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Edited Transcript of ALB earnings conference call or presentation 7-Nov-19 2:00pm GMT

Q3 2019 Albemarle Corp Earnings Call

BATON ROUGE Nov 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Albemarle Corp earnings conference call or presentation Thursday, November 7, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Ryan Terrence

Albemarle Corporation - VP of Corporate Strategy & IR

* Eric W. Norris

Albemarle Corporation - President of Lithium

* Luther C. Kissam

Albemarle Corporation - Chairman, President & CEO

* Netha N. Johnson

Albemarle Corporation - President of Bromine Specialties

* Raphael Goszcz Crawford

Albemarle Corporation - President of Catalysts

* Scott A. Tozier

Albemarle Corporation - Executive VP & CFO

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Conference Call Participants

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* Arun Shankar Viswanathan

RBC Capital Markets, Research Division - Analyst

* Colin William Rusch

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* David L. Begleiter

Deutsche Bank AG, Research Division - MD and Senior Research Analyst

* Dmitry Silversteyn

The Buckingham Research Group Incorporated - Director

* Dylan Scott Carter Campbell

Goldman Sachs Group Inc., Research Division - Research Analyst

* James Michael Sheehan

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Joel Jackson

BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst

* Joseph Charles Catania

Morgan Group Holding Co. - Research Analyst

* Kevin William McCarthy

Vertical Research Partners, LLC - Partner

* Matthew P. DeYoe

BofA Merrill Lynch, Research Division - Research Analyst

* Matthew Stephen Skowronski

UBS Investment Bank, Research Division - Associate Analyst

* Michael Joseph Harrison

Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst

* P.J. Juvekar

Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 Albemarle Corporation Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Dave Ryan, Vice President, Corporate Strategy, Investor Relations. Sir, you may begin.

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David Ryan Terrence, Albemarle Corporation - VP of Corporate Strategy & IR [2]

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Thank you, and welcome to Albemarle's Third 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.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, production volumes and commitments as well as lithium demand may constitute forward-looking statements within the meaning of federal securities laws. Please note the cautionary language about forward-looking statements contained in our press release. That same language applies to this call.

Please also note that some of our comments today refer to financial measures that are not prepared in accordance with GAAP. A GAAP reconciliation can be found in our earnings 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.

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [3]

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Hey, thanks, Dave. Good morning, everybody.

On today's call, I'm going to provide a quick recap on quarterly performance but want to spend the bulk of my time on the long-term position we're taking and how the recent strategic decisions we've made support that view. Scott will provide more detail into our third quarter and full year performance.

Excluding currency impacts, third quarter revenue grew by 14%, adjusted EBITDA by 12% and adjusted diluted earnings per share by 22% year-over-year. Excluding currency impact, each of our GBUs delivered year-on-year EBITDA growth. Increased volume across all of our businesses and favorable year-over-year pricing in lithium and bromine contributed to that growth.

With that, let me take a step back and set the stage for where we are today. As you know, the lithium market is dynamic. It offers a very strong future growth opportunity, and the long-term secular growth trends remain fully intact. However, we are and will be dealing with the challenging market conditions for the next 12 to 18 months. Since late July, we have announced several significant strategic actions to successfully position our business for the long term.

Last quarter, we announced the decision to defer work on approximately 125,000 metric tons of conversion capacity, freeing up about $1.5 billion of our $5 billion 5-year capital investment plan. This will enable us to generate free cash in 2021 and is the right path to take based on current supply-demand dynamics and provides us with the financial flexibility to take advantage of any opportunities we see.

Importantly, this decision does not affect current customer commitments. We are in the position to deliver on all committed contracts, and we have the ability to add capacity if current market dynamics improve. As you know, we have access to geographically diverse, 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.

As we will discuss in detail at our upcoming Investor Day in December, battery technology continues to advance. We expect carbonate demand to continue to grow but expect hydroxide demand to be much stronger. To that end, we're focused on remaining an agnostic lithium producer. Whether our customers want carbonate or hydroxide or other lithium products, we have access to the world's best brine and hard rock and industry-leading conversion expertise to deliver on their needs. And we remain committed to investing to maintain our competitive position and deliver a truly differentiated customer value proposition.

When we shared our strategy in 2017, we told investors that we would take advantage of opportunities that accelerate and strengthen our long-term growth strategy. To that end, we announced last week the completion of our joint venture agreement with Mineral Resources, where we have a majority interest in a 60-40 ownership structure. All in, our investment of $1.3 billion consists of a cash payment of $820 million to MRL for 60% of the Wodgina mine and contribution of a 40% interest in our 50,000 metric ton hydroxide facility currently under construction in Kemerton, Western Australia.

We believe our investment in this new joint venture named MARBL Lithium will produce substantial long-term value. The JV provides access to a high-quality hard rock source, further diversifying our global lithium resource base and strengthens our position in the long term by giving us the ability to increase capacity to support future market demand.

With the combined operating expertise of Albemarle and MRL, the top-tier Wodgina mine and our market knowledge, we're well positioned to benefit from a rapidly growing market, which is increasingly emphasizing hydroxide. The joint venture supports our long-term view, but in the short term, we made the decision to idle production of the Wodgina mine until market conditions support production economics. The returns for this project will still be very attractive. We anticipate that when the JV is producing lithium hydroxide at a rate of 100,000 met tons annually, the return on invested capital will be a healthy 17% to 19% or roughly 2x our cost of capital.

