Q1 2022 Albemarle Corp Earnings Call
Hello, everyone and thank you for joining the Q1 2022 Albemarle Corporation earnings Conference call. My name is storage and I'll be moderating your call today before I hand, you over to your host Meredith bandy I would like to remind you. If you would like to ask a question during the Q&A session at the end of the call. Please.
Press Star followed by one on your telephone keypad.
Now I have the pleasure of how do you deal, but she Meredith bandy Vice President of Investor Relations and sustainability. Please go ahead notice.
Alright, Thank you and welcome everyone to Albemarle is first quarter 2022 earnings Conference call. Our earnings were released after the close of market yesterday, and you'll find the press release and earnings presentation posted on our website under the investors section at Albemarle Dot Com joining me on the call today are Kent Masters, our Chief Executive Officer.
Sure Scott Tozier, Chief Financial Officer, Raphael Crawford, President catalysts, NASA, Johnson, President bromine and Eric Norris President lithium.
As a reminder, some of the statements made during this call, including our outlook guidance expected company performance and timing of expansion projects 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 and earnings presentation that same language applies to this call.
Please also note that some of our comments today refer to non-GAAP financial measures a reconciliation to GAAP financial measures can be found in our earnings release and the appendix of our earnings presentation, and now I'll turn the call over to Ken.
Thanks, Meredith and thank you all for joining us today.
On today's call I will highlight our results and achievements during the recent quarter Scott.
Scott will provide more details on our financial results outlook and balance sheet.
I'll then close our prepared remarks with an update on our growth projects and sustainability before opening the call for questions.
Albemarle has leadership positions in lithium and bromine and our team's ability to execute have enabled us to generate increasingly strong results.
In the first quarter, we generated net sales of $1 1 billion up.
Up 44% compared to prior year, and that's excluding fine chemistry services and the comparison, which we sold in June of last year.
This fundamental strength allowed us to more than double our EBITDA year over year.
The supply demand balance remains tight in the markets. We serve this has enabled us to significantly increase our 2022 outlook based on continued pricing strength in our lithium and bromine businesses.
Scott will dive into the key elements of that outlook later in today's presentation.
In terms of operational highlights for the quarter, the restart of our watch it not lithium mine and our marble joint venture is progressing well.
First spodumene concentrate from train one is expected in may.
We've agreed with our partners to accelerate the restart of train two with first spodumene concentrate from that train.
Why.
Together. These two trains can feed conversion assets with annual capacity of around 70000 tons of lithium hydroxide.
Now I'll turn the call over to Scott to walk through our financials.
Thanks, Ken and good morning, everyone I'll begin on slide five.
During the quarter, we generated net sales of $1.1 billion, a year over year increase of 36%, including the FCS business, which we sold in June last year.
This is due primarily to increased pricing as well as higher volumes driven by strong demand from diverse end markets, especially for our lithium and bromine businesses.
For the first quarter net income attributable to Albemarle was $253 million up $158 million from the prior year because of the strong net sales, partially offset by inflationary cost pressures.
This includes the impact of natural gas prices in Europe on our catalyst business.
Adjusted diluted EPS for the first quarter was $2.38.
The primary adjustments to earnings were seven cents add back for a loss on property sales and a <unk> 19 cents add back for tax related items.
On slide six I'll walk you through our first quarter adjusted EBITDA.
For the first quarter, our adjusted EBIT was $432 million up 107% year over year.
Yes.
The primary driver.
Pricing drew.
Driven by the move to index referenced variable price contracts and higher market pricing.
Lithium also benefited from the sales of lower cost inventories, including a one time sale of spodumene stockpile during the initial startup watching AR.
Bromine was also favorable year over year, reflecting higher pricing driven by tight market conditions and a slight uptick in volumes that was partially offset by raw material and freight inflation.
Catalysts was down relative to the prior year, primarily driven by higher raw material costs and lower volumes.
That was partially offset by pricing.
And lastly, corporate expense and foreign exchange were mostly flat year over year.
Moving to slide seven.
We have meaningfully increased our 2022 outlook, primarily to reflect continued strength in our lithium business.
I'll discuss our lithium outlook in greater detail in just a moment.
For the total company, we now expect 2022 net sales to be in the range of 5.2 to $5 $6 billion up about 60% to 70% versus prior year.
Adjusted EBITDA is expected to be between one seven and $2 billion, reflecting a year over year improvement of 120% at the midpoint of the range.
This implies a total company EBIT margin in the range of 33% to 36%.
And together this translates to updated 2022 adjusted diluted EPS guidance in the range of $9 25 to $12.25 compared to a $4.04 in 2020 one.
Additionally, we are maintaining our capex guidance range of 1.3 to $1 $5 billion as we drive our lithium investments forward to meet increased customer demand.
You may have noticed that we widen the range of our outlook to prudently reflect greater volatility in pricing for sales and inflation for cost of goods sold against the backdrop of a turbulent macro environment.
And regarding the quarterly progression of sales and EBITDA.
