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Edited Transcript of ALB earnings conference call or presentation 7-May-20 1:00pm GMT

Q1 2020 Albemarle Corp Earnings Call

BATON ROUGE Jun 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Albemarle Corp earnings conference call or presentation Thursday, May 7, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric W. Norris

Albemarle Corporation - President of Lithium Global Business Unit

* Jerry Kent Masters

Albemarle Corporation - President, CEO & Chairman

* Luther Kissam;Former CEO

* Meredith H. Bandy

Albemarle Corporation - VP of IR & Sustainability

* Netha N. Johnson

Albemarle Corporation - President of Bromine Specialties Global Business Unit

* Raphael Goszcz Crawford

Albemarle Corporation - President of Catalysts Global Business Unit

* Scott A. Tozier

Albemarle Corporation - Executive VP & CFO

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Conference Call Participants

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* Colin William Rusch

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

* David Wang

Deutsche Bank AG, Research Division - Associate

* James Michael Sheehan

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

* Kendall Renee Marthaler

Citigroup Inc, Research Division - Associate

* Kevin William McCarthy

Vertical Research Partners, LLC - Partner

* Matthew Porter DeYoe

BofA Merrill Lynch, Research Division - VP

* Matthew Stephen Skowronski

UBS Investment Bank, Research Division - Associate Analyst

* Michael Joseph Sison

Wells Fargo Securities, LLC, Research Division - Senior 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 the First Quarter 2020 Albemarle Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Ms. Meredith Bandy, Vice President of Investor Relations and Sustainability. Ma'am, please go ahead.

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Meredith H. Bandy, Albemarle Corporation - VP of IR & Sustainability [2]

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All right. Thank you and welcome to Albemarle's First Quarter 2020 Earnings Conference Call.

Our earnings were released after the close of market yesterday, and you'll find the press release, earnings presentation and non-GAAP reconciliations posted on our website in the Investors section, www.albemarle.com.

Joining me on the call today are Luke Kissam, former Chief Executive Officer; Kent Masters, current Chief Executive Officer; Scott Tozier, Chief Financial Officer; Raphael Crawford, President, Catalyst; Netha Johnson, President, Bromine Specialties; and Eric Norris, President, Lithium, are also available for Q&A.

As a reminder, some of the statements made during this conference call, including our outlook, expected company performance, expected COVID-19 impacts and proposed expansion projects may constitute forward-looking statements within the meaning of federal securities laws. Please note the cautionary language about forward-looking statements contained in our press release, 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 presentation, both of which are on our website.

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

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Luther Kissam;Former CEO, [3]

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Thanks, Meredith, and good morning, everybody. I certainly hope everybody is healthy and safe. I'd like to take this opportunity to welcome Kent Masters as Albemarle's new CEO.

Since Kent joined the Board in 2015, he's been one of my most trusted advisers and mentors. Kent has a proven track record, in good times and in bad, as a successful CEO of a publicly-traded company. And he thoroughly understands what is expected of a leader in that role.

I'm confident that Kent will continue to work with our Board and the entire Albemarle team to position the company for future success and to deliver long-term value for our customers, our employees, shareholders and other stakeholders.

With that, I'll turn it over to Kent.

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Jerry Kent Masters, Albemarle Corporation - President, CEO & Chairman [4]

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Thank you, Luke. It's good to be here today. I'm excited for the opportunity, and I look forward to meeting with members of the investment community virtually and eventually in person when it's safe for us to do so. As Luke mentioned, I joined the Board in 2015 with the acquisition of Rockwood where I had been on the Board -- where I've been a Board member there since 2007. Over the past 5 years, I've worked closely with Luke and was actively involved with my Board colleagues in establishing the company's purpose and values, which are core to our identity.

What excites me about Albemarle is the innovation and leadership we bring to our markets and the prospects we have for future growth. We have earned an enviable position in our markets. And with our strong strategy and values, we will build on that legacy for years to come.

On today's call, I will cover a high-level overview of the current environment, our actions in light of COVID-19 and our capital allocation priorities. Scott will review the first quarter financials, provide an update on cost savings and review our outlook. First, I want to emphasize that the safety and welfare of our people is our highest priority. We are taking multiple actions to protect our employees, serve our customers and help fight the spread of COVID-19.

Thankfully, to date, our sites are operating without material impact related to the pandemic. I deeply appreciate the courage and continued support of the frontline essential workers in our communities and our dedicated Albemarle employees who continue to ensure safe operations at our facilities and offices worldwide.

Yesterday, we released first quarter results, including net income of $107 million or $1.01 per share. Adjusted EBITDA of $196 million was down 13% from prior year. We have previously communicated the outlook for first quarter EBITDA to be down about 25% from prior year. Ultimately, we beat that outlook due to better sales in bromine and lithium and better-than-expected cost reductions.

Of course, there will be impacts to all of our businesses related to COVID-19. The timing, duration and severity of those impacts will vary for each business. Given the degree of uncertainty, we are withdrawing our full year 2020 outlook. We plan to reinstate long-term guidance as soon as it is practical to do so. In the meantime, we are temporarily introducing quarterly guidance that Scott will walk you through in a few minutes.

We have evaluated our capital allocation priorities in light of the current environment and are focusing on -- we are focusing our efforts on preserving cash and maintaining our dividend. That means taking preemptive measures to bolster our balance sheet and maintain financial flexibility. We are also stepping up and accelerating cost-savings initiatives that were already underway and introducing short-term cash management plans.

