Q2 2020 Albemarle Corp Earnings Call
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Welcome to the Q2 20 Tiny Albemarle Corporation earnings Conference call. At this time, all participants are not listen only mode.
After the speaker presentation, there will be a question and answer session ask a question. Dan. This session you want me to Pet Star one on get telephone. Please be advised that todays conference is being recorded.
If you acquire any better insistence. Please start the though I would now like to hand, the comp and Steve Speaker today, Meredith bandy VP of Investor Relations and sustainability. Please go ahead man.
I think you joelle, thanks, everyone and welcome to Albemarle Second quarter 2020 earnings Conference call earnings released after the close yesterday and you'll find our press release presentation and non-GAAP reconciliations posted to our website under the Investor Relations section at album, All Dot Com joining me on the call to their can't mass.
Bruce Chief Executive Officer, and Scott, Twoish, or Chief Financial Officer, Raphael Crawford, President catalyst that the Johnson, President bromine specialties, and Eric Norris President and lithium are also available for queuing <unk>.
As a reminder, some of the statements made during this conference call, including our outlook expected company performance expected impacts of the Koubei 19, pandemic and proposed expansion Pant and plans may constitute forward looking statements within the meeting a federal securities laws.
Note that the cautionary language about forward looking statements is contained in our press release and that same language applies to this call. Please also note that some of our comments today referred to financial measures that are not prepared in accordance with GAAP. A reconciliation of these measures to GAAP financial measures can be found in our earnings release and the appendix of our earnings presentation both away.
Which are posted on our website.
Now I'll turn it over to cap.
Thank you Meredith and good morning, everyone.
Today's call old Cobra high level overview of the current environment give an update on our strategy and highlight some of the actions, we're taking to improve the sustainability of our business.
Scott will then review second quarter financials provide updates on our balance sheet and cost savings initiatives and review our outlook.
I want to reaffirmed the safety and welfare of our people is our highest priority at Albemarle.
Our core values always define how we operate but even more so in the difficult situations we face today.
During the pandemic, we've been able to continue to operate because we care about the welfare of each other we humbly acknowledge that this crisis is not about us, but about everyone and we show integrity by doing the right thing.
Thank really dependent mic has not materially impact our operations to date.
Deeply appreciate the courage and continued support the frontline essential workers in our communities and our dedicated Albemarle employees, who continue to ensure a safe operations at our facilities and offices worldwide.
At this point in time, we have had relatively few diagnosed individuals out of our more than 5600 global employees.
Using our exposure protocol, we have traced the contact path for any confirmed case among employees and have isolated colleagues as needed we.
We are staying in close contact with impacted employees to monitor their welfare. We are grateful that previously diagnosed employees have recovered or are recovering as expected.
In areas, where we're where we are seeing unfavorable trends such as Chile and parts of the US we're extending work from home requirements for non essential workers and working closely with our manufacturing sites to ensure safe operations can continue.
At many of our locations non essential employees have returned to work we continue to be in close contact with site teams to support them help and I healthy and safe return process.
Global Cross comp cross functional co. Good response team continues to meet weekly to mitigate the impact to our operations and manage the impacts to customer demand.
Turning to recent results yesterday, we released second quarter financials, including net income of $86 million or 80 cents per share and adjusted EBITDA of 185 million down 29% from prior year.
However, I'm pleased to say that these results were at the high end of our previous outlook, thanks to better than expected performance in lithium and in bromine.
Our primary capital priorities continue to be paying dividends to shareholders preserving our investment grade credit rating and maintaining our long term growth profile.
To that end during the quarter, we announced a dividend of 38 and a half cents per share inline with prior quarter end up 5% from last year.
We continue to maintain adequate financial flexibility with liquidity of $1.5 billion and our previously announced cost saving initiatives are also on track.
At a high level Albemarle strategy has not materially changed we will invest in and grow our lithium business and we will fund lithium growth with cash flows from our more mature businesses.
Historically, we've actively managed our portfolio to generate shareholder value and we'll continue to do so.
We will also maintaining a disciplined approach to capital allocation.
The difference is that the cobot 19 pandemic has pushed lithium growth out by at least one year, while also impacting near term cash flow from our other businesses.
Our responses to broaden and accelerate our focus on operational discipline to continuously raised the bar on performance.
And specifically manufacturing excellence to drive best in class cost management and product quality with a relentless focus on safety standard work continuous improvement and the application of lean principles across our manufacturing operations.
In business excellent to deliver exceptional value and service to our customers and to capture profitable high value opportunities through tailored value propositions, and optimize optimized business processes and resources, so customer facing as well as back office.
And capital project excellence to effectively manage capacity to demand through the use of standard reliable designs and disciplined planning and process management.
Okay.
We know that being profitable and doing what's right or not at odds with each other we expect to do both well and our sustainability framework as our guide.
In terms of our people in workplace, we continue to advance and promote inclusion and diversity across our organization.
Last year, we added two highly experienced female board members currently 50% of our directors represent gender and racial diversity, which broadens the range of perspective experiences and insights we can leverage to benefit our organization.
Recent events of discrimination and violence against Black citizens in our communities remind us that we need to work much harder to fight racism.
As a result, we've introduced a multi prong strategy to refocus our inclusion and diversity efforts from the bottom up as well as the top down.
