Albemarle Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 14 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Sheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to Albemarle Corporation's Q3 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Press star once again. Thank you. I will now hand it over to Meredith Brandi, Vice President of Investor Relations and Sustainability.

Speaker 1

All right. Thank you, Sheryl, and welcome to Albemarle's 3rd quarter conference call. Our earnings were released after the close of market yesterday, and you'll find the press release and earnings presentation posted to our website under the Investors section at albemoral.com. Joining me on the call today are Kent Masters, Chief Executive Officer and Scott Tozier, Chief Financial Officer Netha Johnson, President of to Mr. Schulteis and Eric Norris, President of Energy Storage are also available for Q and A.

Speaker 1

As a reminder, some of the statements made during this call, including our outlook, guidance, expected company performance, timing of expansion projects and growth initiatives, may constitute forward looking statements. Please note the cautionary language about forward looking statements contained in our press release and earnings presentation, which also applies to this call. Please also note that some of our comments today refer to non GAAP financial measures. Reconciliations can be found in our earnings materials. And now I'll turn the call over to Kent.

Speaker 2

Thank you, Meredith. Before we begin, I'm sure most of you have seen that this will be Scott's last to quarterly call as CFO. Scott is transitioning roles to become a strategic advisor, while Neel Shorri will join the company as Executive Vice President and Chief Financial Officer on November 6. Scott has had a positive impact on the company since he joined in 2011. With his leadership.

Speaker 2

We've advanced Albemarle's growth strategy and maintained our commitment to operating with people and planet in mind. In this new role, Scott will provide strategic advice into our long range plans and will also be on hand to assist with Neil's transition. I know you'll join me in thanking Scott for his contributions to Albemarle over the past 13 years. Our 3rd quarter results reflect strong operating performance and continued volumetric growth in a challenging macro environment. Our net sales were up 10% in the Q3 versus the same period last year.

Speaker 2

However, adjusted EBITDA was down due to softer lithium market pricing and timing impacts of spodumene inventory from our JV owned assets. Based on current market prices, we have revised our 2023 outlook, which still contemplates an increase in net sales to 30% 35% year over year. We remain bullish about Albemarle's long term growth, our role in enabling a more resilient world and our strategy to deliver enduring value. In the Q3, we made significant progress advancing these efforts. During the quarter, we signed agreements with Caterpillar to collaborate on solutions to support full circular battery value chain and sustainable mining operations.

Speaker 2

As part of the partnership, we will purchase an all electric mining fleet for Kings Mountain and make our North American produced lithium available for use in Caterpillar battery production. We will also explore opportunities to collaborate with Caterpillar on to Caterpillar on R and D of battery cell technology and recycling techniques. With this collaboration, We and Caterpillar will be both customers and suppliers of each other with shared goals to pioneer the future of sustainable mining technology and operations. We also received a $90,000,000 grant from the U. S.

Speaker 2

Department of Defense to help support the expansion of domestic mining and the production of lithium for the nation's battery supply chain. The grant will be used to purchase fleet of mining equipment in support of the Kings Mountain restart. Earlier this month, We finalized simplified commercial arrangements related to our joint venture transaction with Mineral Resources. Under the revised agreements, Albemarle will take full ownership of the Kemerton Lithium Processing Facility and 50% ownership of the Wodgina spodumene mine in Australia and retain full ownership of the Zhengzhou and Meishan Lithium Processing Facilities in China. I'll now hand

Speaker 3

it over to Scott to walk through our financial results. Thanks, Kent, and hello, everyone. On Slide 5, let's review our Q3 performance. Net sales were $2,300,000,000 up 10% compared to last year. This increase was driven by higher energy storage volumes, thanks to expansion of our mining and conversion assets.

Speaker 3

Net income attributable to Albemarle was approximately $303,000,000 down 66% compared to the prior year. Similarly, diluted EPS was $2.57 down 66%. Higher net sales were more than offset by higher cost of goods sold, primarily due to inventory timing. And I'll discuss these timing impacts more in a moment. Our year to date results reflect the strong performance and significant growth we've achieved this year, despite recent softer lithium pricing.

Speaker 3

For the 9 months ended September 30, net sales are up 55% year over year and net income is up 42%. Looking at Slide 6, 3rd quarter adjusted EBITDA was $453,000,000 a decrease of 62% year over year, driven primarily by softer lithium market pricing and timing impacts of spodumene inventory and energy storage. The Specialties business was also down due to continued lower volumes and pricing related to softness in certain end markets. For the 1st 3 quarters of 2023, adjusted EBITDA was more than $3,000,000,000 up 38% against last year. Again, energy storage growth reflects the majority of that increase with both volumes and prices up year over year.

Speaker 3

On Slide 7, as Kent mentioned, we are lowering our total company outlook for 2023. As has been our practice, this outlook assumes recent lithium market price indices are constant for the remainder of the year. And as a result, we have decreased the range for net sales. Under this methodology, 2020 to 3 total company net sales would be in the range of $9,500,000,000 to $9,800,000,000 This range represents an increase in net sales of 30% to 35% over the prior year, driven by the ramp of our energy storage volumes. Our adjusted EBITDA outlook is expected to be in the range of $3,200,000,000 to $3,400,000,000 This implies full year EBITDA margins of 34% to 35%.

