forward to updating you on our progress.
Consistent with our efforts to manage the portfolio and maintain a strong balance sheet, we announced last quarter, our intent to divest the fine chemistry services and performance catalyst solutions businesses. The process for both businesses is going well.
Our first priority for the use of proceeds from these transactions will be to reduce debt.
Also last quarter, we announced a program to capture sustainable cost savings. This program is well underway and we expect to deliver a $50 million in savings this year and reach a run rate of over $1 million an annual savings by year end 2021, the new ERP system, we implemented last.
Year will enable this program with better real time visibility into all of our operations Scott will provide more detail about the program in his section.
To support our lithium growth plans, we continued to make progress on major capital expansion projects during 2019.
We successfully commissioned our xinyu to lithium hydroxide unit in China with the start up and operating teams exceeding their 2019 targets and reaching full name plate operating rates in less than 12 months.
We also increased our lithium carbonate production inland negril one into by about 5%.
Hello, Negra, three and four lithium carbonate expansion in Chile his own scheduled for commissioning by the first quarter of 2021 finally, the cameras on lithium hydroxide unit in Western Australia is targeted for commissioning during the latter half of 2021.
We also continued to develop our best in class lithium resources. The Talison joint venture completed phase two of the Green Bush's expansion in the fourth quarter, bringing their annual capacity for chemical grade sponsored mean to approximately a 160000 metric tons on an l. CE basis.
Albemarle has rights to half of that production.
In addition, Albemarle secured access to world class watching the spas mean mine through our marble joint venture. This joint venture has the resources and ultimately will have the conversion assets to annually produced 100000 metric tons l. on an l. CE basis, a battery grade live.
Hi dropped side.
Keep in mind that we are currently using less than 25% of our available lithium resources, which gives us the ability to respond quickly to support the lithium demand growth for at least the next 10 to 15 years.
Turning to our long term lithium contracts currently about 90% of our battery grade carbonate and hydroxide volume is under contract.
To date, we have reached agreement with all but one of our contracted customers on one year price concessions for 2020, which results in a mid teen percentage of price reduction compared to 2019.
Technical and battery grade carbonated seen higher reductions and hydroxide being generally lower.
Otherwise the basic structures of our long term agreements remain unchanged.
We will continue to manage these agreements to evolve with the individual needs of our customer.
Each customer has unique value drivers that are critical to them.
We remain committed to leveraging our world class resources, and low cost conversion processes to meet the growing demand and deliver a differentiated value proposition to each customer.
As we outlined at our Investor day in December while we are slightly adapting some aspects of our execution our strategy remains largely the same.
Invest in growth and focus on cash generation in lithium through smart investments and our advantage resource position.
Maximize the earnings and cash of bromine and catalyst through sustainable cost savings and investments in systems people processes and operational excellence.
Assess our portfolio for opportunities to divest noncore businesses and acquire our build lithium conversion assets at a lower capital intensity.
And take a thoughtful and disciplined approach to capital allocation, while preserving financial flexibility.
By executing that strategy by 2024 album, all should generate revenue in the range of $4.7 billion to $5.3 billion, a five year CAGR versus 2019 results of 6% to 9%.
Adjusted EBITDA of 1.5 to 1.8 billion, a CAGR growth of 8% to 12%.
Adjusted EBITDA margin between 32, and 36% a 300 to 700 basis points improvement.
And $1 billion of annual sustainable free cash flow.
In December we also outlined the mini inputs, we used to build our lithium demand forecast. These inputs include historical and forecasted technology advancements cost projections OEM model announcements and a number of other factors. We continued to see the advancements of these variable.
Sales, which further reduce impediments to wide scale consumer adoption, namely range anxiety infrastructure and cost parity.
The global average range of new EMEA models launched is expected to exceed 200 miles with some models exceeding 300.
To support mobility, there are now almost 1 million public easy charging connections globally and the number will continue to expand especially in Europe and China.
And cost improvements through technology and scale are also accelerating.
In their most recent survey Bloomberg New energy finance reported that the average costs for lithium ion beam E. The battery pack within the range of $150 per kilowatt hour in 2019.
The 100 dollar per kilowatt hour milestone is now within reach in the 2022 to 2024 time period, well ahead of estimates just a year or two ago Infat upfront purchase parity predictions are also being pulled forward into the 2022 timeframe.
