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Albemarle Corp (ALB) Q2 2019 Earnings Call Transcript

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Albemarle Corp  (NYSE: ALB)
Q2 2019 Earnings Call
Aug. 08, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Albemarle Corporation Second Quarter 2019 Earnings Conference Call.

[Operator Instructions] 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.

David Ryan -- Vice President, Corporate Strategy and Investor Relations

Thank you and welcome to Albemarle's second quarter 2019 earnings conference call. Our earnings were released after the close of the market yesterday and you will find our press release, earnings presentation, and non-GAAP reconciliations posted on our website under the Investors section at www.albemarle.com. Joining me on the call today are Luke Kissam, Chief Executive Officer; Scott Tozier, Chief Financial Officer; Raphael Crawford, President, Catalysts; Netha 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 end 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 exclude non-operating, non-recurring, 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 website.

Now, I will turn the call over to Luke.

Luke Kissam -- Chairman, President and Chief Executive Officer

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 and bromine, while pricing was up year-over-year in catalysts. 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 EV 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 in 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 carbonate 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 8 of our earnings presentation, Albemarle has decided to delay all work related to planning, engineering, and construction of approximately 125,000 metric tons of previously announced additional conversion capacity. We anticipate that these changes will reduce our capital expenditures by approximately $1.5 billion over the next five years and allow Albemarle to become 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 50,000 ton lithium hydroxide facility currently under construction by Albemarle in Kemerton, Western Australia. This facility is still on track to be commissioned in stages commencing in the first half of 2021. We had previously announced that the first phase at Kemerton would be a 75,000 metric ton hydroxide facility, but we are scaling the total capacity back to 50,000 metric tons at this time. The Wodgina mine will still have the ability to support at least 100,000 met 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 venture's ability to bring lithium hydroxide to the market.

Albemarle will continue to have responsibility for marketing all of the product produced by this joint venture. In China, our 20,000 met ton Xinyu II 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 40,000 metric tons of lithium carbonate this year. The 40,000 tons of La Negra III and IV remains on schedule for completion in the first quarter of 2021. Based on what we're seeing in the carbonate market and to better manage our cash flow, we have decided to delay all work on the Salar yield improvement project at this time.

This will likely limit our ability to operate La Negra III and IV 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 carbonate 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; the Salar de Atacama; Greenbushes in Australia; and upon closing the MRL transaction, Wodgina. 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 will 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, I'll turn the call over to Scott.

Scott Tozier -- Executive Vice President and Chief Financial Officer

Thanks, Luke, and good morning, everyone. For the second quarter, we reported unadjusted US GAAP net income of $154 million or $1.45 diluted earnings per share. We reported adjusted earnings per share of $1.55, an increase of about $0.19 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 $0.19. Earnings per share also benefited $0.06 from our 2018 share repurchase programs and $0.10 from a more favorable effective tax rate than was the case in 2018. These gains were partially offset by unfavorable currency exchange of about $0.08 and unfavorable results in the Catalysts business compared to second quarter 2018, which was a particularly strong quarter for Catalysts.

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 Kemerton 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 MRL deal closes, we expect our gross-debt-to-adjusted EBITDA ratio to be around 2.7 times and net-debt-to-EBITDA to be around 2.2 times and expected to improve going forward. We will secure a new debt to finance the joint venture and for general corporate purposes. Initially, a delayed drawdown -- 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 it was brought online in the third quarter of 2018.

Catalysts reported second quarter net sales of $266 million an adjusted EBITDA of $67 million. The declining results was caused by a volume shortfall in fluid catalytic cracking or FCC catalysts, due to delays in the start-up 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 were 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 15,000 to 20,000 metric tons and an 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 are 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 customers start-up delays are expected to impact full year volumes. We are working to mitigate the short-term impact by placing volume at other accounts, where the pricing meets our profitability targets, but it is unlikely we will fully replace the delayed volume. To be clear, we have secured this FCC business. 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 of this together, we now expect full-year adjusted EBITDA of the Catalysts 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 a 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.

David Ryan -- Vice President, Corporate Strategy and Investor Relations

Thanks , Scott. Before we get to Q&A, I want to call your attention to our press release of August 6th 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 are now ready to open the lines for Q&A. 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.