Speaker 3

Our full year 2023 adjusted EPS outlook has also been adjusted to a range of $21.50 to $23.50 We expect our net cash from operations to be in the range of $600,000,000 to $800,000,000 The decrease in adjusted EBITDA and net cash from operations reflects current lithium market prices and lower expected sales volumes at our Talison joint venture. Our partner at Talison elected not to take their full allocation in the second half for this year and this has impacted our equity income for the period. Our CapEx guidance remains in line with previous forecasts at $1,900,000,000 to $2,100,000,000 which as a reminder from last quarter reflects 100 percent ownership of our conversion assets with the completed revised agreements with Mineral Resources. We expect to provide our full year 2024 outlook on our Q4 call in February. Turning to the next slide for more detail on our outlook by segment.

Speaker 3

Assuming Recent lithium market prices remain constant through the rest of the year. We expect Energy Storage 2023 net sales in the range of $7,000,000,000 to $7,200,000,000 and adjusted EBITDA to be flat to slightly down on the year as timing impacts of higher priced spodumene more than offset higher net sales. We are projecting that full year average realized Pricing increases will be in the range of 15% to 20% year over year and energy storage volume growth in the range of 30% to 35% year over year. We continue to expect Q4 to see stronger production volumes as a result of project ramps. In 2024, volume growth is anticipated to continue as Kemerton, Qingzhou and La Nega ramp to meet the expected demand from continued strong EV production.

Speaker 3

In specialties, we now expect net sales to be approximately $1,500,000,000 with adjusted EBITDA expected to be down 40% to 45% year over year for the full year. This is due to continued softness in consumer electronics and elastomers, partially offset by strength in demand in other specialties end markets, including pharmaceuticals and oilfield. We continue to monitor the situation in the Middle East and any impacts at our operations in Jordan. Currently, JBC is operating as usual without disruption to our supply chain. Macroeconomic and geopolitical uncertainties will impact market visibility in this business well into 2024.

Speaker 3

TETJEN's 2023 full year adjusted EBITDA is now expected to be up 2 50% to 3 25% year over year due to higher pricing and volumes as well as productivity improvements. During the quarter, we saw higher volumes driven by to high refinery utilization. We also saw benefits of higher contract pricing, primarily for FCC products, which is expected to continue through 2023 and into 2024. We are encouraged to see inflation in material and energy to cost moderating and expect this trend to continue through 2024. On Slide 9.

Speaker 3

We have an experienced team that knows how to operate in a variety of price environments. To maintaining our disciplined growth mindset. We are taking a comprehensive review of actions that will support our near term profitability in cash flow. As we've done in the past, we're reviewing our project spend and sequencing of our projects to preserve cash. We're also implementing cost and efficiency improvements across our business.

Speaker 3

For example, we've reduced non critical travel in our reducing discretionary spending. Our Albemarle Way of Excellence is the standard by which we choose to operate. Slide 10 provides an update to the targets we've made in manufacturing and procurement. We're on track to exceed our goal $170,000,000 in productivity benefits in 2023. In manufacturing, improvements to our overall equipment effectiveness to improve yield and utilization are expected to exceed $70,000,000 in benefits.

Speaker 3

In procurement, we strategically sourced to capture lower raw material pricing. In 2024, we expect to increase these initiatives, targeting additional benefits across manufacturing, procurement and back office. Lowering operational costs in our business is critical to our success as we orient towards sustainable growth. As a reminder, Most of our energy storage volumes are sold under long term contracts with strategic customers. Our to the expected 2023 sales mix on Slide 11 remains unchanged from last quarter and reflects recent lithium market prices.

Speaker 3

We expect year over year energy storage volume growth be in the range of 30% to 35% in 2023. This is driven by successful execution and ramping new capacity as well as additional tolling. With additional convergent assets coming online in 2024 and beyond, We still anticipate a 20% to 30% CAGR in Albemarle sales volumes between now and 2027. We remain on track to nearly triple our volumes to more than 300,000 tons. Slide 13 is the updated bridge for our Energy Storage adjusted EBITDA margins.

Speaker 3

Full year 2023 margins are expected to normalize in the 40% range from the very high rates we saw in 2022. As always, Talison Equity Income is included in our adjusted EBITDA on an after tax basis. That Tax Drag impacted EBITDA margins by about 7% to 10%. The other impacts on the chart are relatively small and are offsetting. Higher lithium pricing is offset by other items.

Speaker 3

This year, we had a 5% negative impact from Marvel JV accounting that goes away next year with the closure of the restructured Marvel JV. That leaves the largest impact to our margins at 20% spodumene inventory lag. We understand this inventory lag is complicated and can be difficult to forecast. I want to spend a little bit more time on that. Through the Talison joint venture, Albemarle has access to one of the world's best to Lithium Resources.