Staying with lithium, I want to address pricing and contracts. As we commented in our preliminary earnings announcement, current marketing conditions are challenging, and we're experiencing pricing pressures in China and on our technical-grade products. To date, our pricing strategy under our long-term battery-grade contracts have held.

As you can see on Pages 10 and 11 of our earnings presentation, Albemarle's third quarter lithium pricing was up slightly year-over-year despite a significant year-over-year decline in market conditions. Recently reported China carbonate prices appear to have stabilized in the range of $7 a kilo. We expect that this price level is at or near the marginal cost of production and do not expect China carbonate prices to drop further in any material way. However, China carbonate at $7 a kilo puts pressure on pricing across the global lithium portfolio, including the fixed and variable pieces under our long-term agreements.

We know that our long-term agreements are of great interest, concern and focus, so let me broadly address the matter here. As we have been in the past, we are in active discussions with customers on our agreements. Those discussions involve price, volume, allocations between carbonate and hydroxide, length of the contract and the value that Albemarle offers for quality, security of supply, flexibility between carbonate and hydroxide, sheer volume of product needed and the ability to meet the customers' growth expectations.

It is obviously not in our best commercial interest to discuss contract negotiations publicly, so we are not going to do it. These are active discussions with many moving pieces. As the dust settles on these negotiations, we'll give you a better look at what this means for our annual outlook. Rest assured that we understand the value we bring to the supply chain, and we intend to capture our fair share in these discussions.

Now let me switch gears and talk a little bit about 2020. As a part of our strategy, we continue to assess our business portfolio. We have received multiple inquiries about our fine chemistry services and performance catalyst solutions businesses. So we have initiated 2 processes to pursue these opportunities. They are both profitable businesses with strong operating teams. So if we can come to agreement on an evaluation that we feel is appropriate, we will pursue a divestiture. If we are not able to secure a valuation that we believe to be appropriate or in the best interests of our stakeholders, we will continue to operate these businesses. We would expect both of these transactions to be 2020 events.

In terms of how we see our portfolio performing in 2020 versus 2019, our preliminary view today is that we expect catalyst, bromine and fine chemistry services to be essentially flat. There are some gives and takes in each but right now, assuming no overall economic slowdown, these businesses should net to approximately flat.

Lithium will be lower year-over-year due to pricing pressure across the portfolio and are not having new conversion capacity to drive any significant volume growth. We have initiated a structured program across the company to capture sustainable cost savings and expect this program to deliver over $100 million in sustainable cost savings over the next 2 years. Taking all this into account, our preliminary view is that our full year 2020 EBITDA performance could be lower than full year 2019 results by around 10%.

In closing, we are taking swift actions to navigate the market challenges that we see in 2020 and emerge even stronger to capture the long-term growth opportunity in a profitable manner. We will continue to build on our strength in manufacturing excellence in bromine and catalyst, and we will transform processes for lithium similar to our other businesses to ensure best-in-class operations. We can -- we will continue to be conscientious in our asset management and capital plan, and seek to be nimble in responses to changing and dynamic market conditions.

With that, I'll turn the call over to Scott.

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Scott A. Tozier, Albemarle Corporation - Executive VP & CFO [4]

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Thanks, Luke, and good morning, everyone.

For the third quarter, we reported net income of $155 million or $1.46 per diluted share. Adjusted earnings per share were $1.53, an increase of about $0.22 per share compared to third quarter 2018 or 17% growth. Our businesses delivered about $0.23 per share of growth, with double-digit earnings growth in both bromine and lithium and high single-digit growth in catalysts. A lower effective tax rate contributed about $0.06 and a lower share count, as a result of our 2018 share repurchase program, contributed about $0.03. Those gains were partially offset by $0.04 of higher depreciation and unfavorable foreign exchange, which was a $0.07 headwind compared to third quarter 2018.

Regarding our business performance. Lithium reported third quarter net sales of $330 million and adjusted EBITDA of $127 million. Excluding the unfavorable impact of currency, lithium sales were up 23% and adjusted EBITDA was up 9% year-over-year. This growth was due to increased volume and favorable pricing despite the impacts we communicated in our earnings prerelease. And as a reminder, these included, first, a volume shortfall, which impacted the third quarter by about $15 million in EBITDA. This was primarily due to Typhoon Tapah, which caused lithium shipments from ports in Shanghai to be delayed into October, and we expect this to be fully recovered in the fourth quarter.

Second, the use of tollers to meet customer commitments and address operating issues in Chile. This resulted in an EBITDA reduction of around $10 million. The technical team in Chile has focused on reliability improvements, which have enabled operating rates to now reach full capacity. Given customer commitments, tolling is expected to continue into the fourth quarter.

Third, impacts also included a $7 million out-of-period adjustment regarding lithium carbonate inventory values that was identified and corrected during the third quarter close process.

And finally, an overall 1% increase in lithium pricing versus prior year. However, continuing price pressure on lithium sales in China unfavorably impacted EBITDA by about $5 million versus our expectations.

Finally, adjusted EBITDA margin was 39%, and it would have been 40% if you excluded the $7 million out-of-period adjustment.

Bromine reported third quarter net sales of $256 million and adjusted EBITDA of $89 million, up 11% and 14% year-over-year, excluding unfavorable currency impacts. Adjusted EBITDA margins were strong at 35%, up nearly 90 basis points, benefiting from 7% higher pricing, a favorable product mix and high plant utilizations. Price and volume were favorable across geographies and most of our products. But we continue to see weakness in the automotive and construction sectors, flame retardant demand for electronics and drilling fluids in the oilfield market remains strong.

