Q2 2019 Earnings Call
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As a reminder, this call is being recorded.
I would now like to introduce your host for today's conference Mr., Dave Ryan Vice President of corporate strategy and Investor Relations you may begin.
Thank you and welcome to Albemarle second quarter 2019 earnings Conference call.
Our earnings were released after the close of the market yesterday, and you'll find our press release earnings presentation, and non-GAAP reconciliations posted on our website under the investors section at Www Dot Albemarle Dot com.
Joining me on the call today are Luke Sam Chief Executive Officer, Scott <unk>, Chief Financial Officer, Raphael Crawford, President catalyst, nothing Johnson, President bromine specialties, and Eric Norris President lithium.
As a reminder, some of the statements made during this conference call about our outlook expected company performance planned joint ventures, as well as lithium production capacity and demand may constitute forward looking statements within the meaning of federal securities laws.
Please note the cautionary language about forward looking statements contained in our press release that same language applies to this call.
Please also note that our comments today regarding our financial results, excluding nonoperating nonrecurring and other unusual items.
GAAP financial measures and reconciliations from those to the adjusted numbers discussed today may be found in our press release and the appendix of our earnings presentation, both of which are posted on our web site.
Now I will turn the call over to Luke.
Hey, Thanks, Dave Good morning, everybody and thanks for joining us on the call today in the second quarter, excluding currency impacts excuse me Albemarle grew revenue and adjusted EBITDA by 6% and adjusted diluted EPS by 20% compared to the second quarter of 2018 volume and pricing contributed to the year over year growth in lithium in bromine, while pricing was up year over year in catalyst.
Scott will go into more detail on our quarterly performance and outlook for the rest of the year in a minute.
I want to focus my comments on why we are adjusting our lithium capital expansion plans to significantly reduce capital expenditures in the medium term.
The potential impact of the E V subsidy changes in China possible shifts in cathode chemistry excess inventory held in spots along the supply chain and the current oversupply of lithium carbonate and the market has caused some caution in the energy storage value chain.
All of this has put downward pressure on price and we expect to see this pressure on carbon at pricing continue in the near term, but we also expect supply demand dynamics to tighten in 2020.
We have always stated that we would add production capacity to meet demand.
As you can see on page eight of our earnings presentation. Albemarle has decided to delay all work related to planning engineering and construction of approximately 125000 metric tons of previously announced additional conversion capacity.
We anticipate that these changes will reduce our capital expenditures were approximately $1.5 billion over the next five years.
And allow Albemarle, but come free cash flow positive in 2021.
As part of this strategic pivot, we recently announced amendments to the transaction with MRL. The joint venture will now be owned 60% by Albemarle and 40% by MRL Albemarle will pay $820 million in cash and contribute a 40% interest in the 50000 ton lithium hydroxide facility currently under construction by Albemarle in Kimpton Western Australia. This facility is still on track to be commissioned in stages commencing in the first half of 2021.
We had previously announced it the first phase it came with some would be a 75000 metric ton hydroxide facility, but we are scaling the total capacity back to 50000 metric tons at this time.
The watching them on we'll still have the ability to support at least 100000 metric tons of lithium hydroxide. However, any additional conversion capacity expansions in this joint venture will be based on market dynamics, and we would expect a lower capital intensity per metric ton of capacity.
This transaction still unites the mining expertise of MRL with the lithium expertise of Albemarle and the modification accelerates the joint ventures ability to bring lithium hydroxide to the market.
Albemarle, we'll continue to have responsibility for marketing all of the product produced by this joint venture.
In China, our 20000 met tons, then you to lithium hydroxide facility continues to ramp production and is on pace to reach the full capacity run rate by year end.
With several large customer qualifications complete we continue to anticipate meaningful sales growth supported by this facility during the second half of 2019.
In Chile, our two existing operating units in La Negra remain on track to produce close to 40000 metric tons of lithium carbonate this year.
The 40000 tons of La Negra three in four remains on schedule for completion in the first quarter of 2021.
Based on what we're seeing in the carbon at market and to better manage our cash flow, we have decided to delay all work on the salon our yield improvement project at this time.
This will likely limit our ability to operate when there are three and four at nameplate capacity initially and will delay our ability to build a safety stock of concentrated brine for a rain event or similar issue. However, we are confident we will still be able to meet our commitments to our carbon it contract customers.
While we are pulling back on previously announced conversion capacity expansions I want to point out that Albemarle has access to the best lithium resources in the world. This a lot out of Karma Green Bush's in Australia and upon closing the MRL transaction watching no. Other lithium company can match the quality size or diversity of those resources.
Albemarle will be cash flow positive in 2021, and our balance sheet will get stronger and stronger as we grow EBITDA and operational cash flow over the next few years. This will give us the flexibility when market conditions dictate.
To build or buy additional conversion capacity that we use feedstock from the world's best lithium resources.