Speaker 3

Greenbushes is a large, high grade and therefore low cost spodumene mine. We recognize our 49% share of Talison earnings in equity income and cash dividends. Our 50% share of Talison offtake also flows through inventories and cost of goods sold based on market pricing. The timing of inventories and sales can often drive short term margin variations. Excluding these timing impacts, We expect Energy Storage adjusted EBITDA margins to be in the range of 30% to 40%, even at today's prevailing market pricing for lithium and spodumene.

Speaker 3

Turning to Slide 15. In the Talison joint venture, we recognize profit associated with our partners' offtake immediately. To recognize profit associated with our offtake when the product is converted and sold, which typically takes about 6 months from when we first extract spodumene from the ground. Throughout 2022 and the first half of twenty twenty three, Talison pricing on partner shipments was higher than that realized on our own shipments. Timing differences between the recognition of our profit on our Partners' offtake and our offtake resulted in about $800,000,000 of benefit to EBITDA during that period.

Speaker 3

As spodumene market prices decrease, we expect this effect to reverse as we recognize higher priced spodumene in cost of goods sold and lower prices in equity income. However, we expect this timing related impact to be temporary with no impact to adjusted EBITDA at steady market prices. Again, assuming today's market prices are held constant, We expect Energy Storage adjusted EBITDA margins to average in the range of 30% to 40%. Turning to Slide 16. Albemarle's capital allocation priorities remain unchanged.

Speaker 3

1st, investing in high return organic and inorganic growth. 2nd, maintaining financial flexibility and our investment grade credit rating. And lastly, funding our dividends. Planned expansions to deliver volumetric growth continue to progress across the company's global portfolio. Although, as I mentioned before, in this softer market, we are taking a hard look at the level of our CapEx spending in the sequence of our projects.

Speaker 3

As it relates to inorganic opportunities, We announced a few weeks ago that we decided not to pursue a binding agreement to purchase Liontown and formally withdrew our non binding offer. While we had productive engagement with Lyondell in town and as we learn more, we decided that moving forward with the acquisition at this time who is not in Albemarle's best interest. This reflects our disciplined capital allocation and M and A approach. As we look forward, we continue to evaluate a broad range of M and A opportunities. However, in the current environment, the scale of those opportunities are not as big.

Speaker 3

And we have many options available across 3 areas: to lithium resources, process technology for our core business and for new advanced materials and battery recycling. Turning to Slide 17. Our balance sheet flexibility is a competitive advantage that allows us to grow both organically and through acquisition as well as support shareholder returns. As of year end 2023, we expect our leverage ratio to be 1.2 to 1.3x net debt to EBITDA. And with that, I'll turn it back over to Kent for a market update and closing remarks.

Speaker 2

Thanks, Scott. On Slide 18, we highlight the continued growth in EV sales that reinforces our long term growth opportunity. Year to date through September, EV sales remain on track for 40% year on year growth and show end market demand to be resilient. While the U. S.

Speaker 2

And Europe make up only about a third of total EV production in 'twenty three and 'twenty four, Near term, we see potential challenges for EV growth in those regions related to economic softness and higher interest rates. We are monitoring any economic impacts to the seasonal acceleration in EV sales at the end of the year. Our long term view of secular growth continues to be supported not only by the adoption of EVs, but transformations across mobility, to Energy, Connectivity and Health. Slide 19 provides a view of lithium inventories across the value chain. Both upstream and downstream producers have continued destocking with very low levels of lithium inventory at cathode producers.

Speaker 2

Cuts to higher cost supply have continued as some lepidolite producers and merchant converters have reduced production. Turning now to Slide 20. We remain on track to achieve strong net sales growth, up 30% to 35% year over year. This reflects our continued growth investments and the strength of our portfolio that have enabled us to overcome the near term pricing challenges. We are disciplined in both how we operate and how we allocate capital, providing an edge across economic cycles.

Speaker 2

Albemarle is a global leader with world class assets and a diversified product portfolio positioned to supply key growth sectors. We have a competitive advantage with vertically integrated assets and innovative advanced solutions designed to meet our customers' needs. The actions we took this quarter, including our collaboration with Caterpillar and the restructuring and simplification of the Marlboro joint venture to help us build on this advantage. The long term growth trajectory of our end markets remains strong, including continued growth in electric vehicles. Our strategy is clear to capitalize on this opportunity with a disciplined operating model to scale and innovate, accelerate profitable growth and advance sustainability.

Speaker 2

With that, I'd like to turn the call back over to the operator to begin the Q and A portion.

Operator

At this time, I would like to remind everyone in order to ask a question, press star then the number 1 on your telephone keypad. Also, please bear in mind, this Q and A session is limited to 1 question and one follow-up per person. Your first question comes from the line of Patrick Cunningham with Citi. Patrick, your line is now open.

Speaker 4

Hi, good morning. So one

Speaker 5

of your JV partners is not taking the full allocation at Greenbushes. And do you still plan to take your full volume allocation? And do you see any risk of production cuts in the Q1, perhaps its concentrated stockpile?

