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Edited Transcript of ALB earnings conference call or presentation 9-May-19 1:00pm GMT

Q1 2019 Albemarle Corp Earnings Call

BATON ROUGE May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Albemarle Corp earnings conference call or presentation Thursday, May 9, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Ryan

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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* Adam Samuel Bubes

Jefferies LLC, Research Division - Equity Associate

* Arun Shankar Viswanathan

RBC Capital Markets, LLC, Research Division - Analyst

* Benjamin Joseph Kallo

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Christopher John Kapsch

Loop Capital Markets LLC, Research Division - MD

* Colin William Rusch

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

* Daniel William Jester

Citigroup Inc, Research Division - VP

* David L. Begleiter

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

* James Michael Sheehan

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

* Joshua David Spector

UBS Investment Bank, Research Division - Equity Research Associate - Chemicals

* Kevin William McCarthy

Vertical Research Partners, LLC - Partner

* Matthew Stephen Skowronski

Nomura Securities Co. Ltd., Research Division - Research Analyst

* Michael Joseph Harrison

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

* Michael Joseph Sison

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* Robert Andrew Koort

Goldman Sachs Group Inc., Research Division - MD

* Robin Fiedler

BMO Capital Markets Equity Research - Senior Associate

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Albemarle's First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Mr. Dave Ryan, Vice President of Corporate Strategy and Investor Relations. Sir, you may begin.

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

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Thank you. And welcome to Albemarle's First 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, including about our outlook, expected company performance, production volumes, expansion projects and our proposed lithium hydroxide joint venture may constitute forward-looking statements within the meaning of the 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 reconciliation of these measures to GAAP financial measures can be found in our earnings release and the appendix of our earnings presentations, 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, and good morning, everybody. In the first quarter, Albemarle delivered adjusted diluted EPS of $1.23. Lithium volume in the first quarter was negatively impacted primarily by the rain event in Chile and delayed customer qualifications. Importantly, however, lithium pricing in the quarter was up 3% versus prior year. Catalysts and Bromine Specialties grew adjusted EBITDA by 5% and 12%, respectively, excluding divested businesses. Both businesses benefited from increases in volume and price.

Turning to our strategic projects. We continue to make progress on our lithium hydroxide joint venture with Mineral Resources Limited. We have made the necessary regulatory filings and, based on the current feedback, continue to expect the transaction to close in the second half of 2019. During April, we signed an interim marketing agreement with MRL that allows Albemarle to market any spodumene concentrate that is produced at the site prior to the closing of the joint venture.

Our new 20,000 met ton Xinyu II lithium hydroxide facility continues to ramp production according to our original schedule. We are shipping from this expansion to customers who have completed their qualification process and have additional qualifications underway. We are on track for full qualification of Xinyu II material by all targeted accounts by the end of the third quarter of this year and expect to achieve a nameplate capacity run rate by year-end.

In Chile, we expect to produce close to 40,000 metric tons of lithium carbonate from our 2 existing operating units in La Negra in 2019 despite the impact on production from the rain event in the Salar de Atacama, which occurred in the first quarter. Due to delays in the delivery of certain equipment, we now expect to commission the 40,000 metric ton lithium carbonate plant, La Negra III and IV, late in the fourth quarter of 2020 or in the first quarter of 2021. This will be followed by a typical 4- to 6-month customer qualification process. It would put the first meaningful sales volume around midyear 2021. In spite of this slight delay, we are confident in being able to meet our volume commitments under our long-term agreements for lithium carbonate.

In the Salar de Atacama, we have commenced a capital investment project which is expected to improve our lithium yields in the Salar. Major equipment has been ordered. Earthworks should commence during the second quarter, and we're on track to commission the project in the second half of 2021. This project will allow us to increase our lithium yield by as much as 30% without increasing the amount of brine being used, further ensuring the sustainability of the Salar de Atacama and increasing the flexibility of our operations.

In Kemerton, Western Australia, work has started on our lithium hydroxide complex. Earthworks are well underway, and contracts have been awarded for the major and long lead time equipment as well as for the engineering, procurement and construction management for the project. The first phase will encompass 3 trains of 20,000 to 25,000 metric tons capacity apiece and expected to be commissioned in stages during the second half of 2021 and continuing into 2022.

Finally, the expansion of Talison, our spodumene joint venture in Greenbushes, Australia, remains on schedule to start up in June of this year. This expansion will result in the capability to produce about 160,000 metric tons on an LCE, full year run-rate basis, with Albemarle's annual share being up to 80,000 metric tons. This spodumene will feed our China and Australia conversion plants. Talison will tailor operations to meet the raw material demands of its 2 partners.

Turning to demand for lithium for a minute. During the first quarter, global sales of electric vehicles were up almost 60% compared to 2018. Full-battery electric vehicles contributed outsized growth, increasing 75% year-over-year. All of this is against the backdrop where year-on-year, global automotive sales decline by 6.5% during the same quarter. Regionally, Europe set a record for EV sales in March, ending the quarter up 23% versus prior year, with most of that growth coming from the full electric segment. U.S. sales were up 11%. First quarter EV sales in China were more than double what they were during the same period of 2018. In addition, battery production remains strong. The Chinese National Bureau of Statistics reported that full year 2018 and first quarter 2019 lithium-ion battery production increased 13% and 8%, respectively, compared to the prior year. Year-on-year, the production of NMC cathode batteries was up more than 25% during the month of March alone.