Questions and Answers:

Operator

[Operator Instructions]. Our first question comes from Josh Spector with UBS . Your line is now open.

Josh Spector -- UBS -- Analyst

Hey, guys. Can you hear me?

Luke Kissam -- Chairman, President and Chief Executive Officer

Yeah, we can hear you.

Josh Spector -- UBS -- Analyst

Okay, great, yeah, sorry, it's a patchy connection. Just a question on capex a little bit in the next five years. I understand you took down the number and I wonder if demand does materialize kind of over the next two, three years either at or ahead of your expectation, do you see some of that capex coming back into your planning? So, I guess, I'm thinking, if you're adding new capacity in the mid-2020 timeframe, you probably need to start building or spending on that in early 2020, kind of how do you balance that versus what you said on the release earlier?

Luke Kissam -- Chairman, President and Chief Executive Officer

Yeah, great question. If you look, what you see is, we are building out Kemerton which would add another 50,000 met tons of lithium hydroxide. And then, in the chart, we show that we are assuming, we will build out another 50,000 metric tons with our partner MRL once that deal closes. So that will reduce the capital that we will have to expand for that next 50,000 metric ton of capacity. We are essentially sharing that capacity with our partner. So, we believe that when we look at the demand that it would be out further past that 2021 timeframe, where we would have to commit any more capital. So we're very comfortable with the free cash flow numbers 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 are seeing today.

Josh Spector -- UBS -- Analyst

Okay, great, thanks. And just on Mineral Resources and the spodumene availability, how does the change in a JV impact any of the plans there, to the extent if you could provide any color of what's going to happen with the capacity which you aren't going to be allocating to Kemerton at the start?

Luke Kissam -- Chairman, President and Chief Executive Officer

Yeah. Upon the closing of that transaction, we will work with MRL to determine the best approach on that spodumene, but it certainly appears to us today that the market is adequately supplied with spodumene today.

Josh Spector -- UBS -- Analyst

Okay, great, thanks.

Operator

Our next question comes from David Begleiter with Deutsche Bank. Your line is now open.

David Begleiter -- Deutsche Bank -- Analyst

Thank you, Luke. Just following up on that situation, the additional Talison spodumene will that be processed or how will that be allocated going forward?

Luke Kissam -- Chairman, President and Chief Executive Officer

Under the Talison agreements, we have the rights to 50% of the offtake and our partner Tianqi has rights to 50% of that offtake, so that won't change in anyway going forward, David. I'm not quite sure I understand the question.

David Begleiter -- Deutsche Bank -- Analyst

With the reduced capacity in Kemerton, will you be processing any of the Talison spodumene in the 50,000 tonnes of initial Kemerton capacity?

Luke Kissam -- Chairman, President and Chief Executive Officer

No, that will be used with Wodgina 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.

David Begleiter -- Deutsche Bank -- Analyst

Very good. And just on second half lithium EBITDA guidance, Luke. It is a big ramp-up. You do have Xinyu coming in, but, any other drivers for the big second half versus first half in terms of lithium EBITDA guidance range?

Eric Norris -- President, Lithium

David, this is Eric. So, it is as you depicted it, it's two things. It's the Xinyu II ramp up now that we are, have six months of experience under our belt and are ramping toward full rates, have four major customers qualified that can really drive that plant, there is another six plus that will 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 of La Negra II in Chile, and the volumes we expect there. And of course the underlying factor is strong demand growth in the EV markets which we -- our demand outlook continues to be as it was three months ago for strong growth going forward.

David Begleiter -- Deutsche Bank -- Analyst

Thank you very much.

Operator

Our next question comes from Arun Viswanathan with RBC Capital Markets. Your line is now open.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Great, thanks, good morning. 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 in carbonate and spodumene and you've halted capex, partly as a result. So, are we supposed to -- I guess interpret that 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 your peers in the industry. Thanks.

Luke Kissam -- Chairman, President and Chief Executive Officer

Yeah, I have no way in knowing what our peers in the industry will do, first of all. What we are looking at is, we have 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 number, the one thing I hear 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 toward 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, to build or buy additional conversion capacity to meet any increased needs in the market.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Okay, thanks for that. And as a follow-up, just curious on your customer's acceptance of the long-term contracts. 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.