Current activities include the addition of a dedicated senior inclusion and diversity leader.
Unconscious bias training for leaders and incorporating inclusion and diversity into the onboarding process for all new employees.
We're also focused on responsible natural resource management water management is an important sustainability objective for Albemarle and to continue to grow it's imperative that we manage water efficiently. One example of this is at our facility in Magnolia, Arkansas, one of the world's largest bromine and bromine chemicals sites Magna.
You uses an artificial marsh as a unique water treatment facility.
We're actively collaborating engaging with our communities our lithium operations at the salada at a common in Chile works closely with the local community to promote environmental stewardship and foster the communities long term development, we share a percentage of our revenue with local indigenous communities and more than 35.
Percent of our employees in the region our indigenous.
Finally, our sustainability business model helps create long term value for all shareholders.
For example, about 50% of our catalyst revenues are from products that reduce sox and Nox emissions to produce cleaner transportation fuels in 2019, the use of our catalyst prevented the release of about 10 million tons of sulfur into the environment.
In the coming weeks, we will publish an updated sustainability report provide increased transparency and disclosure around these and other important topics as discussed at our Investor day late last year.
We are excited about the progress we've made on sustainability, but we also recognize that same is still sustainability is by its nature or long term journey.
In 2021 and beyond our focus will shift from say the baseline on sustainability performance to goal setting and continuous improvement.
With that as a backdrop I'll turn it over to Scott for more detail on our recent results.
Thank you Ken and good morning, everyone.
Meanwhile, generated second quarter net sales of $764 million, a decrease of about 14% compared to the prior year.
This reduction was primarily driven by reduced prices in lithium as expected coming into the year and reduced volumes in catalyst and bromine related to the coated 19 pandemic.
GAAP net income was $86 million or 80 cents per diluted share.
The non-GAAP adjustments this quarter were primarily related to restructuring costs with adjusted earnings of 86 cents per diluted share.
Lower net income was primarily driven by lower net sales.
Partially offset by over $30 million and cost and efficiency improvements.
Corporate ngs in a costs were lower versus the prior year due to these cost savings initiatives.
As Ken stated adjusted EBITDA was a $185 million a decrease of 29% from the prior year, but at the high end of of the guidance. We gave in May.
If you look at slide eight for look at the EBITDA bridged by business segment, adjusted EBITDA was down $77 million over the prior year, reflecting lower net sales higher freight costs and lower equity income.
Partially offset by the cost savings initiatives.
Lithium to adjusted EBITDA declined by $50 million versus the prior year excluding currency.
Pricing was down about 14%, partially offset by cost savings initiatives.
Lower pricing reflects previously agreed battery grade contract price concessions as well as lower market pricing.
Adjusted EBITDA was also impacted by lower Talison equity income as our joint venture partner took lower volumes in the quarter.
For all means adjusted EBITDA was down $8 million excluding currency.
The decline was primarily due to volume reductions related to demand softness, partially offset by cost savings and efficiency improvements.
In catalyst adjusted EBITDA declined $44 million excluding currency.
Volumes are down 22%, while pricing was down just 4%.
Lower volumes, primarily reflect FCC volume declines caused by reduced consumption of transportation fuel high fuel inventories and continued travel restrictions.
HPC volumes were down due to normal lumpiness in order patterns as well as some softness related to lower oil prices and reduced fuel demand.
Catalyst results were also impacted by a net $12 million correction of out of period errors related to inventory valuation and freight accruals. These errors occurred primarily in the first quarter of 2020, following the implementation of our ERP systems.
Our corporate and other category adjusted EBITDA increased $15 million due to improved fine chemistry services results and corporate cost reductions.
As Kent mentioned, we ended the quarter with liquidity of about $1.5 billion, including $737 million of cash $550 million remaining under our $1 billion revolver and $220 million on other available credit lines.
Our short term debt is comprised of commercial paper and the delayed draw term loan.
We also have $441 million of senior notes due in late 2021.
The investment grade market is open to us and we anticipate refinancing a rolling forward these debt maturities.
The divestitures of FCS and Pcbs, which is a portion of our catalyst business our ongoing.
But progress continues to be slow due to cope with 19 pandemic related travel restrictions.
The potential buyers remain interested in both transactions or potential liquidity liquidity events as we get back to normal.
Turning to slide 10 for an update on our cost savings activities.
As discussed last quarter, given the current economic environment, we are executing our downturn playbook to preserve cash.
We continue to expect these short term cash management actions to save the company about $25 million to $40 million per quarter.
Examples of these short term savings include things like travel restrictions due to the curve in 19 endemic limited utilization of professional services and consultants.
And actively managing our working capital.
As previously disclosed our two biggest capital projects to Negra, three and four and Cameron are being slow walk to preserve capital.
We have the optionality to accelerate or stop these projects depending on market conditions.
At this point, we continue to expect full year 2020 capital spending in the range of $850 million to $950 million unchanged from our previous outlook and down 15% from our original outlook late last year.
We are also temporarily reducing some production primarily in response to near term demand weakness.
In catalyst, we have idled one HPC production line.
An FCC production line that was idled in Q2 is now back up and running.
In lithium we plan to idle portions of our silver peak and Kings Mountain production facilities in response to short term supply demand imbalances and excess inventory builds in the battery grade channel.