Overall, these demand signals are in line with what we see from our customers under our long-term agreements, which support the continued secular growth in electric mobility and electric storage and the underlying strength of our businesses.

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. In the first quarter, Albemarle generated unadjusted U.S. GAAP net income of $134 million. Net sales grew 6% and adjusted diluted EPS by 4%, excluding foreign exchange and divested businesses compared to 2018.

Adjusted diluted earnings per share was $1.23 for the quarter, which is up $0.01 compared to 2018 pro forma results, including the currency impact. Earnings growth in Bromine and Catalysts segments contributed about $0.10, and a lower share count contributed about $0.06. The gains were mostly offset by Lithium, which was about $0.09 unfavorable; and foreign exchange, which is about $0.04 unfavorable, driven primarily by the strength of the U.S. dollar.

Corporate costs in the first quarter were $36 million, driven in part by negative currency expense and planned increases in professional services. We do not expect the first quarter spending rate to continue, but given first quarter costs and our updated view on the rest of the year, 2019 corporate costs are now expected to range from $120 million to $130 million.

Net cash from operations was about $55 million, down from last year, impacted by lower EBITDA, lower dividend payments from our joint ventures and higher cash taxes compared to the first quarter.

Operating working capital ended the year -- or ended the quarter just under 28% of sales, an increase from the fourth quarter of 2018, primarily due to increased inventory of spodumene in the Lithium segment in preparation for the ramp of the Xinyu II expansion in China and increased inventory in Catalysts in preparation for orders in the second half of the year.

Capital expenditures during the first quarter were $216 million, on track with expectations. With the ramp of spending on Kemerton, continued buildout of La Negra and the early stages of the Salar yield improvement project, we continue to expect full year CapEx to range between $800 million and $900 million.

Now let me move onto the business performance. Lithium ended the first quarter with sales of $292 million and adjusted EBITDA of $116 million. On a year-over-year basis, pricing was up 3%, benefiting from our long-term agreement structure. Volume, however, was down 3% versus prior year primarily due to the impact of the rain event in the Salar. The adjusted EBITDA margin was solid at 40% and reflects a higher mix of carbonate sourced from toll manufacturers.

Bromine Specialties generated sales of almost $250 million and adjusted EBITDA of $79 million, up 10% and 12%, respectively, compared to the first quarter 2018. Adjusted EBITDA margin improved slightly year-on-year to about 32% as a result of higher sales prices and operating rates, partially offset by increased raw material prices. The increased volume was primarily driven by sales of clear brine fluids used for completion of offshore oil wells and sales of certain brominated derivatives used in the production of polymer resins. The market for flame retardants remained solid, particularly in electronics.

First quarter Catalysts sales of about $252 million increased by 8% compared to 2018, excluding divested businesses. Adjusted EBITDA was $60 million, up 5% from 2018. Growth was driven by our refining catalyst products due to order timing of hydroprocessing catalysts and low single-digit price increases in fluid catalytic cracking, or FCC catalysts, partially offset by a slight volume decline in FCC.

Looking forward to the rest of the year, Lithium remains a volume story. Global demand remains in line with our expectations. As we discussed last quarter, we are starting to see some excess lithium carbonate in China coming from the nonintegrated spodumene converters. This is pulling short-term carbonate pricing down. And for now, we have decided to forgo some opportunistic sales of toll lithium carbonate in China until pricing improves.

Our strategic customers, in general, continue to reflect healthy demand based on their current order pattern and continue to meet volume and pricing commitments under the terms of our long-term agreements. Adding all this together, we now expect year-over-year volume growth of 15,000 to 20,000 metric tons and an adjusted EBITDA growth rate in the high teens. Note that we expect the second half to be notably stronger than the first due to the Xinyu production ramp and the brine improvements in Chile.

Bromine had a strong start to the year, and the current backlog of orders is healthy. With our improving outlook for the second half, we now expect full year Bromine adjusted EBITDA growth in the mid- to high single digits on a percentage basis. Our full year flat outlook on Catalysts is unchanged. Shipments continue to be weighted to the second half, with third quarter expected to be the strongest of the year.

In rounding out commentary on our businesses, the fine chemistry services business, which is reported under the other segment, is beginning to show signs of recovery. We remain cautious. However, we believe this business now has the potential to deliver full year adjusted EBITDA of around $25 million.

For the total company, we are reaffirming the full year guidance. We expect pro forma net sales growth in the range of 9% to 15%. We expect overall corporate adjusted EBITDA margins of around 30%. And this would result in adjusted diluted earnings per share of between $6.10 and $6.50, a pro forma growth rate of 16% over 2018 at the midpoint. We expect the second quarter of 2019 to be about equal to the second quarter of 2018 and the second half to be stronger than the first. As always, normal fluctuations on our business could have an impact on these quarterly results.

I'm excited about our progress in growing Lithium capacity and earnings and the efforts of Bromine and Catalysts to generate increasing cash flow to fund that growth. These efforts, which are consistent with our strategy, continue to position us to benefit from the tremendous growth in the lithium market for decades to come.

Now I'll turn it back over to Dave.