On our last call, we indicated that we expected Q1 to be our strongest quarter of the year, primarily due to higher pricing and sales of low cost inventory.
Given the Covid.
Excuse me given the continued strong pricing and rising volumes, we now expect our second half results to be about 55% of the total year.
Turning to the next slide for more detail on our lithium outlook.
Lithium is full year 2022, EBITDA is expected to be up 200% to 225% year over year.
Up from our previous outlook for growth of around 75%.
We now expect our average realized selling price to be about double last year.
This is the result of our efforts to move toward index referenced variable price contracts and a significant increase in index prices.
We also have better line of sight to price and the full year.
From the beginning of the year to today indices are up.
Tween 85 and 125%.
We're also assuming that our expected Q2, selling price remains at that level for the rest of the year.
If current market prices remain at historically strong levels for the balance of the year, there would be upside to this guidance.
There could also be additional upside if we transition additional existing contracts from fixed to variable pricing.
However, if we see material declines from current market pricing.
Or volume shortfalls, there would be downside to this guidance.
There's no change to our lithium volume outlook for the year, we still expect year over year volume growth in the range of 20% to 30% as we bring on new conversion assets, particularly la Negra, three and four and Cameron one.
For bromine, we are raising our full year 2022 EBIT expectations with a year over year improvement of 15% to 20%.
This revised guidance reflects higher pricing related to strong fire safety demand supported by macro trends such as digitalization and electrification.
We also expect higher volumes following our successful expansion last year in Jordan.
For catalyst 2022 EBITDA is expected to be flat to down 65% year over year.
This is below our prior outlook due to significant cost pressures primarily related to natural gas in Europe , and certain raw materials and freight.
We offset by higher pricing.
The large outlook range for catalysts reflects increased volatility and lack of visibility, particularly related to the war in Ukraine.
Given the extraordinary circumstances, and the resulting changes in oil and gas markets. The business is aggressively seeking to pass through higher natural gas pricing to its customers.
As previously discussed we continue to expect the strategic review of the catalysts business to be completed later this quarter.
The review is intended to maximize value and position the business for success, while enabling us to focus on growth.
I will now turn to slide nine for a deeper dive on our lithium contracts and pricing.
With the change in guidance you can now see we have more exposure to changing market indices.
Our segmented approach gives more flexibility to customers, while still allowing albemarle to preserve its upside and returns on our growth of investments.
This slide reflects the expected split of our 2022 revenues updated for current pricing.
Battery grade revenues are now expected to make up 70% to 80% of our 2022 revenues.
Of which 20% is expected to be from purchase orders on higher short term pricing about half are expected to be from contracts with variable pricing mechanisms typically index referenced with a three to six month lag.
And the remaining 30% is from fixed price contracts.
These fixed contracts also have price opener mechanisms to change prices overtime.
We continue to work with these customers to transition to contracts with variable index reference pricing.
These negotiations are ongoing and progressing well.
If we are successful this could provide additional upside to our current outlook for the lithium business.
Following our last earnings call, we received a lot of questions regarding our expected lithium margins. So I wanted to provide some additional color on the moving pieces on slide 10.
We expect lithium margins to improve in 2022, driven by higher pricing, partially offset by the progressive commissions, we pay in Chile under our corporate contract.
Another item to consider is the impact from higher fixed costs related to the startup and ramp of our new facilities, such as the one of mine and our la Negra and Cambridge and conversion assets.
As well as the potential acquisition of the Jinzhou conversion plant.
These plants are expected to more than double our lithium production.
Over time, the impact of fixed costs on margins will diminish as production ramps and costs are absorbed.
As a reminder, albemarle calculate EBITDA by including joint venture equity income on an after tax basis. This.
This year because of higher spodumene transfer pricing from our Green bushes mine. This tax impact is much more meaningful than it has been in the past.
This is simply a result of a line item, where the tax hits our income statement.
Albemarle remains fully integrated from research to conversion so effectively we pay ourselves this higher spodumene pricing.
On a completely pretax basis lithium EBITDA margins are expected to be between 55 and 60% in 2022.
Slide 11 highlights our expected volume ramp.
As our new lithium conversion facilities are completed.
Last year, we converted 88000 metric tons L C E, including conversion at Silver peak in Kings Mountain.
Zane you in Chengdu in China, and La Negra, one and two in Chile.
We are in the process of more than doubling conversion capacity with the expansions at la Negra and Cameron.
Plus the acquisition of a change of plan.
We typically expect it to take about two years to ramp to full capacity at our new plant, including roughly six months for customer qualification.
Tying all of this together, we expect to achieve 200 docs.
25.
Total lithium volumes are expected to be higher than that including technical grade spodumene sales are about 10000 tons per year.
<unk> volumes of anywhere between zero and 20000 tons per year, depending on market dynamics and then.
How do you mean, plus any additional conversion capacity, we buy or build during this period.
Finally, let's turn to slide 12 to look at our strong balance sheet and cash flow.