In closing as we promised we would do we are adjusting our capital expansion plans to respond to market conditions.
We will still be able to meet all of our commitments to our contracted customers, but reduce capital expenditures significantly in the medium term, allowing albemarle to be free cash flow positive in 2021.
We have access to large high quality low cost lithium resources and the financial flexibility to build or buy conversion capacity in the future if doing so creates value for our stakeholders in short we are well positioned for and excited about the future with that ill turn the call over to Scott.
Thanks, Luke and good morning, everyone.
For the second quarter, we reported an adjusted U.S. GAAP net income of $154 million or $1.45 cents diluted earnings per share.
We reported adjusted earnings per share of $1.55 cents, an increase of about 19 cents or 14% compared to second quarter, 2018, or 20% excluding currency effects.
Growth in bromine lithium and fine chemistry services resulted in an increase of about 19 cents.
Earnings per share also benefited six cents from our 2018 share repurchase programs and 10 cents from a more favorable effective tax rate than was the case in 2018.
These gains were partially offset by unfavorable currency exchange of about eight cents and unfavorable results in the catalyst business compared to second quarter, 2018, which was a particularly strong quarter for catalyst.
Now I will cover a few financial details.
Based on current geographic sales and production mix year to date and our expectations for the rest of 2019. We currently expect our full year effective tax rate to range between 20, and 22% excluding special items non operating pension and OPEB items.
Corporate costs in the second quarter were $39 million an increase over the same period in 2018, primarily driven by an increase in unfavorable currency losses of approximately $8 million.
Full year 2019, corporate costs are now expected to range from $130 million to $140 million.
For the first half of the year net cash from operations was $199 million.
Down $25 million from last year impacted by higher cash taxes and increased working capital to support increased sales in lithium in the second half of 2019.
Capital expenditures during the first half were $416 million and we now expect full year Capex for 2019 to range between 900 million and $1 billion.
Expenditures for the Cameron project remain on track.
However, some expenditures that were planned for 2020 are now expected to occur in 2019.
This is largely driven by increased activity in Australia, and a requirement by vendors for higher upfront payments.
At the end of the quarter, our net debt to adjusted EBITDA was 1.5 times.
After the MRO deal closes we expect our gross debt to adjusted EBITDA ratio to be around 2.7.
Net debt to EBITDA to be around 2.2.
And expected to improve going forward.
We will secure new debt to finance, the joint venture and for general corporate purposes.
Initially a delayed draw down draw term loan will be put in place.
This may ultimately be converted to long term debt.
Turning to the details of our business performance now.
In the second quarter lithium delivered sales of $325 million.
Excluding the unfavorable impact of currency.
Lithium sales were up 5% compared to the second quarter of 2018, driven by increased volume of 3% and increased price and mix of 2%.
Pricing was up 1% primarily in specialty products such as Butyllithium.
And battery grade materials.
Adjusted EBITDA of $142 million was flat compared to the second quarter of 2018, and adjusted EBITDA margin was 44%.
In bromine second quarter net sales and adjusted EBITDA grew year over year by 17% and 20% respectively, excluding the impact of currency.
Adjusted EBITDA margins were strong at 32%.
Although we have seen some weakness in our connectors business that serves the automotive and construction markets. We have been successful to date in shifting our bromine to other end markets where demand remains more robust.
Volume growth in the second quarter was aided by our JBC expansion that is running well and was brought online in the third quarter of 2018.
Catalyst reported second quarter, net sales of $266 million and adjusted EBITDA of $67 million.
The decline in results was caused by the volume shortfall in fluid catalytic cracking or FCC catalyst due to delays in the startup of new units and changes in customer mix.
This was partially offset by favorable pricing in FCC and higher sales volume and a favorable product mix in clean fuel technology or HPC.
Insurance payments related to weather received during 2018, we're also an unfavorable factor in the adjusted EBITDA comparison.
Let me turn to the rest of the year now.
In lithium we continue to expect year over year volume growth of 15000 to 20000 metric tons and then adjusted EBITDA growth rate in the mid to high teens.
With multiple customer qualifications complete hydroxide volume from Xinyu is expected to drive a stronger second half.
We're seeing pricing pressure on some technical grade products and expect second half pricing to be flat to slightly down compared to 2018.
However, we still expect full year pricing to be flat to slightly up versus 2018 and to see sequential adjusted EBITDA growth in the third and fourth quarters.
In catalysts, the FCC customer startup delays arcs.
So it is a matter of when not if we ship FCC catalyst to these refineries.
For HPC the full year remains on track, although timing of orders has shifted around a bit.
Putting all this together we now expect full year adjusted EBITDA of the catalyst segment to be down mid single digits on a percentage basis, excluding divested businesses.
Second half results are expected to be spread fairly evenly across the third and fourth quarter and flat to first half.
The downside in catalyst is offset by an improved outlook in bromine and fine chemistry services.