Eric Norris -- President, Lithium

So, Arun, hello. This is Eric Norris, we ended 2018 with largely all of those major contracts extended out 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, those types of contracts, and we continue to move forward against them.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Thanks. I'll turn it over.

Operator

Our next question comes from Jerry Secaucus with JP Morgan. Your line is now open.

Jeffrey Zekauskas -- JP Morgan -- Analyst

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?

Luke Kissam -- Chairman, President and Chief Executive Officer

Scott, you have that number off top of your head?

Scott Tozier -- Executive Vice President and Chief Financial Officer

I don't have it off the top of my head.

Luke Kissam -- Chairman, President and Chief Executive Officer

Yeah, we'll get back to you with that number. I don't have it off the top of my head. What, what we did was we went in and look exactly what we were taking it down. I can tell you by, we looked at 19 being right around a $1billion, 20 being right around $1 billion and then 21 drop into around $500 million or so or something like that. Am I right, Scott?

Scott Tozier -- Executive Vice President and Chief Financial Officer

Yeah the new is around $500 million. But it was up around $800 million.

Luke Kissam -- Chairman, President and Chief Executive Officer

Yes, so it's about $300 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 of my head, Jeff.

Jeffrey Zekauskas -- JP Morgan -- Analyst

No, it's OK. Okay. And then just for my follow up, originally once here wave two capacity was done, I think you would have had something like 350,000 or 340,000 tons of LCE and what you're now going to do is you're not going to build on 125,000 tons of LCE. So, basically, what you've done is, you've curtailed 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 give us a sense of why your curtailments are so large and how you got there?

Luke Kissam -- Chairman, President and Chief Executive Officer

Yeah, 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 met. I don't -- you should not view this anyway as seen that we don't believe our demand is still going to be where it is, we're still bullish on demand, we were at I think $1 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 a 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 demand is got to have an impact, one would think over time on price. What this will do at $1 million metric tons is, it will reduce our market share unless we build more over time.

So while it is not on demand, I understand how you do the math on the EBITDA and earnings, but I'm not 100 -- I'm not ready to conceive that point yet, if you'll -- 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 our EBITDA and 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 our building additional conversion capacity if it means it makes sense to our stakeholders.

And that's probably once we say go, if we're building it is probably 24 to 36 months.

Jeffrey Zekauskas -- JP Morgan -- Analyst

Okay, great, thanks so much. Luke.

Luke Kissam -- Chairman, President and Chief Executive Officer

Thanks for the questions.

Operator

Our next question comes from PJ Juvekar with Citi. Your line is now open.

PJ Juvekar -- Citi -- Analyst

Yes, hi, good morning. Luke, now that you've delayed a big chunk of your hydroxide capacity, you are going to be more exposed to spodumene concentrate from both Wodgina and from Talison for a longer period of time. Why is that a better economic decision, when you know that there is going to be excess rock capacity in the market?

Luke Kissam -- Chairman, President and Chief Executive Officer

Well, you're assuming I'm selling it, and I'm not saying the day we're going to sell it. So we're not going to be more exposed to spodumene rock. We're not going to sell it, if there is not a market for it.

PJ Juvekar -- Citi -- Analyst

Okay. So you're saying you won't operate the mines if there is no demand for it?

Luke Kissam -- Chairman, President and Chief Executive Officer

I'm saying that we will discuss -- after the deal closes we will discuss with MRL what the best approach is to take on the spodumene rock from that mine.

PJ Juvekar -- Citi -- Analyst

Okay. And then most of your cancelled capacity is in Australia. Is Australia not competitive, either because of higher labor or building cost or whatever, or is it because demand is lower, and you're just matching it to demand has nothing to do with Australia?

Luke Kissam -- Chairman, President and Chief Executive Officer

It didn't have anything to do with Australia. Although I will say and it is clear if you're going to build our an asset in China, versus you're going to build an asset in Australia, you've got a much higher capital intensity in Australia, be the same thing if you built something in the US, you've got a higher capital intensity than you do in China, but what we're delaying is simply what we had on the drawing board and we're taking that capacity out and you ought not read anything more than that into it.

PJ Juvekar -- Citi -- Analyst

Okay, thank you.

Operator

Our next question comes from Robert Koort with Goldman Sachs. Your line is now open.