We remain committed to the long term operations operation of these facilities and currently planned to restart them in early 2021.
And finally, our accelerated 2020 sustainable cost savings initiative is on track to achieve cost reductions of $50 million to $70 million this year and to reach for run rate savings of at least $100 million by the end of 2021.
These cost savings projects were already identified and underway when coven 19 hit.
For example, our lithium team has identified a $11 million of annual savings related to operational excellence and supply chain optimization.
We're leveraging lean principles at our plants to optimize efficiency.
Bromine in catalyst both have projects aimed at reducing annual direct material cost by almost $7 million in total.
We're examining all upcoming contracts for additional cost savings.
Depending on market dynamics that may mean qualify new suppliers and diverse diversifying supply or consolidating spend with fewer suppliers in exchange for better pricing.
And at corporate our global IP group is streamlining the number of software applications that they support to reduce costs and increased productivity, resulting in a savings of about $4 million per year.
Let's turn to our outlook.
For the third quarter on page 11.
Based on our current order book and cost reduction actions. We expect Q3 2020, adjusted EBITDA in the range of $140 million to $190 million.
With the EMS Q3, 2020, EBITDA is expected to be down about 10% to 20% sequentially.
We continue to see the impact of contract price concessions agreed upon in late 2019, as well as lower market prices.
Q3 results are also expected to be impacted by continued low OEM automotive production.
Higher inventory in the battery chain.
And reduced demand in the glass and ceramics markets.
Bromine Q3, EBITDA is expected to be roughly flat sequentially as we continue to see coated 19 pandemic related impacts which began in late Q2.
Stabilization in some markets like construction offset continued weakness in other areas, including flame retardant and drilling fluids.
Finally catalyst Q3, EBITDA is expected to remain down about 50% to 60% from the prior year.
FCC demand is expected to partially recover in the second half as travel resumes and global gasoline inventories continue to deplete.
Conversely, the HPC business is expected to be negatively impacted in the second half as refiners to first spending and pushed turnarounds into 2021 and 2022.
Looking beyond Q3, 2020 continues to be challenging with limited visibility for most of our businesses.
We're staying in close contact with customers and suppliers and reviewing various economic forecast, how we as we continue to navigate through this uncertain environment.
Albemarle benefits from strong business positions acquired across a wide range of end user markets.
About a quarter of our revenues our firm transportation fuels. These revenues are largely tied to miles driven our fuel consumption.
US miles driven dropped off sharply in March with stay at home orders around the country and has rebounded since but remains well below a normal summer season season.
EA forecasts suggest at us miles driven won't return to 2019 levels until late next year.
Electric vehicle sales are a key driver for energy storage business.
We look at a variety of auto production and sales forecast, including Hs markets forecast.
Hi, Hs expects 2020 electric vehicle production of 3 million units down significantly from their pre coated forecast.
But up about 20% from 2019.
Expected 2021 easy production of 5.2 million units is also down from previous forecast for represents a significant rebound from current easy production levels.
Of course, ultimately what matters is consumer behavior, and automotive sales and to that end. We're also encouraged by recent green incentives, we are seeing around the world, which are supportive of easy demand.
Many of our end markets, such as electronics chemical synthesis and construction.
Our driven by broader consumer sentiment and glow global GDP.
Consumer sentiment is rebounding in all regions, but remains below pre covered levels.
In 2020, GDP forecast of stabilized or represent fairly significant year over year declines.
These forecasts and leading indicators help gauge the outlook for our end use markets, but a variety of factors, including order lags inventory changes in regulatory changes could cause our own results to differ from the underlying market conditions and of course secondary ways of infection could also caused.
Setbacks in demand.
Nevertheless, we are cautiously optimistic that many of our end use markets or at least stabilizing if not starting to recover.
Thanks Scott.
As we all know economic conditions remain very challenging.
Albemarle is an industry leader in all three of our core businesses. We believe in the long term growth prospects of these businesses, but our immediate challenge is to manage through this crisis in the meantime, we will focus on controlling what we can control.
That means first and foremost working hard to keep our people safe.
It also means building operational discipline to improve cost and efficiency to deliver exceptional value in service and optimize our capital spending.
We remain confident in our strategy and we will modify execution of that strategy to further position album all for success.
Alright. Thank you before we open the lines for Q and I'd like to remind everyone to please limit questions to one question and one follow up to ensure that as many participants as possible have a chance ask questions and feel free to get back in the queue for additional follow ups as time allows and with that operator. Please proceed with acuity.
Thank you as a reminder to ask a question you'll need to press star one on your telephone to withdraw your question past upon key please stand by where we come back in and they lost there.
First question comes from David that leader with Deutsche Bank. Your line is now open.
Hi, This is Dave applying your foot, Dave I guess fares.
Given the timing lag and pretend probably some lower fixed cost absorption.
Ken lithium EBITDA be up sequentially in Q4.
It's really going to depend this is Scott, it's really going to depend on what the volume environment looks like in Q4. The teams done a great job on cost reduction.
Im not expecting any incrementals sequential cost reduction going into fourth quarter at this point in time unless demand starts to decline further.
But at the end of the day dependent.
Fourth quarter.
Growth is going to depend on what what.
The volume looks like coming out of our customers.
Okay, and then I guess you have any early year on how your weight them prices could trend in 21.
On this.
Yes, so yes this is Ken.