Our 2019 order backlog in bromine remains healthy and we now expect full year adjusted EBITDA growth in the range of 10%.
Global economic weakness is always a risk for this business, although signs are pointing toward.
Up potential 2020 impact on bromine rather than 2019.
For the total company, excluding divested businesses, we are reaffirming the full year guidance of net sales growth in the range of 9% to 15% and adjusted EBITDA growth in the range of 7% to 14%.
We are increasing guidance for adjusted diluted earnings per share to $6.25 to $6.65, a pro forma growth rate of 15% to 22% over 2018.
Now I'll turn the call back over to Dave.
Thanks, Scott before we get to Q in a I want to call your attention to our press release of August six announcing that we will host an investor day in New York City on the morning of December 12 2019.
Additional details will be forthcoming, but we look forward to the opportunity to provide a detailed update on Albemarle and the strategy and priorities for the company in each of our global business units.
Operator, we're now ready to open the lines for acuity, but before doing so I'd like to remind everyone to please limit questions to two per person to ensure that all participants have a chance to ask questions then feel free to get back into the queue for follow ups. If time allows please proceed.
Ladies and gentlemen, if we have a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
If your question has been answered we wish to remove yourself from the queue. Please press the pound key.
Our first question comes from Josh Spector with DBS. Your line is now open.
Hey, guys can you hear me.
Yes, we can hear you.
Great Thats all right.
That Ken.
Just a question on Capex and I will over the next five years I understand you took down the doctor.
And I wonder if demand materialize over the next three years.
At or ahead of your expectation.
Do you see some of that cash coming back share planning.
Okay. Thank you are adding capacity in 2020 timeframe.
Probably need to start building their spending on that and in early 2020 kind of how do you about that.
Earlier.
Yes.
This so that will reduce the capital that we will have to expand for that next 50000 metric ton of capacity were essentially sharing that capacity with our partner. So we believe that we will look at the demand that it would be out further pass that 2021 timeframe, where we would have to commit any more capital. So we're very comfortable with the free cash flow number that we say and being free cash flow positive in 2021, and then as our EBITDA grows we will selectively buy or build.
Additional capacity if the market demands it at a lower capital intensity than what we're seeing today.
Okay, great Thanks, and just on that.
Oh, sorry.
But in the availability how does that change.
Impact any of that plant there that you could provide any color what's going to happen with the capacity that you are going to be allocating to Kevin.
Yes upon the closing of that transaction will work with MRL to determine the best approach on that spot I mean, but it certainly appears to US today. The market is adequately supplied would spodumene today.
Okay, great. Thanks.
Our next question comes from David Begleiter with.
Deutsche Bank. Your line is now open.
Thank you Luke just following up on on that situation, perhaps additional talison spodumene will that be process or how will that be allocated going forward.
Under the Talison agreements.
We have the rights to 50% of the offtake and.
Our partner T. on she has the rights to 50% of that offtake, so that won't change in any way going forward, David I'm not quite sure I understand the question.
With reduced capacity in cameras in.
Would you be processing any that health and spotted you mean in the 50000 tons of <unk> initial converting capacity.
I know that will be used without watching a rock we would expect to do that but we certainly have flexibility to allow us in the future to with these resources to do whatever makes the most sense from a financial perspective.
Very good and just on a second half lithium EBITDA guidance Luke It is a big ramp up you do has a new coming in but.
And the other drivers for the a big second half versus first half in terms of lithium EBITDA.
Guidance range.
David This is Eric so it is as you depicted its two things its decision you to ramp up now that we are have six months of experience under our belt and are ramping towards full rates have for major customers qualified that can really drive that plant as another six plus that we'll probably qualify or in the process of qualifying but we have sufficient now to fill that plant in the second half of this year.
And then the other factor is the ramp up of similarly have lend Agra two in Chile.
And the volumes, we expect there and of course, the underlying factors strong demand growth in the markets, which we are demand outlook continues to be as it was three months ago for strong growth going forward.
Thank you very much.
Our next question comes from Aaron This one and then with RBC capital markets. Your line is now open.
Great. Thanks, good morning.
I'm just trying to I guess understand your comments put them in context.
In the prepared remarks, so obviously, they're going through a little bit of a period of oversupply and carbon it and spot you mean.
And Youve halted capex.
Partly as a result, so are we supposed to.
I guess interpret that or some of your decisions to not bring as much tonnage to market would help kind of stabilize the market.
And do you think.
We would see some similar responses from from your peers in the industry. Thanks.
Yes, I have no way of knowing what our peers in the industry will do first of all what we're looking at is we've always told our stakeholders that we were going to invest capital to meet our contracted customers demand, where we could get an attractive return on invested capital.
And our stakeholders have been clear when I talk to shareholders. The number one thing here is when are you going to be free cash flow positive. It's critical that we adjust our capital to allow us to meet our stakeholders demand while at the same time driving towards a positive free cash flow and we put a stake in the ground that we're going to be free cash flow positive in 2021, we believe that will create more value for our stakeholders and we will have the financial flexibility if the market conditions call for it to build or buy additional conversion capacity to meet any increase needs in the market.