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David Ryan, 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) And our first question comes from the line of Robert Koort from Goldman Sachs.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [2]

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Luke, I was wondering if you could talk, there's been, I guess some angst around what's going on in pricing in China. You guys alluded to maybe doing some less tolling and opportunistic sales. Can you talk about your contract integrity of sales in China and then outside of China? And maybe just review for us once again the balance and approach on that contracting in Lithium.

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

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Yes. I'll let Eric talk a little bit about what he sees specifically in China. And then at a high level, I'll talk a little bit about the contracts.

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Eric W. Norris, Albemarle Corporation - President of Lithium [4]

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So Bob, this is Eric. In China, we are seeing pricing falling to what we would consider the cash costs of high-cost nonintegrated spodumene converters. So that price is one which, when we take the Talison rock and convert it through a toll or to carbonate, the economics just don't make sense. And so as Scott alluded to in his prepared remarks, that's the volume we're pulling out of. That's the opportunistic volume. That volume was either 1 of 2 kinds. It was either a variable price piece to an existing customer we have a fixed price contract already in China, and we have several of those. Or it was to a new prospective account that we would be developing for future growth who we do not have a contract with, that is, of course, anchoring their expectations on that price.

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

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So if you look at our long term, okay, I think this quarter has been a quarter that shows the strength of our long-term agreements. We've had the fixed pricing and the minimum volumes that we've had in the contracts. All of our customer had held to those. They've taken their minimum commitments and they've held to that minimum pricing floor that we had. As you can see, our pricing was up 3% year-over-year when a number of other lithium companies were talking about price being down year-over-year. So again, this strategy is one that we thought through to kind of shave off the highs and the lows and to get a quality return on what we invested. So we feel good about that strategy. And they're long enough now that we have these contracts. The bulk of our carbonate, spoken for under these long-term contracts through the end of 2021. And we have the bulk of our carbonate spoken all the way through -- I'm sorry, and the bulk of hydroxide, I apologize, Bob, spoken through the end of 2025 at prices. So we feel very good about where we are and our ability and the respect and the legal significance that are given these contracts.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [6]

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And then, Luke, if I might ask. You mentioned -- or Eric, you mentioned that you thought maybe a nonintegrated producer in China is at breakeven. You pulled some of your own tons out of that market through the tollers using Talison which is, I believe, far and away, the lowest cost. So does that mean we should start to see what you expect to see, some of these nonintegrated independent companies pulling back production? And is what they're selling in that market different than what you're selling from a quality standpoint? Or is it fungible?

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Eric W. Norris, Albemarle Corporation - President of Lithium [7]

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It's -- well, let me answer the last question first. It's kind all over the board. It depends on the converter and their track record. So some is higher-quality carbonate, some is lower. But to your point around cost structure, yes, once you remove toller margin, right, because obviously the tollers we work with are earning a profit, the Talison converted product is going to be the lowest-cost product in the marketplace, no doubt. With the toller margin though, that's what gets us close to being not profitable at current market prices and why we have pulled out. It is possible, certainly, that this could have a constraint on high-cash cost producers. We'll have to wait and see.

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

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I mean, Bob, I think one thing is -- remember, our margins, what we've committed, it was going to overall 40% margins. And there are plenty of people -- there's some people out there in China who are willing to operate at cash costs and making cash. We're not. And the people that we'd committed to and then have committed to us, whether through the high pricing, through the low pricing, whatever the market may bring, we're going to be consistent with those prices. We're going to meet our commitments, and they're meeting their commitments as well. So we feel good about it.

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Operator [9]

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And our next question comes from the line of John Roberts from UBS.

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Joshua David Spector, UBS Investment Bank, Research Division - Equity Research Associate - Chemicals [10]

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This is a Josh Spector on for John. Just a question. If you could provide some additional information around the delay and qualification of Xinyu II, I guess, particularly what impacted the first quarter. Just trying to mesh together kind of what you guys saw relative to your competitors and some of that capital producers in terms of timing in longer-term versus nearer-term impacts?

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Eric W. Norris, Albemarle Corporation - President of Lithium [11]

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Josh, this is Eric Norris. I'm going to refer to a comment Luke made. Qualification time is for a company like ourselves that has -- using an existing plant or expanding a new brownfield next to it, has an established track record with a cathode producer. That's a 4- to 6-month qualification process. We brought Xinyu II to up in the sort of November, December time frame. So we are always bucking up against that time frame, right. And we were able to get certain customers qualified in time to get the product out by the end of March and make that volume in the quarter, and others we didn't. So it's really just playing against the clock.

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

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And I think that also speaks to the confidence that those long-term customers have and the relationship we have with them as they cut actually, in the first quarter, cut some of their -- at least 1 or 2 of them did cut that qualification time a little short. So we got that volume in for a piece of their work but not for all of it. So I think we were trying to be a little more aggressive thinking they could shorten the qualification time across the board, and just at the higher end, quality for those long EV batteries. They weren't able to do that or weren't willing to do that. So but we've done -- it continues on schedule for qualifications. And there are no issues. It was just a matter of we thought we could get it tighter than what the traditional qualification would have been.

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Joshua David Spector, UBS Investment Bank, Research Division - Equity Research Associate - Chemicals [13]

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So this -- in your view, in terms of what you're seeing for the higher-quality hydroxide product, are you seeing any customers push back some of the order timing? Or any indications of different demand patterns? It seems like what you said with Xinyu, you expect to be full rates later this year, which seems to be, I think a bit different from what we're hearing from others.