Robert Koort -- Goldman Sachs -- Analyst

Thank you. Good morning. Maybe a question for Eric. I'm trying to reconcile Albemarle's unique supply capability, I think, you guys have talked in the past about customers may be narrowing or tightening their specifications and your ability to supply there given legacy, supply arrangements, qualifications and whatnot. And Luke you suggesting, maybe you could seed some share. So are the Tier 2 and Tier 3 converters beginning to be able to meet those specifications of a narrowing the distance to and performance capabilities that you have. And then, secondly, are we seeing those goalposts narrowing by the customer base or the specs getting tighter tougher requiring more out of their suppliers, the lithium suppliers?

Eric Norris -- President, Lithium

Hi, it's Eric. So I would say that this is all about EV growth rate for our strategy. And, first of all that and that may be obvious, but an important point, because where we see that going, is largely a high nickel 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 and you talk about the ability to supply piece to meet them, it's a handful or less of companies that can do that. So I would say that, that is today that is not, the non-integrated producers. It is the integrated major producers in the marketplace 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 statements around what we see competitively in this high growth market or the continued need for more specialized or high quality products.

Luke Kissam -- Chairman, President and Chief Executive Officer

Yeah, Bob, this is Luke. 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 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, 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 here is, we're going to be very responsible in how we are managing our cash to drive shareholder value and meet our customers' demand.

Robert Koort -- Goldman Sachs -- Analyst

And if I could follow up, Luke, that it 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 your pricing is not in any way correlated to that spot market. But I'm curious as you think about renewing contracts, I assume some role in some role off and you're writing a new contract today, does that still have a price uplift from where it may have been written expiring contracts or how do you sort of characterize the contract pricing dynamic as you look forward from here.

Luke Kissam -- Chairman, President and Chief Executive Officer

Yeah, I'm going to let Eric talk about that, but I think you got to separate it between what you're seeing today in carbonate and what you're seeing today in hydroxide from a battery grade standpoint. Okay. So , Eric?

Eric Norris -- President, Lithium

Yeah. So it is different by the two. Yes, I mean first of all, in our mix of business, as I said in the previous question, 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, a large volume committed on hydroxide side of that, that is where we see the growth, certainly for EVs 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 in carbonate, carbonate is also a product that is not the preferred product line going forward for EVs. And as a result, you will see pricing pressure there on any contracts that renewals, you'll see more there in carbonate than you would on hydroxide. And so that's really the dynamic we're facing right now.

Luke Kissam -- Chairman, President and Chief Executive Officer

I mean, Bob, that's the question is, as these contracts in, what 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 a discussion with our major customers, the major battery suppliers and some automotive OEMs, because 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 makes sense for us and for our stakeholders and allows our customers to also meet their demands that they have to the OEMs. That's our goal.

Robert Koort -- Goldman Sachs -- Analyst

Great, thanks. That.

Operator

Our next question comes from Aleksey Yefremov with Nomura. Your line is now open.

Matt Skowronski -- -- Analyst

Good morning. This is Matt Skowronski on for Aleksey. Given the price volatility that you've seen so far this year, are you lithium contracts being executed as expected or were there any change in terms midyear?

Eric Norris -- President, Lithium

So. Hi, Matt. Eric 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 that's where our contract 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 all those contracts are performing as expected. We have some technical grade products that are sold under more shorter-term non-traditional or not traditional for 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 a position within that supply chain is also not a traditional sort of contract, it's been shorter term, some expire this year, and some cases, we are able to reach a price agreement with some and others we weren't willing to go where they felt they wanted them to go. And so we walked away from some contracts, but we've kept a foothold in China. So it really would be China, which is less than 10% of our volume and tech rate, 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 portion of the market is growing. Those contracts are performing.

Matt Skowronski -- -- Analyst

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?

Eric Norris -- President, Lithium

Again it's Eric here. It's a question that I asked my team and I think it's really way too early to know. You are asking in the spirit of I think the fact that the new subsidies went into effect as of July 1, 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 into July or August, where I could speculate one way or the other. The market for EVs remains robust but subsidies do distort behavior. And so, it's possible that the July or 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 .

Matt Skowronski -- -- Analyst

Thank you.

Operator

Our next question comes from Stephen Byrne with Bank of America. Your line is now open.