Our 2022 revised operating cash flow guidance is $650 million at the midpoint.
Relative to 2021 you can see incremental cash flow driven by the higher net income adding back higher depreciation.
This is partially offset by higher working capital related to higher sales volumes and pricing plus higher cost of raw materials and inventories.
As a reminder, working capital typically averages about 25% of net sales.
Our balance sheet is in great shape with $463 million of cash.
And liquidity of almost $2 billion.
Current net debt to adjusted EBITDA is approximately one nine times.
With rising EBITDA from higher pricing and volumes, we expect leverage to remain at or below our target range of two to two and a half times.
Our balance sheet supports the capex for our lithium investments to meet growing customer demand.
Following our equity offering early last year, we repaid debt with the intention of re levering as needed to fund capital projects.
Were actively evaluating options to do just that we are planning to be in the debt market. This quarter if market conditions are favorable.
We remain committed to maintaining our investment grade credit rating and the debt markets provide a favorable avenue of acquiring additional capital.
With that I'll turn it back to Ken for an update on our projects on slide 13.
Thanks Scott.
First let's look at a few of our expansions in Asia Pacific.
Albert more was focused on expanding global lithium conversion capacity to leverage our low cost resource base.
The acquisition of the Tims, though conversion facility is now expected to close in the second half of this year as we continued to work through regulatory approvals. We look forward to closing this transaction to bring an additional 25000 tons of lithium to the market.
The commissioning process at cymric to them one is progressing well we have introduced spodumene into the process and we expect to achieve first product by the end of the month.
Kim Martin two remains on track for mechanical completion later this year.
At our China Greenfield expansions, we have broken ground at May Shawn to construct a 50000 ton per year hydroxide conversion facility.
There are also options to expand that facility.
The second China Greenfield project Zhong Dugong is currently in the engineering phase and we are looking at options to produce either carbonate or hydroxide.
Importantly, with our ownership stakes at the Washington, and Green bushes lithium minds, we already have access to low cost spodumene to feed these conversion facilities.
As I mentioned previously the restart of the Washington, a lithium mine by our JV partner mineral resources is going well.
And we continue to negotiate agreements to expand and restructured the marble joint venture and will update the market when we have more information.
We also have a 49% stake a greenbush is one of the highest quality lithium resources in the world.
Palisson joint venture is ramping up C. G. P. Two and has approved construction of C. G. P. Three.
It is expected to begin later this year.
In addition, construction of the tailings re treatment plant was completed during the quarter and commissioning is progressing to plan.
Our intention is to rent lithium resources in advance of conversion assets in which case in the near term we could be net long spodumene. If so we may elect to toll or sell spodumene.
The expansions in Australia, and Asia are just a portion of our globally diverse lithium projects, we have defined to meet growing customer demand.
We remain focused on growing our global conversion capacity to leverage our world class resources in Australia, Chile, and the United States.
Our wave three projects should provide albemarle with approximately 200000 tons of additional lithium conversion capacity, which is higher than the 150000 tons that we originally planned.
Additionally, we continued to progress our growth options for wave four which is expected to bring an additional 75000 to 125000 tons of capacity.
This includes continued evaluation of options to restart our Kings Mountain lithium mine and build conversion assets in North America and Europe .
Our high degree of vertical integration access to high quality low cost resources years' of experience, bringing converging capacity online and a strong balance sheet provide considerable advantages for the foreseeable future.
Looking now at slide 15.
As you can see Albemarle is executing a robust pipeline of projects all around the world.
Our bromine business is pursuing incremental expansions in Jordan and the United States. These.
These high return projects leverage our low cost resources, and technical know how to support customers and growing and diverse markets like electronics telecom and automotive.
In Chile, the Solara yield improvement project is progressing and is expected to allow us to increase lithium production without increasing our bryan pumping rates utilizing our proprietary technology to improve recovery efficiency and sustainability.
We also have access to a lithium resource in Argentina called amplifier, we anticipate restarting exploration of amplifier later this year after securing all necessary permits.
In Australia, we continued to progress study work on Kim return expansions to leverage greater scale and efficiency with repeatable designs.
Finally in the United States the expansion of our silver peak facility in Nevada is on track to double lithium carbonate production.
This is the first of several options to expand U S production in Kings Mountain North Carolina, we've begun a pre feasibility study to evaluate restarting the mine and then our bromine facility in Magnolia, Arkansas, we're evaluating process technologies to leverage our brine to extract lithium.
This robust pipeline, coupled with our industry knowledge and strong balance sheet provides significant growth opportunities for Albemarle.
Moving onto our sustainability initiatives on slide 16.
Creating sustainable shareholder value requires our company to continue to drive progress on our own ESG and sustainability efforts and I'm proud of what we are achieving on that front.
We will publish our 2021 corporate sustainability report on June 2nd.
And that report you will see strong progress in our work towards hitting our target reductions in greenhouse gas emissions and freshwater usage.
Our initial scope three emissions assessment and our first full lifecycle assessments for lithium products.