All of these trends are consistent with the projections of our model, leaving us even more confident in our demand expectations.
I remain very confident in the lithium market demand, we will see over the next three four to five years.
In an album Walt ability to seize that opportunity.
Album, All has the best lithium resources in the World.
Converting those resources in the battery grade comment and a drug side cost effectively will be absolutely critical to support that demand growth remember there is no e. the revolution without lithia.
With that I'll turn the call over to Scott to provide greater detail on fourth quarter performance and full year outlook.
Thanks, Ken good morning, everyone.
Adam are generated an adjusted US GAAP net income of $90 million during the fourth quarter, bringing full year 2019, net income to $533 million compared to $694 million in 2018.
Increased charges for the marble acquisition. During 2019 were a factor. However, 2018 benefited from $170 million gain on the sale of the Polyolefins and components business, creating a difficult comparison.
Full year 2019, adjusted earnings were $6.04 per diluted share an increase of 63 cents or 12% over the prior year on a 2018 pro forma basis.
Our businesses delivered about 58 cents per share of that growth.
2019 also benefited from a favorable tax rate and from our 2018 share repurchase program.
The gains were partially offset by currency impacts higher depreciation in lithium and increased corporate expense.
Net cash from operations were $719 million in 2019, an increase of just over 30% versus the prior year driven by the strength of the businesses or reduction in lithium working capital and improve working capital across the rest of the company.
Capital expenditures and total ended 2019 at $852 million after approximately $90 million, an expanded expenditures shifted into 2020 based on invoice timing.
As we've mentioned all our major growth projects remain on track and we will continue to update you on their progress throughout the year.
In November 2019, we closed the note offerings on the equivalent of about $1.6 billion, which we used to pay the marble joint venture cash payment and restructure the short end of our maturity curve.
As a result of the bond offerings, we were able to reduce our annual average interest cost by 70 basis points to 2.7%.
And get our investment grade ratings reaffirmed by all three agencies.
We closed 2019 with a net debt to EBITDA right on track at 2.4.
Now, let me move on to the business performance.
During 2019 bromine delivered sales of just over $1 billion and adjusted EBITDA of $328 million, a year on year growth of 9% and 14% respectively.
Full year adjusted EBITDA margin was strong at 33%.
Although there is continued weakness in the automotive sector. The other markets for flame Retardants and bromine derivatives remained healthy supporting year on year volume growth and elevated prices.
Volume growth was supported by the Tetrabrom expansion in Jordan that came online in mid 2018.
Pricing continued to be Boyd by constrain production of elemental bromine by Chinese competitors.
Full year catalyst sales were $1.1 billion and adjusted EBITDA was $271 million approximately flat compared to 2018, excluding divested businesses.
Refining catalyst provided mid single digit percent adjusted EBITDA growth, excluding onetime insurance settlements that were received in 2018.
Strong sales volumes in HPC and low single digit price increases in FCC helped to offset lower FCC volumes.
During the fourth quarter lithium volumes were up 27% compared to the fourth quarter of 2018.
Average pricing was flat in the quarter end customer mix hurt sales by about 5%.
Increased totaling to meet customer commitments and the negative customer mix resulted in adjusted EBITDA margins of 34%.
For the full year lithium generated net sales of $1.36 billion, an increase of about 11%.
Adjusted EBITDA was $525 million down by about 1% compared to 2018 and full year adjusted EBITDA margin was 39%.
During 2019, we grew lithium LC volume by 14% versus the prior year, our average prices remain flat under our backdrop of an overall industry prices being down 28% to 30% year on year, demonstrating the strength of our customer related.
One chips and contract structure.
As we mentioned at our Investor day, the lithium market has been more volatile than we expected. So we're adjusting our approach.
We have access to the world's lowest cost resources in both bromine and lithium.
But to succeed in a viacom marketplace, we need to have low cost operations and business processes as well.
As Luke mentioned earlier, our sustainable cost savings program is well underway.
We have identified over 70 discrete projects assigned project ownership and instituted a tracking dashboard.
We have included $50 million of anticipated sustainable savings in our 2020 guidance.
About 40% of the savings will come from selling and administrative costs. For example, we've identified savings of more than $10 million that we can achieve through the reduction of outside services.
About 40% will also come from reduced factory spending and operational efficiency.