Yes, so thats the magic question, and it's going to depend on volume as volume comes back and the market gets tighter, but we know there's inventory in the in the supply chain is going to take a little bit of additional volume to work that off before prices move. So that's the inflection that we're looking for but.
It's too early for us to call that.
Okay. Thanks.
Thank you Sir our next question comes from Joel Jackson with BMO capital markets. Your line is now open.
Hi, This is robin on for Joel Thanks for taking my questions can you describe the magnitude of the current LC inventory dynamic you could break it down both regionally and by and product versus feedstock and possible. Thank you.
Hi, Rob and this is Eric Norris hair.
I'll do as best I can I can't give all the granularity that you're asking but we definitely saw during the second quarter.
Inventories continue to build.
In the channel. This is because as we all know automotive producers for shut down for good part of the second quarter, our demand in the industrial sectors has weakened.
And when those automotive producers reopened area, we open at lower rates, so that inventory rose to levels that are in excess of five months above normal levels for refined lithium products, that's largely almost entirely in the battery channel I mean, there may be some inventories in industrial but thats being worked off so it's really the battery channel.
And most of the battery industry today is Asia regionally, it's going to be in Asia, although some of that inventories and suppliers hands as well.
We talked about an action, we're taking to reduce some of our inventory by idling facilities, but some of our competitors. We believe may have excess inventories as well.
So that would be it's hard to say where that might be that might be in the region of Asia might be at their production sites, but that's that's our view now and we're obviously watching very closely as we look towards a recovery to see that that peak and then begin to get drawn down as demand improves. The question is out of course.
As Scott indicated visibility to that demand improvement at this point.
Great. Thanks for that and just one quick follow up so can you just quantified in magnitude.
Reduce production.
2000 tons are.
Yes, so the the production where that we're talking about as far as going to be down for us call at the beginning of September through at this point the ended the year, depending on market conditions. So approximately four months of production.
On a plant that annually it was really driven by our Kings mountain facility, which produces hydroxide.
What's supplies that plan is silver peak the carbonate that feeds it so on an end hydroxide bets and product hydroxide basis annualize, you're talking about 4004 or 5000 tons a year.
And so we're going be down for four months of that at this point.
Great. Thank you.
Thank you Sir our next question comes from Mike Sison with Wells Fargo. Your line is now open.
Hey, good morning.
Quarter in terms of you have a nice slide I was talking about the potential demand for lithium out. The 2025 I think the base case was a 1 million tons can you can you sort of walk us through what you think that long term potential is it hasn't changed materially that about the same and.
How do you think that will work through it.
The next couple of years.
So I'll start with that and then Eric can fill in the details.
To the extent, we can so we we've said and we still believe kind of the demand profiles been pushed out by about a year. So it and we so we don't think condo long term demand is affected but it's the curve has changed probably steepened, but it's been pushed out a year. During this and we continue to watch the forecast and how.
The ECB penetration happens around the world Odyssey, if it changes that profile, but today, we believe it's the kind of the curves for five years out. The volume is the same curves little steeper to get there and starts about a year later.
Yes, there's not much to add to that comment, but if you do look at slide 12, you can see the steepness of that curve in the following way, we've said that demand we thought would materialize in 2020 afford the crisis at growth has shifted a year.
Originally we thought that would be 4.1 million vehicles. If you want to put on a vehicle electric vehicle basis.
And so that did materialize for looking I Hs is currently forecasting something closer to 3 million vehicles, but if you look out for the next year, what we said diminish shifted to its 5.2 is what I chest pain. So thats, obviously hired and 4.1, so thats the point at which this curve is getting deeper we believe that the stimulus measures that have been.
Added on top of the already measures that are there on the Oems visco to reductions now you have consumer based incentives in Europe that have been added on top of those are part of what's driving the steepness of that curve and allow us to stay of the on that projection. We've done a detailed modeling of it although after 2025.
And it's right around that 1 million b.
Matt tons that we talked about for the industry driven by electric vehicles.
Got it and then Eric.
As a quick follow up the price concessions.
How does that get negotiated is as I recall that was sort of our fourth quarter event right. So can you can you sort of walk through.
Kind of the semantics, what will happen with those price concessions as you head into 21.
Yes, you're right, it's a bit early to say what's going to happen.
I can say this is you know we're doing the same thing last year, we're looking at a falling set a market prices last year.
And.
And were Interstate we're trying to figure out how we're going to approach the year and that's what led to the 2021 year concessions on on these long term agreements as we sit here and look at 2021 the price in the market now as far lower than it was a year ago. So that I guess would be the negative on this the positive in that in that negotiation is what I just talked about is the steepness.
So that growth curve suspected or projected for next year, which.
There are other indications are that is happening if you look at some of the Korean automotive public releases about with a seat not the Korean automotive excuse me the Korean battery producers with they're projecting for their second half of the year, they're already starting to see and believe that can start to see that leading edge of that demand in terms of demand for their product.
So that it I can't tell you had a negotiation is going to play out in terms of the exact.
Wait price will look in 2021, as Ken said earlier Thats. The Thats the big question, but I and those are the positives and negatives are LTA days have health right and we use them as part of the commercial negotiation to find a good solution going forward that honors the spirit.
Yes, we have with them right now with these customers. So we'll be able to give more detail later in the year or earlier in the in the coming here.