Okay. Thanks for that.
And as a follow up just curious.
On your customers' acceptance as a long term contracts or are you still seeing.
Increased contracting you mentioned 10 years previous on previous calls.
Are you still able to extend those agreements.
And if so what's kind of the magnitude or the level of acceptance that you're seeing out there. Thanks.
Sarah and Hello. This is Eric Norris, we ended 2018 with.
Largely all of those major contracts extended out.
In at somewhere in the three to five year range, some five plus.
And that is what is we're operating against today.
And those contracts are holding.
They are all largely outside of China are those types of contracts and.
And we continue to move forward against them.
Thanks, I'll turn it over.
Our next question comes from Jerry Secaucus with JP Morgan. Your line is now open.
Thanks very much.
You said that over a five year period, you would drop your capex by 1.5 billion. So what was your five year Capex expectation.
And what is it now.
Scott you have that number off top yet I don't have it off.
We'll get we'll get we'll get back to you would that number I don't have it off the top of my head what we what we did was we went in and look exactly what we were taking it down I can tell you buy we looked at 19 being right around a billion 20 being right around a billion and then.
21 drop into around 500 million or so or something like that am I right. Scott do you have a new new is around 500 million. There was up around 800, yes. So it's about $3 million to $400 million drop so in that one year alone. So we'll get that number for you I'm sorry, I don't have it off top my agenda. Okay. Okay, and then just for my follow up.
Originally once here or ways to capacity was done I think you would have had something like.
350000, or 340000 tons of LC.
And what you're now going to do is you're not going to build 125000 tons of LC. So basically what you've done is you've curtailed York your longer term capacity to the mid decade.
By about 35% 35 or 36%.
So that must correspond to a diminished expectation for either lithium growth rates overall or lithium profitability. Overall can you can you.
Give us a sense yet why your curtailments are so large and how you got there.
Yes, Jeff certainly can.
First of all we will still have the capability.
Out in the years to either buy or build additional capacity if that's Matt.
I don't you should not view this anyway as seen that we don't believe.
Demand is still going to be where it is we're still bullish on demand. We were at a I think a million metric tons in that range by 2025, and we still see that based on all the data that we have coming in so it's not demand.
From an actual dollar perspective, I think it's too soon to say, whether it's going to be a reduction in EBITDA or not.
When the supply and demand is got to have an impact one would think over time on price. What this will do at a million at a million metric tons is it will reduce our market share.
Unless we build more over time so while.
It is not owned demand I understand how you do the math on the EBITDA and earnings, but I'm not 100 can I'm not ready to concede that point, yet if you will we just need to let's see how this plays out but I want to be clear, we're going to meet the commitments that we have to our customers.
We're going to be free cash flow positive in 2021.
As we go out through the years in our EBITDA on our volumes do grow you'll continue to see us generate significant free cash flow and we'll have the balance sheet and the flexibility to invest.
Either in buying or building additional conversion capacity if it.
Means it makes sense to our stakeholders and Thats, probably once we say go if we're building it is probably 24 to 36 months.
Okay, great. Thank so much look thanks for the questions.
Our next question comes from PJ Juvekar with Citi. Your line is now open.
Yes, hi, good morning.
Look now that you have delayed a big chunk of your hydroxide capacity.
You are going to be more exposed to support them in concentrate.
From both what you know and from Talison.
For longer period of time.
Why is that a better economic decision when he noted that is going to be excess capacity in the market.
Well youre assume themselves on that and I'm not I'm not saying today, we're going to sell it. So we're not going to be more exposed to spot I mean, Rob.
We're not going to sell it if there's not a market for.
Okay. So you're saying you ought to operate the mines if there is more demand for.
I'm, saying that we will discuss after the deal closes we will discuss within MRL. What the best approach is to take on the spot you mean rock from that Mark.
Okay.
And then most of your cancer capacity is in Australia.
Just when you're not competitive either because of higher labor or building costs or whatever.
Is it because.
Demand is lower and you're just matching it to demand as has nothing to do with Australia.
It doesn't have anything to do with Australia, Although I will say and it's clear if you're going to build our an asset in China versus you're going to build them asset in Australia, we've got a much higher capital intensity in Australia be the same thing if you built something the U.S., you've got a higher capital intensity than you do in China.
But what we are delaying is simply what we had on the drawing board and we're taking that capacity out in you ought not read anything more than that into it.
Okay. Thank you.
Our next question comes from Robert Koort with Goldman Sachs. Your line is now open.
Thank you good morning.
But your question for Eric Im trying to reconcile.
Yes, Alamos unique supply capability.
I think you guys have talked in the past about customers, maybe narrowing are tightening their specifications and.
Your ability to supply their given legacy.