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [14]

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Yes. So nobody's pushing back on their order pattern from what we had expected for this year for our major customers. And what we said, that we will ramp in toward full capacity on a run-rate basis. So in other words, we won't produce 20,000 metric tons out of Xinyu II this year. But by the end of the year, we'll be operating at a run-rate basis that would equal 20,000 tons if we ran for the full year. There's a little bit of difference there. So you understand what I'm saying?

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Operator [15]

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And our next question comes from the line of Kevin McCarthy from Vertical Research.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [16]

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Luke, nice to see the positive 3% on lithium pricing. Can you talk to what you're seeing with regard to mix? And what is your level of confidence that you can sustain the positive pricing throughout the course of 2019?

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Eric W. Norris, Albemarle Corporation - President of Lithium [17]

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Kevin, so this is Eric again. Our volumes are, as you know, under long-term contracts. So the vast majority of our carbonate volumes and you know that almost all of our hydroxide volumes under long-term contracts with fixed prices and they have a floor associated with them. So our mix is going to be representative of the production mix we talked about. It's going to be close to 30,000 tons roughly of hydroxide and 40,000 tons of carbonate that we're putting into the market on a rounded basis. And our confidence of being able to sell that is -- at current prices that we are seeing in the first quarter, is very high going forward.

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [18]

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And then, Kevin, if you remember, on the last call, we said that we thought pricing would be -- for Lithium for the full year would be flat inflationary. That's still what we expect. What you're seeing, that 3 quarter in the first quarter -- that 3% in the first quarter, some of it is that some of the price increases in 2018 didn't hit all the way the first quarter. They were staggered through the year. So you're seeing a little bit of that also in the first quarter 2019. But we still expect them to be flat inflationary for the year.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [19]

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Great. And then secondly, I was wondering if you could discuss or elaborate in terms of what you're seeing on the evolution of cathode technology. There's been some discussion that the move to high nickel systems is taking a little bit longer than anticipated. Are you observing that? And if so, does it have any appreciable impact on your business, either positive or negative?

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Eric W. Norris, Albemarle Corporation - President of Lithium [20]

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So Kevin, we can't account for what other folks' projection would be about demand and a mix of demand. We are -- things aren't falling as we thought they were. And we discussed them in our last conference call, where we are seeing a '19 unfolding largely as we predicted a couple of months ago. And we are seeing no pullback from the forecasted high nickel demand that we anticipated to see. Now it's fair to say that, that's largely an NCA market; and secondarily, on the NMC side, it's 6:2:2 market, which has a partial amount of hydroxide on it. But NCA, as you know, is all hydroxide. We've never put a big bet near term on 8:1:1. We think it's an attractive chemistry long term, but there's quite a few processing technologies that we put in place to improve the economics of manufacturing 811, which we anticipate will take a number of years to put in place.

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Operator [21]

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And our next question comes from the line of Laurence Alexander from Jefferies.

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Adam Samuel Bubes, Jefferies LLC, Research Division - Equity Associate [22]

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Adam Bubes on here for Laurence. As you talk with your partners in the value chain, I was wondering how do you see stationary storage evolving. Are the specs any less rigorous than electrical vehicles? And how do potential volume commitments differ?

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

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So you mean for grid storage, energy storage systems? This is Eric speaking. Just to clarify.

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Adam Samuel Bubes, Jefferies LLC, Research Division - Equity Associate [24]

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Yes.

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Eric W. Norris, Albemarle Corporation - President of Lithium [25]

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Yes. So look, we see a market that -- and then we forecasted this a couple of months ago, that there's maybe 60,000 ton market in -- going forward. And it is not a big part of what is sold today. It is included and part of the long-term contracts we do. The Koreans and the Japanese, and I believe, the Chinese as well, although I can speak more directly to the first 2, have volumes that -- of our product that are sold and used in grid storage applications. And so we'll monitor it carefully. It's an intriguing market, but we don't see it being the driver that the EV market will be.

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Adam Samuel Bubes, Jefferies LLC, Research Division - Equity Associate [26]

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Okay. And my second question. I was wondering what your view on bromine derivatives was. And if demand stabilizes in Asia, should margins expand?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [27]

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Yes. I will turn that to Netha.

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Netha N. Johnson, Albemarle Corporation - President of Bromine Specialties [28]

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Yes. This is Netha. What we're seeing is basically stable demand for flame retardants through the second half of the year and really an increased opportunity for our clear brine fluids in the oil and gas market based on our offshore recount increasing. So what we've done and projected our guidance forward is we basically removed the risk we had in the second half and projected that going forward to the mid-single digits for the full year.

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Operator [29]

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And our next question comes from the line of Joel Jackson from BMO Capital Markets.

