Neal Sheorey
Executive Vice President, Chief Financial Officer at Albemarle
Thanks, Kent, and good morning, everyone. It's a pleasure to join my first earnings call with Albemarle. I've hit the ground running. And in the coming weeks, I'll be on the road, meeting with our shareholders and analysts. I'm looking forward to reconnecting with many of you and building new relationships with those of you I haven't yet met.
Moving to Slide 5. I'll start with a review of our fourth quarter and full year 2023 performance. In Q4, we reported net sales of $2.4 billion, down 10% compared to last year, as lower lithium market pricing was partially offset by increased volumes in Energy Storage and higher volumes in pricing in Ketjen. As Kent mentioned, we recorded two charges in Q4 that impacted results. The first was a lower of cost or market charge of $604 million, and the second was a tax valuation allowance in China of $223 million. These charges were fundamentally related to the fact that in the second half of 2023, lithium market prices fell over a relatively short period of time. In the case of the LCM charge, market prices reached a level such that our cost of inventory, especially spodumene, which we purchased at a market price from our Talison JV, was above the market price of the final lithium salts, which resulted in us writing down the value of our inventory in accordance with GAAP.
Similarly, in the case of the tax valuation allowance, the rapid decline in market prices led us to recognizing losses in China as we process the higher cost spodumene in inventory. In China, we are only allowed a five-year carry-forward period to utilize these losses. In accordance with GAAP, we recognized the valuation allowance against the losses.
The Company's full year results, excluding those charges, met our previously announced expectations. Net sales of $9.6 billion were up 31%, primarily driven by volume growth. Adjusted diluted EPS, excluding both charges was $22.25, roughly flat year-over-year.
Looking at Slide 6. Fourth quarter adjusted EBITDA was $289 million, excluding the lower of cost or market charge. This primarily reflects a decrease in Energy Storage adjusted EBITDA, driven by a lower lithium market pricing, which more than offset higher volumes. In Specialties, adjusted EBITDA declined $64 million, primarily due to lower sales volumes and pricing, reflecting ongoing demand weakness in key end markets. Ketjen adjusted EBITDA increased $34 million as higher sales and higher pricing more than offset increased raw materials costs.
Turning to Slide 7. Before I transition to forward-looking information, I want to take a moment to review our adjusted EBITDA definition and share an update that we plan to make. Effective with Q1 2024, we are updating our definition of adjusted EBITDA to include Albemarle's share of the pretax earnings of our Talison joint venture. There are a few important reasons for this change. First, the updated definition better reflects our vertical integration with Talison's Greenbushes mine, one of the world's largest, highest-grade and lowest cost lithium resources. Second, it smooths the impact of price variations in inventory timing that obscure the underlying profitability of our full chain integration. And finally, this definition is consistent with the amendment to our revolving credit facility, which I'll discuss later on the call.
As a reference point, on this slide, we've given you both the Energy Storage and Albemarle's full year 2023 adjusted EBITDA under the previous and updated adjusted EBITDA definitions. We will report under the updated definition in 2024. Therefore, all of our comments and numbers regarding 2024 modeling considerations are based on this new definition.
Turning to Slide 8. To help investors model Albemarle's earnings under different price scenarios, we have provided ranges of outcomes for our Energy Storage business based on three lithium market price scenarios that were observed in the back half of 2023. First, year-end 2023 market pricing of about $15 per kilogram of lithium carbonate equivalent or LCE. Second, Q4 2023 average market pricing, which was about $20 per kilogram of LCE. And third, second half 2023 average market pricing, which was about $25 per kilogram of LCE.
Within each scenario, the ranges are based on our expectation to increase Energy Storage volumes by 10% to 20% in 2024 compared to 2023. All three scenarios assume flat market pricing flowing through Energy Storage's current book of business. These scenarios demonstrate the resilience of our Energy Storage business. As you would expect, given our strong resource positions around the world, we can maintain solid margins even with lower year-over-year lithium pricing, which are further bolstered by our organic volumetric growth and the normalization of temporary inventory timing impacts.