You will also see further definition of our sustainability related targets, including diversity and inclusion.
In addition to publishing our new sustainability report, we will host a webcast on June 28, and I Hope you will join to listen in.
In that presentation, we will discuss next steps, including full CDP disclosure.
With T C F D goals and disclosures and third party Irma assessments at the Florida at a comma.
As you can see we have accomplished a great deal and we are committed to continue that progress.
So this concludes our prepared remarks and now we will open the call for Q&A.
Thank you. So if you would like to ask a question. Please press star followed by one on your telephone keypad EBIT change your mind piece best thoughtful by G weapon to ask a question. Please is showing phones on mute locally.
Also please bear in mind. This Q&A session is limited to one question on the follow up per person.
Our first questions come from P. J <unk> from T. T. T go ahead P J.
Yes, good morning.
Good pricing initiatives.
Given that your leverage is down substantially.
You know, it's it's a real advantage for you right now would you consider more M&A in lithium or getting into recycling or potentially going downstream. How would you view those options for almost 60000 foot view.
So P. J I think I mean, we've always we're looking at M&A on a regular basis. So I'm not I don't think I really our view has changed so we do want to be in recycling and we feel like we have a plan we're working towards being in the recycling business. We look at resources on a regular basis for acquisition and we look at conversion assets as well.
So.
Our strategy has not changed we may have a little more firepower now than we did in the past, but I think the strategy is.
The same areas.
And we're pretty focused on those areas.
Well I'm trying to Argentina, and identify what are the permits or the hurdles that are remaining before you proceed and similar for Kings mountain and what could be some environmental concerns there, which as you know impacted other projects in the region.
Thank you.
Yeah. So yeah I'll just I'll just comment at a high level I mean, if all the permits that we need I think we're closer in Argentina, We arent Kings mountain, but we're early in the process in North Carolina, but Eric can talk about more details there.
Yeah, but these are classical studies P. J, it's Eric here that you would do for any pre feasibility work. There are the N F. I a site has a is a is a greenfield site. It has not ever been mined before so there are a host of different permits from Hum environmental onwards that that would have to be achieved in <unk>.
And those are underway.
And then we would progress from there in the case of Kings Mountain. This is a brownfield site and so much of the work has to be done and similarly on a testing groundwater testing.
Environmental there's a lot of work we're doing also with the community. We are engaged in very early on.
And did so earlier this quarter to participate in that process and so that as Ken said, that's a little earlier on but it's also a brownfield sites. So it'll it'll have a slightly different trajectory than say, a greenfield site like Empire.
Thank you.
Okay.
Our next question comes from.
Jeff Zekauskas from J P. Morgan. Please go ahead Jeff.
Thanks very much.
You have a very clear idea.
Capacity expansion, if you wish to execute over the next five years whats the trajectory of capital expenditures.
One three to $1 5 billion.
I'm not sure. The question you mean over the past the next five years.
Yes, exactly right how do you expect your capital expenditures to change over that period.
Yeah, I think we I think you probably we expect them to be in that range right over the over the next five year period, and and going forward I mean, it depends on what an opportunity. So resources. We had if we had additional resource that would change that profile. If we were able to acquire or identify additional reach.
<unk> that could change that but I think our baselines, what we've laid out in our.
Investor Day is kind of a.
Capital in that range over the next five year period.
Okay great.
Lithium prices have really moved up.
Okay.
Are there limits to what.
Cathode manufacturers are battery manufacturers can absorb.
Sure.
Do you see any ceilings or.
We'll just see what the market brings.
Well it is it it's difficult to call what the market's going to do so I think we have to see what the market is going to bring and I think there are economic factors that come into play, but it when you look at the overall cost of a vehicle I mean theres a lot of there are a lot of components that go in their lithium starts to become a <unk>.
A little bit material, but it's still a small percentage of that overall cost so I mean.
Look our view is that.
Prices.
Yeah. They they there the market is moving they have recently just come down a little bit I suspect that's because demand in China is off because of COVID-19 related issues and so it has softened recently, but we're trying to structure our contracts we've talked about this for a while so we move with the market. So we're we're we're not dislocated to the market and.
They're up either in an up market or down market.
Okay, great. Thank you so much.
Our next question comes from David <unk> from Cowen Pease go ahead David.
Yeah.
Think about expansion in your gross projects in North America, you discussed.
Accelerating some activity at silver peak.
Growing out King the Kings Mountain facility and restarting the mine there and in looking at it obviously, the Magnolia Brian operations.
One is there an interest or should we expect albemarle to be filing any loan applications.
To look for some low cost financing with any of these projects.
And my my second part with that would be.
Do you anticipate building out conversion facilities.
And then around the Kings mountain that would be sort of greater than your U S based resource on the upstream side.
Okay. So there were a couple of.
Questions in there so.
I think first I mean loans I think we'd be interested if we can get a economically viable loans better than we can do on our own we're definitely interested in that to help us build out the the battery supply chain in North America, and we would be looking to build converging capacity locally our customers want local conversion, Quebec local resource and convert.