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Robin Fiedler, BMO Capital Markets Equity Research - Senior Associate [30]

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This is Robin on for Joel. So my first is -- so we've seen publicly available export data out of Chile. It's showing sequential carbonate price reductions in the past couple months. I know you mentioned in your prepared remarks that carbonate price -- there's some carbonate price weakness from spodumene supply pressures. But can you talk a little bit about the Chilean export price dynamic and how that might impact Q2 Lithium EBITDA specifically?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [31]

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Yes. So I'm not sure what data you're looking at out of Chile. But what I would say is the way we go to market, that's a transfer price from Chile -- from our Chile entity to our U.S. entity that didn't turn themselves to the products. So you ought to not view the Albemarle export data as the final product that we sell to the customer at that price, okay. So then if we look at carbonate longer term, what we said is in Asia, there's been some pressure on carbonate pricing in the first quarter largely due to some excess spodumene that the converters have over there that they are able to convert and they're willing to sell at a lower price than what we've seen over the last couple years. That will, over time, dry up. The market will continue. As we've always said, the market will be relatively balanced through here to 2025, but there will be pockets where you have oversupply, pockets where you have undersupply. And what we're seeing right now is a pocket where, particularly for carbonate, in many of the non-EV usage, we're seeing some downward pressure because of this excess carbonate. But I think, long term, the market is going to remain in balance. And in fact, some of that carbonate is going to have to convert to the dry side demand or we will not have enough dry side capacity to meet the demand for these battery makers on that chemistry over the long term.

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Robin Fiedler, BMO Capital Markets Equity Research - Senior Associate [32]

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That's helpful. Just a quick follow-up on that. Are you able to provide Q2 Lithium EBITDA guidance on a year-over-year basis?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [33]

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No. Not more than what Scott said in his prepared remarks.

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Robin Fiedler, BMO Capital Markets Equity Research - Senior Associate [34]

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Okay. No problem. And just one last question for me. Can you give us an update on the construction time line at Wodgina? It seems like the first line is on schedule and commissioning now. Are the second and third lines still expected sometime this summer? And can you elaborate on the market agreement that's now in place and how that might impact ALB's received volumes from Wodgina for this year?

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

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Well, that's a lot of questions for one follow-up. So let me try to address the marketing agreement. What the marketing agreement says is that we have the right to sell spodumene that's produced out of that site during the full year. We're getting -- MRL is on schedule on train 1. We will get qualification samples out. We're in the middle of marketing some of that spodumene and we will sell that spodumene at attractive prices. But we are certainly not in a position or thinking about operating that wide open and then sell it. We're going to sell it to meet the demand and that's it.

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Operator [36]

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And our next question comes from the line of Aleksey Yefremov from Nomura Instinet.

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Matthew Stephen Skowronski, Nomura Securities Co. Ltd., Research Division - Research Analyst [37]

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This is Matt Skowronski on for Aleksey. If you were to see a downturn in demand for hydroxide, would you consider slowing down your investment?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [38]

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Yes.

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Matthew Stephen Skowronski, Nomura Securities Co. Ltd., Research Division - Research Analyst [39]

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And you mentioned that your outlook for bromine is driven by improving demand and second half conditions. How good are your visibility into the orders? And what kind of gives you confidence that this pickup will occur? Is it flame retardants? Is it anything else?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [40]

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Netha?

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Netha N. Johnson, Albemarle Corporation - President of Bromine Specialties [41]

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This is Netha. We have pretty good visibility into our orders. We analyze our backlog extensively, and we're essentially sold out. So we're in a good position. We feel good about the orders we have and our ability to produce and deliver those orders. What we had in there was just a slight risk on the basis of economics in the second half that we removed, which improved our outlook for the year.

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Operator [42]

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And our next question comes from the line of P.J. Juvekar from Citi.

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Daniel William Jester, Citigroup Inc, Research Division - VP [43]

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It's Dan Jester on for P.J. Just another one on bromine, if we could dive in a little bit deeper. It sounds like the mix of sales is going to change a little bit as the year progresses. How does that affect margin -- the margin outlook?

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Netha N. Johnson, Albemarle Corporation - President of Bromine Specialties [44]

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That's -- again, I don't know if our mix is going to change per se. We had risk built into the second half based on the economic conditions we were seeing. Those are looking a little bit better now, so we removed that risk. But our fundamental sales mix shouldn't change throughout the year, and margins should be as we forecasted.

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Daniel William Jester, Citigroup Inc, Research Division - VP [45]

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Got you. And then on Catalysts. You've had a little bit of margin pressure over the last couple of quarters. Can you just comment what's driving that and how you think 2019 evolves?

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Raphael Goszcz Crawford, Albemarle Corporation - President of Catalysts [46]

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So this is Raphael. So we're really looking at 2019 to be essentially flat year-over-year on an adjusted EBITDA basis. There certainly are mix effects that occur from year-to-year depending on how much hydroprocessing versus FCC business. Though I would say on the whole, the business is strong. It continues to follow the macro trends of need for chemicals, fuels and clean chemicals and fuels. So we feel confident in the future outlook for the business.

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Operator [47]

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And our next question comes from the line of David Begleiter from Deutsche Bank.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [48]

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Luke, just on the carbonate excess in China. How long do you think this will last? Is it a matter of months or quarters or something like that?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [49]

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Yes. It's hard to say, David, because it depends so much about how many third people (sic) [third-party] are. But I would expect that you're going to see it through the year. I think you're going to see it through the year my bet is it's going to start -- you're going to see pricing start picking up toward year-end. But it's very, very difficult to say. It depends upon so many, so many third parties and what they may be doing, and you can't control all that. So that's what I would say. Eric?

