Albemarle Q2 2021 Earnings Call Transcript

Presentation

[Operator]

Good morning and welcome to the Q2 2021 Albemarle Corporation Earnings Conference Call. [Operator Instructions] I will now like to turn the conference over to your host, Meredith Bandy, Vice President of Sustainability and Investor Relations. Please go ahead.

[Meredith H. Bandy, Vice President Investor Relations & Sustainability at Albemarle]

Thanks, operator, and welcome, everyone, to Albemarle's Second Quarter 2021 Earnings Conference Call. Our earnings were released after the close of market yesterday, and you will find the press release, earnings presentation and non-GAAP reconciliations on our website under the Investor Relations section at www.albemarle.com. Joining me on the call today are Kent Masters, Chief Executive Officer; and 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. Reminder, some of the statements made during this call, including outlook, guidance, expected company performance and timing of 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 and earnings presentation, that same language applies to this call. Also note that some of our comments today refer to non-GAAP financial measures. A reconciliation to GAAP financial measures can be found in our earnings release and appendix of the presentation, both are posted on the website. And finally, as a reminder, Albemarle will be hosting our 2021 Investor Day the morning of Friday, September 10, webcast live from our Charlotte offices. Registration for webcast is also available on the Investor Relations section of our website.

And now I'll turn the call over to Kent.

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

Good morning, and thank you all for joining us today. On today's call, I'll highlight quarterly results and our recent strategic achievements. I'll also introduce the new operating model we are implementing to support Albemarle's growth strategy. Scott will give you more detail on our results, outlook and guidance. Our businesses continue to execute well as global markets improve. Second quarter net sales were $774 million and adjusted EBITDA was $195 million, both of which marked a slight improvement compared to the second quarter of last year. Note that we closed the divestiture of FCS on June 1. So second quarter 2021 included only two months of FCS results. Excluding FCS, net sales increased 5% and adjusted EBITDA was up 13% compared to last year. And our financial release issued yesterday after the close, we revised our guidance for the year, in part to reflect higher lithium performance, but also supply chain disruptions for our bromine business.

We've also updated full year guidance to reflect the sale of FCS. Scott will walk you through those changes in more detail in just a few minutes. We continue to execute on our next wave of growth projects to capitalize on attractive long-term fundamentals in the markets we serve. We recently completed construction of La Negra three and four as planned, and we are progressing through the commissioning stage. Finally, I want to briefly describe the operating model we are launching to drive greater value, improve performance and deliver exceptional customer service. And you see that on slide five. Our operating model, which we call the Albemarle Way of Excellence, or AWE, serves as a framework for how we execute, deliver and ultimately accelerate our strategy. AWE is based on four pillars: sustainable approach includes responsibly managing our natural resourcing and engaging with our stakeholders; high-performance culture includes focusing on safety leadership and fostering an agile, engaged corporate culture; competitive capabilities means we are ensuring we have the right talent, resources and technologies; and finally, operational discipline is about embracing lean principles and operational excellence across the organization.

The operating model helps us connect our strategy with day-to-day initiatives, prioritize projects, clarify resource allocation, ensure accountability and drive efficient and profitable execution. We will discuss the operating model in more detail at our upcoming Investor Day on September 10. Now turning to slide six. We've completed construction of La Negra three and four in Chile and are in the commissioning stage. We expect commercial production from these two trains beginning in the first half of next year, ramping to 40,000 tons of lithium carbonate per year by 2024. This brownfield project allows us to increase existing capacity and leverage our world-class brine resource in Chile, just one of the avenues of growth that we have as an established lithium producer with a global footprint. We also continue to progress our Kemerton conversion facility in Western Australia.

To mitigate risk related to the tight labor market and COVID-related travel restrictions in Western Australia, we have modified our execution strategy to prioritize Kemerton I over Kemerton II. Kemerton I remains on track for construction completion by the end of the year. We now anticipate completion of Kemerton II by the end of the first quarter next year, a delay of about three months. These delays and higher labor rates have also increased capital cost. It's been a difficult situation in a labor market that was already tight, but we have been able to maintain the schedule for Kemerton I with only a three-month delay for Kemerton II. We continue to expect commercial production for both Kemerton I and II during 2022. Importantly, we are making progress on our Wave III lithium projects, and we'll provide further details at Investor Day in September.

Site selection is underway, and we are negotiating with the authorities to include investment agreements. We're also expediting investments in bromine to meet increasing demand. We completed the first well at Magnolia ahead of schedule and under budget. Unfortunately, we're unable to take advantage of that additional capacity in the second half due to shortages of chlorine in the supply chain. We also have two projects in Arkansas that are currently in the select phase. These projects are designed to increase production capacity of clear brine fluids and hydrobromic acid. A third project to increase the capacity of our brominated flame retardants is in the evaluate stage.

I'll now hand the call over to Scott, who will provide an overview of our financial results for the quarter.