Luke Washer -- -- Analyst

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 optimism perhaps for the timing in the shift to 811 in the NCA technologies?

Eric Norris -- President, Lithium

Hi, Luke, Eric again. So as Luke said -- first of all, there is nothing that's changing the next two to three years. Right. The capacity that we have opted to not pursue is in that three to five year timeframe, in that same three to five year timeframe we'll have certainly the resources and the cash should the market wanted to go after that, that opportunity. So, it's putting the stake in the ground as Luke 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, it remains strong and probably stronger than for hydroxide than we would have expected maybe six months ago. So there continues to be that edging toward hydroxide that is supported by NCA chemistries and 811 chemistries .

But I will reiterate what I said three months ago, we never expected 811 to be a big player in EVs in the next couple of years, there are technology and processing challenges yet for that technology to be safely used in a large scale format in a battery for an EV. It is being used experimentally in some in China in some consumer goods products. It is being blended with 622 to sort of, if you will, supplement the energy within that battery at a small level. But it is not, there are today really , no, we don't see any 811 full EV batteries for some time yet. NCA continues to grow is driven by a few automotive producers in particular and so 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.

Luke Washer -- -- Analyst

Thanks, that's helpful. And then on the La Negra III and IV, you expected to add 40,000 metric tons of carbonate 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?

Luke Kissam -- Chairman, President and Chief Executive Officer

Yeah, I think, we always intended to bring that capacity home, its 2021 is when we would have mechanical completion in the first quarter, we have to have four to six months worth of qualification. So I wouldn't expect much in 2021. And we always talk about bringing these units on to third , third, third. So we're confident we can still bring that home and we could probably have this a lot of yield online and have the brand ready for 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.

Luke Washer -- -- Analyst

Great, thank you.

Operator

Our next question comes from Joel Jackson with BMO Capital Markets. Your line is now open.

Joel Jackson -- BMO Capital Markets -- Analyst

Hi, good morning.

Luke Kissam -- Chairman, President and Chief Executive Officer

Hi.

Joel Jackson -- BMO Capital Markets -- Analyst

You clearly said that, that being free cash flow positive in 2021 is the key thing for you, when considering

Luke Washer -- -- Analyst

Considering the change in the -- JV with Min Res and I understand the optionally, I guess, spodumene for you here. So maybe you can talk about the rationale about deciding to give over $1 billion of consideration for spodumene resource where maybe in the future, you could go and get that resource later when you need it?

Luke Kissam -- Chairman, President and Chief Executive Officer

Yeah, that's 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 Talison out of the equation and you take out Greenbushes that is the best rock resources in the world. When you look at Wodgina the size of that resource, the purity of that resource and the skill that MRL brings to the table from a mining standpoint and I believe, from a capital execution standpoint that 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 raise that we didn't have in the past.

So, all in all, quality asset, we're going to use that rock for Kemerton. We will also partner with MRL on our next instalment of capital, which will further reduce our capital outlay and still allow us to meet our customer demand. So quality resource, quality people ability to reduce our capital outlay and still have a 100,000 met tons worth lithium hydroxide coming on board. It all made sense to us from a return standpoint.

Luke Washer -- -- Analyst

Thank you for that. A little more on the yield improvement program deferral. Is that just 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 will know?

Luke Kissam -- Chairman, President and Chief Executive Officer

Yeah, no, this is nothing involved 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 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 were going to take the step to do that because when we calculate it, we believe we can still meet all the commitments we've made to the carbonate customers that we have under contract. So it's all about free cash flow has nothing to do with any way our relations with the government in Chile are fine.

Luke Washer -- -- Analyst

Thanks.

Operator

Our next question comes from Colin Rusch with Oppenheimer. Your line is now open.

Colin Rusch -- Oppenheimer -- Analyst

Thanks so much. Can you tell us what you're looking for from your customers or from the demand environment to think about reanimate in these projects. And then can you just update us in terms of your targeted return on capital. Are you looking at evolving that or looking for higher returns as you see this market evolve and see the strategic moves play out a little bit more in advance?

Luke Kissam -- Chairman, President and Chief Executive Officer

Now we -- 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 always been the case. And we continue to see that as our case. As a -- what we're looking for, for our customers at, if people are going to sell carbonate at the cash call so that marginal producer, it didn't make sense for us to add new capacity and we want, we can 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 see the need to put new capacity in the ground.