And capacity and then I think your question would be outsize conversion, our Uh huh.
They used to be the local resorts that we have so.
We'll have to work that out over time, but we the way we see it we've got to convert the local product will probably have to supplement local product with product coming from outside the U S. And then we want to make sure that we as we do this we're considering recycling as well so we want to have.
Not only Virgin lithium coming from the resources in the United States and outside the U S, but capacity for recycling as well and we see that as an integrated facility that does that.
I appreciate the color on that and then just my follow up quickly maybe if you could just characterize the situation you know you reiterated your outlook around volumes and obviously increase the outlook around pricing.
Are you seeing any impacts I guess from some of the shipping woes that we here are getting into China are getting product into China or are you anticipating that and then have you experienced you know little friction moving spodumene concentrate into your converters in China, and how do you see that situation kind of progressing throughout the year.
Well, we I mean, we see that in all of our businesses right. So we were fighting the supply chain as you hear in the news and with every other business. We're fighting it but we've been able to manage through it today. We know it's not we can't say, we don't have issues, but we've managed through it but maybe not the area you guys could comment a little.
Bit on specifically, what you see in our I guess really around China in spodumene in and out so relative to China and the lithium business.
Recall that we are an exporter as well as an importer. So a lot of the hydroxide production that we make in China goes to that market and then a chunk goes outside and surrounding Asia countries as well.
And in addition, as you point out, we're bringing spodumene from Australia entirely support those operations.
We have not we've experienced some customer impacts where we haven't been able due to logistics to hit certain timelines, but we haven't had any material impact to our revenues or two are our contracts with these customers and it comes down to just a very active supply chain team that is constantly managing very.
<unk> ports.
Cross the east coast of Eastern Seaboard of China to find the right way in and out for those products, but I you know.
There are thousands of ships sitting off the coast of China now so it's no small task and so we'll manage it on a day to day basis.
The Covid crisis, and how it's being managed there in China has definitely made this challenging and.
And we expect to continue to to have to have that challenge and be very astute in how we manage it but no no impact of a material variety so far.
Yeah, I think for us in bromine, China, where net importer so for us getting mature wins the same pre Eric an extreme challenge, but we're also getting it on the back and seeing containers returned from China that allow us to load up our facilities in America and in the Middle East that's probably the bigger issue and that's car part of the macro some.
Fly chain challenging container movement around the world, We've got a great logistics team here at Albemarle and supply chain with a brand new leader and we're excited about what they are doing to manage this difficulty, but again no material impact we've got a great team and they were they were managing that very well for us.
Thanks, Eric Thanks, Ken.
Our next question comes from Vincent Andrews from Morgan Stanley . Please go ahead Vince.
Thank you Scott I just was wondering if you could give us a bit more color on the working capital and how it works just given so much of the increase.
Guidance was price related so is it is it just a question of.
Receivables are going to spike for a period of time as these prices flow through or is there anything going on on the inventory side as well.
Yeah.
Yeah, Vincent I think you've nailed it so as prices go up obviously, the receivables go up where generally averaging between 55 and 60 days as a total companies. He basically of two months of <unk>.
Of of receivables and the impact of that so that's that's a driver the second one is on inventory.
Rising cost and inflation, we're seeing obviously, our inventory costs go up as well.
Even though the quantities are about the same or actually a little bit lower.
From from what we what we saw last year. So those are the two doses. The two big drivers, we see a little bit of benefit from in the payables to offset that inventory, but that that's what's going on.
Okay, and just as a follow up you mentioned that.
There are some contracts that might be renegotiated.
Mid year off a fixed to variable.
Do you have a rough idea of what percentage of your mix that could be or that's at least in discussion.
Yeah. So if you actually look at the chart that we put in in the presentation that breaks down our revenue at those fixed contracts make up about 30% of our battery grade revenue and does that those are the ones that are in discussions right now dope, we'll see if we're successful.
There there would be additional upside.
Two to the guidance as we moved us to to variable the variable pricing.
But it's all of the 30% not a subset of it.
Eric do you want to provide some additional detail there yeah I would just knowing that the mix of business. We have Vincent I would say, it's a subset we'd still have a double digit percentage there.
Go to zero, but it could come down from 30% if we prevail.
Okay excellent I appreciate the help.
Our next question comes from Joel Jackson from BMO Capital markets. Please go ahead Joe.
Hi, good morning, everyone.
I wanted to question and it's not just you it's out of the business and your peers. What you thought pricing would be in margins a lot different look only three months ago, but you know into February and into that core into Q1 and finally the way your contracts are working with index pricing suddenly now it's a lot higher pricing a lot better margin.
Stories really different so I want to ask you know what really changed and if things could change. So quickly in three months. How can you be confident pricing you know in your base case can stay flat for the rest of the year.
Yes, so I mean, we've been talking about moving to these variable price contracts for over a year and so and coming into the year. I mean, we're basically in the same position that we were at the beginning of the year most of the discussions that we've done with most happened that changed our contract structure.