For example, and operational Excellence project at one of our production facilities is expected to generate $6 million to $7 million in savings this year.
And the last 20% of savings will come from supply chain activities like procurement and logistics. For example, one program will consolidate the number of freight forwarders that we use across the globe.
We are confident in our ability to achieve this milestone in 2020 and reach our targeted run rate of $100 million by the end of 2021.
And we'll provide periodic updates on our progress throughout the year.
Execution of our capital projects continues to be a focus in 2020.
Due to the timing of payments that push from 2019 capital spending in 2020 will be higher than previously anticipated you can expect total capex of between 1 billion and $1.1 billion with over 70% of that dedicated to lithium growth.
We're certain that our businesses will continue to perform at a level that generates the cash needed for this growth plan.
Net cash from operations is expected to range between 700 and $800 million in 2020.
Up modestly from 2019 due to lower working capital.
Free cash flow is expected to remain about the same as 2019.
Note that on page.
18 of our earnings deck, we have provided some additional data points on our forecast that may be helpful. When you're doing your models.
Now, let me turn to our business unit outlook for 2020.
I'm going to begin with the Corona virus and the impacts from that.
Our thoughts or with the families who have been impacted by this virus for Albemarle. We've had zero confirmed cases, among our employees were diligently managing the situation to protect our employees and the local communities and our complying with all government and health agency recommendations and requirements.
In addition to our Chinese lithium hydroxide conversion facilities in Xinyu and Chengdu, we architect occupy offices in several cities across China.
Employees in the is offices have been working from home and are expected to return next week on a limited basis.
In lithium we continue to operate safely, but at a reduced capacity at our production sites.
And in cooperation with the local government offices are to determining the next steps to reserve zoom.
Normal operations.
To date, we've experienced minimal order reductions from our customers and have been able to produce the quantities needed to fulfill orders.
However, each businesses is experiencing logistics delays.
The potential impact on deliveries to our customers and deliveries of raw materials to our facilities remains an area of concern.
In lithium there's a risk that the automotive OEM slowdown in China will have ripple effects. For example, the potential of inventory building up at the battery manufacturers could impact us later in the year.
And our lithium hydroxide conversion plant construction at Cameron in Western Australia for lies in part on equipment sourced from China.
The startup of the plant could experienced delays given the uncertainty for Chinese equipment deliveries.
To date, though project construction has been proceeding as expected.
In catalyst, our largest risk is lower FCC sales to customers, who export fuel into China to the degree that transportation within China continues to be reduced restricted.
And a secondary risk is that raw materials that we sourced from China, but we currently have sufficient inventory to cover our.
Requirements well into the second quarter.
In bromine the primary risk is related to logistics caused by a shortage of drivers and depends on the duration of restrictions on people movement to manage virus containment.
Overall, we expect a weak first quarter in China, and depending on the continued length and severity of the outbreak our operations could be further negatively impacted.
2020 will be a pivotal year for lithium.
The growth in Europe is expected to accelerate driven by fleet wide Seo to reduction targets.
Growth in China is still uncertain, we saw the market begin to stabilize at the end of 2019.
And expect growth to return in 2020, however, the impact from the Corona virus adds a measure of uncertainty on how the year will play out.
We anticipate the total lithium demand to increase by about 50000 metric tons.
And inventories to begin to tighten as we go through the year.
Our volume growth will be about 3% in 2020 and will be limited until we commissioned Dillon negra three for lithium carbonate expansion in early 2021.
As we've mentioned we have reached agreement with all but one of our contracted customers and our sold out on battery grade materials.
Although the prior inventory buildup and additional supply availability put pressure on pricing for 2020 versus our prices in 2019.
We believe that market pricing has stabilized.
Unfavorable pricing will be partially offset by lower cost as or as a result of reduced tolling volumes.
Higher operating rates lower royalties in Chile.
And the impact of our cost savings program.
Consequently, we expect a year over year decline in adjusted EBITDA of about 20%.
For bromine, we expect 2020, adjusted EBITDA performance to be flat to slightly down compared to 2019.
Demand for flame Retardants and other bromine derivatives is expected to remain stable.
However, slightly increased supply across the industry could put price price pressure on the business in the second half.
We are operating in a sold out position, meaning we have little to no headroom to makeup any price degradation with volume growth. However, we will continue to optimize our sales into markets that provide us with the highest margins.