We will remain focused on controlling what is within our control. And we'll continue to act in the best interest of our shareholders, employees, customers and other stakeholders to ensure success in these uncertain times.

Right now, ensuring success means responding to COVID-19 in a way that protects our employees, customers, suppliers and communities. Our Chinese operations were the first to be impacted by the virus. We have been able to take those early learnings from our teams in China and apply them around the globe.

In early March, we created a global cross-functional pandemic response team to recommend, develop and implement strategies to respond to the pandemic. Albemarle's leadership team meets almost daily to review and take actions on recommendations from that team. In uncertain times, communication is critical, and we are in frequent dialogue with our employees around the world. To help our employees stay safe and healthy, we have implemented protocols, including restricting travel, implementing work from home for nonessential personnel, and adjusting shifts, increasing hygiene practices and requiring social distancing for essential workers in our plants.

To date, we have had very few confirmed cases. However, availability of testing varies by region. A small number of employees have self-quarantined due to prior travel, exposure to a COVID positive individual or presenting mild flu, mild cold or flu-like symptoms. We are thankful that the number of people directly impacted by COVID-19 has been trending down across the globe, and we see this as evidence that the precautions we are taking are working.

We are communicating frequently with our customers and suppliers to help us manage supply and demand issues as they arise. To date, our plants have operated with minimal impacts other than in China where we operated at reduced rates for 2 weeks at the first -- during the first quarter.

For the health and welfare of our business partners, we have halted customer visits to our plant sites and have implemented plant-entry protocols for safe and efficient deliveries. Logistics remain a concern across all of our businesses as trucking and shipping companies struggle with new demand patterns and border requirements. We are working through these challenges to keep our customers supplied.

As the pandemic continues, Albemarle is supporting our communities in the fight against COVID-19. We are providing mask and PPE to frontline health and relief workers and donations and grants to help fight hunger and improve access to online learning. We are collaborating with universities, local disaster relief funds, trade organizations and other grantors to extend the reach of our efforts. To date, we have distributed more than $1 million to organizations around the globe.

Some of our products are also used in the fight against COVID-19. For example, our flame retardants are used in electrical medical equipment, such as ventilators. Our hydrobromic acid product is a catalyst in the manufacturer of PET for protective clothing in hospitals. We produce a line of water treatment products and intermediates used in cleaning products and disinfectants. And at our plant in Germany, we are producing hand sanitizer for the local community. While these products are not financially significant to our business, we are proud to do our part to protect against the spread of COVID-19.

The extent of the economic impact of the global pandemic remains unclear, but I am confident that the actions we are taking to adapt to current market conditions will position us to execute our strategy across the cycle.

Now I'd like to set the groundwork for our capital allocation priorities. Our first priorities are to fund our dividend and maintain financial flexibility, and that is unchanged in the current environment. 2020 is expected to be Albemarle's 26th consecutive year of dividend increases, and we remain committed to shareholder returns. We are also committed to maintaining our investment grade credit rating.

Execution of our other capital allocation priorities have shifted in this environment. First, all capital projects are being examined for opportunities to preserve cash and spending. Our 2 biggest capital projects, La Negra III and IV and Kemerton are being slow walked to preserve capital in the near term. We are also reducing our sustaining capital spend with an eye to maintaining safety in critical maintenance projects.

Second, we are taking a disciplined and thoughtful approach to investments, including M&A and joint ventures, and we'll continue to act in the best interest of our shareholders. Lastly, while our share repurchase authorization remains in place, there are no buybacks planned in this environment.

So with that as a backdrop, I'll turn it over to Scott for more detail.

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Scott A. Tozier, Albemarle Corporation - Executive VP & CFO [5]

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Thank you, Kent. Albemarle generated first quarter net sales of $739 million, a decrease of about 11% compared to the prior year. This reduction was primarily driven by reduced volume and price in lithium as expected coming into the year and reduced volumes in catalysts due in part to low transportation fuel demand caused by COVID-19.

GAAP net income was $107 million or $1.01 per diluted share. There were very minimal adjustments this quarter with adjusted earnings of $1 per diluted share. Corporate costs, including SG&A, R&D and interest and financing expenses were broadly in line with the prior year period. As Kent stated, adjusted EBITDA was $196 million, a decrease of 13% from the prior year, but above the previously communicated outlook.

Turning to Slide 8 for a look at EBITDA by business segment. Adjusted EBITDA was down $30 million over the prior year. Solid performance in bromine and our FCS businesses and company-wide cost savings partially offset top line declines in lithium and catalyst. Lithium's adjusted EBITDA declined by $40 million versus the prior year, excluding currency impacts. Pricing and volumes were down about 10% each, offset by product and customer mix and cost-savings initiatives.

As you know, in late 2019, we gave 1-year price concessions to many of our battery material customers. Also, as expected, customers reduced Q1 2020 shipments as they work through excess inventories from late 2019. In catalyst, adjusted EBITDA declined $11 million, excluding currency impacts. Both FCC and HPC volumes were down this quarter, but for different reasons. The FCC decline was caused by reduced consumption of transportation fuel. Stay-at-home orders and travel restrictions mean refiners don't have to run as hard to meet reduced demand. HPC volumes were impacted by logistics challenges as the world's cargo fleet and truck transportation adjusted to slowing global demand. Partially offsetting these challenges, the catalyst business benefited from lower raw materials, better product mix and cost reduction efforts.