And at the end of last year toward the end of last year well, what's changed is pricing. The indices have moved up market has tightened up.
They know the market has gotten stronger from an EV demand standpoint, and particularly in China. So that's really I think was the driver of those of the first prices to move in other other prices followed that and it's a tight market.
The demand is strong and the supply is it's all it is.
It is tight it's a little bit of an imbalance and that's what's driven pricing will it how it stays there I mean, we have but there are lags on our contracts. So we feel like we understand the second quarter pricing very good and we don't see it dropping dramatically. That's why we were comfortable giving guidance holding what we see for the second quarter for the balance of.
The year, what it does going forward after that it's difficult it's difficult to call but it.
The market is still tight it's it's gotten a little soft.
Because the demand is off in China over Covid issues.
Some of the E.
E V plants were shut down their mostly back up now, but they are at lower rates. So demand is a little bit slower which has caused a pause in the market and pricing has come off a little but it's hard it's hard to see how that comes down over time.
I mean, it can but it's hard to see that happening very quickly.
Okay, if I follow up on that.
So.
We should see now more exposed to spot and not as much effects of prices moving around a lot more how does that change how you manage the business because you can have a view right now like you just said, but obviously that could change in a month or two and that may that may change. How you look at things your risks how you handle working capital.
What level, how comfortable are with leverage.
Like your business now is going to be more variable.
With spot prices lithium which have surge in their way more volatile than they were in the past how does that change how you view the business month to month quarter to quarter, how Ya man and plan for it.
Yeah, so our contracts I mean, they're not all spot. So there are these are these are contracts that we have some shorter term, though in the variable category summer short term with a better index to the market the longer term contracts. We have are indexed to the market, but tend to have collars on them with floors and ceilings.
And that takes some of that variability out. So this is I mean, it's up evolution of our strategy around pricing, we are more indexed to the market today than we were a year ago definitely and that was by design and I think we know, but we're confident in the volume growth and then pricing will will will it will move up and down but.
We have a very good cost position with the resource base that we have in our cost position or will we still think that we can invest capital to grow for this business and have confidence in them.
Yeah.
Thank you.
Our next question comes from Alex <unk> from Keybanc. Please go ahead Alex.
Yeah.
Thanks, Good morning, everyone.
Grabs on renegotiating the contracts question on volumes.
You're raising your you're watching Hum.
Goals for this year and yet your overall volumes are about the same for this year could you kind of explain what's going on with your volume assumptions and lithium.
Yeah, so the Levine.
Alex and thanks for your words.
The the volumes that we have guided to or 20 or 30% above last years numbers of about 88000. That's that's describe to you in the chart on page 11.
We had we had already contemplated.
In our guidance that that some form of watching the one would be used to support that volume growth.
Watching it too coming on is to follow the strategy they can't.
Indicated of having an excess of resource capacity to conversion growth and theirs and we will look potentially there could be some possible upsides if that goes smoothly. It won't come on until the second half of this year theres, some possibilities to toll or sell that as we indicated during our prepared remarks.
So that would be certainly in excess to the the 20, 30% that was the range, which is our internal production.
Okay understood. Thanks, a lot and a second question on pricing I mean, you indicated three to six months lag a fact for for half of your battery grade revenues.
So.
If we take second quarter for example, your expectation for second quarter pricing and then we assume that these indices kind of stay flat, where they are today does that imply that third quarter price and perhaps fourth quarter price go up sequentially. It would that'd be right logic given these lags.
If yes, given the lags we only can see out of as Ken said clearly out three months because of the nature of these lags.
But if market prices stay where they are yes, there's there's upside very clear theres upside I think we said in our guidance it would have to be a material decline in market prices and what we've seen in the past couple of weeks in China. It does not represent a material decline. So it has to be much more significant decline before that would have a.
Ah down where it impact on our guidance.
Great. Thanks, a lot.
Our next question comes from Matthew Bouley from Bank of America. Please go ahead Matthew.
Good morning, everyone.
Yes.
So questions on on minerals marble joint venture.
Like one of the page you for the 10% stake yet too.
Who controls the decision to run <unk> and at what pace is that man. Rev. Is that you is that a joint decision and then when you move to 50 50 is that going to establish after tax accounting for that business as well or yeah.
Yeah.
So I guess, maybe try and take that so that they pay not paid us for anything in it and it's a concept and we're negotiating that at the moment. So we're operating at 60 40.
After that we had previously so we are talking we are having we are under discussions and I would say negotiations around expanding that JV, which and that expansion would move it to be 50 50 at Watson, but that's we've got to conclude all of that and none of that will change until we we conclude the discussions and get.
Final documents, so the accounting Scott I'll, let leave that to you yeah. So on the accounting.
Some of this depends on how those negotiate.
So with this 50 50 joint venture Theres, some complex accounting rules around control that we all have to go through and evaluate that once those agreements are there. There's so there's two potential options. There. One is that it is a consolidated joint venture on our books with minority.