So it all comes down to what's the pricing going to be? How is that pricing be? How are the contracts coming with the customers. What are -- 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're doing.

Colin Rusch -- Oppenheimer -- Analyst

Okay, great. And then just and with the kind of changing trajectory here in the operating expenses, are you -- is the organization right-sized at this point, do you need to make any adjustments there?

Luke Kissam -- Chairman, President and Chief Executive Officer

Yeah, I think as we look at -- as we look at 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 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 very successfully. So those continue to grow. But I don't know how much longer that's practical to expect that business to grow at that? So we are undertaking in the second half of the year a view of our overall cost 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.

Colin Rusch -- Oppenheimer -- Analyst

Thanks so much guys.

Operator

Our next question comes from Mike Harrison with Seaport Global Securities. Your line is now open.

Mike Harrison -- Mike Harrison with Seaport Global Securities -- Analyst

Hi, good morning.

Luke Kissam -- Chairman, President and Chief Executive Officer

Hey.

Mike Harrison -- Mike Harrison with Seaport Global Securities -- Analyst

Luke. As you've 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?

Luke Kissam -- Chairman, President and Chief Executive Officer

Yeah, I think there is excess conversion capacity available today. And there is more coming online. So I think that is going to provide perhaps an opportunity for people that are interested in conversion assets. So as a integrated player with the best resources in the world, we believe 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.

Mike Harrison -- Mike Harrison with Seaport Global Securities -- Analyst

And then, wanted to actually ask a question about catalysts, can you just maybe give a little bit of color on the changes in customer mix that you mentioned and the start-up delays, may be what's causing them and how those play out in the second half?

Raphael Crawford -- President, Catalysts

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 catalysts in 2018. That is a refill, re bid business. So sometimes those projects or 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 won. 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.

Mike Harrison -- Mike Harrison with Seaport Global Securities -- Analyst

All right, thanks very much.

Operator

Our next question comes from Chris Kapsch with Loop Capital Markets. Your line is now open.

Chris Kapsch -- Loop Capital Markets -- Analyst

Yeah, good morning. Thanks. Question probably for Eric maybe Luke, in your formal comments you 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, are you seeing anything specifically from a bottoms up standpoint either customer order patterns, inventory levels, anything that acceleration demand that is pointing to that, if you could just characterize that, that'd be appreciated?

Eric Norris -- President, Lithium

Hey, Chris. Sure. It's Eric here. So a couple of factors; one, demand is, as we've said on prior questions, continues to be strong and we see it based on electric vehicle launches, commitments from EV producers to battery producers. We see that demand will continue to step up again in 2020 to a greater degree, we'll give more specific guidance, but it's consistent with our demand model that we articulated of 50, 000 to 60,000 tons of this year and 1 million by 2025. So it's a natural step up there. So that's on the demand side. On the supply side, we are seeing a couple of projects on the resource side be delayed, take longer to come to market and/or under current economics we believe may be challenge to operate 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 that's largely been depleted we think, from the supply chain on the carbonate hydroxide side and what's being in hands. It's not outside of China. There continues to be some excess rock in inventory outside of China, in Australia, and there continues to be some excess salt in some of the battery producers hands outside of China. So maybe the balance of this year that would be drawn down. And when you put that formula together, we see a pretty tight 2020.

Chris Kapsch -- Loop Capital Markets -- Analyst

Thanks for that color. And then my follow up is really to the expansion curtailments and really the question is that strategic pivot juxtaposed against a couple of your slide you've used in prior investor presentations, regarding your lithium hydroxide and lithium carbon it that you have under contract over the 2021 and 2025 period. It's like, it looks like this decision doesn't influence those metrics on 2020 intended production, but this is really all about not having, visibility on and longer-term commitments from customers out to 2025. So could you just -- is that one way to think about you, maybe characterize the decision against those slides? Thank you.

Luke Kissam -- Chairman, President and Chief Executive Officer

Yes. So we've made commitments to people out through 2025 in some instances. And in all of these scenarios, we're able to meet those commitments with the capacity that we've announced and that we have under construction today. And we know what the price is on those and we're able to calculate the return based on what that capital is going to be. But we'll 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 or 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 change a little bit, all these agreements are a little bit different. What we're looking for is, not a guarantee but a surety of or 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 potential for customers to come.