Bromine's adjusted EBITDA was up $5 million excluding currency impacts. Improved average realized pricing, cost savings and lower minority interest expense more than offset lower volume. The Q1 order book was strong, but logistics challenges prevented us from filling all of those orders during the quarter. Our corporate and other category is driven primarily by our SDS business. SDS EBITDA was up nearly $16 million on higher volumes and product mix.

While Q1 results were better than we expected, we are operating in uncertain times. As Kent discussed, maintaining our strong financial position is a top priority, and we remain committed to maintaining our investment grade rating. We have ample liquidity of about $1.7 billion as of quarter end, consisting of $553 million of cash, including $250 million drawn on our revolver plus $715 million remaining under our $1 billion revolver; $200 million available under our delayed draw term loan, which we drew in April; and $190 million on other available credit lines. Since quarter close, we have issued additional commercial paper as that market returned to more normal terms and tenors.

In terms of debt maturity, we are pretty well termed out. The only short-term debt is from commercial paper. Our revolver is not due until 2024, but we may choose to repay that sooner. Otherwise, the nearest-term maturities are $444 million due at the end of 2021. The investment-grade market is open to us, and I'm confident we'll be able to repay that or roll it forward. The divestitures of PCS, a portion of our catalyst business, and FCS are being slowed down due to the COVID-19 travel restrictions. The potential buyers remain interested and both transactions are potential liquidity events as we get back to normal.

Turning to Slide 10 for more on our cost savings. We have had a strong history of generating operating cash, including $359 million generated during the Great Recession in 2009. We expect to continue to generate significant operating cash, thanks to industry-leading positions in all of our businesses and through active cost management. As communicated during the fourth quarter earnings call, we are accelerating the 2020 sustainable cost-savings initiative. These were projects that were already identified and underway when COVID-19 hit. We now expect to achieve cost reductions of $50 million to $70 million this year and reach run rate savings of at least $100 million by the end of 2021. Basically, we're bringing forward about $10 million to $20 million of cost savings into 2020.

Based on our current order book and cost-reduction actions, we now expect Q2 2020 adjusted EBITDA in the range of $140 million to $190 million. Lithium's Q2 2020 EBITDA is expected to be down year-over-year but up slightly on a sequential basis. The Q2 order book continues to look solid, albeit with some softness in technical grades. Specialties and technical grades make up about 40% of lithium revenues and have a pretty short supply chain. Lags are usually just a few months going into and coming out of a recession.

Specialties and technical grade products usually grow at or above GDP growth rates and are driven by consumer spending and industrial production. The energy storage market makes up about 60% of our lithium sales and has a relatively long supply chain with a 1- to 2-quarter lag on battery-grade sales, both in the downturn and in the recovery.

Battery-grade customers continue to forecast a stable order pattern in the second quarter as cathode and battery manufacturers catch up on backlog orders placed prior to COVID-19. We expect to see the impact of recent OEM automotive shutdowns flow through the supply chain in the second half. By year-end, OEM automotive restarts are expected to be supportive of battery and lithium demand. China OEM production has started back up, and some European plants are scheduled to restart production in mid-May.

Looking beyond Q2 for each of our businesses is difficult and nowhere is that more the case than with lithium. The electric vehicle market that is now the primary growth driver for lithium was not mature enough during the global financial crisis to provide much context for today. Nevertheless, we expect the EV growth curve to be delayed by at least 1 year.

Bromine Q2 order patterns are starting to show the impact from COVID-19. They are off expectations by about 10% and down sequentially. We're seeing some indications that customers may push orders from late May or June into the third quarter. And net-net, we expect first half EBITDA to be down year-over-year, with Q2 EBITDA down about 20% from prior year.

We do expect softness to continue into Q3 related to slowdowns in automotive, consumer electronics, appliances and construction, all as a result of the knock-on impacts of COVID-19. Based on our position in the supply chain, we typically see a lag of at least one or 2 quarters and in some cases, longer.

Our bromine business has been profitable every year for 20 years. In the global financial crisis, bromine's 2009 net sales were down 30% year-over-year, and EBITDA margins fell to 16% compared to a more normal margin in the high 20% or low 30% range.

Then the business rebounded very strongly in 2010 and 2011, back to, and in some markets, above prerecession levels, thanks to pent-up demand. Compared to 2009, bromine today has a tighter supply-demand balance going into the downturn. We've also seen some competitor-specific supply disruptions, which somewhat muddied the water and they partially offset some of the demand softness. Bromine is also much more diversified as a business today. It tends to be relatively GDP-driven with customers across multiple end user markets.

Flame retardants make up about 50% of sales and are used in electronics, automotive, construction and appliances. Oilfield represents up to 10% of sales, and other industrial uses include PET and agriculture. This diversity allows us to shift sales across markets into the best-performing industries.

Finally, as you know, our catalyst business includes 2 primary product groups: FCC catalyst and HPC catalyst. Across the cycle, FCC and HPC are fairly similar in size, but the HPC business is much lumpier. Customers order HPCs only every 2 to 5 years when they perform turnarounds at refineries. Therefore, HPC demand is driven by customer turnaround schedules, whereas FCC demand is driven by transportation fuel consumption and miles driven. In a typical recession, there's very minimal impact to FCCs. Oil pricing falls and miles driven goes up, meaning more fuel demand and more catalyst demand. HPCs, on the other hand, tend to see sharply lower demand when oil pricing contracts, refineries run at lower rates and are able to push out turnarounds and conserve cash.