Similar to what we do with J B C R.
With no control and it'll just run through equity income.
Which would then create that tax impact that a deck that you asked about so more to come on that all depends on how the negotiations and the final contract comes out.
Yeah.
Alright, that's helpful and then.
What do you what are the assumptions for second half 2020 to spodumene internal transfers, how we're looking at sizing that impact is it still $17 70 or have you moved that up.
No no that that's moved up its almost doubled its almost doubled from that so I think it's Eric Yeah, Hello, Yes, yes, or will double right. It's based on a formula with.
We've agreed to the of the JV has agreed to with the authorities in Australia for tax and royalty purposes, and then it's based upon a lagging basis of how spodumene prices in the market in several different indices have fared so based on that what you've seen with spodumene prices rising with certainly with the salt prices as well that we talked about earlier that.
Average prices, probably going to be on the order of double where it's been.
Yeah understood. Okay. Thank you.
Our next question comes from Christopher Parkinson from Mizuho. Please go ahead Kristen.
Hi, This is Harris fein on for Chris Thanks for taking my question.
So your competitors have been discussing that there has been a noticeable step change in your customers' willingness to enter into contracts and more of an acknowledgment that the world will be short lithium in the coming years. So.
I was wondering if you could give your perspective on that based on what you're seeing and I know, it's early but how what that implies for the setup for 2023 pricing.
Is it is it reasonable to expect that you would be able to maintain these levels.
So.
Here's this is Eric I'll, I'll, I'll start and maybe others will add.
So the market there is certainly a very big concern about security of supply with the rapid commit with with the significant commitment that automotive manufacturers are making towards evs and the excitement that that brings with it there is a concern as well that the whether the industry can can can spool up quickly enough to meet that day.
And in one regard that might be why the spot prices. So high that's just a fundamental concern in that regard and that's leading to two.
Two long term partnership discussions Unfortunately that falls squarely in our strategy. We've had for years now which is picking the right partners partnering with them long term leveraging our world class resources on our ability to execute well to give them comfort that we're the right partner for them to to ease that concern around security of supply.
Price is.
As we've discussed at length in this call and is is a function of what happens with the market indices for a large measure of our our revenue currently 50% of our battery grade revenues are going to be impacted by that it is and that's going to be what the market does so they will be structures, we take on with with these sorts of partners that as Ken earlier said well probably be into.
<unk> space and have some colouring.
On either side of them.
And our long term commitment from from from these customers to buy and for us to supply where that price is is going to be a function of the market are so hard to call that right now.
Yeah.
Got it and and piggybacking off of that you know.
In the past we've been looking at.
Sort of a 40% long term EBITDA margin bogey for lithium and.
<unk> looks like a little bit of an anomaly, but given the current price set up that you're seeing is there any meaningful change to.
Your long term normalized margin outlook, it's a bit higher in 2022, and and if you could also talk about helping us.
Cover the framework for quantifying how startup costs are going to play into that over the next few years that would be really helpful.
Yeah.
So I would say that our long term view as we laid out last year in our in our Investor day was in the mid Forty's for the lithium business.
At mid cycle pricing, so through the cycle and and and I would say that our view really hasn't changed at this point in time we.
We will continue to evaluate that and adjust as we need to as we better understand the long term pricing outlooks.
Of course, as you mentioned our plant startups do have an impact on that its bigger today, because we're doubling our capacity versus as you go forward in time, you know that.
The next increment is going to be a smaller and smaller percentage.
And eventually just be part of just part of our normal operating activities.
Okay.
Our next question comes from our own this one my phone from RBC capital markets. Please go ahead.
I mean first off I guess I just wanted to go back to the pricing discussion. So you know we have had a some majors announce you know.
Some new capacity announcements I think Ken thing and some others.
No.
And that would kind of potentially signal some confidence that we are in a new price regime.
You've also taken up your guidance for the full year.
You know I'm just curious what you think you.
You know the new level of say peak to trough pricing in lithium as you move into 'twenty. Three I mean do you think you can build off of this base that you're at right now.
So we're not gonna called lithium pricing going forward.
We what we've done is we've structured our contracts. So we move with the market and we've given ourselves a little bit of stability been work that's been part of our plan for some time and it gives our customers visibility of what the what the price is relative to the market I mean, they have the same visibility going forward as we do and and as you do so it's typical.
<unk> for us to say, where it goes in 'twenty three we think the market is tight when we look at the demand from E beam and demand on lithium.
What we see is capacity coming on the market is tight for.
Years.
So for at least through our planning period, which I would call. It five years. So we see it being pretty tight now there'll be periods, where there is some oversupply, but the growth in the market. It catches up very quickly. So we think the market is tight but.
We're not gonna call lithium prices for 'twenty three.
Understood.
And then I guess are we.
We haven't really asked about bromine yet so maybe I'll just ask quickly there maybe.
Maybe you can just provide a couple more details on your thoughts there do you expect continued price upward momentum there and.