We expect catalyst adjusted EBITDA to be flat to slightly up year on year with the second half somewhat stronger than the first.
FCC catalyst are expected to benefit from strong demand and an improved product mix.
However, our FCC units are also operating at full capacity limiting our ability to benefit from additional volume upside.
Clean fuels technologies are hydroprocessing catalyst is expected to be slightly down based on our incumbency mix and lower year for distillates turnarounds and change outs.
Since we'll be operating bromine lithium and FCC catalysts that sold out utilization rates, our operational excellence teams will be focused on reliability and productivity improvements to get the most we can from these assets.
Driven by the pricing pressure and lithium in bromine.
Modest low single digit volume growth in all divisions and the high utilization of our manufacturing assets. We expect 2020 net sales to be $3.48 billion to $3.53 billion.
Adjusted EBITDA should range between $880 million and $930 million.
With an overall corporate adjusted EBITDA margin of around 26%.
In total this is expected to result in an adjusted diluted earnings per share between $4 and 80.
And $5.10.
With lithium sales and catalyst HPC shipments weighted to the second half. We currently expect a cadence of earnings to ramp up through the year.
Due in part to the impact from the Corona virus on global logistics on each of our businesses and lower lithium volumes, while our customers make inventory adjustments. The first half adjusted EBITDA is estimated to be 15% to 20% below the first half of 2019.
And Q1 could be down as much as 20% to 25% year over year.
In closing the actions we've taken give us confidence that we are heading into 2000 as we head into 2021, we will deliver sustainable savings.
Actively report on our sustainability goals and support notable volume growth in lithium and be positioned to achieve positive free cash flow and with that I'll turn the call back over to Dave.
Operator, we're now ready to open the lines for Q in any but before doing so I'd like to remind everyone to please limit questions to two per person to ensure that all participants have a chance to ask questions then feel free to get back into the queue for follow ups. If time allows please proceed.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchtone telephone. If your question has been answered or English or move yourself from the Q. Please press the pound King once again to ask a question. Please press Star then one now.
And our first question comes from Bob Court from Goldman Sachs. Your line is open.
Thanks very much.
Look I wanted to ask about the contracting approach I guess, you characterized as a onetime concession in 2020.
Can you talk about maybe why you took that avenue as opposed to may be just repricing every year and then secondly, I think you talked about.
Range, which would seem to suggest again to trend towards hydroxide, but maybe theres been some more news about alipay and some other cathode types.
Gaining some momentum can you just talk about how you see that developing over the next couple of years. Thanks.
Yes, I'll take the first one and I'll turn it over to air to talk a little bit about the the draw side versus department in the LR I'm, assuming you're talking about the L. RP.
They talked about with Tom Hill, LLP, I'm, sorry, I'm thinking about a long range plan here the l. at the that Tesla announced with two artesia.
I think the idea on the contract is that there's a situation that is occurring today that we want to address but we believe that that dynamic will change over the next three to four years and these are long term contracts. So it doesn't make any sense for us to reset that contract for five or six.
Years, when we think we've got a short term disconnect here between supply and demand. So we thought it was in our best interest to address the concerns that the customers had today yet keep the overall structure those contracts where they are now that's not to say long term, we might not see modifications of of our plan of the contracts.
This is why you have a long term contract you set those prices. We've got a short term issue. We address it short term and then it goes back to the way the contract Wasnt, we have to renegotiate 2021, we'll do the same thing again. So that's that's why that Bob we took that approach as opposed to just set it doesn't do us any good to see.
The price when the markets low I mean that doesn't make any sense at all so we were trying to preserve the integrity of those agreements while adjusting to the marketplace for the short time for that short window that we see that those issue and with that I'll turn it over the air to talk a little bit about your question on LLP.
Hey, Bob it's Eric here with regard to LSP or lithium iron phosphate catheter.
The as you May know the China market has used that as a workforce for a variety of applications for some years now and that supply chain as well developed in China.
As you will I think also known we've talked about the development of high nickel Chemistries, which would shift from carbonate which is used in iron phosphate predominantly too.
Hi, hydroxide for high nickel that tends to be a range driven technology get higher energy density to provide higher driving ranges.