In 2008 and '09 and in 2014 and '15, the oil price corrected by more than 50% in a matter of months. In both cases, FCC earnings were up slightly, but HPC earnings were down about 30% in 2009 and 50% in 2015. In the current economic environment, we do expect HPCs to be down, especially in the second half. But in this case, FCCs will also be down as widespread stay-at-home orders and travel restrictions lead to dramatically lower miles driven in transportation fuel consumption.

In Q2, we expect to see a full quarter impact of the travel restrictions that began in the first quarter. To date, we've seen minimal changes to the FCC order book for Q2. But based on the experience of prior oil price reductions, we expect to see a shift of HPC orders out of second half and into 2021. The timing and extent of the downturn is unclear and a lot depends on how long travel restrictions are in place, how long the oil price remains low and how much crude and refined product inventory is built up when restrictions are lifted.

Given the current economic environment, we are executing our downturn playbook for short-term cash management and have already activated many of these tactics. In terms of variable costs, restricted travel due to COVID-19 will continue while also strictly limiting professional services and consultants.

On fixed costs, we are reducing capital expenditures and limiting hiring, overtime and contractors. Senior executives and the Board have also agreed to a temporary 20% cut to base pay. We're also cutting sustaining and growth capital spending. We will continue to maintain our health, safety and environmental standards. Beyond that, we're taking a critical look at all capital spending across our businesses.

The most meaningful capital spend is at our lithium expansion projects, La Negra III and IV and Kemerton. We are slowing work on these projects to conserve cash and to reassess the demand requirement when the battery industry recovers. We have maintained optionality to defer additional capital or accelerate these projects, depending on market conditions.

Including cuts to sustaining and major project capital, we now expect our CapEx to be in the range of $850 million to $950 million, a 15% reduction from the midpoint of previous guidance. Working capital averages about 25% of sales. So we'd expect to see some reduction here as revenue declines. We're also actively managing working capital to see further improvements, including seeking payment term extensions from vendors, accelerating collection of pass-through receivables and actively reducing inventories. We have begun shutdowns of some catalyst production and have plans in place to slow down our plant as needed, assuming demand declines as recent customer shutdowns work their way through supply chains.

All told, the short-term cash management actions detailed here are expected to save the company about $25 million to $40 million per quarter. That will be in addition to the CapEx reductions and sustainable cost savings we've just discussed.

We're working hard to cut costs but also minimize the impact to our employees. Unfortunately, depending on the length and severity of the downturn, we may idle additional production sites or take more drastic cost actions, if necessary. These actions are difficult and not something that we undertake lightly, but they are meaningful to help position Albemarle to be stronger for longer.

Now I'll turn the call back over to Kent.

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Jerry Kent Masters, Albemarle Corporation - President, CEO & Chairman [6]

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Thanks, Scott. Current economic conditions are challenging. Albemarle is an industry leader in all 3 of our core businesses. We believe in the long-term growth prospects in all of these businesses, but our immediate challenge is to manage through this crisis. We will act on cost-reduction measures quickly to preserve cash and maintain our financial flexibility. We will also be poised to respond to meet customer needs when the market returns. We remain confident in our strategy, and we will modify execution of that strategy to further position Albemarle for success.

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Meredith H. Bandy, Albemarle Corporation - VP of IR & Sustainability [7]

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Great. (Operator Instructions) Thank you. And Michelle, please proceed with the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Steve Byrne with Bank of America.

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Matthew Porter DeYoe, BofA Merrill Lynch, Research Division - VP [2]

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This is Matt DeYoe on for Steve. I wanted to dig into the guidance a little bit more and see if you could kind of point out the drivers, which would result in either the low end or the high end of the guidance range. It seems like your direct segment commentary points to something like $150 million. How do you get to that $190 million number?

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Scott A. Tozier, Albemarle Corporation - Executive VP & CFO [3]

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This is Scott. So I think a couple of key things around uncertainty. One is, in each of our businesses, we've got a pretty good visibility through the end of May, beginning of June in terms of our order book and are executing to that. I think the uncertainty comes in each of the businesses as we get through the month of May, particularly with catalyst in terms of how deep the slowdowns in the refineries will be or if they -- as states start to come back on, how quickly those refineries start back up.

In bromine, it's going to come down, most likely, to some logistics issues and questions around order books getting filled on time. And then in lithium, we do expect that the auto OEM shutdowns will be impacting us in the second half. Right now, the order books look pretty good through June, but they're starting to soften. So there's some variability there as well. So those are the key drivers for us.

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Matthew Porter DeYoe, BofA Merrill Lynch, Research Division - VP [4]

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Okay. And I guess on prior calls, you discussed the potential for overbuilding in battery cells as lithium demand appeared strong despite what we saw was probably a slowdown in autos in 2Q and beyond.

How does this end up playing out? Where do you see downstream product inventories? And I guess, finally, Luke, I want to wish you well. I always appreciate your candor and brevity you brought to the conversations over the years.

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Scott A. Tozier, Albemarle Corporation - Executive VP & CFO [5]

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Eric, do you want to take that question?

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Eric W. Norris, Albemarle Corporation - President of Lithium Global Business Unit [6]

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Sure. So Matt, let me tell you what we know about battery cell manufacturers. We -- today, we are seeing and have talked about excess inventories of lithium-bearing products in the value chain. That is being worked up. It's one of the reasons why our first quarter for us was weaker on volumes. We knew that, expected that coming into the quarter.