Supply arrangements qualifications and whatnot and Luke you, suggesting maybe you could see some share so.
Are the tier two and tier three converters beginning.
To be able to meet those specifications of the narrowing.
The distance to and performance capabilities that you have and then.
Secondly are we seeing those goalposts narrowing by the customer base.
Our the specs getting tighter tougher requiring more out of their suppliers that are lithium suppliers.
Hi, it's Erik so I would I would say that.
This this is all about the growth rate for our strategy first of all that that maybe obvious but an important point, because where we see that going is largely a hi, Nicole base increasingly.
And where we see that needing therefore is hydroxide lithium hydroxide. When you talk about the types of quality specifications. They are tightening in you talk about the ability to supply pace to meet them. It's a handful or last of companies that can do that so I wouldnt I would say that that is today that is not the non integrated producers. It is it is the integrated major producers in the marketplace and and so our strategy is one simply around creating flexibility that you're hearing on this conference call for growth, while continuing to meet needs not any statement around what we see competitively.
In this high growth market or the continued need for more specialized or high quality products. Yeah. Bob. This is Lee as as a leader in the lithium business, we feel like we need to put a stake in the ground and that's what we're doing we're pivoting our strategy to address the major concern we hear from our shareholders, which is when are you going to be free cash flow positive, we're going and we're going to be free cash flow positive in 2021, and we're still going to be able to meet the commitments we have to our customers and we will also have the flexibility in the future using the world's best resources to build or buy additional conversion capacity. So don't hear me. Please don't hear me say that I'm willing to cede share I'm happy with a lower EBITDA or I'm not looking for earnings growth I don't hear any of that what you ought to hear is we're going to be very responsible in how we are managing our cash to drive shareholder value and meet our customers.
As demand.
And if I could follow up loop that.
Seems to be an ongoing anxiety in the market about spot prices and relevance to your portfolio. I think you guys have obviously demonstrated consistently year.
Your pricing is not in any way a correlated to that spot market, but I am curious.
As you think about renewing contracts I assume some role in some roll off.
And you're writing a new contract today does that still have a.
Price uplift from where it may have been written the expiring contracts or how do you. How do you sort of characterize the contract pricing dynamic as you look forward from here.
Yeah, I will let Eric talk about that but I think you got to you got to separate it between what you're seeing today in carbon it and what you're seeing today in a drug side from from a battery grade standpoint, okay. So Eric yes. So it is it is different by the two yes, I mean first of all in our mix of business as I said in a previous question. We we are not seeing a lot of we don't have a lot of contracts expiring within the next this year or next year.
We have a large number of large volume committed on on the hydroxide side of that that is where we see.
The growth certainly free these but it's also where we see considerable tightness from a supply standpoint, both today and into the future.
And so while there might be excess and carbonate carbonate is also a product that is not the preferred.
Product line going forward for each of these and as a result, you will see pricing pressure there.
And any contract that renews, you'll see more there and carbonated you would on hydroxide.
And so that's really the dynamic we're facing right now.
I mean, Bob that's the question is as these contracts in or we've got to look to see is a steady price a set price on that minimum volume the way it makes sense or do we go to a band of pricing how are we going to do this in this evolving market and that's something that there is a significant amount of focus on.
Not only internally with Albemarle, but on discussion with our major customers the major battery suppliers and some automotive Oems because you're what we're seeing today is that buying decision is moving further to the right of that supply chain and we are engaged in those discussions at the right levels.
And we're going to hopefully reach an arrangement that make sense for us and for our stakeholders and allows our customers.
Also.
Meet their demands that they have to the Oems that's our goal.
Great. Thanks.
Our next question comes from Aleksey Yefremov with.
Good morning, this is Matt Skorupski on for Alexia.
Given the price volatility that you've seen so far this year are your lithium contracts being executed as expected or were there any change in terms midyear.
So.
Matt Eric Norris here again so.
We see a mix of things right.
The vast majority of our businesses is battery grade the vast majority of that is located outside of China, and Thats, where our contracts sweet spot has been for years and where it continues to be where we renewed a lot of our contracts last year for the duration of a number of years going forward. So those all those contracts are performing as expected. We have some technical grade products that are sold under more shorter term nontraditional are not traditional to these battery grade contracts. They are seeing pressure and Scott referenced that we'll see some of that in the second half of this year.
The volume that we have in China, which is strategic to maintain and position within that supply chain.
It is also not a traditional sort of contract has been shorter term. Some expired this year and some cases, we were able to reach a price agreement with summit and others, we weren't willing to go where they felt they felt they wanted them to go and so we walked away from some contracts that we've kept a foot hold in China. So it really would be China, which is less than 10% of our volume and tech raid, which is another depending on how you kind of 10% to 20% of our volume, that's where there might be some pressure, but in the vast majority of our business and certainly our battery grade pars portion of the market that's growing.
Those contracts are performing.
Thank you that's helpful and then what are your early.
