Albemarle Q4 2017 Earnings Call Transcript

February 28, 2018


Below you will find our transcript of Albemarle Corporation’s Q4 2017 earnings call.  These are our personal notes posted directly after the call.  As such, please excuse any incomplete sentences/questions, or missed words.  It is not to be taken as a verbatim transcript.

CFO: Scott Tozier

CEO: Luther Kissam

Highlights

  • 2017 Adj EBITDA from three GBU’s increased by $160m, or 19% comp to 2016
  • Lithium Adj EBITDA growth of 56%
  • Bromine 14%
  • Adj EPS up 29%
  • Strong segment cashflows, as well as chemetall sale enabled significant deleveraging, as well as purchase $250m of stock and dividend increase (23 years in a row)
  • Net debt/EBITDA ratio of .9x
  • Sale of polyolefin business will close in the next few months
  • Capex in 2017 was $318m, with lion’s share in the lithium business
    • Substantial progress in wave 1 projects, all on track
    • Integrated Jiangli acquisition
  • Seeing acceleration of demand and expectations of EV penetration, now range in the high teens % by 2025
    • They see 12% EV penetration by 2025, equivalent of 800kt of LCE
    • Seeing growth reflected in the volume requirements of customers
    • Wave 1 volumes already committed through 2021
    • Need to accelerate commitments in additional capacity
    • Remain on schedule for Wave 1
    • Expect lithium capex >1B between now and 2021, with about half of that in 2018
      • La negra 3
      • 20,000kt expansion in china for OH
      • And greenfield plant in WA- 40kt of conversion capacity, and infrastructure to allow significant expansion
      • Accelerating wave 2 plan- another 100kt LCE early in the next decade
        • Committed spending to yield enhancement tech in Atacama, expansion in Chile conversion, additional greenfield site in WA (mentioned above)
      • Very early stages of wave 3 opportunities- new resources in King’s Mountain, Argentina
        • Imply a multi-year deployment of FCF towards growth in lithium while maintaining investment grade balance sheet, supporting dividend
        • Expect to end 2018 at .9x Net debt/EBITDA
        • Confident in ability to execute multiyear expansion
  • 3 important points on capex
    • Only building capacity to meet demands of long term customers- No speculation on demand
    • Flexibility to adjust size, timing of future increments incase demand changes from customers
    • Ability to produce both carbonate and hydroxide- both markets growing strongly, but we can adjust if one outpaces another.

 Financials

  • Adj EPS of $1.34 for Q4, up $.56 or 72% yoy
    • All business performed well, providing 50% of that growth
      • $4.59 eps for full year, up 29%
        • Growth in lithium and bromine accounted for all of it
  • Diluted EPS $.49 ($3.20 taken out related for tax code change)
    • Recorded $429m tax expense for the transition tax- will be paid out over 8 years
    • Benefit of $49m related to deferment
    • Net $367m charge
  • Operating WC improved to 24% of sales at end of Q4, compared to 28% at end of Q3
    • Capex continued to ramp up
    • WC related to polyolefin business was reduced when reclassified as held for sale
  • $317m capex reflecting growth capital in lithium business
  • Lithium and Adv Mat sales of $1.3b, adj ebitda of $519m, up 35% and 43% compared to 2016
    • Lithium sales up 52%, adj ebitda up 56%, adj ebitda margins of 44%
      • Volume growth up 24%, pricing up 28% driven by inc demand from customers and pricing reset that started in 2016
      • Discussions with key accounts to lengthen contract terms continue as demand growth linked to EV plans raise concerns over securing supply
    • Bromine sales of $855m and adj ebitda of $259m, up 8% and 14% respectively
      • Adj ebitda margin 30%
      • Market for flame retardants remain healthy
      • Clear brine fluid demand flat compared to 2016
    • Refining solutions sales of $778m up 6%
      • Adjusted ebitda $212m down 11%
      • Higher volumes in HPC catalysts driven by good demand compared to prior year
      • FCC sales up with relatively flat pricing compared to 2016
        • Adjusted ebitda negatively impacted by hurricane Harvey
  • Guidance
    • Impact of tax reform on earnings, capex, and key elements of balance sheet
      • Expect effective tax rates to increase despite tax reform
        • Operations in Chile will bear high income and mining tax rates going forward
        • Expect projected geographic revenue mix to bias towards higher rate jurisdictions
        • Anticipate US reform to push domestic rates slightly higher
        • Expect effective tax rate to be 23-24%
      • Demand has driven accelerated capex plans
        • Expect capex of $800-$900m in 2018, resulting in breakeven to negative FCF
        • Net cash from ops expected to benefit from improved WC and lower cash taxes
    • 2018 guidance based on today’s FX rates
    • Expect net sales of $3.2-$3.4B, adj ebitda $955m to a little over $1b
    • Result in adj EPS of $5-$5.4 (assumes a march 31,2018 close for polyolefin sale)
      • Earnings weighted more to first half of year
    • 56% growth rate for EV/HEV/PHEV in 2017
      • EVs grew faster, expect that to continue in 2018
      • Expect adj ebitda margins over 40% for lithium
      • Volumes for lithium expected to grow by 10kt driven by battery grade customers, and it is fully committed for 2018