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Eric W. Norris, Albemarle Corporation - President of Lithium [50]

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Yes. I would just add, David, that we haven't talked a lot about supply. Supply -- our expectations, if you compare them to where we were 3 months ago on supply, are very different. South America production is going to be nearly flat year-on-year once you consider the broad impacts of rains that impacted all producers. We believe some have publicly talked about it, including ourselves and SQM's outlook for production this year. You then turn and look at the other side of the world. In spodumene production, it's taking longer for some to get to market. And we'd expect that the economic values being achieved by the time it's converted to a carbonate salt is not sufficient to drive a lot more interest in putting more capacity in the market. So it will last the year. I'm not going to contradict Luke's comment at all. But I think we need to look at, on a long-term, on a multiyear basis, the impact that -- of supply and what we see. And therefore, we see supply in the -- going out beyond this year being a lot more balanced with demand.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [51]

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Very good. And just on, Luke, kind of watching the spodumene. How should we picture or think about that being marketed in relation to perhaps some of your additional Talison volumes as well being marketed in China?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [52]

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Yes. So remember, Talison, we do not market that rock in Talison except for the technical grade. And so that would go into things like glasses and ceramics and things such as that and Tianqi markets within China. And we market outside of China for that technical grade. But all battery grade has to be converted by the partners. So we don't -- Talison is not -- does not sell spodumene rock to be converted into battery grade by either one of the partners anywhere in the world. It is simply a raw material source for Tianqi and Albemarle. And we're going to market the Wodgina rock to meet the demand. If the demand is not there, we won't run the plant. So if demand's there, we'll run it to meet that demand that we can sell and get a profit on it.

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Operator [53]

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And our next question will come from the line of Ben Kallo from Baird.

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Benjamin Joseph Kallo, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [54]

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So first, can you talk about maybe just conversations in out-years and how that looks, particularly in carbonate for new contracts. And then I want to talk about capital allocation. First of all, maybe if you could talk about where you stand on your buyback and what your thoughts are there.

And then second, just with the agreement with MRL, how you're viewing valuations out there in the private market. It looks like public markets hate lithium right now. But I'm wondering what the implications are in the private market for either new project start-ups that need capital or any type of M&A activity out there from a private market perspective and what that does to supply and demand.

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

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Okay. First of all, from a buyback standpoint, our buyback is already closed out. We closed out the last one that we did out -- it was closed out last year. Right, Scott?

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Scott A. Tozier, Albemarle Corporation - Executive VP & CFO [56]

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Yes. That's correct. The end of December, we finished that buyback. So we're complete.

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [57]

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Okay. And then I'm going to ask if you'll talk about carbonate to his question for the year and the contracts.

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Eric W. Norris, Albemarle Corporation - President of Lithium [58]

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So then help me -- help clarify, what was your specific question? It's how does carbonate look versus start-up in the long term.

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Benjamin Joseph Kallo, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [59]

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Yes. As you look out to 2022 and beyond, how are those discussions going? Are they active? Or are people pausing to look at how the market is? And how do you look at pricing there, too?

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Eric W. Norris, Albemarle Corporation - President of Lithium [60]

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Okay. So let me first point out something you didn't ask, which is, through 2021, and we've got the charts we've put out over the past few quarters, we are 80% contracted out through that period of time on carbonate, which just hits our targets exactly. I'll be candid. There are not a lot of discussions in the current market about contracts. We don't have any contracts that need to renew, that are going to renew this year or next of any material size. And as a result, given where pricing is and given the expectation of how we think price -- the supply-and-demand relationship will play out, we'll engage in those discussions in due course but not imminently.

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

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Then you asked about valuations. What I would say is if it's a resource, the valuations, even the private side, the ask is still pretty steep from a resource standpoint, where there may be some opportunities are in a conversion assets. And then you look at that as a -- obviously, we got some capital projects as a build-your-own versus buy. But from a resource standpoint, some of the valuations -- some of the better valuations -- I'm sorry, some of the better resources, I apologize, are still have pretty high valuations.

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Operator [62]

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And our next question comes from the line of Chris Kapsch from Loop Capital Markets.

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Christopher John Kapsch, Loop Capital Markets LLC, Research Division - MD [63]

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So there -- if you look at lithium pricing, there's been -- maybe not historically, but more recently, there's been a premium for hydroxide pricing vis-à-vis carbonate pricing. And that premium has been compressing. I'm just wondering if you could comment on what do you think the endpoint is there. How do you see that playing out? And does that affect your business and outlook?

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Eric W. Norris, Albemarle Corporation - President of Lithium [64]

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Well, Chris, this is Eric. So from our -- let me start with the last question first. From our standpoint, and I indicated earlier, we are largely completely -- or nearly sold out for hydroxide. So that is not going to affect our pricing this year or for years to come, we believe. Our pricing is fixed at prices that are just a bit higher as witnessed in the first quarter than last year this time. And we expect them to be largely flat for the balance of the year. And if the market improves, there might be an opportunity for us to increase some of these contracts. We have the floor in all of these contracts.

So as to your question about what's going on in the broader market, well, there are different kinds of quality of hydroxide, right. The hydroxide, it's sold broadly for the grease applications or for -- even for certain lower energy-dense applications like LFP, may not be of the same standard of quality that's used in the high nickel chemistries. And we see that as a result -- and if you look at some of the relationships with the large battery producers, that's where only a few people can play in these high nickel chemistries, including Albemarle. So there's a 2-tier market. The compression though of the spread back to what we consider more normal spread of about $1.50 or $2, which is half in between carbonate and hydroxide, has been largely brought about us of there being some excess hydroxide from other producers that is -- that aren't under long-term contract that's largely in China. That's driven that back in line.