In terms of battery cell manufacture, it's actually the opposite of what you described. The phenomenon we saw during the first quarter, particularly in Europe, was the battery manufacturers having a tough time keeping up with EV demand and production in the months of January and February. That's obviously started to change. But it's one reason why the order books continue for the first and second quarter, we believe, to remain strong. But with these closures, you see it tip down in the second half of the year. It's very hard for us to know what that means in the second half of the year. It's very cloudy. But those are the drivers and phenomenon we're seeing right now.

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Operator [7]

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And our next question comes from the line of Bob Koort with Goldman Sachs.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [8]

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I think, Scott, you might have mentioned that you thought maybe the demand curve on lithium was pushed out a year. So I guess I'm trying to ascertain, is that an issue of being episodic for these closures? Is it the issue of a recessionary pressure dampening consumer spending? How do you come to that conclusion? What is sort of the calculus of a 1-year push out for the industry, given that, I guess, a lot of the mandates don't go away and China seems to be cranking back up again?

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Scott A. Tozier, Albemarle Corporation - Executive VP & CFO [9]

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Yes. It's really based on the current demand in 2020 and the recessionary impacts and some of the modeling that we've been doing. To be honest, we don't know exactly what that curve looks like. And Eric, maybe you can provide a little bit more detail there. But right now, the expectations, even if you look at a source such as IHS, would suggest that the growth curve is going to be pushed out by at least 1 year.

So Eric, do you want to provide some more information?

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Eric W. Norris, Albemarle Corporation - President of Lithium Global Business Unit [10]

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Yes. I don't know if I can provide a lot of granularity. Bob, we know that automotive plants, collectively, are closing. Some openings are delayed. Here in the U.S., Tesco's opening is imminent, but has been delayed a few times. There's been openings in Germany so far. There, hopefully, will be more in May. And collectively, if you look at the duration of time that they've been down and look at the supply chain in this one or 2-quarter lag, we would expect that the third quarter is going to -- that the impact of that shutdown is going to impact to the market in the third quarter.

It is much, much harder to ascertain what the consumer impact will be and consumer spending will look like. We do know that regulatory factors in Europe and in China play a role in EV adoption, but we don't know what consumer purchasing will look like thereafter. So that's why, as Scott says, we -- we're only as good as looking at what other people say. And there are widely divergent views on what might happen. When we say we think it might be pushed out a year, that's sort of a consensus view, looking at all the data. And we're just going to have to, as time goes on, scrutinize that and get sharper in understanding it with time. But right now, that's what we've got to work with.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [11]

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And if I could follow up, Scott, on the covenant waiver efforts. Is that -- are you going to attempt to get a net debt measure? And what are the ramifications of seeking that covenant waiver if you do end up violating that covenant?

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Scott A. Tozier, Albemarle Corporation - Executive VP & CFO [12]

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Yes. Bob, so we're actively in the discussions with the banks, even as we speak. So it's a little bit early to call exactly what the final outcome will be. But the banks have been very, very supportive of Albemarle, given our track record and the capability of our team to deliver. Clearly, a covenant breach is not a good thing. And we're going to take all the actions necessary to make sure we don't breach.

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Operator [13]

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

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David Wang, Deutsche Bank AG, Research Division - Associate [14]

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This is David Wang here for Dave. I guess, first of all, your Q1 lithium sales down 18% ex FX. Can you talk about how much of the decline was pricing versus volume? And probably your expectation for lithium pricing for the rest of the year?

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Scott A. Tozier, Albemarle Corporation - Executive VP & CFO [15]

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Yes. This is Scott. So the first quarter, lithium was down, as you said. Both price and volume were down about 10%, above equal. And really, as expected on volume, so we're expecting volumes to be down coming into the year. Pricing, in fact, was a little bit better than we expected versus our expectations. So that was a positive surprise for us.

As you go through the year, our current expectations are still that pricing is going to be down in the mid-teens as we expected coming into the year.

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David Wang, Deutsche Bank AG, Research Division - Associate [16]

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And secondly, I guess for the oilfield business in your bromine segment, given producers reducing their capital budgets and especially after a very weak offshore drilling market, what's your expectation on what type of impact do you expect that to have on your bromine business, on the volume side, in the medium term?

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Scott A. Tozier, Albemarle Corporation - Executive VP & CFO [17]

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Yes. Netha, do you want to take that?

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Netha N. Johnson, Albemarle Corporation - President of Bromine Specialties Global Business Unit [18]

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David, this is Netha. As you know, our oilfield business is primarily with deep drilling fluids which is impact we see probably really into 2021, more so than 2020. It's about 9% of our business today. So in the medium term, we really see that impact coming to us next year rather than this year.

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Operator [19]

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

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Robin Fiedler, BMO Capital Markets Equity Research - Senior Associate [20]

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This is Robin on for Joel. Your Greenbushes JV partner is out shopping with a statement in JV, would ALB be willing to increase leverage or issue equity or sell assets to buy out all or some of that stake? And would you be concerned if that controlling stake ends up in another company's hands?

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Jerry Kent Masters, Albemarle Corporation - President, CEO & Chairman [21]

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Okay. So we know that Talison is a good project for us, and we're following that process closely, and we'll see where it goes. We know that the Chinese government will probably have influence on where that asset ends up. But we're interested in it. We're following it, but we're also mindful of the current market environment. So there'll be more to come on that, but we're following it very closely.