Kind of views on demand for lithium in China in July and August So far has there been any change or deterioration from June levels.
Again, it's Eric here, it's a it's a question that I asked my team and I think it's really way too early to know.
Are you asking in the spirit of I think the fact that the new subsidies went into effect as of July one.
Very often there is a run up before any subsidy change of buying behavior and so we don't know what it's going to mean going in July or August we I could speculate one way or the other the market gravies remains robust, but subsidies do distort behavior.
And so it's possible that Joe I or our August could be weak.
Weaker than they otherwise would be without the subsidy on balance, though we see a strong year for China going forward from a demand standpoint.
Thank you.
Our next question comes from.
Steven.
With Bank of America. Your line is now open.
Hi, Good morning. This is actually Luke washer on for Steve. So given your decision to reduce hydroxide capacity could you provide some more detail on what you're seeing on the demand side. That's changing your tone are you seeing a slowdown in the optimism perhaps for the timing and the shift to 8.1 in the end CA technologies.
Hi, Hi, Luca Erik again, so as Luke said.
First of all there is nothing thats changing the next two to three years right that the capacity that we have opted to not pursue.
Isn't that three to five year timeframe and that same three to five year timeframe, we'll have certainly the resources and the cash should the market warranted to go after that that opportunity.
So it's putting a stake in the ground is look referred to in terms of now your question of demand demand is unchanged from what we thought.
Three months ago from what we thought six months ago remains strong and that and probably stronger than for hydroxide than we would have expected.
Maybe six months ago. So there continues to be that edging towards hydroxide that is supported by in CA, Chemistries and 811, Chemistries, but I'll reiterate what I said three three months ago, we never expected 811 to be a big player in each of these in the next couple of years, there are technology and processing challenges yet for that technology to be safely use in a large scale format in a battery for navy. It is being used experimentally in some in China in some consumer goods products is being blended with six to two to sort of if you will supplement the energy within that battery and at a small level, but it is not there are today really no. We don't see any eight when one full E V batteries for some time, yet and CA continues to grow is driven by a few automotive producers in particular.
And and so that that continues on but again going back to the original point nothing has really changed in our demand view in the next couple of years or for that matter five years out.
Thanks, that's helpful.
And then on the line Negra three and four you expected to add 40000 metric tons of carbon it to the market and now you're delaying that project a bit what do you believe the effective capacity of those increases will be now.
Yes, I think we always intended to bring that capacity own you know is 2021.
As one would have mechanical completion in the first quarter would have to have.
Four to six months worth of qualification. So I wouldn't expect much in in 2021, and we always talk about bringing these units on a third a third a third.
So we're confident we can still bring that own and we could probably have this law yield online and have the Brian ready for it by 2023, when we need that last.
Third of that of that project there so I would look at it as.
15, 15, 10, something like that something in that range.
Great. Thank you.
Our next question comes from Joel Jackson with BMO capital markets. Your line is now open.
Hi, good morning.
Hey, Hi, you clearly said that being free cash flow positive 2021.
Thing for you.
Considering that change in the JV with mid rise I understand the Optionality I guess.
You mean for you here.
Maybe you could talk about the rationale about deciding.
Give over $1 billion of consideration for spot human resource.
Where maybe in the future could go and get that resource later, when you need it.
Yes, Thats a great question.
They will run in an auction and it was going to get sold.
If you go back to the very beginning of it MRL was running a process. We were engaged in a process. It was a top tier asset.
If you take talus now the equation and you take out Greenbush is that is the best rock resource in the World. When you look at watching the size of that resource the purity that resource in the skill that MRL brings to the table from a mining standpoint, and I believe from a capital execution standpoint, they can help us. It just made for a perfect fit ultimately you're going to need that volume and we thought it was best that we had it we saw it as a good asset.
And now when we restructured it we have 60% of that joint venture. So that gives us some some rice that we didnt have in the past so all in all quality asset we're going to use that rock for Cameron. We will also partnered with MRL on our next installment of capital, which will further reduce our capital outlay in still allow us to meet our customer demand so quality resource quality people ability to reduce our capital outlay in still have 100000 met tons worth of lithium hydroxide coming on board. It all made sense to us from a return standpoint.
Thank you for that a little more on the yield improvement program deferral.
Is that Jeff.
Matching some of the conversations you've talked about earlier today is there anything else going on with the government on getting proper quota.
Increases or maybe.
No no.
Yes, no. This is nothing involve with the government our quota system is fine there have been no changes in any of the regulatory issues no changes really of our contracts. This is purely a decision where we saw an opportunity to delay the implementation of capital to allow us to get free cash flow positive.
Yeah more quickly than we were so we decided that we're going to take the steps to do that because when we calculate it. We believe we can still meet all the commitments we made to the carbon at customers that we have under contract.
So it's all about free cash flow has nothing to do in any way our relations with the government in Chile are fine.
Okay.
Our next question comes from Colin Rusch with Oppenheimer. Your line is now open.