Great. Thank you.
Thank you and next question comes from Jim Sheehan mature Securities. Your line is now open.
Good morning, Thanks for taking my question.
So could you talk about what.
Downside and upside.
Our from year segment guidance.
So it looks like your full year EBITDA sorry, your your your whole company third quarter EBITDA guidance vary significantly from the segments I'm just trying to figure out.
Either whether you have downsides and upsides baked in or is this coming from corporate and all other.
Yeah. Jim This is Scott so if you look at the segment.
For for lithium, we're expecting a range of being down sequentially by around 10% to 20%.
So that kind of bounds what's happening there most of that is going to be volume related.
Overall for for lithium.
For bromine, it's relatively tight right now they've got pretty good visibility into their order book at least through the end of August and so.
Flat sequentially that could be down a little bit are up a little bit but flat sequentially.
And then catalyst is expected to be down between 50, and 60% on a year over year basis.
Really on the back of Hydroprocessing orders.
And the timing of those as well as the recovery of FCC.
On the back of increased fuel demand globally, and so that kind of balance arrange corporate is pretty well pretty well bound in with the cost reductions that we have out there and the end the small business fine chemistry services is doing well in the EU us so.
Thank you and not as it pertains to capital allocation you've listed M&A.
In your slide on capital allocation.
Maybe you could talk about the pipeline.
What type of.
Acquisitions, you might be considering what size and.
What region in the World.
Or is that process really slowed down the same way that you're.
Asset sale process is.
Yes, so we continue to look for those opportunities, but they're going to be bolt ons, nothing dramatic and but I would say, it's probably fair to say that process has slowed down but we continue to look for opportunities in the down market.
And that would probably most likely be around the lithium conversion assets that were available in the markets, where we find that attractive.
Thank you.
Thank you.
Next question comes from Vincent Andrews with Morgan Stanley. Your line is now open.
Hi, Thank you are going to standards advantage of the studio on for Vincent.
I just had a quick question in terms of the technical grade how much is that when the demand down this year versus battery grade demand and how fast to do you expect technical grade to come back and kind of what are the signposts that we should be watching the track that.
It's the smaller market for us I would say this is Eric speaking I would say that the technical grade market. If you look at any industrial indicator.
For the recession, it's going be represented what that technical grade market is doing I've seen some external statistics, it say that the glass and ceramics industry. As an example is contracted by 25%.
In the second quarter, so that that is that that's not obviously inconsistent with what's happened economically around the world. So.
That's the order magnitude of what we're seeing it's it's a small part of our business right it's less than.
20% of our sales overall and it's very mix is not just glass and ceramics or other segments that are doing better than in the glass and ceramics sector.
We aren't seeing any signs of recovery in that yet.
As we are as we roll here into the third quarter and as what we expect in the fourth quarter again I just comes under the head or what we talked about earlier, it's very murky and hard to tell at this point, which is why when we're up we're cautious to give more detailed guidance on Q4.
Understood. Thank you and then.
In terms of the idling facilities, what does the costs that temporarily idling the and how quickly can both be taken down and brought back up.
And I guess as part of that what it's kind of Lois that utilization rates that they can barnett.
Before it becomes a unit cost prohibitive.
Now I'll take the the cost of idling, it's relatively small so these are smaller plants.
With a relatively small small workforce, so really though in total less than $10 million to actually idle the plan itself and Eric as you want to just talk about utilization Yeah. We had a recovery yeah. We just told the workforce yesterday or the about this right and we expect to be fully idled safely down.
By September the first so that gives you some idea of it down and then there will be comp a comparable period to come up once we see the demand signals to come back up.
It is.
I'm sorry, the second question I guess with utilization. This is a fairly small part of of our of our of our mix, but an important part of being able to supply 2021, we believe provided recovery takes root as we expected to so.
It's it's it's.
On utilization basis, not a lot, but here's here's a point that I think is also implied in your question. It is not is this product that given the weakness in the market.
While were while our contracts are being upheld any opportunities outside of those and the opportunities in China and the opportunities in industrial markets is limited for all the reasons, we've discussed because of the contraction in the marketplace. So.
This is product that would have gone to inventory. So there's not an EBITDA impact in our guidance associated with what are the all with our guidance otherwise would have been associated with US. This is just a reduction in inventory and during this period of time, our down we'll continue to make investments to prepare these assets to run full out when the recovery does occur, which we again hope we'll be in anticipate will be into.
21.
Very helpful. Thank you.
Thank you. Our next question comes from Iran. This one it then with RBC capital markets. Your line is now open.
Great. Thanks, good morning.
I guess I just wanted to get your perspective on lithium markets I understand that.
Your overall view as maybe even pushed out a year.
But has there been any change in I guess.
How you're looking at supply demand I mean, you know I appreciate the automakers may not be coming back at full but are they potentially coming back with greater focus on each of these and if so would that be a positive tailwind for years. So that's my question on lithium and then I one more question on catalyst if you could maybe just characterize how.
You're thinking about that business.
On on the on the surface. It looks like there can be some structural impairment that could last for quite awhile.
I guess is that a fair characterization so.
Maybe just give your medium term thoughts on on both businesses. Thanks.