And Thats a phenomenon that see appears to be most prominent outside of China with large established global automotive Oems and also Tesla what test as announced recently is is the adoption at appears if from the press releases of working with iron phosphate to provide a compromise of reduced range for a lower costs.
Costs that market, we view being.
China market today, we still believe in the us and in Europe and for that matter. Other developed countries like Japan that range is an important consideration for the adoption rates were saying, but the reason we've talked about the the value we have as a player both carbonate and hydroxide is that we can play in both opportunities I think the China.
Hey, subsidy changes or the reduction of subsidy changes as maybe strengthen the movement to Lf pay because it helps it's not putting a print is not giving an incentive to move to higher range and I think the characteristics of the Chinese consumers support.
Potentially a lower range lower cost vehicle and that's the market had to App I think tests lessees.
Yes. This is Lee just one other thing if you go back and look to our our Investor Day presentation. We did in December we were still talking about carbon at production Dublin between now and 2025 going from about 195 to about 14 in in a draw side going from 70 525. So.
We still believe we believe Cardinal is going to continue to grow we think there's going to be a higher growth in a draw side.
What we do have the flexibility to go either way there seems to be some some scraping on the funds I'm not quite sure what that is but operator could you check on that please and we'll go next question.
Thank you. Our next question comes from PJ Juvekar from Citi. Your line is open.
Yes. Please check that your line is not on me.
Right.
Okay.
What happens.
Right.
Okay.
Yes.
Sure.
Yeah.
So the is a one year amendment so out in 2021, a go back to the original agreements and if we have to negotiate from there in some instances we will but you go back to the original agreement the discussions took place.
Before and during the Corona virus.
Great and just one quick question on bromine.
You mentioned that you're seeing some there could be some pricing impact in second half because of increased supply can you just sort of elaborate on that.
I will let net to handle that please.
If you look at the import data and people who are importing bombing in China, you can see from the data very clearly that theres more supply going in to China than what we have last year. So we expect that trend to continue and we'll see that supply increase into that market, which will put some pressure on pricing.
Thank you.
Thank you. Our next question comes from John Roberts from FBR. Your line is open.
Thank you and Luke I know you have at least one more quarterly call coming but good luck with your treatments and thank you for your service.
And could I ask do have any covenant issues, if you don't get the divestments off okay.
Hi, Scott.
Now, we'll do it will be okay, we're monitoring that carefully but given our outlook in given even a lower risk are higher risk type of scenario with corona virus will be okay.
Okay, and then Theres been a lot of news recently about stationary storage are we reaching an inflection point, where that could actually start to become material.
Eric.
John This is Eric So I would reference the Investor day presentation, we talked about the demand. That's there. It's it's still a small part of the demand picture it's growing rapidly.
That said I see the same news you see about being continued push towards.
These sorts of installation so we're watching it closely but we still don't view that as being quite the mover for our strategy and driving the capacity growth that we see and the volume contracts with our customers.
Doesn't look it's is it still ease that really drives that that equation for us.
Thank you.
Thank you.
Our next question comes from Phil Jackson from BMO Capital markets. Your line is open hi, good morning for my two questions.
First one thank you for the update on high crime virus that may be impacting your business. When you set your guidance here for 2020, what did you assume where the impacts from chronic virus in the first half year second half year I.
I understand all the uncertainty here, especially around Oems.
Sales in China. Thanks.
Yes, So I think Joe that's that's the big point is that it is really difficult to know exactly how this is going to play out.
In our everyday there is a new data point out there in terms of is it getting worse is it getting better.
China is trying to get back to work and how long that's going to take so it's difficult to now I think as you look at our first half Theres certainly a component of Corona virus has built into that so, particularly in the in the first quarter.
With an expectation of EBITDA overall being down between 20, and 25% part of Thats Corona virus part of that inventory adjustments happening with.
With in the lithium business so.
As we get out further in the year, we'll just what were discount that continue to adjust and keep you updated but suffices to say that what we're looking at Corona virus is it is a delay it is causing the first half to be weaker we were already talking about a week of our staff to begin well is may get weaker, but we're not projecting now for it to have an impact on the full.
Year.
Okay. So just my second question was first can be a follow up. So then it sounds like what you're saying it impacting first month of the year and sounds like you're expecting that to all come back to the second half of the year and my second question would be on inventory situation right now for feedstock and for the chemicals How's that looking right now both for out of them all in for the industry and.