Thanks, So much can you tell us what you're looking for from your customers or from the demand environment to to think about reactivating. These projects and then can you just update us in terms of your thinking on targeted return on capital are you looking at evolving that are looking for higher returns as you see this market evolve and see the strategic.
Moves play out a little bit more.
More in advance.
No. We fought for return on invested capital, we still sheet for two times, our weighted average cost of capital for return.
That's what that's and that's that's always been the case and we continue to see that as our case.
As of what we're looking for for our customers at you know if people are going to sell car minute at.
The cash cost of that marginal producer.
Well it doesn't make sense for us to add new capacity.
And we won't weakened because of our position in Chile, because of our cost position in Chile, we can still make very good margins at that level, but we don't we don't see the need to put new capacity in the ground. So it all comes down to what's the pricing going to be how's that pricing a b how are the contracts coming with the customers what or how are those going to evolve over time and those are all decisions that need to be made in the context of a company that needs to make a commitment to our stakeholders on free cash flow, which we are doing.
Okay, Great and then just in with the the kind of changing.
Change in trajectory here in the operating expenses are you is the organization right sized at this point you need to make any adjustments there.
Yeah, I think as we look at as we look out into 2020, and you start looking across our portfolio.
We've been operating bromine has grown almost double digits for three or four years in a row. That's that's not happened before and we can see some.
Weakness in automotive, we can see some weakness in construction as we talked about we've been able to reallocate that bromine molecule.
To date.
It very successfully so those continue to grow but I don't know how much longer that's practical expect that business to grow at that so we are undertaking in the second half of the year a view of our overall costs in a way to try to.
Reduce our overall cost and gain efficiencies.
Going forward and we'll share more of that with you at our December Investor Day presentation.
Thanks, so much guys.
Our next question comes from Mike Harrison with Seaport Global Securities. Your line is now open.
Hi, good morning.
Hey.
Look as you commented several times about this build versus buy decision that you could have looking out a few years. When it comes to conversion capacity does this reflect a view that you think there is going to be excess conversion capacity available when you might need it.
Yeah, I think theres excess conversion capacity available today.
And there is more coming online so I think that it's going to provide perhaps.
An opportunity for people that are interested in conversion assets. So as an integrated player with the best resources in the world.
We believe that that could be an opportunity for us and we are always.
Mindful of making sure we're getting the best return on the dollars we invest in that regard.
And then.
I wanted to actually ask your question about catalyst.
Can you just maybe give a little bit of color.
The changes in customer mix that you mentioned and the startup delays, maybe what's causing them and how those play out in the second half.
Hey, Mike This is Raphael.
So.
In the second quarter.
The mix in the second quarter was different namely we had a very strong second quarter in Hydroprocessing catalyst in 2018 that is a refill rebid re bed business. So sometimes those projects are those refills shift from one quarter to the next and it just so happened that last year, we were very strong in hydroprocessing with regard to FCC.
As Scott had mentioned in his commentary.
There are some delays in some projects that we have one.
It is not a matter of if but when so we have in 2019.
Coming into 2019, we shed some low priced low margin business to make room for those orders. Some of those have now been delayed so that gives us a little bit of a gap in 2019, but we fully expect that we will have that business in 2020 and beyond so fundamentally FCC catalyst and catalyst overall in the refining space is very strong for Albemarle.
Alright, thanks very much.
Our next question comes from Chris.
Caps with loop capital markets. Your line is now open.
Yes. Good morning, Thanks question, probably for maybe Luke.
In your formal comments you'd pointed to expectation that you'd see tighter supply demand in the industry. In 2020, just wondering if that's just based on sort of.
Top down math or are you seeing anything specifically from a bottoms up standpoint, either customer order patterns inventory levels anything that.
Any acceleration in demand that is pointing to that if you could just characterize that that'd be appreciated.
Hey, Chris sure. It's Eric here, So a couple of factors one.
Demand is as we've said on prior questions is continues to be strong and we see it.
Based on electric vehicle launches commitments from.
Eddie producers to battery producers, we see that demand will continue to step up again in 2020.
To to a greater degree, we'll give more specific guidance, but it's consistent with our demand model that we articulated of 50 to 60000 tons. This year and a million by 2025, such a natural step up there.
So thats on the on the on the demand side on the supply side. We we are seeing a couple of projects on on the resource side be delayed.
Take longer to come to market and door under current economics.
We believe may may be challenged to operate.
And then and then finally inventory, which has been a big factor in the marketplace. This year, we believe hard to quantify a lot of it is in China.
Within China, and Thats largely been depleted we think are.
From the supply chain on the carbonate hydroxide side and whats being in ENHANZE, it's not outside of China continues to be some excess rock inventory outside of China, and Australia in Australia, and it continues to be some excess salt in in some of the battery producers hands outside of China. So maybe the balance of this year that that would be drawn down and when you put that formula together, we see a pretty tight 2020.