So again, I'll I'll comment on that and Eric and fill in if I Miss piece on the on lithium. So if we said before we really don't think it's changed the dynamic for the market long term. So we kind of funding fundamentally believe in the easy market and the lithium demand that's going to go into that.
So the one thing that has happened I guess that is quite different.
Is there incentives, becoming they're becoming more incentives associated with electric vehicles, and that's primarily in Europe that probably is going to drive that a little differently than it was before so.
Previously you Didnt have the dip, but the curve was a year earlier the demand coming out now you've got a depth, but comes back a little stronger primarily on those incentives and trying to figure out exactly what that curve looks like we did we don't know.
And regardless of incentives and the demand that is going to happen to meet the consumers still has to buy cars and thats. The fundamental thing, we don't really know and I think people forecasting that don't know as well so.
Eric anything on top of that no nothing that other then you just you all have to be conscious of the fact that just like the impact that happened the second quarter aren't really hitting us into the third quarter. So to the recovery just as I said, we have the Korean manufacturers out, saying that they see a significant uptick in their sales, that's probably and hopefully related to.
These and these what's going on in Europe, and there's obviously, a corresponding lag, particularly with excess channel inventories there for it to come back and hit US. So that's why in the longer term, we're pretty optimistic but in the next six months, it's very hard to say very hard to say.
Yes, and then the on your catalyst question same approach I'll do a high level rocket Raphael can fill in.
But so.
Oil prices are down and then the miles driven are pretty dramatic change and it had you can see on that slide I think it was slide 12, how dramatic that was the miles driven and thats change that.
We don't really see it.
Changing the fundamentals of that business long term, but it is going to take some time for that to come back up before people go back to work and commute and maybe they don't commute as much as they did after this may be much less miles driven may be more vacation by driving rather than flying but then again that air travel so.
We think thats been pushed out for some period of time, but but peak oil probably.
It doesn't change we knew that was coming in some period of time has that been pulled forward by a little bit. We don't know that most of the forecast they may be a year, maybe not so I don't think it fundamentally changes the business that we have clean fuels continued to be important our businesses are based on innovation around clean fuels. So we don't think it fundamentally changes it or.
Structurally changes it.
But it might change kind of the dynamics of where our markets are geographically and which of our customers do better do worse during this.
Yes. This is raphael room to add to that view.
Certainly this is a time for our business to take action to mitigate the impact whether it be cost working capital capital for the near term because it has cobot 19 has had an acute impact on our customers and suppliers to our customers you are that being said.
As Kent said there is a there is a bright future for refining catalyst.
When positioned correctly and our strategy is really all around positioning our business to take advantage of trends in emerging markets, where fuel consumption will continue to grow beyond global peak gasoline as well as emerging chemicals applications from refineries, where we already have a position of strength and we need to.
Advance that so with all the challenges that cobot 19 brings it is a great motivator.
For us as a company to stay on strategy and accelerate that strategy to be in.
More resilient spaces as we progress.
Thanks.
Thank you.
Next question comes from Mike Harrison with Seaport Global Securities. Your line is now open.
Hi, good morning.
Raphael maybe.
Continuing on the catalyst discussion.
Talk about the FCC pricing outlook I believe.
You saw a pricing in your catalyst business overall decline.
By 4% not sure if thats pricing or mix.
But are you seeing.
Resilient FCC pricing and are you seeing any trading down.
As you look at your overall mix and catalysts.
Hey, Mike Thanks for the question.
So when we look at it.
Pricing does there's been some downward movement on price, but not for the value oriented products that are the bulk of our portfolio. So.
As you know in the FCC industry, you certainly have contracted business do you have business. It's not on contract and then there are trials and trials are a period of time within a contract when a competitor can bring a catalyst into a refinery to test performance.
Trial pricing is lower so to the extent that within our mix. We have trials and we are pursuing trials with new refineries are refineries. We don't have yes that pricing is going to be lower than what we've typically seen but for the business Thats our core business on performance products that pricing has been stable.
I would even think if I looked at prior quarter and looking ahead as we are negotiating for contracts, where we're demonstrating value or increased value, we're able to gain on price. So I would say through the mix between trial pricing and contract pricing and what we generate on value.
As the biggest impact on that.
Alright, Thanks for that and then on lithium I was wondering if you can give a little more color on where you're seeing the greatest concern in terms of inventories in the lithium channel and in the battery channel is it.
With with finished catalyst material.
The battery makers is it hydroxide is a carbon it's spotty mean.
Maybe some more detail there.
Hey, Mike It's Eric here so.
Well gets.
I would say, we have and you can sort of interpret this by the action we've taken with our plants. It's both hydroxide end carbonate.
And it's it's it's with our customers be they catheter customers or battery accounts.
And with we believe with with suppliers in the channel.
We understand that there are probably potentially even some excess inventories mcopco standpoint. So I mean, you have an industry that during the second quarter increased to a halt right nothing was happening for depended on plan it could have been a month or more.
In terms of the OEM closures. So it's in the battery channel and it's at various points in the battery channel and so I think it's up.
About the most color I can give you at this point in time spodumene is.
It continues to be excess barge mean in China. Some of that is below grade at sponsored maintenance and meaning below 6%. Some of that's even the DSL variety, which is just for all rockets not processed.
And in some of that by its purchasers as purchase that prior high prices for spodumene rock so its uneconomic in the in the current situation.