Speaker 2

So we our partners, they dial it they've made decisions into to Q4, not to the Q1 yet. So we'll wait and see that and we'll make our allocation at a later time as well. So It's I think things are changing. And as we look at our inventories, we'll decide what we do on that allocation. So It could be that we pull back on the mind, but that's something we'll have to decide with our partners when we see their allocation and when we make ours.

Speaker 2

That's helpful. And then just given some of

Speaker 5

the recent price weakness, headlines dialing back EV targets, I'm just curious on more detail on how you're thinking about growth investments and trajectory going forward. How has your thinking started to Change on regions, projects and sequencing of those projects.

Speaker 2

Yes. So we're going through that at the moment. So we're not prepared to really give guidance for next year's capital plan, but we are taking a look at that. Everything we can do to cut capital, but without really impacting the long term growth trajectory or the growth projects that we've developed out there. So there's some flexibility around sequencing and we'll be able to push some projects out slightly without really changing the long term profile for that.

Speaker 2

And that's the work that we're doing now and we'll be able to give guidance on that in the February call.

Speaker 5

Thank you.

Operator

Your next question comes from the line of Josh Spector with UBS. Josh, your line is open.

Speaker 6

Yes. Hi. Thanks for taking my question. I guess, first, I wanted to ask on to with the pricing and specifically the realized pricing for Albemarle and just kind of thinking about a scenario where the spot goes less than $20, so say $18 Kilogram. What happens to the other 80% of your contracts?

Speaker 6

You've talked about floors. You've indicated that they're above or at the high end of the cost curve. But what really does that mean in that scenario? I guess, what does Albemarle realize in terms of pricing?

Speaker 7

Good morning, Josh. It's Eric. As you know, we don't give precise price guidance for our overall portfolio. But let me try to help give you some perspective around this. First off, obviously a spot price realized in China We'll look different as you look out of the market pricing around the world.

Speaker 7

There is most of the supply or a lot of the supply comes from China. To their transactional and VAT considerations that would translate that to a higher price, oftentimes outside of China. We have floors on our 80% of our index reference contracts. We have a variety of different floors. We don't We look forward, I mean, we are I'd have to admit a bit perplexed as to why price is where it is.

Speaker 7

These are levels that for a great number of the higher cost projects, We would expect supply to come off and in fact have seen supply come off. Should it prevail, we'd expect to see to potentially other resources or other projects be slowed down. From our perspective though, we have a growth plan, it's double digit growth next year. We feel comfortable with the protections our contracts give us and importantly, the low cost position we have going forward in our portfolio.

Speaker 6

Yes. Thanks, Eric. And I guess I wanted to follow-up just on the margin comments that you made, Scott. So the range that you gave, I mean, it's different than you go back a couple of years ago, you talked about 45% plus. And I believe at that time, you said you could maintain those margins in a lower price environment.

Speaker 6

I guess, I don't know if I'm remembering right or if anything's changed, but what accounts for the difference?

Speaker 3

Yes, I think the difference, Josh is that when we made those mid kind of 40% comments. We are thinking about a mid cycle type of pricing. As we look at this 30% to 40% that I commented on today, that's really at today's prevailing prices. And again, it's based on constant pricing as opposed to some of the volatility, which is going to distort to our margins either higher as prices go up or lower as prices come down.

Speaker 6

Okay. Thank you.

Operator

Your next question comes from the line of Joel Jackson with BMO Capital Markets. Joe, your line is open.

Speaker 7

Good morning, Eric, maybe Kent. So I think Eric, you just said you were perplexed how low prices Come down to maybe low 20s here LCE. So you're saying considering reinvestment economics. So maybe you could talk about why you think prices have gone down to where they are? Is it Lipidolite?

Speaker 7

Is it African spasumene? Is it something else? What do you think?

Speaker 5

Everyone still there?

Operator

We are here. Hi. Can you hear us on the line? Hello? We can hear you.

Speaker 8

Yes.

Speaker 2

Sheryl, can you hear us?

Operator

Yes, we can hear you.

Speaker 2

Okay. Okay. Sorry, I'm not sure what

Speaker 7

happened there. So, Sheryl, I'll If it's okay and you can hear me, just confirm.

Operator

Yes, I can hear you.

Speaker 7

Okay. So I'll continue to answer Joel's question. Joel, so I apologize the interruption. Can we start from the beginning, Eric, if that's okay? I didn't hear it anyway.

Speaker 7

Of course. Of course. Thank you. Thank you. Yes.

Speaker 7

So what I was describing is that we do a lot of work to model supply and demand. And if you look last year, this year, next year, remove for a moment what we know has happened this year, which has been an inventory correction in the supply chain. The industry by our reckoning is operating at us, if you look at or demand over supply at about a mid-90s capacity utilization rate. So that's the part that's perplexing. And in any other market, at those levels, You wouldn't see pricing fall like it has.

Speaker 7

Now we have had an inventory correction this year. It's largely run its course at least at the cathode level in the largest market in the world and that's one of the slides we shared with you. Any inventory correction further in the supply chain, we would expect on balance to occur Or be behind us or certainly be behind us in the balance of this year. And so as we look forward, we don't see a rationale for why prices would fall to where they are because they are below reinvestment economics. As we've said many times, our concern would be towards the end of the decade that there needs to be to the service of the EV market.