Catalysts third quarter net sales were $261 million and adjusted EBITDA was $67 million, up 5% and 8%, respectively, compared to the third quarter of 2018, excluding unfavorable currency impacts. And adjusted EBITDA margins were 26%. Favorable pricing in fluid catalytic cracking, or FCC catalysts, was offset by lower volumes due to the delays in the start-up of 2 customers' new FCC units. We currently expect both of these units to be in operation in 2020. Clean fuel technology or hydroprocessing catalysts benefited from higher sales volumes and a favorable product mix.

On the innovation front, on October 31, Exxon Mobile and Albemarle together launched a transformative hydroprocessing suite of catalysts and service solutions for the refining industry called the Galexia platform. The new platform helps refiners realize the full potential of specialty catalysts and enhance plant performance by analyzing and identifying operational opportunities that extract greater value.

Corporate costs in the third quarter were $39 million, an increase of $16 million over the same period in 2018 primarily driven by unfavorable currency losses of approximately $11 million. Our cash from operations was approximately $346 million for the 9 months ended at the end of September and a decrease of $31 million versus the same period in 2018 primarily due to the timing of payables and the collection of certain receivables.

Capital expenditures through September were $608 million. Expenditures for the La Negra lithium carbonate expansion and the Kemerton lithium hydroxide project remain on track, and we now expect full year 2019 CapEx to range between $900 million and $950 million.

At the end of the quarter, our net debt to adjusted EBITDA was 1.6x. With the close of the MRL deal, we estimate our gross debt to adjusted EBITDA ratio to move from 1.9x to around 2.8x and net debt-to-EBITDA to be around 2.6x. We have funded our payments associated with the new joint venture by borrowing approximately $1 billion under an unsecured credit facility. We expect that this borrowing, along with other corporate funding activity, may ultimately be converted to long-term debt given attractive economics.

As communicated in our prerelease on October 24, we expect 2019 pro forma net sales to be $3.6 billion to $3.7 billion, reflecting 7% to 10% growth; adjusted EBITDA to be $1.02 billion to $1.06 billion, equating to 2% to 6% growth; and adjusted EPS of $6 to $6.20 or 10% to 14% growth.

Drilling down into the businesses. We expect that Bromine will continue its strong performance and deliver adjusted EBITDA growth in the low double-digit percent for the full year. The catalyst business has improved since our second quarter outlook, and we now expect it to be down low single digits on a percentage basis, excluding divested businesses. And finally, lithium is expected to grow EBITDA in the low to mid-single-digit percent range and deliver full year adjusted EBITDA margins of around 40%.

You've likely seen reports of civil unrest in Chile and are wondering how this is affecting our operations. And first, I'm happy to report that all of our employees are safe. At this time, our plants are operational and shipments are moving on schedule. We have lost approximately 500 metric tons of production since the unrest started, but it will not materially impact our financial results. We will continue to monitor this fluid situation very closely.

Based on our current geographic sales, production mix year-to-date and our expectations for the rest of 2019, we currently expect our full year effective tax rate to be about 18%, excluding special items, nonoperating pension and OPEB items. This rate is, in part, a reflection of strong operating performance at our bromine plants.

To close, we will be prudent in these challenging times, act on cost-reduction measures to align our cost structure and maintain our leadership position to deliver value to our stakeholders.

We look forward to sharing more details with you at our Investor Day on December 12 in New York City.

And with that, I'll turn the call back over to Dave.

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David Ryan Terrence, Albemarle Corporation - VP of Corporate Strategy & IR [5]

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Operator, we are now ready to open the lines for Q&A. (Operator Instructions)

Please proceed.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Bob Koort from Goldman Sachs.

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Dylan Scott Carter Campbell, Goldman Sachs Group Inc., Research Division - Research Analyst [2]

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This is Dylan Campbell on for Bob. When we look at kind of the 10% decline that you're looking at for 2020, can you give us a sense of just kind of what moving pieces are embedded in that guidance in terms of the rollover in terms of lithium volume growth and then, I guess, the growth for the catalysts and bromine businesses.

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [3]

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Yes. So this is Luke. Let me try that at a high level. If you look at Page 11 on our -- on the earnings presentation, you can see that year-over-year lithium prices is down about 30%. And Albemarle has been flat to up slightly on our year-over-year comparisons each quarter on lithium pricing. So the big mover that we're seeing on the down for the profitability from '19 to '20 all comes down to lithium pricing and how much of that we can offset with cost reductions.

On catalysts, when we look next year, we'll have probably higher volume in FCC catalysts. And it depends on HPC how those bills -- how they timeout. Do we get some in the second half of next year or they roll into 2021? So again, catalysts will be -- there's some moving bits and pieces there, but FCC would probably be stronger from a volume and price standpoint and HPC, probably a little bit weaker. But we're working hard to get some of those additional loads in 2020.

And then on bromine, we don't have any additional volume. I mean we're running flat out right now and allocating every bromine molecule we have, so it all comes down to, what do we see from an overall economic condition, what happens in the electronics, what do we see from automotive, will we see a little pickup and does pricing hold? And then that's offset by our cost action.