“I have never been more excited about the opportunities that we see in front of us” – Luke Kissam

Q & A

Q: Allan Campbell- on EV/PHEV penetration rates, you noted 2.3/2.7%, with your revised outlook, how does your current estimate compare

A: We are building our forecast models up by specific auto models that were announced.  Looking at battery systems in each of the models that are announced.  As we look from 2017-2025, see battery size increasing about 40%.  A combo of technologies are coming to market, a few hundred models been announced last six months, so without giving you specifics, you should break it down by model.  kWh per vehicle accelerating by 40% in our model to 2025.

Q: Help us understand if you expect margins to be above or below 2017 for lithium.

A: Expecting to be above 40%, but don’t expect to break 45%, so on the lower end of that expectation.

Q: Arun Viswanathan, RBC- Your penetration target for 2025, you now assume 70kt of average annual demand growth, your previous forecast was for 35kt per year.  Has your estimate for growth changed?

A: You are correct, our new demand model suggests it is about 70kt of annual demand growth for the next 5 years on average.  Driven by all of the new model announcements by OEMs.  Also please note that we have almost no incremental demand in grid storage in our new model. 

Luke- We had expected it to grow on average by 35kt, and we always said it would be lower in the early years, and higher in the later years (around 50kt).  Now we are saying the average penetration rate by 2025 would be about 12%.  So, it’s consistent with what we said last year- ramp up in later years, it’ll still be a bell curve like shape.

Q: Should we expect volumes from the new projects sooner, since you’re accelerating capex?

A: You should not expect it before 2021.  That is a post 2021 type volume.  And we will bring it online to meet the demand of our customers.  We will build it in 20kt increments, to meet customer demands.  And don’t see any impact on price.

Q: PJ Juvekar, Citi- You expect EV penetration to reach 12% by 2025.  What is the cadence of that?  And between you and the downstream guys, is there a choke piont of capacity/supply chain?

A: We don’t see any chokepoint right now.  If you look at the products that we sell to end customers, we feel supply/demand will remain in balance until the 2021 period.

Q: Bromine- what is going on with the Chinese shutdowns?

A: Sure.  We did see the shutdown in Q3 last year.  So overall Chinese production was down in second half last year.  Some of those plants that were shutdown, and the downstream ones as well have restarted.  Most are expected to come back up by the end of march.  But we are watching it closely to see if there will be further environmental action taken by China.  We’re in a little bit of a wait and see mode to see what transpires over the year.  And we have increased prices to reflect the shortage of bromine.  It’s both on the elemental bromine as well as the downstream products sides as well.  There’s been less downstream production because of the higher bromine pricing level.  So, it has shifted the competitiveness of the Chinese market as well.

Q: Alex Sayed, Nomura- Can you discuss price expectations for lithium in 2018? And any view on 2019/2020 pricing?