What's the outlook I guess from a demand standpoint.
Yeah.
Yes in terms of pricing I think we should see pretty stable pricing, we're pretty fortunate that the applications and digitalization.
Frication continue to grow and that those applications are growing slightly faster than supply can come on in the market. So similar to what we saw in our Investor Day last fall. We expect this market to be fundamentally under supplied for the next five years, where our planning period, so and we're adding capacity.
We expect the pricing to stay relatively strong for four <unk>.
Foreseeable future.
Thanks.
Next question is from Ben <unk> from Baird. Please go ahead.
Hey, good morning.
Just two questions first for hydroxide versus carbonate.
How do you decide on where to make.
The investment.
On the two.
And then geopolitical risk.
The.
Countries as you know there was a headline out yesterday broke through them.
Mexico.
Nationalizing their lithium resource, but you know as you look towards making that investment choice, we get a lot of questions about that so how do you think about that going forward. Thanks, Chris.
Yeah.
Hey, this is Eric I can take the hydroxide.
Myself for Ken can address the geopolitical risk ones, so first on hydroxide versus carbonate.
The prior question was about the trend towards long term partnerships and security of supply.
One of the benefits of the cart customer partnership approaches to leverage that and their commitment to us in and making commitment firmly to the product for them that they wish. It. There's also in this does relate to the geopolitical risk side of things and that there's also a discussion around where they want it and then.
And increasingly a concern and a desire to have localization of supply. So we leveraged the commitments we're trying to get in these contracts all of these customers have to narrow down those two issues the product risk in there in the regional risk for the two.
As a as an added comment we currently are seeing that may be carbonated.
L. S. P. Chemistries are about maybe 20, 25% of the market. That's our current view, we continue to monitor that carefully.
You want to comment just on how we think about risk.
Yeah, I mean, I would say I mean.
It's important for us given the.
The locations were.
And when we look we look at it kind of at a macro level and by country, So and we look at it.
Particularly kind of as we get deeper and deeper as we make a new investment, but we monitor that so a lot happening in Chile as you know we've talked about on these calls before Argentina as we make investments there will have to make sure that we're we're looking at those risk and monitoring that Australia less of an issue China.
Another area that we have to focus on and make sure we have our our risk assessments, but we monitor those we try and combine it with the government active government relations on making sure that we're doing the right thing in the country. So we're seeing as a good actor in that we're bringing value to them as well that others can't necessarily brings and that's a big part of how we felt like we miss.
Again, the risk in some of those geographies.
Thank you.
Yeah.
Our next question is from Colin Rusch from Oppenheimer. Please go ahead Colin.
How much guys can you talk a little bit about the potential for <unk>.
Incremental customer deposits or customer funded Capex you guys are spending a ton of money to.
To grow capacity and I'm, just wondering about some alternative strategies for signs of men.
Yeah, Colin I think that's a good question I think given the environment that we're in and the concern around are around supply from our customers are were exploring all sorts of options partnership type of options like like Eric talked about.
Prepayments, there's a variety of different things there I think the key for US is to ensure that that those types of agreements are giving us incremental return versus what we could do on our own. So clearly our strong balance sheet strong support from investors give us.
Plenty of capacity to build to do it on our own but if we can get incremental returns.
Take a look at it.
Okay, and then just given the expertise that you guys have around cathode materials and formulation.
Your willingness or interest in additional vertical integration, obviously, you don't want us to do with your customers, but it seems like you guys have enough expertise.
Do some real work in that space.
Is that a cathode question or just trying to make sure everybody's question, Yes, now you're kind of West Virginia I'm wondering if your.
Vertical integration there.
Yeah. So so I mean look we look at the different options, but where we're from them. We look at it from a material standpoint, and our interest in batteries and cathodes is to make sure that we're producing at developing the right chemistries that go into our customers' processes. So we're not looking to be in the cattle business, but we're looking to be an excellent.
Player to those cathode makers and the Oems, but that have a vested interest in the battery and the cap the technology.
Yeah, and I, just just expand calling part of note part of doing that is being able to understand that application very well, but not not integrate forward into it and as I would also say, though that as we look at other advanced forms of lithium will look at that.
Again question exactly how we want to play in that is still being material player, but what material are we supplying and so we're looking at is if you look at solid state Chemistries Theres a variety of different ways. We can play in that area and we're doing a lot of work currently with our partners and customers in that area to determine the future.
That's super helpful. Thanks, guys.
Yes.
That's all the telling me off for today's Q&A session I'm now going to hand, it back to Ken Ken Smith for any final remarks. Please go ahead.
Alright, Thank you Darius and thank you all again for your participation on our call today. Our success in 2021 combined with the momentum we are experiencing experiencing in 'twenty two strongly positions us for profitable growth I am confident in our team's ability to drive value for all of our stakeholders like seller.
Right now our growth in a sustainable way and to lead by example.
And thanks for joining us.
This concludes his school. Thank you for joining you may now disconnect your lines.
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