So those are the big moving pieces. It's preliminary right now. We'll obviously have more information as we finish this quarter and head into next year. So we'll update that on our -- at our year-end earnings call.

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Dylan Scott Carter Campbell, Goldman Sachs Group Inc., Research Division - Research Analyst [4]

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Got it. That's helpful. And then considering the situation, I guess, if -- assuming that the market tightens once again, how do you preserve, I guess, some type of upside considering the fact that -- and the majority of your volumes are going through your contracting structure?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [5]

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Well, under those contracting structures, we have the ability to raise price on a certain percentage of that volumes, just like we have in the past. So we would -- if the conditions tighten, we'll certainly be looking at pricing actions that we can take to raise those prices.

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Operator [6]

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Our next question comes from Stephen Byrne from Bank of America.

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Matthew P. DeYoe, BofA Merrill Lynch, Research Division - Research Analyst [7]

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So this is Matt DeYoe on for Steve. I wanted to talk a little bit about the potential fallout to you in the industry from the EU proposal to ban certain flame retardants and consumer electronics and display applications. Kind of broadly, what percent of demand goes into that market? And do you think consumer electronics companies kind of may adopt the new standard more globally?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [8]

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Yes. I'm going to let Netha start, and then I'll -- to go into the specific, and then I'll tell you at a high level where we are.

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Netha N. Johnson, Albemarle Corporation - President of Bromine Specialties [9]

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Yes. We've looked at that, and we expect that to have minimal impact on our business going forward, starting when it goes into effect in 2021. Customers will make some alternate substitutions there, but we've looked at that, and we think we have alternate paths there to replace that business.

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [10]

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So at a high level, we've been dealing with the -- if you look at TOSCA in the U.S., if you look at some of the European regulations globally, all of these flame retardants have been under review for -- since I joined Albemarle in 2003. And we've done a really good job of moving away from some of the products that were smaller. So we're getting a larger molecule, so it's harder for them to bioaccumulate, if at all. And we are constantly evolving our technology to be able to meet the needs that the customers have.

So what you see in Europe, it's a small piece today. We believe it's controlled in that sense. And we continue to innovate to bring products to the market to meet what's really needed and is a serious issue related to flame retardants. And so I think that it's -- it won't have an effect in 2020, maybe a small effect, if anything, around the edges. In the long term, we'll continue to innovate to provide the really needed flame retardants that our customers need.

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Matthew P. DeYoe, BofA Merrill Lynch, Research Division - Research Analyst [11]

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And then if I can touch on the contracts, so I think past discussions stipulated that the contract terms can be renegotiated if customers could find a like product and -- like both like quality and like quantity. As you're seeing demand slowdown for EVs and the market kind of soften here, is what's happening more proliferation of technology and such that different producers can now hit the specs? Or are you just seeing more supply to a market from the same 4 or 5 incumbent tech-savvy producers?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [12]

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Well, I think all those 4, 5 tech-savvy producers you're talking about have sufficient volume. It's -- what you're seeing is there's an oversupply in the market today. I talked about it, carbonates selling in China right now at $7 a kilo. That's probably below some of the cash conversion costs for some of those China converters.

So I would -- you should not have the impression that there's any technological advance by some of the marginal producers. It's not. It is where it's been. The specs are getting tighter. And ultimately, long term, it's going to be for those EV battery grades. You're going to see those big, big 4 or 5 able to meet those specs on a consistent regular basis with the volume. There is other volume out there that is not the EV spec, and that's where you're seeing, in the technical grade and some other lower specs for other uses, you're seeing those lower producers, lower technology producers being able to come in at a price that they're comfortable with.

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Operator [13]

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Our next question comes from Joel Jackson from BMO Capital Markets.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [14]

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If I take the $100 million EBITDA guidance in lithium, it looks like you're guiding down to average price decline next year of about 15% to 20%. Can you maybe give a little more color, how do we break down the price declines between your contracted and your noncontract base? So is it just a very, very massive 30% drop in your noncontracted base and a small decline in your contracted base? Or is it going to be similar, do you think, across both contracted and noncontracted?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [15]

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Yes. So as I said, I'm not going to get into discussions about specific contracts because we're in the middle of negotiation. And that doesn't do us any good. So I hope you'll understand that.

So let me back up and just say at a high level, there is pricing pressure across the portfolio. The most pressure is coming in carbonate, particularly in technical grade and in China, but that is having a ripple effect across the portfolio. So you're going to see it, as you said, different levels of price movement according to different products and according to that end market. But that's about as much as I'm comfortable going into, given the fact that we're in the middle of discussions.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [16]

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Appreciate that. Second question on Kemerton. So it looks like you would have almost enough spodumene at Greenbushes to support Kemerton, the next wave for hydroxide in 2021 and beyond there, maybe not quite enough to get to 50,000 tons, maybe 45,000. Does that mean you'll look for operational improvements at Greenbushes? Will you source external carbonate? It doesn't seem like it would makes sense to restart Wodgina to run at very low rates just to supply the extra marginal spodumene there.

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [17]

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Yes. So I can't see us buying carbonate from other parties to do anything. We'll have sufficient carbonate supply to do whatever we need to do. From a spodumene standpoint because of our geographic diversity that we have around the globe, what we'll do is we'll source spodumene from the source that gives us the highest netback to Albemarle and our stakeholders. So we're all in the -- we'll see where the market shakes out and where we are at that point in time. But you are right that we have flexibility for sourcing that no other producers have.