A: For 2018, we said we expect high single digit pricing increase for 2018.  Longer term, we don’t see negative impact on price- we are focused on long term partnerships/supply agreements.  With us, customers are buying reliability of supply, ability to grow with them and their demand, quality of products, and the ability to continue to evolve the molecule into performance-based products (to ensure that their batteries have better performance than competitors).  We ensure that we get fair value to support this significant growth that customers have in front of them.

Q: Trying to understand magnitude of capex in 2018.  Overall capex rising $500m.  Wave 1 lithium entirely will cost $500m.  So what percent of 2018 capex is dedicated to Wave 1/2/3.  And any acceleration in wave 1 manufacturing cost?

A: $450-550m is dedicated to wave 1 build out.  $100-125m capex dedicated to wave 2 and 3 capacity, both in mining and refining side.

Q: David, Deutsche Bank- on the 10,000t volume inc in 2018, is that all from la negra, and is that fully running?

A: The incremental 10kt (at the minimum), a big portion of that is Chile based, but also other volumes from Asia/China and Australia.  In terms of la negra peak capacity- there is still some additional room in la negra, so we won’t be at full capacity, but ramping up to full capacity at end of 2018.

Q: Similar capex number for 2019/2020 as 2018?

A: That’s our expectation, may vary a bit, but expecting that.  Slightly flat to negative FCF this year is our expectation.  We also have flexibility in our balance sheet to take strategic action.

Q: Kevin Mccarthy- regarding your price forecast for lithium of high single digit contribution in 2018, could you comment on where your contract weighted average price levels finished last year?  Just wondering how much of that price uplift is from roll through effects of existing contracts vs prospective market movements in pricing.

A: You can assume the majority of the price movements are based on long term agreements.  A good assumption is that the majority of the pricing we are getting are embedded in our long term agreements with customers.  That’s all I can say on pricing.

Q: Your lithium supply is committed to 2021, can you comment on what that aggregate commitment is in kt.

A: We expected to bring online 165kt by 2021 in incremental capacity.  We won’t quite be at 165 by 2021 because of ramp up phases for that last bit of new supply, but you should have the expectation that what we bring online, we will have already sold out.

Q: Vincent Andrews, Morgan Stanley- you said you saw the market in balance through 2021.  Did you mean there won’t be balance after?  And can you clarify your comments on price as well.

A: We said we think it will be in balance through 2021.  We didn’t mean to imply any over/under supply beyond 2021.  Our long-term agreements allow us to bring these volumes online, and the confidence to place that volume under existing contracts.  If you look at what our customers are willing to do, they entered long term agreements, and are talking about even longer-term agreements.  If you look at the OEMs trying to directly grab lithium, that tells you that they beleive the market will be tight and they want the security and supply that they need to be able to bring their EVs online.  So what the supply chain, and the customers are telling us, and what we believe the market will remain tight for the foreseeable future, given reports in the press about autos trying to go straight to source lithium directly.

Q: What is your view on the supply side of the equation going out to 2025 to match up with your EV and lithium demand forecast?

A: There’s a whole host of gaps out there on who’s gonna bring on supply and who’s not gonna bring on supply.  If you look at what has happened since we bought the lithium business, there’s been a steady delay of projects.  Projects have been delayed, projects have come in at higher costs, and projects have also come in at a lower volume.  We believe this business will stay in balance for the extended period of time.  And again if you point what the OEMs are doing, and the supply chains are doing with longer term agreements, they believe that those will be out in relative supply.  From our standpoin, we’re going to be able to modulate, and we can bring new supply on in 20kt increments, and we can speedup/slow down new capacity to meet the needs of our customers.

Q: Can you give a bit more color on your ability to speed up/slow down new capacity increases? 

A: I would say that on wave 1, very little with the exception of Western Australia.  The permits we applied for is 100kt for WA.  But we will be doing it in 20kt plant increments (5 plants).  So we’ll build infrastructure for 100kt, but break it down like that.  That will give us the format to pop out incremental capacity in 20kt increments instead of one big 100kt plant all at once.

Q: You also mentioned the ability to maintain optionality around carbonate vs hydroxide.  Is that a situation where the customers aren’t exactly sure what type of technology they will be using? Or is it more of not knowing which customers will be growing faster?