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Christopher John Kapsch, Loop Capital Markets LLC, Research Division - MD [65]

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Okay. That color is helpful. And then my follow-up is one of the things that contributed to the angst, if you will, has been this -- the unexpected magnitude of the Chinese subsidy change for EVs. And obviously, that subsidy has been known to be going 0 in the relatively near term. But nonetheless, that seems to have influenced some patterns. I'm just wondering how you see that influencing your business. There's some discussion that this change gives a longer tail to LFP. I'm not sure that was ever going away given the relevance in e-buses for LFP and so forth. But maybe you could just comment on effects from the changing Chinese EV subsidies.

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Eric W. Norris, Albemarle Corporation - President of Lithium [66]

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Right. So again, I would agree with you that it might favor longer some of the chemistries other than high nickel chemistries. With the more rapid drop in subsidizing some of the longer-range vehicles, we might see more movements across the LFP to getting range with larger, less dense energy batteries. So that's a possibility. In our case, if you look at our product mix, that's not a good nor bad news, right, as long as the growth is there. And the first quarter illustrates that the growth is still there. We play in carbonate and hydroxide. And then finally, for us, we have always noted that our mix of business is more biased outside than inside China. So while it does impact our business, this growth in EV in China, certainly, we are more tied to what happens globally with electric vehicles.

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Operator [67]

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And our next question comes from the line of Colin Rusch from Oppenheimer.

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [68]

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As you look at the rapid evolution of battery chemistries, what are you seeing in terms of needs for incremental R&D spend for your internal office to kind of keep up with the chemistries that folks need?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [69]

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Yes. This is Luke Kissam. I think where we are in our spending the days about where we need to be, we're not going to invent the next battery. What is important for us is to understand where our customers are going so that we can take where they're doing and be sure that we have either the lithium metal, the lithium carbonate, the lithium hydroxide or whatever other derivative lithium might be to apply to their situation. So it's more -- less of a development and more of an application. And we've, over the last 3 or 4 years, built up that expertise so that we're able to meet those demands. And I don't see our need to increase R&D any further than those kind of levels that we have at the day in order to successfully meet the changing and evolving demands of the markets.

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [70]

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Great. And then just on the contracting. Has anyone come back and tried to renegotiate prices lower and they had to be put off and/or refused to take volumes at this point?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [71]

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We're constantly having conversations with our customers. So I'm not aware of anything where a customer has come back and said, "We need to sit down and have discussion about price right now." I'm just not aware of that in this quarter. Maybe a small customer on edge is. Certainly, the major customers, no. Certainly the major customers, no.

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Operator [72]

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And our next question comes from the line of Mike Sison from KeyBanc.

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Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [73]

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In terms of 2Q, I think you noted earnings be flat year-over-year. Can you maybe give us directional feel for the segments? And then what do you think needs to happen to get that better second half?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [74]

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Yes. This is Luke. Let me take the second question first. The better second half is easy. From a Lithium standpoint, it's Xinyu full qualifications and ramping that production up. And it's the Chile brine, having the better brine, getting through that rain event, having enough brine to feed the plants to operate it at high capacity. It's operating. Can we operate Xinyu a little better than we have in the forecast? And then it comes down to continued strength of bromine getting a little -- we've got another well coming online in bromine. And then we've got big orders. You know the hydrotreating catalysts business is a little bit lumpy business. And if you look right now, the third and fourth quarter are big quarters for hydrotreating catalysts. Right now, we believe it's going to be a really big third quarter because of that. But those HPC orders always have a tendency to slide a little bit, so it's the second half. But that's what gives us confidence in the big second half. It's not a lot of price built in across our portfolio for those. It's really all about the additional volume, the additional qualifications and the way the order patterns are set in HPC catalysts.

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Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [75]

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Great. And then 2Q, just by segment?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [76]

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Scott?

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Scott A. Tozier, Albemarle Corporation - Executive VP & CFO [77]

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Yes. Mike, this is Scott. So as you look at Q2, we're expecting that Bromine, Catalysts, even fine chemistry will be sequentially similar to Q1. And the growth that we see sequentially is really all coming from Lithium. And so that's kind of how you look at it. And the big driver there, if you look on a year-over-year basis -- while Catalysts is going to have this big Q3, on a year-over-year basis, it's actually going to be down in the second quarter. So you'll see growth. That's a dynamic that you got to take into account as well.

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Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [78]

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Got it. And then just as a follow-up. You rattled off some pretty strong growth outlook early for first quarter for global sales for EVs. Can you maybe give us your thoughts for the full year and what you see or what you're hearing in terms of global EV sales for '19 versus '18?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [79]

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Yes. I would expect the EV sales to continue on the trajectory what you've seen from '16 to '17 and '17 to '18 and '18 to '19 is what I would see. We don't see any evidence in the order pattern of our big customers or from what we're seeing in the models that are being rolled out by the EV makers, by the automotive OEMs, that are going to change that direction. You're still going to see continued growth in the EV sector in '19. I just -- I don't know what that number's going to be. But I think you'll see a continuing trend of what we've seen in the past.

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Operator [80]

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And our next question comes from the line of Jim Sheehan from SunTrust.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [81]

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In terms of the earnings shortfall that you announced, I think on March 28, you listed 3 buckets of classes for that. Could you give us a size of each of the buckets, please?