Are you seeing in terms of.
Closures or curtailments for some of the sponsoring players on the conversion plants in China. Thanks.
Well he is talking specifically about lithium our across our portfolio.
I'm talking about for both Albemarle and leasing industry for both past feedstock, Okay spodumene and also physical thanks. So so today, we have not seen an input on on the raw materials for us we've been able to secure the raw materials that we need to to run in the first.
Quarter as Weve referenced on our calls we've had lower run rates and China than we had anticipated for our lithium but it hasn't been an issue to date of getting raw materials and our other businesses. We have seen some in and if you if you listen to the calls on now you have you seen a number of chemical in.
Industries.
Companies talking about the ability to get raw materials, but we're pretty well okay for that from a from a raw materials standpoint, right. Now we don't we don't see those issue from from where we are in the kind of time frames are talking about on the Corona virus I do think one of the issues that we don't know about is.
As you know if you look at the automotive OEM some of them are not running today, but some of the batteries are running today, a both inside and outside of China. So what remains to be seen is for the full year.
Automotive Oems going to run fast enough to soak up the inventory levels in that lithium that we would expect over the year or is there going to be a ripple effect later in the year, which would put our full year kind of some downward pressure on that we've got contracted volumes. So we don't expect it to be a significant risks, but thats one of the thing.
With that we're going to really keep our eyes on is what is of real impact not only on our products, but on our supply chains and particularly in bromine in in lithium as these.
And in product Oems either ramp up a ramp down during the course of the year. That's the biggest unknown issue that we will face and we're we're not we don't sell to the we're not a tier one supplier. We're further back in the chain. So that causes a ripple effect to be even even more what.
Do you think or the inventories for spot you mean carbonate and hydroxide right now in the industry. Thanks.
Overall, Hey, Charlottes, Eric overall, we would say that.
We are about six months inventory across the supply chain.
And so as you look at that it's probably closer to four months for refined lithium and the additional couple of months is excess spot you mean, the excess barge mean, that's that's in inventory now great deal of it is not economic at current prices, meaning it's not at 6% not of the great to be able to cost effectively be converted.
Current spot prices so.
It's that is what we watch very carefully this year, we expect demand growth of 50000 tons. So it's going to be an overhang for the year supply growth as you referenced senior question. It's already been curtailed, we see very little supply growth year over year, it's going to be stocks and the drawdown the stocks of the important to the stabilization.
And we'll look for that over the next 12 months and give you update this what that we think that means for pricing later in the years, we approached 2021.
Thank you very much.
Thank you.
Our next question comes from David Begleiter from Deutsche Bank. Your line is open.
Thank you good morning.
Ill look you mentioned that one customer had not agree to the I guess down 15% in lithium how large that customer and what's your expectation for those negotiations.
So Dave you know the answer that question I'm, not going to get until a conversation about a specific customer.
Our expectation obviously is we're going to meet.
And find a resolution that meets that customer needs and meets our expectations and if not opposition is we've got a vastly enforceable contracts.
Understood and on the non tech nonbearing rate technical grade lithium what's your expectations for pricing in 2020 versus 2019.
For technical grade lithium correct.
Yes. So if you look at both car minute and as I said on the called the the technical grade Carbonite Ob down more than that mid teens average that we talked about as I said in our prepared remarks it is down.
More than that.
Actually meant the non non battery grade.
Lithium.
Oh, My apologies I'll turn it over to Eric Yes, I think would satisfy let me let me summarize it so as Luke said on the battery grade side carbonate is probably down a little more than than hydroxide in on the technical grade side, all technical grade products are down that more than.
Then then then battery grade and so and specialties.
Mixed very mix, it's not as price sensitive an area. Although there are the input lifting the input lifting materials in that business and that does have a mild effect on price that would be the least affected.
Thank you.
Thank you.
Next question comes from Jim Sheehan from Suntrust Robinson Humphrey Your line is open.
Thank you in catalyst.
Our outlook for flattish earnings in 2020 can you describe what impact IMO 2020 regulation is having and what what is the underlying growth you're seeing in that business. Excluding the IMO 2020 and also.
What does your outlook for FCC pricing in 2020.
Hey, Jim This is Raphael.
So to give you a view the as Scott and Luke have indicated.