A: The battery makers will be working with auto OEMs, and their chemistry requirements survive a 5 year period.  Over a longer-term, there could be chemistry changes that change the product.  But as we work with customers for long term planning, if they need to change chemistry, they need to work with us to tailor the molecule to meet specs.

Q: Dimitry Silverstein, Longbow- I’ll do one on Bromine.  You had good price realization in 2017, given the strong demand in flame retardants, and the Chinese capacity issues.  Is there a chance of that reversing as Chinese capacity comes back online?

A: I think you characterized it well, we’ll be watching the back half of the year to see what volume/pricing does in China.  But going into 2018, we’ve been able to lock in at higher prices for 2018 given our volumes.  This will offset higher raw mats costs.  We’re not counting on higher Chinese prices being maintained, we’ll see what happens on a global level.  We try to maintain efficiency in our business to maintain earnings quality.  So we’re preparing for a decrease in pricing, but offset that with higher performance.

Q: You mentioned that in the HPC part of the catalyst business, you’re looking for a better product mix.  Does that mean that growth will slow down in the heavy oil resid business?

A: The growth of the resids globally, whether HPC or FCC, keeps on growing.  On an average, resids oil is somewhat cheaper than crude, so people prefer that.  You see a growing amount of resids that need to be treated, because more is being dug up.  Same goes for FCC, the growing resid market plays well for our portfolio.

Q: Mike Sison, Key Bank- When you think about forecast through 2025, and the thought that demand/supply will remain balanced.  How much of supply will come from the majors, and how much will be needed from china/juniors?

A: When customers are building out capacity, I think they want to rely on the companies that have the financial, technical, wherewithal to supply them.  So I think the majors will play a significant role in the market.  That’s not to say other supply won’t come online, but if I’m sitting in a battery company, I wanna go with a company that has the capability/strengths to grow with me.

Q: As you think about getting the capacity up and running by 2021, can you give a ballpark for EBITDA expectations?

A: I think if you look at the 40% margins at current volumes, and roll it out to 165kt, that’s where I think it would be- at least 2x at a minimum.

Q: Collin Rush, Oppenheimer- Can you talk about customer mix from geo perspective as well as OEM perspective.

A: Most of our customers for cathodes are Asia based, China.  Overtime we see that diversifying into America’s and Europe.  And you can make the assumption that these are the leading names in the space.

Q: Are you seeing any initial activity from the German ruling on diesel vehicle ban?  We think it accelerates EV production in Europe- any response from customer base?

A: We’re seeing from all over the world, officials taking more aggressive steps to shift to renewable energy, and electrify transportations.  They want to attack energy independence, environmental effects, pollution.  So you’re seeing a lot of momentum across the world, not just those stories.

Q: Joel Jackson, BMO- When do you guys expect to see increased extraction quotas from Corfo, and any risk from upcoming gov’t change?

A: Have great relationship with Corfo/gov’t.  The process just takes some time, but we’re highly optimistic that we will come through with additional quota- just makes sense from the gov’ts perspective.  We’re not pumping additional resources out of the ground, just improving yields using technology, so it’s a no-brainer for them.  Hopefully we’ll be back shortly with some good news there.

Q: Any priority to King’s Mountain vs Nevada for wave 3?

A: Still looking at that.  Qualitatively, it’s regarding the ease of getting there.  But we’re still looking at that.

Q: John Roberts, UBS- Luke you had a target of capturing 50% of industry growth in lithium, is that still the right way to look at it?

A: I think that we laid that as a target when we were looking at much lower growth expectations.  We’re not gonna chase volume, our goal is to be the most profitable lithium business in the world.  We want to make sure everyone understands that we have the balance sheet to meet the demands of our customers.  There’s no magic number out there other than to be the most profitable Li company in the world.

Q: Does acceleration in capex increase likelihood of another asset sale?

A: We don’t need to do it given the balance sheet flexibility, but if we can do something to drive shareholder value we can do it, but don’t have any plans in medium or short term to do it as of now.