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Scott A. Tozier, Albemarle Corporation - Executive VP & CFO [82]

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Yes. This is Scott, Jim. So as you look at the -- I'm going to put them into 2 buckets because the first one is the rain event in Chile. And so about 50% of the shortfall is coming from that, and 50% was coming from the qualifications -- the qualification delays. If you remember, we actually had qualification delays on Xinyu II as well as on the tolls carbonate that we talked about, and you can split those about 50-50 as well. So that's kind of 25% from toll carbonate delays, 25% from Xinyu II, 50% from the carbonate out of Chile.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [83]

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Great. And on CapEx, you talked about your expectations for this year. What do you expect the CapEx to look like in 2020 and '21?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [84]

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Yes. It's going to be roughly the same. We'll give you update on that. But if I was modeling that right now, it would be roughly the same, assuming that we still have the good demand that we are seeing. If we don't have that demand from the customers, if we got issues with customers, we will certainly pull it back. But as of right now, the demand we're seeing from our customers would necessitate those investments and would give us the return on those investments as well.

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Operator [85]

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And our next question comes from the line of Mike Harrison from Seaport Global.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [86]

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Was wondering if you can give a little bit more detail on the lithium yield increase project in Chile? It sounds like you're moving forward on that. I believe last we heard, you have had some success kind of at the lab or pilot scale, but maybe there were some concerns in scaling up to the commercial level. So what's changed there? And are you confident that, that technology is going to be ready for prime time?

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [87]

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Yes. This is Luke. We're very confident. It worked at the lab quite well. It also worked in pilot scale from brines in the Salar that we ran it through. It's known -- it's not new equipment. It's known equipment. There's not any specially made pieces of equipment or things like that. So we feel confident in our ability to execute this project. It allows for us to achieve about a 30% increase in the yield of the lithium from the same amount of brine being pumped in the Salar. So it's good for the Salar. It gives us a lot of unit flexibility and preservation of capital going forward. So that's the best place in the world to make lithium derivatives. So we're excited about that ability, and we're moving forward. We expect to commission that sometime in 2021, I believe.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [88]

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All right. And then I was also wondering, well, if we can talk a little bit about what you're seeing in HPC demand ahead of the IMO 2020 regulations kicking in. Are you starting to see some ability to capture additional hydrotreating capacity? Is that really what's driving the Q3, Q4? Or can you maybe just talk about what the ramp looks like during this year?

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Raphael Goszcz Crawford, Albemarle Corporation - President of Catalysts [89]

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Sure, Mike. That's a piece of it. We're -- we generally see a tightening of sulfur specs around the world, beyond the efforts of the IMO. But there is a part of Q3 which is really our customers gearing up for the increase in demand for low-sulfur diesel fuel for blending, low-sulfur fuels in general. So to that end, we are starting to see a positive impact for HPC because of IMO 2020. As Luke had mentioned, it is a lumpy business. So some of what we're seeing growth in Q3 is a function of just timing of rebids from existing customers and the opportunities that we have.

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Operator [90]

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And our next question comes from the line of Arun Viswanathan from RBC Capital Markets.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [91]

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Just wanted to ask about the MRL investment. Could you characterize kind of the return profile there and if it has changed at all given some of the pricing action that you've seen? And if you (inaudible) I guess...

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Scott A. Tozier, Albemarle Corporation - Executive VP & CFO [92]

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Yes. Arun, this is Scott. So as you look at one of the impacts around the returns is going to be the spodumene sales that we have in the short term. And obviously, with the pullback in spodumene pricing, we'll see a little bit of an impact there. Fortunately, hydroxide is the big driver of returns. That -- I mean that dynamic hasn't changed. That's going to be all under our long -- marketed under our long-term contracts. So we still feel very good about the returns.

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Luther C. Kissam, Albemarle Corporation - Chairman, President & CEO [93]

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Yes. This is Luke. From a MRL standpoint, this is a great partnership, combines the mining expertise they have with the lithium hydroxide expertise that we have. And we're not buying this for this quarter or for the next quarter, but for the next 20 years to be able to drive the returns. And we're still confident in those returns over that period of time, and we feel good about the deal.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [94]

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Okay. And just as a quick follow-up, if you think about what's gone on in China, has there been any impact around demand, I guess shorter term from destocking or any kind of macro concerns or pressures?

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Eric W. Norris, Albemarle Corporation - President of Lithium [95]

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Arun, it's Eric. That's a good question. As you know, China is a very opaque market and hard to tell. My theory, and we discussed it with -- I discussed it with my business team is there's probably a level of destocking only because we can look at prior years and see that there was a high level of buying above demand, we believe, for feedstocks. In a market like this, if you're a cash-based -- if you're running a business for cash, you have all that working capital on hand, you may exhaust it. It's just a theory. Hard to know for sure and may be part of the aggravating factor as to why prices are where they are. But that's just a theory at the time being and hard to prove.

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Operator [96]

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And at this time, I'd like to turn the call back to Dave Ryan for closing remarks.

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David Ryan, Albemarle Corporation - VP of Corporate Strategy & IR [97]

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Okay. I'd like to thank everyone for your questions and participation in today's conference. We always appreciate your interest. And this concludes the third (sic) [first] quarter earnings call. Thank you.

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Operator [98]

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