Speaker 7

Here we are operating at a healthy relatively healthy supply demand utilization with prices where they are. So it's very difficult to explain how that's the case, Joel. But obviously, we're well positioned with to our cost position and our go to market strategy to weather that storm, it's just it's going to be challenging for the industry at these levels. So that's our greater concern is to future availability and investment in supply to support the transition across the industry. So, that's probably the best we can tell you in terms of our view at the moment.

Speaker 7

Okay. Thank you for that. If I can follow-up on then, I think it was Kent who said a little few minutes ago, You're going to look at maybe ratcheting back your growth plans a little like slightly, so slow down a little bit sequencing, but not changing anything in your longer term plan. So, what if you're not right about your lithium price view here and what if prices are lower and the returns aren't as good as you think And you're going to go full steam ahead on a lot of this growth that ends up not being needed. How do you balance the risk of overspending and driving negative free cash flow for a long time with making sure you are supplying enough volume for the market over time and maintaining your market share.

Speaker 2

Yes. So that's the balance, right? I think what we're saying is we're looking at our capital programs and we're going to cut back where we can, but it's not changing our overall strategy around growth. And again, our cost position protects us with that. So it's not really the returns on the projects, given what we see, but it's more about the capital that we're investing while the market is down.

Speaker 2

So we're We're just adjusting the timing on that and then we'll be cautious as we layer those back in over time to make sure that we're right around pricing.

Speaker 7

Thank you.

Operator

Our next call Question comes from the line of Michael with Wells Fargo Securities. Michael, your line is open.

Speaker 8

Hey, guys. Scott, it's been great working with you over the last decade or so. So for 2024, Can you still do or do you still expect demand to support sort of that 200,000 KTs that you're expecting to expand to? And if you do, I guess at these pricing levels, you could do 30% to 40% EBITDA margins?

Speaker 7

Why don't I comment on the demand first? I think it's an important topic and then I'll turn it over to Scott. This is Eric speaking. A couple of facts just to give flavor of our business today. All of our contracts are performing.

Speaker 7

We're able to sell product into the spot markets for that 20%. There's a lot of negative sentiment broadly in sort of media around the marketplace. It happens to be around maybe certain manufacturers announcements. I think you can't lose sight of the fact that the bigger to markets, China, the bigger producers in the EV space are continuing to grow their output and that's driving healthy demand. It is true that this year demand from a production standpoint the need for new production has probably slightly underperformed the 40% growth.

Speaker 7

So the market for consumption living is probably close to 35% growth year on year with the EV market is growing at 40% and that's because of the inventory correction we see or have seen. But looking forward, that is not that's not a sustainable trend. Once inventories run its course, there's a return to normalcy and or potentially even a restocking that occurs. So we feel very good about what we see what's happening now as road bumps, but certainly not a determined for the long term growth we have. And as we look out to 2024, we'll be bringing on capacity that will allow us to put against those contracts, like I said, are performing well to another double digit year growth in 2024.

Speaker 7

As for margins, I'll let Scott comment.

Speaker 3

Yes. Thanks, Eric. So I think, the way you should think about this is kind of illustrated on Slide 15 of our deck. We're going to continue to see some level of to spodumene inventory lag affecting us in the first half of next year and then by the second half we'll be in that to normalized 30% to 40% range that I talked about. So the full year is likely to be lower than that.

Speaker 3

However, we'll get to normalized to margins by the second half of the year, again assuming if prices remain constant through that period and we don't see the price volatility that causes these

Speaker 8

to ups and downs. And then I guess if the industry is running in the mid-90s and Let's just say demand does continue to grow next year. Stability in pricing hasn't been the case, right, for the last year or so. I mean, do you think there is potential for sort of a quick rise again in pricing as would that happen if prices if folks restock?

Speaker 2

Look, this industry is it's still early in the industry, so it's difficult to say. So we were anticipating some of the volatility coming out in this cycle, but that didn't really happen. So it is difficult to say exactly to how quick it responds, where it goes and where it comes back to. We anticipate over time the highs and lows and that volatility coming out. But the question is what is that period of time?

Speaker 8

Got it. Thank you.

Operator

Our next question comes from the line of Jeff with JPMorgan. Jeff, your line is open.

Speaker 5

Thanks very much. Your cash flow through the 1st 9 months was $1,450,000,000 and you're expecting cash flow for the year of to $600,000,000 to $800,000,000 Why is the cash flow in the 4th quarter to negative 6 or negative 8, is that one time, is it ongoing? And what do you make of that?

Speaker 3

Thanks, Jeff, for the question. So I think a couple of things are doing that. Of course, we've got lower EBITDA in the Q4. As we look at our sales patterns, we're back end loaded in the quarter. So we have increased working capital as a result of that.