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Operator [18]

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Our next question comes from John Roberts from UBS.

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Matthew Stephen Skowronski, UBS Investment Bank, Research Division - Associate Analyst [19]

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This is Matt Skowronski on for John. In your pre-announcement, you mentioned lower prices in China were a $5 million hit to EBITDA in the third quarter. Where have prices moved from 3Q average level? And if this remain -- if prices remained at this level throughout 2020, what would the impact be?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [20]

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Ask that question one more time, please. I'm not sure I'm following you.

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Matthew Stephen Skowronski, UBS Investment Bank, Research Division - Associate Analyst [21]

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So you mentioned that Chinese prices were a $5 million hit to EBITDA, lower pricing. Where have prices moved from that level? So are they lower or are they higher than 3Q '19? And then...

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [22]

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Yes. If you look at Page 11, you'll see that most of the -- over -- and a lot of the price decline that we've seen year-over-year, it accelerated in the third quarter. So you see -- you saw an acceleration of price decline overall for the market for lithium products in the third quarter. If they're down 30%, in some of those, it was 15% of that down was -- about half of it was you saw in the third quarter year-over-year. So prices have continued to decelerate going into the fourth quarter. Eric, do you want to talk about some details?

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Eric W. Norris, Albemarle Corporation - President of Lithium [23]

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I would just offer that in looking at price in China, if you were asking that question where we were talking about price 3 months ago, we would have talked about an $8 or $9 price and now we're talking about a $7 price. So that's your difference right there. And China is a small part of our business, but it is a part, and that's the impact it's had on our P&L.

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Matthew Stephen Skowronski, UBS Investment Bank, Research Division - Associate Analyst [24]

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And then you noted your bromine assets are operating at higher-than-expected volumes, just going off of a comment that you just made, are these kind of normalized levels now?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [25]

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Yes. I think we've been able to get some nice get rights in our JBC expansion that we did last year. That's enabling us to run at a little bit higher rates than we expected when we set the plan in place. And that will be the new run rate going forward. But we always do productivity enhancements and utilization increases, and we'll continue to do that. And we're very confident in our manufacturing capability to continue to give out increased volumes from those manufacturing enhancements.

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Operator [26]

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Our next question comes from Arun Viswanathan from RBC Capital Markets.

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Arun Shankar Viswanathan, RBC Capital Markets, Research Division - Analyst [27]

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I guess I just wanted to ask about the lithium environment. Do you think -- as you look into next year, what are some of the drivers you're watching to see if things are stabilizing or even potentially turning around? I mean is it just EV demand? Or is it macroeconomic growth? Or what else are you guys kind of looking for? Or maybe supply disruptions or anything else?

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Eric W. Norris, Albemarle Corporation - President of Lithium [28]

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Arun, it's Eric here. I think the big drivers for us are not necessarily about demand. We feel fundamentally that while you've seen a pause in China, that's a pause, and our long-term view for the global EV growth remains intact. So our focus is on supply and inventory that's in the channel.

We believe, on our assessment, there's not a lot -- there's not enough new supply -- or let's put it this way, the new supply coming in will not exceed the demand growth. So the question is, how much is still in inventory? There's probably at least 6 months of product in inventory, maybe more. So you're probably 2 or 3x the level inventory you should have, and that's the drag on price now. And then we see that having an effect into 2020.

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Arun Shankar Viswanathan, RBC Capital Markets, Research Division - Analyst [29]

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And on that note, I guess, how long do you think it would take to kind of work through that, especially on the technical grades? And I'm just a little bit surprised that there's been such an impact on EV battery-grade lithium, even with the oversupply in the tech side. So maybe you can just help us understand what the impact is there and why we're seeing that.

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [30]

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Yes. This is Luke. Don't -- we didn't -- what Eric was just talking about was overall. That included battery grade as well as technical grade. So we think there's an overhang of the supply chain for lithium derivatives overall.

And what I said in the prepared remarks is we think we're looking at 12 to 18 months of trying market conditions, and we think that's about the time it's going to take for people to work it off. That's our view today.

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Arun Shankar Viswanathan, RBC Capital Markets, Research Division - Analyst [31]

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And lastly, just -- is there anything else that the industry can do, I guess, to accelerate that process of destocking? Have you been aware of any other potential shutdowns or reductions in production?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [32]

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Yes. I can't comment on what other people are thinking about doing. I can tell you what we're doing is we're going to take control of what we can control. So you can see when the joint venture deal with MRL closed, we made the decision to idle those assets because we don't need to bring any more spodumene right to the market in these market conditions.

Secondly, we're going to take actions internally from a cost standpoint to ensure that what we can control, we will control.

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Operator [33]

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Our next question comes from Mike Harrison from Seaport Global Securities.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [34]

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Just looking at the -- and kind of building on the questions around inventory levels, it seems like spodumene is one of the areas where there is too much supply. And I'm just wondering, can you talk about your operations at Talison, and maybe how we should think about the contribution from Talison in 2020 relative to 2019?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [35]

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Yes. The Talison contribution to '20 relative to '19, remember that Talison is a raw material supplier to Tianqi and Albemarle. And that's really it, both from a technical-grade perspective as well as from a battery-grade perspective that we take that rock and convert it as Tianqi does into our -- in our assets or in toll converters. So it's going to be -- essentially, that volume will be similar to up slightly [based on] Tianqi's bringing on a new plant. And so I would expect it to be slightly higher than what we saw in 2019.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [36]

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All right. And then on the catalysts side of the business, I guess I was a little bit surprised to hear you say that HPC was expected to be a little bit lower in 2020. Can we go back and discuss maybe your updated view on IMO 2020 and the impact that, that could have on HPC catalysts' growth over the next -- maybe what it's doing here in second half of '19 and what your expectations are for '20?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [37]

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Go ahead, Raphael.