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Robin Fiedler, BMO Capital Markets Equity Research - Senior Associate [22]

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And just want to follow up on that. Has there been any progress with Tianqi repaying the $100 million that they owe to the Talison JV of the oversight agreement?

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Jerry Kent Masters, Albemarle Corporation - President, CEO & Chairman [23]

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Yes. So there's a plan in place that we've agreed with them or that Talison has agreed with them. And we expect that they'll meet that plan, and we have actions that we've put in place to mitigate, if, for some reason, they don't meet the plan.

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Operator [24]

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

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [25]

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Could you give some more color on your plans to slow walk the lithium project spending? Are you pushing out those projects by the same time line as your expectations for electric vehicle demands? Or how are you thinking about that?

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Jerry Kent Masters, Albemarle Corporation - President, CEO & Chairman [26]

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So we're slowing the projects. It's a couple of things, but it's about cash management, but it's also about where they are in their execution. So we're trying not to cross over a demobilization process. So -- that is something we could do if we needed to, but that would be more difficult for us and would change the time line.

So they're being pushed out, what we both -- we think both of those projects stay reasonably close to their time line. And it will change depending on what we see in the market. So we've slowed those. We'll have the opportunity to slow down more or speed them up as we go and as we learn more about what the environment looks like economically as a result of this crisis.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [27]

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And in China, what are you seeing in terms of stimulus spending and other incentives to jump-start the electric vehicle sales? Are you expecting more of an impact from that in the second half?

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Jerry Kent Masters, Albemarle Corporation - President, CEO & Chairman [28]

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Eric?

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Eric W. Norris, Albemarle Corporation - President of Lithium Global Business Unit [29]

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Yes. This is Eric, Jim. We've been looking at the same sort of announcements you have, which announced an extension -- a 2-year extension of the incentives for electric vehicles to consumers in China from where they were due to lapse or due to lapse this year, they've been extended. Our expectation, the data we're seeing is that China is improving, recovering from its portion of the pandemic. We hope that's sustained. And the belief is by third parties, which we would subscribe to, that their demand will improve.

And how much at this point, though, is, again, just is too hard to call because we cannot speak to the strength of the consumer. We understand what regulations are, but in the end, it's the consumer coming forward that will make the difference.

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Operator [30]

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

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [31]

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The EBITDA derived from your all other segment tripled versus the same period last year. Can you speak to what drove that increase and how sustainable or not you think it may be as 2020 progresses?

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Scott A. Tozier, Albemarle Corporation - Executive VP & CFO [32]

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Kevin, this is Scott. So yes, I think what we've seen in our business, clearly a contract driven business, and it all comes down to the timing of the shipments. And so throughout 2019, we saw sequential growth in that business quarter-to-quarter. And our expectation coming into the year that we'd see sequential declines in that business, starting with a higher first quarter declining into the back half.

And that's basically the same expectation now. They did a little bit better on some earlier as expected in Q1. Right now, Q2 and Q3 are holding up, and Q4 will be a little bit softer. But it really just comes down to the timing of those shipments on the contracts.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [33]

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Very good. And then a follow-up. I wanted to ask about logistics. I think you cited it as an issue in the bromine business. And also cited some challenges related to logistics as it relates to hydroprocessing catalysts. Can you expand on what those challenges are? And are you seeing any alleviation here today as it relates to the second quarter forecast?

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Scott A. Tozier, Albemarle Corporation - Executive VP & CFO [34]

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Yes. So the challenges really come down to the disruption of demand throughout the logistics change. So when China was down in the first quarter, all of a sudden, a big chunk of the, like containers, shipping fleet, trucking fleet were basically in the wrong spot to be able to support things in the rest of the world. And as we move through the crisis, you start to see border closures, restrictions in terms of when ports are going to be operating, all those types of things start to impact us as well.

Things are, I'd say, marginally better now. Things -- we're finding ways to manage through that. So for example, we have one product in our FCS business that we have to air ship and we have to air ship it -- we normally air ship it into Denmark. That flight has been canceled. So that cargo flight has been canceled. We're now going into Belgium and trucking that over to Denmark from there.

So we're finally managing our way through it, but the challenges are still there. So I mean I think the waves of demand change is going to continue to be challenging to the global fleet out there. And they're going to have to continue to adjust. And our logistics team are doing a great job working with our business guys to make sure our customers stay supplied. So I'm really happy for the work that they're putting in.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [35]

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Appreciate the color, and Luke, all the best to you.

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Luther Kissam;Former CEO, [36]

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Thanks, Kevin.

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Operator [37]

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And our next question comes from the line of PJ Juvekar with Citi.

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Kendall Renee Marthaler, Citigroup Inc, Research Division - Associate [38]

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This is Kendall Marthaler on for PJ. Just with the delayed impact of COVID from 1H into 2H. Are there any thoughts on starting to reduce operating rates in the lithium segment now to try and work through that supply outside of, obviously, the Wodgina shutdown? And just, can you give us an update on the inventory situation? I believe it was kind of thought that the lithium inventory should be worked through by year-end '20, early 2021. How do you see that progressing now?

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Scott A. Tozier, Albemarle Corporation - Executive VP & CFO [39]

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Eric, do you want to talk a little bit about our shutdown plans in your business and then our current view on inventory and the supply chain?