So so there is much excess spiked mean, there as well that has a lot more opaque and hard to tell exactly how much. However.
All right thanks very much.
Thank you next question comes from Matthew deal with Bank of America. Your line is now open.
Hi, yet I wanted to hit a little bit on the catalyst trial pricing issue I mean.
Why are you are trial prices lower our refineries just kind of trialing lower quality products is that way to temporarily lower costs do you see risk.
These get adopted because refineries don't need better utilization rates right. Now you are higher fccs would deliver.
Hey, Matthew this is Raphael the some of it has to do just the dynamic that.
Every market is down and every catalyst producer would like to look for new volume opportunities and the.
The most accessible way to go and do that.
Is to participate in trials. So I think the activity in the eagerness of the market around trials has increased and win in that competitive space.
Certainly folks are.
Albemarle included are willing to price lower than what we normally would still it positive margin to participate in a trial to prove out vault value to a refinery over what they might already have with.
They are coming supplier that being said with trials I mean, you get in the door.
To some extent that trial sets a benchmark for future pricing, but.
Most refineries understand that.
Pricing in catalyst is very much tied to value and if you're generating value.
Overtime, you're able to raise the price to what you're which are able to justify with your performance Albemarle has been very good at doing that and where we participate in markets related to Max chemicals bottoms cracking, which is really our strength within FCC were able to demonstrate value and capture price overtime.
Okay, and then if I wanted to circle back on the excess spot you mean comment I know there's.
Yeah Fair amount that you mentioned below six plus the DSO, but how much excess spot Jimmy is out there that is about 6% and like is feasible product I think that was size before at about three to six months of excess inventory is that still the case is any of that and work down at all.
I will have to go back to the kind as Eric again, the comment I made before it is incredibly opaque.
And.
And even to the point, where sometimes inventory is counted twice depending on who you are talking too. So I really couldn't tell you.
I can tell you that that that 6% the 6% inspired you mean that has been produced.
For integrated producers.
Like Mike Albemarle, our partner and obviously competitors while TRG.
Potentially there's some of the other producers that are integrated Ikang fan I doubt that they would be carrying a lot of excess inventories because we've been.
I'm assuming that those competitors are doing the same thing that that that almost doing which is we're trying as.
As a leader in the industry trying to.
Assist the chat and the challenge by reducing inventories and the output as you can see from an equity income is substantially reduced from thousand big part of that actually is challenging and the challenges they've had so it's.
That 6%, which is very high quality rock.
That I think has been coming down but as for the rest the majority of which is below 6%.
Or barely 6%, that's probably where more of the excesses because that's the less economic and product.
In today's market with today's prices.
Okay I appreciate your.
Yes, good detail I know, it's definitely helping so thank you.
Thank you. Our next question comes from Bob Cutlip Goldman Sachs. Your line is now open.
Thank you good morning.
Couple lifting questions.
How do you guys think about reconciling that seems to be some odd financial math when I.
I guess in China were seeing battery grade material under 6000, you get spotted wing market prices under 400.
I think Eric you're talking about inventories might be gloated everywhere. So.
Ken your competitors in China make money is there the risk that they try to liquidate those inventories more aggressively in a week period.
The a bifurcated market is China different than Japan, and Korea, just give us a little color there.
Well on the on.
Hey, Bob its hair care on the first part of your question.
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I would say that what you're seeing is.
Nothing has changed in the cost curves that we talked about you go back and look at the Investor Day look at where we thought marginal cash costs are between six and $7 and in that range that hasn't changed theres nothing thats changed in that regard.
And so effectively at prices, you're seeing the China market now spot prices the whole right hand side of the cost curve is underwater theyre not able to make money to lose money selling product.
So I can explain why that's happening other than it's a market that has gone through a a compression that we talked about because of the cobot crisis and second quarter that its start working its way out of as we go into the second half of the year.
And you have lower cost producers, particularly on the carbonate side and remember China is largely a carbonate market.
Who have lower cost positions brine base rock are both Brian base carbonate has a much lower cost position are able to sell well below the cash costs of of those who are rock based producers in the region. So I think that's what's happening.
It is sort of shows so to the stress in the system.
We'll Chinese producers start to unload inventory.
I think.
Potentially to if and the desperation move, but I think I think at this point.
Most of that rock is sitting stationary until market values improve.
At this at this point.
You had a second part of your question of ours was about wondering was there any difference between China and elsewhere, Yeah, No, yes, theres a difference.
Again, it's largely a carbonate market more more of the high nickel chemistry today, that's hydroxide bases made outside of.
Of of China's some of the is it may be produced in China, but most of the demand for that is outside China.
And of course, our structural differences or is that you know VHP difference between China and inside and outside of China as well.
But again I don't know anything has changed other than the fact that.
That we've had a demand crisis and thats really put pressure on the system.
And Eric you mentioned that your Ltacs largely held.
I think maybe last couple of quarters, you've talked about you want to sell to your customers in the manner that they want to buy in terms of contract.
Dynamics.
What's your expectation for the.
Desire for those LTAC was huge start get the exponential part of that demand curve because it would seem.
The capital folks are looking at this volatility in pricing and obviously resets on pricing, but then you've got some pretty.
Dangerous implications for them at the industry.
Curtails its expansion activity, where there may be a scarcity value sometime down the road so.