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Raphael Goszcz Crawford, Albemarle Corporation - President of Catalysts [38]

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Yes. Sure. Mike, this is Raphael. So we do think that IMO will have an impact on HPC catalysts demand, low to mid-single digits. But I think when you look at -- when you step back and you look at the overall picture, more so than IMO for our business, it's really the tightening of sulfur specifications around the world, which will be favorable.

As Luke mentioned at the onset of the call, there are things that with the timing of various refills at customers that could push us up or down in any given year, not an indication of a weakness in the business, more of timing in customer demand. But overall, we feel like the tightening of sulfur-specific regulations around the world, IMO included, is favorable for our business and industry.

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [39]

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Yes. This is Luke. HPC is just simply a lumpy business. And what you have to do is the customer mix, the product mix as well as what that -- what the fills are going to be in any one period of time. So that's the only reason I say it could be down. It's got nothing to do with overall market demand, not a share issue, not a price issue. It's just simply a matter of the fills that we expect today.

Now if we were sitting here in 2018, we got more fills in 2019 than we expected we'd get in '18. So the team is still working. We may be able to move some orders up a little bit or get a little bit better mix. So it's early. But yet, people ask what an indication is from where we are today, it looks like HPC is going to be a little bit down and FCC is going to be up. Thanks.

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Operator [40]

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Our next question comes from David Begleiter from Deutsche Bank.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [41]

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Luke and Eric, just on lithium volumes in 2019, what do you think they'll be? And do you expect any growth in your lithium sales volumes in 2020?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [42]

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Go ahead, Eric.

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Eric W. Norris, Albemarle Corporation - President of Lithium [43]

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David, your question is the market or us? I'm sorry.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [44]

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On you, your sales volumes in '19 and potentially '20.

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Eric W. Norris, Albemarle Corporation - President of Lithium [45]

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So our sales volumes in '19 -- so you're wondering about the growth and what it's like year-on -- versus prior year?

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [46]

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Yes.

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Eric W. Norris, Albemarle Corporation - President of Lithium [47]

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That growth is coming from -- both from the ramp-up of Xinyu II, which is now running at full rates, but for the first half of the year is ramping. So we'll be 3 quarters full there for this year. So that's a 20,000-ton plant, so that's a big part of our growth.

And the remainder is coming from La Negra, though La Negra, we haven't run as well as we wanted to in the third quarter. We expect to show favorable year-on-year growth, though, in the fourth quarter of 1,000 -- a couple of thousand tons or so for the year.

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [48]

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So if you look to 2020, David, I would expect that from a volume standpoint, we'd probably have maybe 5,000 to 7,500 metric tons of growth. That assumes we get additional growth in and run La Negra at rates -- we don't have another rain incident like we did in the first quarter. The brine is percolating down there the way it ought to be. And they ran at October rates at the highest rate they've ever run. Now we've got to sustain that all into 2020.

And then we'll get a full year of Xinyu II from what we ran this year. So that's how I get to about the 5,000 to the 7,500 or 8,000 met tons, okay?

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [49]

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Very helpful. And look, just on the cost savings, how much will be realized next year of $100 million? And what's a [cadent] breakdown between the 3 segments of the $100 million?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [50]

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Yes. I don't know how much we're going to get in next year because some of it is -- it's going to take a little bit of time. So we will update you in December. We'll have more information at the Investor Day. And then when we roll out into our fourth quarter earnings call, we'll give you more update, David.

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Operator [51]

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Our next question comes from Jim Sheehan from SunTrust.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [52]

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I think you've repeatedly said that La Negra was on track to produce close to 40,000 metric tons of lithium carbonate in 2019. What is that number now going to be given the shortfall in third quarter? And can you just give some color on what caused these operational issues at La Negra? And what gives you the confidence they won't repeat?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [53]

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Yes. So let me do the first one, and Eric can talk about some details. We're running about 38,000. Is that about right, Eric?

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Eric W. Norris, Albemarle Corporation - President of Lithium [54]

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38,000, 39,000.

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [55]

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Between 38,000, 39,000 met tons for La Negra this year. And one of the things that we've done is we've taken some of the best process engineers we have around the company from Catalyst from Fine Chemistry Services from Bromine, and they've been down in La Negra over the last couple of months, helping with some best-in-class, some debottlenecks and things like that. So I'm confident next year that we'll be able to build from where we are, not have the rain events, not have the struggles with the brine because of the rain and things such as that. So I feel good about where we are and the progress that we're making.

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Eric W. Norris, Albemarle Corporation - President of Lithium [56]

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So Jim, I'll just add -- and I'll move beyond the brine issue and the rain. We've talked about that enough this year. But in terms of reliability and uptime of the plant, we expected more reliability and more uptime during the third quarter than we had.

Let me, first of all, point out, this plant is sold out. So everything we make, we can sell. So if there is an uptime issue, it's going to have an impact. And that's why we're backfilling where we can, where we're qualified to do so with tollers.