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Eric W. Norris, Albemarle Corporation - President of Lithium Global Business Unit [40]

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Yes. So we entered the year, as you know, with our capacity fully committed and under contract, 90% plus of our battery-grade materials are under contract. And as we go through this year, we obviously have the uncertainty associated with what might happen in the second half. But our intent is to keep our plants running, to keep our customers supplied. We are seeing some indications that they -- from a few customers that they're going to want to reduce their forecast. Those will be commercial discussions we have with them.

There are other opportunities we have to place that volume if we have to, but our intent is to -- and our hope is our customers want our contracts. So at the moment, we don't -- we're operating on a place-the-volume-per-plan mode. There are -- or is a playbook we have that in the event there is a worst-case sort of recession coming, there certainly is a playbook we have around what we need to do, around how we'd run our plants. But we do not have any -- well, beyond what we've already announced, have further intent to close any plants at this point in time until we see how the second half demand plays out. I think that was your first question.

Second question was inventory, correct, Kendall? So inventory has been drawn down to some extent with customers we serve. We know that because they've reduced their volumes in the first half as expected. The challenge we have is not knowing what's happening else -- of course, China had a very weak first quarter itself because of the pandemic. Now automotive plants in Europe and the U.S. have been -- are closing, which, as I said earlier, could have a third quarter impact. And there's been numerous supply disruptions amongst our competitors, some of which is related to COVID-19 and some of which, frankly, has been related to their own liquidity challenges.

So when you put all that together, it's very hard for me to comment on what inventory looks like and how much it has been drawn down across the channel -- across the whole industry. So I'll just have to sort of let you know as we go through. Maybe next quarter or 2, we'll get better clarity on that. But right now, it's quite muddy.

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Operator [41]

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And our next question comes from the line of Matthew Skowronski with UBS.

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Matthew Stephen Skowronski, UBS Investment Bank, Research Division - Associate Analyst [42]

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Following up with Jim's question, you cut CapEx for this year and obviously, these are very challenging times to predict. But as of right now, what's your base case for CapEx for 2021 and 2022, given you're slowing down projects? And then kind of alongside that, what is the minimum amount of CapEx you would be willing to go down to if these trends continue?

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Scott A. Tozier, Albemarle Corporation - Executive VP & CFO [43]

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Yes. This is Scott -- oh, go ahead.

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Jerry Kent Masters, Albemarle Corporation - President, CEO & Chairman [44]

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Let me start, Scott, and then you can look further out. So I mean we look at it in 2 different buckets. So we've got -- well, sustaining capital, so capital in our plants, so both from a safety standpoint, from a maintenance perspective and then growth capital and the big projects. So we've cut back on the big projects to where we can without making a bigger move on those particular projects. I'm kind of more or less talking about La Negra and Kemerton at this point.

So there's another leg that we can go down. But from an execution standpoint, it makes that more difficult. And we don't really want to cross that. But if things get difficult, we have that lever. Operationally, we've -- for this year, we've kind of narrowed it to the point where we can. There will be other -- as we shut down, we'll be able to cut capital if we have to shut down lines, but we've kind of narrowed down to what we believe we have to do from a health and safety and from maintaining our assets perspective plus a little bit of buffer. So we're not getting -- we're not to the bone, but we're close on that for this year. And then as we look out, we would -- depending on what happens, we would go back to what our previous level of spend would be and increase a little bit in the sustaining part, some growth -- smaller growth projects with nice returns in the plants and then go back to the big projects, what's necessary to execute those.

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Matthew Stephen Skowronski, UBS Investment Bank, Research Division - Associate Analyst [45]

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That's helpful. And then with regards to FCC sales, can you just remind us how those are split geographically? And if you're seeing any regions start to pick up besides, presumably, Asia?

And then thank you for everything, Luke, over the last couple of years. Best wishes for the future.

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Luther Kissam;Former CEO, [46]

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Thanks a lot, Matt.

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Raphael Goszcz Crawford, Albemarle Corporation - President of Catalysts Global Business Unit [47]

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Matt, this is Raphael. Let me give you a little perspective on FCC. So geographically, the strengths for our business are in North America, Europe. Europe is a smaller market for FCC, but we're relatively strong in Europe. And our largest market is in Asia and India. So that's where we have our pockets of strength. And from a product standpoint, we're very strong in bottoms cracking and in propylene yield. So as you look at the impact of the pandemic and where we see recovery, for the first time last week, global -- the inventory of gasoline in the United States went down from a record high of about 263 million barrels of gasoline inventory 2 weeks ago. So I think we started to see an inflection in North America. As you see states open up, it's going to start to improve from a bottoming out in North America.

Asia has been recovering. So China has been recovering. There's still mandatory shutdowns and a lot of mandatory stay-at-home orders and reduced travel in a lot of Southeast Asia. So that has an impact on our business as well as in Europe.

I would say that from a global perspective, I think we're near the bottom or at the bottom of the demand picture, and we should start to see a recovery from here on out, but there's a lot of uncertainty as to whether there's a second wave of outbreak of COVID, how fast it comes back.

All that being said, I think we're positioned pretty well as an FCC business in the right markets with the right technologies for long-term success.

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Operator [48]

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And our next question comes from the line of Mike Sison with Wells Fargo.