We're expecting and fairly strong year on FCC catalyst.
And a slightly weaker year on HPC catalyst.
The reason for that is as explained in Investor day is that HPC catalyst is about change outs and the change outs happened to be smaller.
In 2024 distillates than they were in 2019 and Thats an area of strength for our business overall, the industry will see IMO 2020, as a tailwind for our business.
A higher diesel production to blend to be able to meet the sulfur specs is favorable it might not be as favorable as it is for others because our business.
Is weighted more towards distillate than it is towards resulted in reserve is the areas that will benefit the most from IMO 2020 again it will be positive.
Perhaps not as positive as it could be for others, but we have a very strong business in distillate and in specialty catalyst for hydro processing in the trends in the industry are favorable.
Overall for the long term in that business.
As you, it's a little bit too early on FCC pricing, we did have positive pricing in 2019, it's too early to say in 2020, a crack spreads are a little narrower narrower than they have been so that could have an impact, but our business is about value creation for our customers we.
Continue to do that in where we can get value pricing for that value creation, we will.
Thank you and another $50 million in cost savings for 2020 could you just discuss how the savings will be realized by segment.
Okay.
Yeah. Jim This is Scott so as you look at this time of the split out.
Roughly you're getting get about two thirds of that savings in the lithium business.
Some of that 10% in catalyst in bromine in the remainder is going to be in the corporate functions.
Yes, Hello, Hello play out in 2020.
Thank you very much.
Thank you.
Our next question comes from Jeff Zekauskas from Jpmorgan. Your line is open.
Thank you very much.
You said that you thought that global lithium demand would Carl about 50000 tons in 2020.
How fast do you think it crew in 2019.
And wouldn't 50000 tons imply about a million incremental electric vehicles for 2020 or or or how because the component.
Tied to electric vehicles, and how to calculate it.
Eric.
Hey, Jeff This is Eric so yes the growth.
50000 tons was a similar growth rate last year. The issue last year was we had a lot of excess supply in light of excess inventory. So a lot of our customers didnt buy it didnt actually buy that a lot of people in the marketing by that volume actually drew down there their inventories instead, but they're real consumption was was in that same order Maggie.
The two for US looking forward then.
Yes, it does imply a growth and significant growth in electric vehicles are where our view on 2019 was that it was.
Production was about 2.6 million electric vehicles, and and we're looking for that number to be.
Close go up to three and a half to force over a million electric vehicles and growth most of that's going to be driven out of the European producers automotive producers.
Okay, and then in your financials here Youre equity income and in the lithium business drop sequentially from may be rough roughly 30 million to 15.
What's going on at Talison, such that the equity income is is dropping so sharply and how do you see that for 2020.
Hey, Jeff I think you're referring to the fourth quarter.
And the equity income for Talison and then the lithium business is largely driven by the volume that's being taken.
By both chunky.
Or albermarle.
Out of that joint venture and so we did see reduced shipments primarily going to TRG in in the fourth quarter.
Expecting that will be roughly flat as we go into roughly flat to slightly down as we go into our 2020 overall.
Flat to down from the fourth quarter or year over year versus the previous here year over year.
Okay. Thank you so much.
Thank you. Our next question comes from Mike Harrison from Seaport Global Securities. Your line is open.
Hi, good morning.
Good morning, I was wondering on.
On slide seven DSS box, there can you give us an update on the opportunities that you're seeing to acquire lithium conversion assets.
As opposed to building additional conversion capacity, maybe how you're thinking about that.
Hi versus build strategy today versus how you might have been lucky that in a few quarters ago.
Yes, it's the the from matter of pricing I.
I think the.
Reduced price as that we've seen of covenant in the marketplace.
And the inability to get some of the spodumene rock is a raw material supply has brought some prices down to a level that it appears to US you could have.
A lower capital base, and if you build your own and you'd be in the market a whole lot sooner so for us It all comes down to.
Is there is at a price at which when you look at our all in cost of.
Acquiring modifying where necessary to meet HSC standpoints in converting from me to call net a draw side are or what have you was that return on capital how will we lay that out versus what's the return on capital in the timing from building is it's a mathematical equation.
For us and you got a negotiated and be able to close it as well. So that's how we're looking at it and there are opportunities out there because of our tolling relationships. We're familiar with many so we are we are in active.