I guess on that because we could gain planet.
You think you'll have a lot more LTAC fixed prices two and three years from now or a lot fewer because your customers and may be moving away from that could you give me your sense of how this market develops from a very weak pricing period to potentially very tight market in a few years.
Well I don't think the security of supply and notion of that it's changed but we do see our contract.
Starting to evolve from there if you want to comment Ken Yes, I would say that security and this and how our customers look out a year or two and looking for guaranteed supply out in that timeframe.
Is is part of that dynamic and Wifi, and but we're seeing it as a portfolio where the percentage MLB those long term contracts, but with slightly different terms all across the portfolio somewhat guaranteed promises of supply a couple of years out and some without that and some more spot based and others more.
Contracted with a formula that may indicate spot, but not move with spot.
Yes, and what's happening now as I think you put your sort of put your finger on and Bob is that.
Short termism.
Is that as an interesting strategy nano saving some money because spot prices are really low.
But as you've also point out capacity is being withdrawn from the market on the economics to support expansion are not there today in the market for almost every producer except for the very lowest cost producers.
And so there's a scarcity value at some point that starts to shift we think the supply chain, particularly those most invested in the supply chain all the way to the top of it. The automotive producers are increasingly focused and will become increasingly focused on this issue, which is why I think theres always a value for security supply and into India.
Kens point, we always want to portfolio, where I was going to want some of those price buyers because because that those that there is that there's a value to that when the market goes up right in terms of what it means your EBITDA and we don't want a majority of our business there, but we'll have some of it there.
Okay.
Great. Thanks for the insight.
Thank you Sir our next question comes from Matt So on ski with U.S. Your line is now.
Good morning. Thank you for taking my question can you give us an update on when we should expect to see sales from one negra three and four and if you've changed your view at all about the timing of the ramp of additional capacity given the demand disruption you've seen this year.
Well, we had said last quarter, we've kind of slowed down the execution of those of our two big projects will negra, three four and Kim written and and so that really hasn't changed we slowed that down basically calls we see demand being pushed out that at gap, we've done and we did that to kind of preserve cash spread at all.
So matches, what we see a supply demand and obviously given the discussion you seeing today, where we've got our forecast and we have our view, but it's a bit of a shot in the dark, but we see a volume to Europe to your question from let Negra three and four capacity coming on late next year and then the qualification period after that.
Thank you.
Thank you.
And then next question comes from Chris Kapsch swiftly capital markets. Your line is Hamilton.
Yes, good morning.
Question, probably for Eric and.
Slightly nuance follow ups to fund the stuff you've talked about but just.
On the comments about excess inventory in the battery supply chain.
Hydroxide, there the limited shelf life given that.
Hi, Andrew Scopic nature, no such history retirement, so just wondering if your comments about inventory if those if that dynamic is more pronounced per car make grades versus hydroxide grade maybe you got it this a little bit by suggesting that some of that excess inventories at the catheter level, but just wondering given that a lot of these newly introduced.
EDI models, particularly in Europe are definitely.
Deploying higher energy density catheters that require hydroxide wondering if there is a little bit of.
Like rotation in those dynamics.
So you're right yes.
Chris This Erica there is shorter shelf life for hydroxide, which is but it's also a smaller market. So it's a more men as we look at our customer base on a number of customers that they use hydroxide to a large degree and would have high inventory levels at some more manageable group of folks to work with and it's also the reason that them.
Motivator for the Idlings that we did we announced our employees yesterday in our release last night is driven first and foremost by hydroxide.
Hi, carbonate is a bigger market.
And the shelf lives considerations aren't the same so you do manage them differently, there because it's bigger theres theres a lot of carbonate inventory out there too right more people produce it and more people buy it so.
There is a theres a differentiated way in which we manage it.
But but the challenges are the same and that they are elevated for both.
Okay and my follow up is and you've got at this a little bit with in response to Bob's question on.
Long term agreements, but there's obviously this juxtaposition where there's.
Near term oversupply, probably amplified by the covert dynamic.
Then the increasing steepness of the adoption curve a couple few years out so I'm just wondering.
Again, probably looking at maybe the conversation around carbon at versus the conversations around long term source.
Hydroxide.
Is there can you just provide any color on as some some of those customers are looking for a little relief from the previously agreed to pricing floors is there still.
Anxiousness about the ability to source long term basis hydroxide is and is that more more.
Yes noticeable with the conversation around hydroxide DSW carbonite. Thank you.
I would say that that because the steepness in the growth curve that we see that I HSS projecting and it's a guide post for US provided it happens when it does it thats also what our customers are seeing.
It's driven largely by a big chunk of it is driven by Europe.
And that is also a big hydroxide opportunity that yes. There is in probably increased I don't know things ideas right word but statement around from customers around they're going to need more a lot more hydroxide in the coming year show and their banking on.
Albemarle to be able to bring.
Camera can in particular on line to meet that.
Now all of this has tempered about when right that the Stephens that curve feels right based on what we're seeing the timing of it is consumer spending driven so we just keep a careful eye on that up and down the supply chain.
Okay.
Fair enough thanks, guys.
Thank you. This concludes the question and answer session I would now like to turn the call back over to Meredith bandy for closing remarks.
Hi, Thank you all for your questions on participation in today's call as always me appreciate your interest and Albemarle and this concludes our call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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