Now that being said, as Luke earlier said, we had the best October we've ever had in that -- or best month we ever had in the month of October. We got to sustain that. It's been a large measure due to upskilling from people from outside of the lithium business, but we've also brought in new operational talent, and we're building skills within the organization.

It's a journey, right? It's an operational journey. This plant has to be operationally excellent, and we're on our way there. The aim is world-class, but we're not there yet.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [57]

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Very helpful. And Luke, could you also explain how the tolling process works in Chile? Do you meet La Negra commitments with tolled brine-based carbonate or spodumene-based carbonate? And you've explained a lot in the past about how difficult it is to meet product specifications for battery-grade products. Are tolled volumes coming from a big 5 producer, and thus, they meet those specs? And if not, do you have to offer some kind of price concession given the lower-quality tolled product?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [58]

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That's a lot of questions, so let me try to address them one at a time. Overall, we don't take any brine from anybody else and toll it. And we don't give our brine to anybody else to toll for us. So if we have a slowdown at La Negra where we lose 1,000 metric tons, we take spodumene from our Talison supply and have a third party, generally and kind of toll it, either to carbonate or hydroxide. And we generally, if it's tolled to carbonate, at least in 2019, previously, it might have been a little bit different. But in 2019, we used that for internal consumption mainly to go downstream into our specialty businesses. And we continue to sell our carbonate directly to third-party customers.

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Operator [59]

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Our next question comes from Dmitry Silversteyn from Buckingham Research.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [60]

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A couple of questions, if I may. You talked about the -- sort of the outlook for incremental volume growth that you're still going to get in 2020 without added capacity just from capacity ramp-ups that you've done over 2019. But I just want to understand, the closure of the Wodgina mine, it doesn't impact sort of the progression of capacity additions that you've outlined in the second quarter slide when you took down the $1.5 billion CapEx expectation, right? I mean in terms of hydroxide and carbonate capacity, that's still going to go online through 2022 as you've outlined in that slide?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [61]

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That's exactly right, Dmitry.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [62]

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Okay. And then on your divestitures, I found it interesting that you're getting sort of inquiries on the Catalysts and the Fine Chemistry business. Obviously, the Fine Chemistry business has been around on the market, I guess, for a while. On the Catalysts side, you mentioned kind of pro forma Catalysts being the subject of interest. Does that include the curatives and organometallics? Or would that still be strictly the FCC/HPC Catalysts business?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [63]

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Yes. So let me be clear, Dmitry. It is not the refining catalyst. It is not FCC, and it is not HPC. The inquiries have been for the PCS portion of that business, which you are right, are the organometallics and the curatives.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [64]

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Okay. So basically, you're looking at some of the, what I would call sort of orphan businesses, not necessarily contemplating yet the possibility of bromine or refining catalysts being used as a way to help you with the capital requirements in lithium?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [65]

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Dmitry, that's like asking me which one of my children are favorite. I love them all. I wouldn't call them an orphan business, but I would say that they are quality businesses with good operating teams that can do much better if they have a focus and additional capital. And with the competition for capital that we have, they're just not going to get it. So it's a better value creation for our stakeholders for divestiture if, and only if, the valuation is where it needs to be. So that's how I look at it, okay?

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Operator [66]

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Our next question comes from P.J. Juvekar from Citi.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [67]

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So in light of your Wodgina shutdown, can you talk about the spodumene cost curve? What's the cost of marginal producer? And where does Wodgina fall there? And what signals are you looking to for the start-up of Wodgina again?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [68]

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Well, the best cost position in the world from spodumene rock is Talison. And if you followed the purity of the rock and the lack of foreign substances in there, you follow the cost curve, Talison is the premier in the world.

If you take Talison out of the picture, then Wodgina is right up there on the cost curve with the low-cost producers out there from a quality resource, from the size of the resource, from the length that we're going to be able to mine there, from a cost position that we'll be able to get. So it's a top-tier resource from a cost standpoint and from a quality standpoint.

Remember, we weren't planning to sell that spodumene. We were going to use it to convert it to lithium hydroxide. And when we look at the market today, it makes sense for us, we think, today to treat Wodgina the same way we treat Talison as a raw material source for the MRBL Limited joint venture between Albemarle and MRL. So we'll get Kemerton online, and we'll start that mechanical completion sometime in 2021. We'll have a period of time where we have to have qualification runs. And then we'll look to source Wodgina with Kemerton to the extent the market conditions make sense for us to bring whatever amount of capacity it makes for us to bring on for lithium hydroxide. We don't need to operate it wide open on day 1. We'll bring on capacity to meet that demand for lithium hydroxide. And that will dictate how we run the Wodgina mine.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [69]

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Sure. And then if you were to divest your fine chemistry and performance catalyst business, is the long-term goal for Albemarle to become a pure lithium company? Or is it just to keep the deep refining catalysts business and bromine in the portfolio so that, that's a cash-generative business that can fund the growth out of lithium?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [70]

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Yes. I think lithium will be able to fund it. If we start back and look, lithium will be cash flow positive in 2021, '22 kind of time frame, inclusive of servicing its debt, if you had to and things like that. But right now, our goal is to drive shareholder value.

When we look at our portfolio today, we see bromine and catalysts good, solid business, high EBITDA margins that allows us to harvest cash and use that for the Lithium business. So we will consistently, as we always have, look at our portfolio. But for the foreseeable future, we like where we are after these 2 divestitures.

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Operator [71]

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Our next question comes from Colin Rusch from Oppenheimer & Co.