Valuations.
Yes.
Alright, and then in terms of lithium customer mix, you mentioned that that was a negative.
Order can you talk about how that plays out during 2020 is that something is mixed something that may be improves as we get later in the year, maybe we get some additional hydroxide demand growth.
Well, Hey, Michael This Ed it's Eric I.
I would say its.
We have.
2019 was had a lot of moving parts to it in 2020, we're going to have.
An equal amount of growth in production out of when Agra and out of.
Out of Zhenyu for hydroxide.
And at the same time, a big reduction toll volumes, we sell into the marketplace as Luke said, Scott said, we've contracted out 9% of our business.
We endeavor each year to try to keep the mix fairly constant. So we don't have swings from from period to period. The simple fact, the matter is is that we tend to produce a lot more carbon at the end of the year, beginning so there's sometimes and product mix factors.
And some customer manufacturers I don't know it will probably similar throughout the year.
But it's.
Again, we try to manage it so it doesn't cause these swings as best we can but I think over a fairly similar.
Alright, thanks very much.
Thank you. Our next question comes from Colin Rusch from Oppenheimer. Your line is open.
Thanks, So much guys can you talk about what's going on with your customers in terms of potential consolidation and how you think about that not just in 2020, but as you move into 2021 2022 at some of the production schedules, so you're getting from the Oems.
Yes, if you look in that you're talking I'm, assuming about lithium and the battery producers what what we've said is that we've seen to decisions movement from the cathode producers to the battery producers and then some essence all the way to the OEM. So we've seen those those big battery producers, making the purchase.
Soon decisions in the volume decisions and then allocating some of that volume for in house production and then some of it to be directed towards certain of the cathode producers. So so we are seeing that that that will can enough in effect consolidate the decision makers about these purchasing decisions and how you concho.
And with.
Down to a lower number I think long term as you look across.
The spectrum Youre going to see a consolidation even further of battery producers you're going to have.
The Korean and Chinese.
And the Japanese are going to consolidate into the bigger into the bigger producers that be typical of what you've seen in other industries and I'll point. This is going to be any different.
Okay, and then we're seeing Oems with.
Various challenges in terms of getting into production and ramping up production on you can use as it's a different manufacturing process can you talk a little bit about the capex plans and your ability to modulate.
The spend this year and early next year as you as you see those those schedules at US you because obviously, there's a fair amount variability there.
Yes, So I think you know own own Carbonite. If you look at Covenant, We've got Linagliptin you for.
Thats going to come online in by the first quarter 2021 and will be commissioned.
Most of that spending has already done so it's kind of hard to do anything there on la Negra Im sorry, Onem further inland nagra, we have the ability we have the plans where if necessary we could expand that.
But it would be kind of a two to three year process Atlanta Agriphar call minute plant.
If you look in at a dry side from a from a kimpton standpoint, we believe we're on track for the second half of 2021 for start up.
It will be difficult to it took to lateral that back much because of the the cost we've got in there.
And if anything else, we builds going to be a lower capital intensity. So thats why were looking at a build versus buy in an area like China, you can probably get it done in China in from start to finish in about two years, we have teams in our engineering walking right now on taking the plans in the designs that we have.
And building, a lower capital intensity and a lower operating costs looking at what our opportunities are there. So that the next asset that we build from a draw side conversion standpoint, we will build.
More efficiently more cost effectively and operate it with lower costs than than the ones. We have the day, we got to continually drive that down.
In addition to that I know there you can take as you know take carbonate and convert it to lithium hydroxide. We also have teams looking at what is the most cost effective way if the market goes that way what is the most cost effective way would we build that in close to our covenants.
Facilities will we convert that.
Convert the covenant somewhere else what is the best way to do that and the idea of Modularizing that is a concept that we're looking at.
But we need to be prepared to pull the trigger on that if and when the market costs were that again that would take you probably if you build in it in China is probably 50% of the capital and probably a year off the time and to get it build to get it permitted and get it up and running.
Excellent thanks, guys.
Thank you and that does conclude our question and answer session for today's conference I'd now like turn the call back over to Dave Ryan for any closing remarks.
Hi, just like to thank everybody for their participation today and for your questions as always we appreciate your your interest. This concludes our malls fourth quarter earnings call. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program you may all disconnect everyone have a wonderful day.
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