Thanks for that color and then my follow up is really to the.
The expansion curtailments and.
Really the question is is that.
Strategic pivot juxtaposed against a couple of your slide you've used in prior investor presentations regarding your your lithium hydroxide and lithium carbonate that you have under contract over the 2021 and 2025 period. The question is like it looks like this decision doesnt influence.
Those.
Metrics on 2020 intended production, but this is really all about not having visibility on on longer term commitments from customers out to 2025. So could you just.
Is that one way to think about maybe characterize the decision against those slides. Thank you.
Yes, so we have made commitments to people lot through 2025 in some instances and all these scenarios were able to meet those commitments with the capacity that we've announced in that we have under construction today.
And we know what the prices on those and were able to calculate their return based on what.
That capital is going to be but we will be able to meet everything that is under contract today.
What we're doing now again is driving to free cash flow positive in 2021 with the ability to flex up if necessary to build or buy additional capacity if the market demands it and if we have customers that are prepared to enter into contracts with us for those volumes that we will be producing but we don't think it makes a whole lot of sense for us to build a lot of capacity. If we're not going to have contracts that we can place against those are and it doesn't have to be the exact same contracts. We have today, we just need to know within the range. What that return is going to be and we can make intelligent.
Economic decision about what that will be so if you see our long term agreements changed a little bit. All these agreements are a little bit different what we're looking for is a show of an not a guarantee but assurity of return based upon the capital we put in the ground, but we're going to meet our commitments to our customers. We have enough. What this is a pivot to make sure that we're also focusing on free cash flow for our stakeholders not just of potential for customers to come.
Got it thank you.
Our next question comes from Dmitry Silversteyn with Buckingham Research. Your line is now open.
And make sure we can.
Thank you God bless you good enough all right.
Okay, now, but okay. Great. Thanks, Thanks for taking my call quickly on the.
You mentioned higher upfront payments that you're.
Vendors are requiring for the expanded capacity that you are undertaking and that was one of the reasons that your capex is staying where it is I am just trying to understand.
Sort of why I mean, I have a less I mean are they concerned about.
The rapid lithium expansion across the world by many players and just want to make sure that you guys.
I'm sort of curious about the these longer to orders.
No Dmitry. This is Luke it's just a matter of the Australian market is heating up for construction. So you're seeing a lot of activity in mind, you've seen a lot of activity in Australia and they got a book of business that they are is now they're kind of they've got a good market I mean, they got they got a good sellers market and what they're doing is if you want to get in line for the time that we wanted to get in line in the shops, we had to pay more upfront to get that preferred space in line. So we could get it to the market.
When we said we would.
In that time frame, so thats all it is and the cost it and the the overall cost in change and it's a matter of having to pay a little bit more upfront sooner than we originally thought we would that's all it is it's just a market heat up it's got nothing to do without malls not got nothing to do with lithium particulars the construction market.
In Australia.
Got you. Okay. That's helpful. Okay, and then just as my follow up question on volume growth that you saw in the second quarter and lithium.
I think you talked about 3% volume growth.
I mean, it doesn't sort of jive, well with a market, that's growing 60% or whatever the the TV megawatt markets battery market is growing at.
Was this.
Constraints on your capacity.
That prevents you from from from delivering a better volume number.
Or is there something else going on and that's going to go away in the second half and you've got to get to the growth that is more reflective of what the heavy market is growing at.
Hey, Dmitry. This is Eric so we're selling everything we can make right that we are ramping up John you too that has natural limitations just on the ramp experience curve and it has limitations on customer qualification, but I can tell you that both for that plant and for Chile, which was impacted in the first quarter by rain event everything we can make we can sell where we were limited in the first half of the year on sales growth was opportunistic sales.
That will be enabled by tolling of spodumene capacity, we have.
Those opportunistic sales are off contract.
By by nature, given that they are opportunistic a lot of them given that half the market in China is in China.
All of them are in carbonate and with the excess carbonate market with prices, where they are in that eight to $9 marginal cash cost range. We just it doesn't make sense economically for to do that so we pull back on that we maximize the growth we can get from our internal assets and what happens in the second half of the year is we get the full benefit of Qualys for qualification engine you too.
Running to full rent ramp rates and you too which is nameplate on that facility to 20000 tons and the same on unless nagra. Both the benefit of both units running at full tilt as well as seasonally better brine, we have an opportunity to really recover from the headwinds we had from range in the first quarter and those are the factors that drive the comparison first to second half.
Gotcha. So there was a bit of a capacity constraint that thats going to resolve itself in the second half of the year, that's what I wanted to make sure. Okay. Thank you.
At this time Im showing no further questions I would like to turn the call back over to Mr., Dave Ryan for any closing remarks.
We just wanted to thank everyone for your questions and participation in today's conference as always we appreciate your interest and this concludes Albemarle second quarter earnings call. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect everyone have a great day.