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [72]

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As you're looking at the landscape of battery manufacturers and considering your strategy, can you talk about consolidation in the industry, folks that may be distressed and how you expect to handle that sort of situation?

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Eric W. Norris, Albemarle Corporation - President of Lithium [73]

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Well, Colin, this is Eric. So what we are seeing, and talked about before and it continues, is a shift of power decision-making around lithium in the battery materials used in a battery to the battery manufacturers themselves. And in some cases, the OEM is getting more engaged.

And so when we look at how we do business going forward, that is the group that we speak with as a group or we'll partner with. That's a group we have are -- a great deal of our contractor relationships already. Cathode players form the balance. That's where there's more stress in the value chain. There's a lot more fragmentation. And I think you will see some consolidation over time there, but it's hard to say at what pace that would occur.

But that's the dynamic we see, and we're well balanced and prepared with pretty deep relationships across all of those 3 parties: OEMs, battery producers, cathode producers.

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [74]

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Okay. And then on the policy side, obviously, the situation in China from a sell-through perspective on -- it has just been a major disappointment, particularly in the second half of this year. What are you hearing in terms of potential for stimulus in China for vehicles and for vehicles and EAs at this point, if anything?

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Eric W. Norris, Albemarle Corporation - President of Lithium [75]

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What we interpret as what is going on is a pause, right? It's a shift in policies to incent the development of an industry that is part of a grand plan for China. So we have no doubt about China's intent and where they want to go. And what we are hearing specifically is, is that the drive towards higher-energy-density batteries and full battery electric vehicles is the aim of where they want to go.

So we recognize that the past couple of months has been a pause. It's been a little slow. But we view that as simply a natural pause in the road of what will be significant growth, and we're certainly seeing that in the global EV space in Europe today.

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Operator [76]

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Our next question comes from Joseph Catania from G. Research.

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Joseph Charles Catania, Morgan Group Holding Co. - Research Analyst [77]

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Obviously, the lithium industry has responded to the softening price dynamic with you and others delaying or canceling capacity expansions. But with the amount of lithium carbonate sitting in supply chain that needs to be consumed, are you concerned there's going to be more room for prices to fall going forward as the industry destocks?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [78]

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We -- as we said, I think on the call, you got $7 a kilo price kind of in China right now. We think that's about where their cash cost of conversion is. I have seen a hard time them going much, much lower than that.

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Joseph Charles Catania, Morgan Group Holding Co. - Research Analyst [79]

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Okay. And as the shift to high-nickel cathodes accelerates and you're seeing the growth in lithium carbonate slow, do you expect the price spread between the 2 to widen? It seems like it's tracked fairly steadily this year, the $1.50 to $2 per kilogram range.

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Eric W. Norris, Albemarle Corporation - President of Lithium [80]

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Well, a couple of things I'll say. One is that the demand growth for carbonate remains strong. Demand outlook for hydroxide is much stronger. Today, the workhorse of the industry is 622 Chemistry agminated with carbonate or hydroxide, which plays to Albemarle's advantage as we're the only producer that has ability to play both.

As to the future, we see -- because of the growth, we see the hydroxide market getting tight. But today, I don't know that we would forecast any major change in spreads between the 2.

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Operator [81]

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Our next question comes from Kevin McCarthy from Vertical Research Partners.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [82]

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Luke, one of your industry peers announced a new contract with LG earlier this week. As you consider your contract strategy, given all that has transpired with lithium prices, are you generally disinclined to enter new long-term contracts? Or are there perhaps isolated opportunities that look attractive?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [83]

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Yes. So Kevin, we're talking to everybody. As I said, we're in negotiations under our existing long-term agreements and for new long-term agreements, both in the -- both with the OEMs as well as with additional battery producers. So we're in negotiations and in discussions with a lot of moving parts and pieces.

And what that tells me is that there's ability -- there is a need for a security of supply from companies like Albemarle. And everybody knows we're not going to enter into a contract long term today at a $7 a kilo price for carbonate. It's just not going to happen. We're not going to do it. It don't make any sense for us to do it and allot that in because we think the market is going to move up. So we know the value we bring. I think the customers know the value that we bring as well. And we're inclined to enter into agreements that will drive value for our stakeholders. That's the best way I know to describe it.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [84]

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Okay. Fair enough. And then second, with regard to your potential divestitures, how would you characterize the aggregate level of EBITDA there? And as a point of clarification, is that amount of EBITDA included in your 2020 guidance comments? Or are you contemplating a decrement or step-down related to a midyear divestiture?

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Scott A. Tozier, Albemarle Corporation - Executive VP & CFO [85]

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Kevin, this is Scott. So the combined EBITDA is kind of in the $55 million to $60 million range. We have not assumed that we sell those businesses in our guidance at this point in time. We just started the process, as we talked about, and we need to see if we're going to get the value for those businesses that we expect. And if not, then we'll -- if we don't, we'll hold them. If we do, we'll end up transacting.

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Operator [86]

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And that does conclude the question-and-answer session for today's conference. I'd now like to turn the conference back over to Dave Ryan for any closing remarks.

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David Ryan Terrence, Albemarle Corporation - VP of Corporate Strategy & IR [87]

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I'd like to thank everyone for joining us this morning and for your questions and participation. As always, we appreciate your interest. This concludes Albemarle's third quarter earnings call. Thank you.

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Operator [88]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.