Moving to Slide 9. Here, we provided modeling considerations for Specialties, Ketjen and Corporate. We expect Specialties 2024 net sales of $1.3 billion to $1.5 billion and adjusted EBITDA of $270 million to $330 million. Ketjen 2024 net sales are expected to be $1.0 billion to $1.2 billion, with adjusted EBITDA of $130 million to $150 million. The Corporate outlook reflects our planned decrease in capital expenditures, which we expect to total $1.6 billion to $1.8 billion in 2024, down from $2.1 billion in 2023. Corporate costs in 2024 are expected to be between $120 million and $150 million. Corporate costs in 2023 included interest income that is not expected to recur. And therefore, excluding this factor, corporate costs are relatively flat year-over-year.
Adding it all together on Slide 10. We provided here the full roll-up of Albemarle under each of the Energy Storage price scenarios.
Turning to Slide 11. I'll provide some further detail on the trends that underpin each segment's outlook. In Energy Storage, approximately two-thirds of 2024 estimated volumes are expected to be sold on index referenced, variable priced contracts. The remaining approximately one-third of volume is expected to be sold on short-term purchase agreements. This is a modest change from our past mix and reflects our positioning in this lower price environment. We could potentially add additional long-term contracts, but we will only entertain that if the pricing and other terms reflect long-term industry fundamentals.
Energy Storage volume is expected to be weighted toward the second half of 2024 as our own capacity expansions ramp and as we experience normal seasonality. Specialties results are also expected to be back-half weighted. The Specialties outlook reflects continued softness and opaque demand conditions in consumer electronics and elastomers end markets, partially offset by strong demand in oilfield services, agriculture and pharmaceuticals. We continue to actively monitor the situation in the Middle East, and in particular, the Red Sea, and are working with our partners to facilitate safe, efficient and cost-effective transport of our products to customers.
To date, operations continue largely as normal, though we are experiencing some shipping delays and tighter availability of processing materials. In Ketjen, we are optimistic about increased volumes driven by high refinery utilization as well as higher pricing, primarily in clean fuel technology products. Ketjen made good progress against its improvement plans in 2023, and we are expecting another year of improvement in both net sales and adjusted EBITDA.
Moving to Slide 12. We continue to deliver volumetric growth with line of sight to a growth CAGR of about 20% from 2022 to 2027. Our expected 2024 volume growth reflects projects that are at or near completion in which we have prioritized as we reduce capital spending in other areas. This includes commissioning and start-up of the Meishan lithium conversion facility, completion of commissioning activities at the Kemerton lithium conversion facility and ongoing expansions at Silver Peak, La Negra and Qingzhou. Our long-term expected lithium sales volumes are mostly unchanged as we continue to utilize flexible tolling arrangements to bridge to full capacity at our conversion expansions, as well as pace supply to current market conditions.
Turning to Slide 13. This is an update to a slide we provided last quarter, which explains how energy storage margins are impacted by JV accounting and the inherent timing lag that occurs from the mine through our conversion processes. The inventory lag we saw beginning in the second half of 2023 is expected to be reduced for two reasons. First, the lower of cost or market charge recorded in Q4 2023 resets inventory costs closer to current market pricing. And second, the Talison JV partners recently agreed to change the spodumene pricing to N-1 or a one-month lag versus the prior use of a three-month lag. That said, these changes will not completely offset the inventory lag, particularly in a period where prices have significantly changed. And therefore, we expect our first half 2024 margins in Energy Storage to be impacted by the lag as we process higher cost spodumene inventory and by expected reduced sales from Talison to our JV partner. Importantly, when we look beyond these temporal impacts, we estimate that Energy Storage could exit the year at a margin of approximately 30%, assuming constant current market pricing and a return to normal shipments from the Talison JV.
Turning to Slide 14, and our financial position. As our rapid action in recent months has shown, we are committed to maintaining a solid investment-grade credit rating and enhancing our financial flexibility as we navigate the lower price environment. With our earnings release yesterday, we announced that we have completed an amendment to our revolving credit facility to ensure ongoing financial flexibility. The amendment uses the revised adjusted EBITDA definition, consistent with the definition that we will use for financial reporting going forward. I'm happy to share that we had unanimous support from our bank syndicate for the amendment. This action, along with all the steps we are proactively taking as a company to modify our cost and capital spending, demonstrates our focus on maintaining financial flexibility, adapting with changing market conditions and exercising our investing discipline.
With that, I'll turn it back over to Kent to provide more details on our actions to preserve growth, reduce costs and optimize cash flow.