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Michael Joseph Sison, Wells Fargo Securities, LLC, Research Division - Senior Analyst [49]

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In '19, there was an inventory build for lithium. And I recall it's somewhere in that 50,000 to 75,000 and then it shrank towards the end of the year. I know you guys have -- tended to have a good feel for those levels. Do you think that inventory build builds back? And then at the end of the day, is the volume of lithium demand going to be down this year? And by how much?

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

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Mike, it's Eric here. So with regards to inventory, I don't know if I have much to add versus the earlier question. We did have, if you include all forms of lithium, somewhere between and refinery lithium maybe 3 to 4 months, if you add in spodumene, maybe 6 months of inventory as we are exiting last year.

As you know and as Scott described in our results, our customers, and we expected this, drew down from our purchases that they'd otherwise have in the beginning of the year, their inventories. And it was, particularly in Europe, a reasonably strong first quarter despite the onset of the pandemic outside of China.

So there has been, in a small -- in a lot of parts of the world, some inventory reduction, but what I can't account for is what's happened elsewhere. China demand was not strong at all in the first quarter. It is the largest lithium market. However, producers to that market, many of our competitors, weren't able to produce either. So the relative balance of the 2 and how that change in a 3-month period, too hard to say. Really too hard to say right now.

So that's what I'd have to leave it out. Was there a second part to your question that I missed?

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Michael Joseph Sison, Wells Fargo Securities, LLC, Research Division - Senior Analyst [51]

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Yes. And just a quick follow-up. If you think about the long term, kind of the 2025 forecast for EV adoption, how has that changed do you think with oil prices being low and kind of the impact on automakers and their ability to ramp up those cars?

And then Luke, I just want to wish you the best. I hope you have a lot of fresh fish to catch over the next couple of days.

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Luther Kissam;Former CEO, [52]

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Well, don't forget you owe me that dinner and the wine over that bet you lost about the football games. But thanks, Mike.

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Michael Joseph Sison, Wells Fargo Securities, LLC, Research Division - Senior Analyst [53]

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I'll get down there.

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

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So on demand, I think it's -- like we said, we know that we're going to see a weaker second half. We don't know how weak, Mike. So I really can't tell you how -- what this coming year's demand is going to look like versus last year's at this point in time. What I can tell you, on EV specifically, is that what we look at for EV adoption is not necessarily oil price. That's an older convention or a rule of thumb that does not seem relevant in a world where whole regions and countries are putting in regulations in place that are driving things towards electric vehicles.

So that's what we look for, and we see that sustained. We see that increasing in the case of China. There's a possibility those regulations are sustained or potentially increased under the Green Deal initiatives in Europe. We'll have to watch and see. But all that being said, as we said earlier, the reasons we think, and we rely on third-party research for this, that the EV curve has been shifted out perhaps by as much as a year or more, is that the consumer spending is going to be nicked significantly during this recession. We just don't know what that impact looks like.

So we, like you, are going to rely on experts who provide those forecasts. And as we get more information, we'll provide more.

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Operator [55]

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

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [56]

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Can you talk a little bit about the technology road maps for your cathode customers and whether those are accelerating or changing at all? We know you've got some targets out there. But are they taking this downtime to look at accelerating some of those road maps?

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Eric W. Norris, Albemarle Corporation - President of Lithium Global Business Unit [57]

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I don't -- Colin, I don't think there's any material change to those road maps. So just at a high level what those are is as chemistries move to higher levels of nickel, NMC 622 or higher in the NMC chemistry area or NCA, you'll -- and those are the preferred chemistries for energy density, therefore, lower cost ultimately and higher range for EVs.

As all of these electric vehicle manufacturers, particularly in Europe, given the regulations I just referenced earlier that are driving this adoption, roll out their plans, they're moving to those chemistries, those are oriented towards hydroxide. There's some salt and pepper ingredients that are used on the anode side of things for prelithiation and other things that are starting to develop as well. So some interesting technology developments.

That's where we see the future. We're going to continue to see a core of chemistries used to support consumer electronics products, power tools and lower range, lower value EVs, which will be predominantly based in China. And those will be carbonate based chemistries, they can be lithium iron phosphate or NMC variety, cells that have lower levels of nickel and are, therefore, more economically produced with carbonate.

And that's pretty much the story as it's been -- it hasn't changed a lot. Just given what's going on with the pandemic, most automotive and battery manufacturers are just dealing with the pandemic at the time being rather than accelerating their technology programs.

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [58]

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All right. That's helpful. And then in terms of some of the health measures that you guys are implementing in your facilities, are there permanent changes to the cost structure on production and processing that you can speak to at this point?

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Jerry Kent Masters, Albemarle Corporation - President, CEO & Chairman [59]

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I wouldn't -- I mean what we've done from a health standpoint, I don't think will change our long-term cost structure. So that will move back. There are things that we're learning, and that will inform some decisions as we go forward. But so far, we've done that in response to the pandemic and continue to operate in a difficult environment.

We've done fairly well with that, but we'll go back to the way we were operating as soon as that's possible. But some of the things that we've learned, we will probably apply. That may affect that, but we're not in that spot today.

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Operator [60]

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Thank you. And this does conclude today's Q&A session. I would now like to turn the conference back over to Ms. Meredith Bandy for any further remarks.

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Meredith H. Bandy, Albemarle Corporation - VP of IR & Sustainability [61]

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All right. Thanks, everyone, for your questions and your participation in today's conference call. As always, we do appreciate your interest in Albemarle, and this concludes our first quarter conference call. Thank you.

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Operator [62]

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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.