Chris Kapsch -- Loop Capital Markets -- Analyst

Got it. Thank you.

Operator

Our next question comes from Dmitry Silversteyn with Buckingham Research. Your line is now open.

Luke Kissam -- Chairman, President and Chief Executive Officer

Dmitry, we can't -- there you go Dmitry, go ahead.

Dmitry Silversteyn -- -- Analyst

Hello, is it clear now? All right.

Luke Kissam -- Chairman, President and Chief Executive Officer

Yeah, we can hear you now, buddy.

Dmitry Silversteyn -- -- Analyst

Okay, great thanks, thanks for taking my call. Quickly on the, you mentioned higher upfront payments that your vendors are requiring for the expanded capacity that you are undertaking and that was one of the reasons that your capex staying where it is. I'm just trying to understand sort of why, I mean are they less -- I mean are they concerned about rapid lithium expansion across the world by many players, I'm just want to make sure that you guys sort of serious about these longer-term orders?

Luke Kissam -- Chairman, President and Chief Executive Officer

No. Dmitry, this is Luke, it's just a matter of the Australian market is heating up for construction. So you've seeing a lot of activity in mine, you've seen a lot of activity in Australia and they got a book of business that they -- is now they are kind of -- they 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 want 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 timeframe. So that's all it is. And the cost didn't -- the overall cost didn't change in, it's a matter of we 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 with Albemarle. It's got nothing to do with lithium in particular, the construction market in Australia.

Dmitry Silversteyn -- -- Analyst

Got you. Okay, that's helpful, Luke. And then just as my follow-up question on the volume growth that you saw in the second quarter in lithium, I think you talked about 3% volume growth, I mean, it doesn't sort of jive well with the market that's growing 60% of whatever the EV megawatt battery market is growing at. So it was this constrain in your capacity that prevented you 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're going to get to the growth of that is more reflective of what the EV market is growing at?

Eric Norris -- President, Lithium

Hey Dmitry, this is Eric. So we're selling everything we can make right that we are ramping up Xinyu II 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 a 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 would be enabled by tolling of spodumene capacity we have, those opportunistic sales are off contract by nature, given that they are opportunistic. A lot of them, give 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 $8 to $9 marginal cash cost range, we just -- it doesn't make sense economically for to do that. So we pulled back on that, we've maximized 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 -- full qualification at Xinyu II running to full ramp rate on Xinyu II which is nameplate on that facility 20,000 tons. And the same on La Negra 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 rains in the first quarter and those are the factors that drive the comparison first and second half.

Dmitry Silversteyn -- -- Analyst

Got you. So there was a little bit of a capacity constraint that that's going to resolve itself in the second half of the year. That's what I wanted to make sure. Okay, thank you.

Operator

At this time, I'm showing no further questions. I would like to turn the call back over to Mr. Dave Ryan for any closing remarks.

David Ryan -- Vice President, Corporate Strategy and Investor Relations

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's Second Quarter Earnings Call. Thank you.

Operator

[Operator Closing Remarks].

Duration: 59 minutes

Call participants:

David Ryan -- Vice President, Corporate Strategy and Investor Relations

Luke Kissam -- Chairman, President and Chief Executive Officer

Scott Tozier -- Executive Vice President and Chief Financial Officer

Josh Spector -- UBS -- Analyst

David Begleiter -- Deutsche Bank -- Analyst

Eric Norris -- President, Lithium

Arun Viswanathan -- RBC Capital Markets -- Analyst

Jeffrey Zekauskas -- JP Morgan -- Analyst

PJ Juvekar -- Citi -- Analyst

Robert Koort -- Goldman Sachs -- Analyst

Matt Skowronski -- -- Analyst

Luke Washer -- -- Analyst

Joel Jackson -- BMO Capital Markets -- Analyst

Colin Rusch -- Oppenheimer -- Analyst

Mike Harrison -- Mike Harrison with Seaport Global Securities -- Analyst

Raphael Crawford -- President, Catalysts

Chris Kapsch -- Loop Capital Markets -- Analyst

Dmitry Silversteyn -- -- Analyst

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