Speaker 3

And then we've got some one time items, including the DOJ and SEC settlement that we did that flows through our operating cash flow. So those are the key drivers. And then right now, our CapEx is on track to be about the same as what it was in the Q3. So those are kind of the moving pieces in our cash flow for the Q4.

Speaker 5

And second, just what you said was that your EBITDA margin was being penalized by about 7 to 10 percentage points in your lithium business because of these timing differences. If you look at the EBITDA of Energy Storage, excluding equity income, In the quarter, it was about negative 15%. And so if you take 10% of to the energy storage revenues of $1,700,000,000 that's another $170,000,000 you netted out, that's 150. So it looks like the EBITDA margin on your businesses excluding, Telesen is about 8%. So

Speaker 2

what am I doing wrong in

Speaker 5

the math? What am I missing? And then why do the so what are the returns on your business excluding Talison and the changes in inventories.

Speaker 3

Yes. So, Jeff, this is important because our strategy is to be an integrated producer. That means we're going to make money throughout the chain from the mine all the way through the chemical conversion into the Salts business. Given where the prices are today and how they dropped, the JV is making the joint venture, I will just focus on Talison, but the same is Happening at Wodgina. The JV is making a significant amount of our operating income.

Speaker 3

And as those high cost spodumene inventories being processed in the quarter and the second half of this year, primarily in China. We're actually seeing losses as you on that conversion. That's really just being driven by the timing of that spodumene inventory being processed. If you were to normalize and again in a flat rate flat price environment, you would see normal margins in both the core business as well as the joint venture ultimately. And so again, I think as you look at the geography of our P and L, That's the effect that we've been talking about with that inventory spodumene lag happening.

Operator

Your next question comes from the line of Aleksey with KeyBanc Capital Markets. Your line is now open.

Speaker 4

Thanks and good morning everyone. On your 4th quarter guidance for Lithium. If I look at your Slide 15 and sort of take the difference between your expected to 4th quarter margin for the segment and your expected normalized margin of 35%. I get about to $300,000,000 to $400,000,000 EBITDA impact of this timing difference just in the Q4. Does this sound About right to you as a dollar impact for this phenomenon?

Speaker 3

Yes. That's pretty close, Alexey.

Speaker 4

Great. And another question is the you mentioned the impact of lower equity income because your partner chose Not to take their full allocation. Can you talk about the size of that impact in the Q4? And If you can't talk about it directly, maybe you can speak about your equity income expectations in general in Q4.

Speaker 7

Alex, hey, it's Eric Norris. It obviously because of that curve that you do reference on Slide 15, it would vary any point in time, but in the Q4 itself, it's over $100,000,000 to $200,000,000 to $200,000,000 range.

Speaker 4

Thanks a lot.

Operator

Your next question comes from the line of David with Deutsche Bank. David, your line is open.

Speaker 9

Thank you. You referenced some spodumene producers sorry, labile producers in China shutting down as well as maybe some non integrated producers. When did you start to see these shutdowns occur and how much is being shut down in your view?

Speaker 7

It's Eric again. So you may recall that we saw the same phenomenon in the during the Q1 as well when prices took a similar dip. And if you and so there are a couple of factors going on. 1, starting first with merchant spodumene producers. Those are the producers we refer to as they're buying spodumene on the market, converting it in China.

Speaker 7

Their cost has when you start to get certainly at current price levels actually probably when you get into the mid-20s and less, They start their margins start to get upside down. In fact, the prior comment that Scott just answered around the negative margins that were pointed out in the quarter on a non consolidated basis for us are an illustration of what a non integrated producer would be dealing with. So they shut down at those prices or they have to unless they can get their hands on lower cost spodumene. Spodumene has been coming down, hasn't been coming down at the same rate. The big question, obviously that pivot point of when they shut down depends on when or where the spread is basically to spodumene, But that is currently negative.

Speaker 7

Lepebalyte is a bit of a different story. It's a much higher cost material to produce and has been fraught with environmental and startup challenges. So there's been both moderation of capacity for those reasons over the course of the year as well as a moderation of capacity for the same reason I just referenced on integrated lepidolite producers, people who buy lepidolite on the market and convert it are seeing a similar margin loss at these prices. If you look at the peptide producers from peak from where they started beginning the year to now, it's about a 40% reduction of which about 10% has come offline in the recent few months, some more came off in the earlier part of the year. So those are the various factors that are driving closures within China at these prices for idling.

Speaker 7

Obviously, if price recovers, they could come back, of course.

Speaker 9

Got it. Eric, did you mention that 24 volumes in Energy Storage should be up around between a 20% to 30% range Thank you for guiding to longer term.

Speaker 7

I don't know that we've given guidance fully on that yet, but I mean if you take the demand forecasts that we gave you earlier in the year that we're multi year, you see a similar growth rate projected for next year as we had this year. This year's growth rate was clipped a little bit by or lithium consumption Let's clip a little bit by the inventory correction we saw during the year, but it's well into the 30s for sure, going into next year, we believe. Thank you.

Operator

Your next question comes from the line of David with TD Cowen. David, your line is open.

Speaker 10

Thanks for squeezing me in, guys. I wanted to just ask maybe a non lithium related question. I'd say, I guess, upwards of a year ago, you guys were looking strategically at perhaps divesting the Ketchum business. We've seen a rebound in that business. It seems like the outlook is fairly robust for the Q4.

Speaker 10

Considering that the balance to the energy storage side right now. Is this potentially a strategic time of divesting that business or putting it under review? Or should we think of this as part of the going concern?

Speaker 2

So I think we went through that process a year ago and couldn't get the value for Ketchum that we were thinking about. So we rebranded it. For treating as a wholly owned subsidiary and that's kind of the go forward for the moment. I don't know that we would think about it long term as part of to the overall strategy, but in the near term, that's part of the plan.

Speaker 10

I guess just maybe a question for Eric. On the Energy Storage side, you talked about the Talison JV and partner electing not to take shipments in the 4th quarter. We've seen some other of your peers building inventory in the Q4 here. Do you anticipate doing that on any of your assets Or advocating for incremental inventory stocking or slowing down at any of the other assets in Australia.

Speaker 7

The best way to answer that and you're right, every supplier has a different situation and the situation for our partners at Talison that they have unique issues and challenges that are different perhaps than ours. When we look at our rate of capacity addition downstream for conversion and that includes Chinsou coming up and it includes, Kemerton 1 and 2 coming up in that part of the world, and continuing to run Xinyu and our Chengdu facilities at full capacity and then look at ramping Mei Xiang later in the year next year. We see demand for more spodumene to obviously serve that growth. We haven't given precise guidance on what that volume growth is for next year. We'll do that in 3 months' time.

Speaker 7

But as I said, I think earlier, it's a double digit type growth we're expecting again, which has a demand on spodumene. Our mandate is to run efficiently in this environment, right, because cash preservation to support our growth is critical. So We're not in a mode of trying to carry working capital that we aren't going to put into convert into cash in a reasonable timeframe. So Building inventories is less of a strategy than ramping production to match the conversion demand downstream. And again, we'll give more guidance on all of that

Speaker 10

It sounds like you guys aren't going to be coming back to the market with an update like you did last to January that we should wait until February with the Q4 earnings.

Speaker 2

Yes. The thinking at the moment is that we'll do that in normal course to the February earnings.

Speaker 10

Thank you all for the answers.

Operator

Your next question comes from the line of Kevin McCarthy with Vertical Research Partners. Kevin, your line is open.

Speaker 11

Thank you and good morning.

Speaker 8

On Slide

Speaker 11

11, you indicate that a $10 per kilogram change in market indices would equate to a change of $5 to $7 per kilogram in your realized pricing for this year. My question is, would that sort of rule of thumb apply to 2024 as well or might it be different?

Speaker 3

Yes, Kevin, so that should apply. And just as a reminder, that's on a full year basis. So it has to move by $10 over the full year and then full year impact that kind of $5 to $7 range. That's a little bit Confusing because you got moves up and down like we did this year that makes it a little bit harder to track through that, but that ratio would carry forward into 2024.

Speaker 2

So the only exception of that is if you were to get into the contract floors.

Speaker 7

Correct.

Speaker 2

Yes. So that number is kind of When we put that out there, it was a higher number, it wasn't anywhere near the floors.

Speaker 11

Thank you for that. And then coming back to Slide 15 and maybe the subject of the to spodumene concentrate inventory flow through. I attempted to ask Scott, How do you see the quarterly margin pattern progressing? Or put differently, which do you think would be to the trough margin quarter as you digest the expense of spodumene, might it be the Q1 of next year or the Q2 or Is it difficult to tell at this point?

Speaker 3

Yes. I think as you look at that chart, You can kind of see where those lines start to converge and that the trough would be in the Q4 of 2023. Of course, as you look at that, you're going to have some impact in the Q1. So I think as you look at the next year from that impact that the trough in 2024 would be in the Q1.

Speaker 11

Okay. Thanks so much.

Operator

Your next question comes from the line of Vincent Andrews with Morgan Stanley. Vincent, your line is open.

Speaker 12

Thank you. Ken, could I ask you on

Speaker 13

the balance sheet philosophically, if we think back a couple of months with Liontown, you're going to debt finance that acquisition. And if I recall correctly in the slide deck, you had a range of outcomes on price and I think the bear case was about 15,000. So how do you think about or how do you think about using the balance sheet for M and A versus your growth CapEx plans? Because I'm just thinking about your comments from earlier that you might push things change the sequencing or so forth. And I guess I'm also wondering, to Are you less interested in debt financing, organic growth versus acquired growth?

Speaker 13

And as you think about the next couple of years, do you need to be free cash flow positive? Are you willing to let the leverage come up a little bit if that's what happens?

Speaker 2

Yes. So there's a lot in that question and it depends on how things play out. I mean, I guess, the things we want to make sure that we Kind of said fundamentally, we want to be investment grade and we kind of have a we have a target or kind of a ceiling that we kind of work It's about 2.5 times around that. So we want to be and obviously, that's under a stress period. We want to stay below that and we will have to make adjustments to do that, right?

Speaker 2

So we want to preserve our organic growth plan that we have because we've got resources for that. Our acquisitions have been focused in a couple of different areas. We'll still look at M and A, but it's not going to be at the same scale that we We're frankly looking at 6 months ago.

Speaker 13

Okay. And then, Eric, if I could ask you on the Chinese converters or the non integrated converters kind of referenced this earlier that the current spodumene prices, some of them are backing off. At least on our calculation, spodumene prices could still go down quite substantially and most spodumene producers would still be quite profitable. So is there a reason why that won't happen that those spodumene producers won't just lower price to keep their customers operating so that they can Make sales and generate cash or is there something in that market dynamic that's not obvious to me?

Speaker 7

Well, I mean, I think in theory, you're right. I mean, there is margin to give from a spodumene mine producer, but then on the other hand, there is market demand, what's required. That's the counter effect to price obviously. And with the amount of capacity that would come off, While spot there's room for spot green price to potentially come down at some point, there's now demand for salts in the market that is not being met. And that would turn things the other way around, right?

Speaker 7

So it's about the demand equation, which I think generally speaking, the market's to SAP, not the trade, not the lithium market, but the broader global markets, stock markets are a little down on is that the demand It's not as weak, but we see it as weak as being portrayed and then particularly in China. So as that And in China, as a reminder, is about 70% of the world's consumption or production of EVs. So I think it's the demand factor that would be the mitigating factor on further spodumene prices. But to your point, I don't know we know exactly where spodumene prices will go because we keep it's hard to predict relative to when there's a stimulus on demand that pulls them back up.

Speaker 13

Okay. Thanks very much. I appreciate it and Congratulations, Scott, on retirement. I appreciate all your help over the years.

Speaker 3

Thanks, Vincent.

Operator

Your next question comes from Colin with Oppenheimer. Colin, your line is open.

Speaker 13

Thanks so much, guys. With the inventories hanging out at these lower levels, we're Seeing some new balances in terms of a variety of supply chains, what's your expectation around where that normalizes in terms of number of days of inventory? It seems Like the industry is running awfully lean at this point. And then if you could also address what you're hearing from some of your longer term OEM customers around to concerns on security supply as they adjust some of their EV production plans.

Speaker 7

So Colin, it's Eric. On your first question, don't know that we have a good answer for that. It's because it's perpetually operated, particularly if you look at Chinese catheter producers at levels which are less than a week.

Speaker 3

Just as

Speaker 7

a contrast that with our supply chain and this inventory lag that is one of the most popular and understandably popular The reason we have that is it takes 6 months to go from mine to product on our side. And if there's any disruption in the supply chain, 5 days of supply to cathode producers isn't going to be enough. So it doesn't feel sustainable, but they've been able to operate that way throughout the year. So there are some question marks we would have about what's a sustainable and responsible way as a company to operate your supply chain for security purposes. I just I got to believe that it's got to be higher downstream at some point than it is, but I don't think we know exactly what it could be.

Speaker 7

And then in terms of the global OEM sort of concern on security supply, there is no let up from OEMs on interest in long term off takes in securing supply. Yes, it is true. There are some OEMs who have announced some changes to their or express some concerns about their targets. But I think if you look at the larger players in the EV space, Keeping in mind that that isn't necessarily, the companies that are now announcing that they're pushing out their targets. Those larger producers are continuing to increase their output, whether they're here or in China or in Europe and they're continuing to demand security supply because they realize they cannot fulfill the large investments they're making downstream in electric vehicles without lithium.

Speaker 7

So I think that demand, that dynamic is still there with the OEMs.

Operator

Our final question comes from the line of Stephen with Bank of America. Steven, your line is open.

Speaker 12

I just wanted to ask you whether you would be looking at any new technologies to extract more lithium out of the brine deposits in Argentina. Anything that You think could bolster your production there at a more capital efficient way and any of these technologies in development that you see Could potentially lower the reinvestment economics.

Speaker 2

Yes. So we I mean, look, we have a broad R and D program and around extracting lithium and converting lithium to salt and other materials is a big part of that. The program sounds like you're referencing would be around direct lithium extraction, which is a variety of technologies. It's not to just one particular thing, but a variety of technologies that tends to be unique for each brine. And we have a program around that, that's It's kind of broad in nature, but it's very focused on the resource we have in Magnolia and the Salar de Atacama.

Speaker 2

It would also apply in Argentina as well or to any brine to at the moment, the work is particularly focused on the Salar de Atacama and the Brines in Magnolia, Arkansas. Very good. Thank you.

Operator

That was all the time we have for questions. I would like to turn the call back over to Ken.

Speaker 2

Okay. Thank you. Thank you all for joining us today, and I Albemarle leads the world in transforming essential resources into the critical ingredients for modern living with people and planted in mind. We're confident in the market opportunity and our disciplined strategy to achieve both short term and long term results. We continue to work to be the partner of choice for our customers and the investment of choice for both the present and the future.

Speaker 2

Thank you for joining us today.

Operator

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Albemarle Q3 2023
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