[Scott Tozier, Executive Vice President and Chief Financial Officer at Albemarle]

Thanks, Kent, and good morning, everyone. I'll begin on slide seven. We generated net sales of $774 million during the second quarter, which is a slight increase from the same period last year, driven by stronger sales from our lithium and bromine segments. Higher sales as well as strong operating margins resulted in an adjusted EBITDA of $195 million, which was 5% higher year-over-year. GAAP net income of $425 million includes an after-tax gain of $332 million related to the divestiture of our FCS business to W.R. Grace. Adjusted EPS, which excludes the gain on FCS, was $0.89 for the quarter, up 4% from the prior year. Let's turn to slide eight for a look at adjusted EBITDA by business. Excluding FCS, second quarter adjusted EBITDA increased by 13% or $22 million compared to the prior year. Higher adjusted EBITDA for lithium and bromine was partially offset by higher corporate costs related to incentive compensation and foreign exchange movements.

Lithium's adjusted EBITDA increased by $19 million, excluding FX compared to last year, primarily driven by higher volumes, as customers under long-term agreements continue to pull orders forward and we shipped higher spodumene volumes from our Talison joint venture. Adjusted EBITDA for bromine increased by $16 million due to higher volumes and pricing. End market demand continues to very strong following the winter storms experienced in Q1 we had very limited excess capacity or inventory to meet that additional demand. Catalyst adjusted EBITDA declined just $1 million from the previous year. CFT volumes were down due to shipment timing, FCC continued to be impacted by a change in their order patterns from a large North American customer, although the FCC demand trend was generally higher. This was partially offset by excellent PCS results which benefited from a favorable customer mix.

Slide nine highlights the company's financial strength. Since the beginning of the year, we have taken significant steps to strengthen our balance sheet. The strategic decision to divest our FCS business added cash proceeds to the balance sheet and reduced our leverage ratio to 1.5 times. That transaction further demonstrates our ability to drive value by prudently managing our asset portfolio. Our strong balance sheet and investment-grade credit rating gives us the financial flexibility we need to accelerate profitable growth and continue to provide a growing dividend. Turning to slide 10. I'll walk you through the updates to our guidance that Kent mentioned earlier. And there are several key changes from our previous guidance. First, higher net sales guidance reflects higher lithium sales volumes and improving catalyst trends, offset by a lower bromine outlook.

Adjusted EBITDA guidance is the same reflecting higher net sales, offset by higher corporate costs and foreign exchange expense. Guidance on adjusted diluted EPS and net cash from operations is improving from an expected reduction in interest expense and tax rates. The timing of working capital changes is also expected to benefit net cash from operations. And finally, we see capital expenditures trending towards the high end of our previous $850 million to $950 million range based on the tight labor markets in Western Australia, as Kent discussed. In the far-right column, pro forma revised guidance ranges are adjusted for the sale of our FCS business on June one this year, removing the guidance on FCS for the rest of the year. I'm turning to slide 11 for more detail on the GBUs outlook. Adjusted EBITDA for lithium is expected to increase by 10% to 15% over last year, an improvement from our previous outlook.

Lithium volume growth is expected to be in the mid-teens on a percentage basis, mostly due to higher tolling volumes as well as the restart of North American plants at the beginning of the year and improvements in plant productivity. Our pricing outlook is unchanged. We continue to expect average realized pricing to increase sequentially over the second half of the year, but to remain roughly flat compared to full year 2020. We also continue to expect margins to remain below 35%, owing to higher costs related to project start-ups and incremental tolling costs. Margins should improve as the plants ramp up commercial sales volumes. Our outlook for Catalyst hasn't changed since the first quarter report with adjusted EBITDA anticipated to be lower by 30% to 40%. However, we are more optimistic as fuel markets continue to improve globally.

Lower year-over-year results are primarily related to the impact of the U.S. Gulf Coast, winter storm in the first quarter and the ongoing impact from the change in customer order patterns in North America. Finally, for bromine, we now expect mid-single-digit year-over-year growth in adjusted EBITDA, which is down from our previous outlook due to a force majeure declaration from our chlorine supplier in the U.S. Like many industrial companies, we are -- increased costs and supply disruptions for raw materials, but it is partially offset by price and productivity improvements. Results are expected to be lower in the second half as production is constrained due to the chlorine shortage. We are accelerating our expansion plans in bromine. However, we have been unable to take advantage of this new capacity yet due to the chlorine disruption. Looking ahead to 2022, we expect sales and EBITDA increases for all three businesses.

Lithium results are expected to improve on the higher volumes as the new plants ramp up. Bromine results are expected to rebound from short-term supply chain disruptions and the winter storm impacts, and Catalyst results are expected to rebound strongly from 2021 levels, assuming continued improvements in global transportation fuel demand.

And with that, I'll hand it back to Kent.

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

Okay. Thanks, Scott. On slide 12, we continue to execute on our strategic objectives for 2021. First, we are growing profitably. Construction is complete at La Negra, and we are commissioning this project with commercial volumes expected in the first half of next year. Both Kemerton trains are expected to contribute volumes in 2022 as well, despite the restructuring of our execution plan at Kemerton. As previously discussed, we are making progress on our Wave three lithium projects and expediting investments in bromine to meet increasing demand. Second, we are increasing productivity. We are on track to achieve at least our targeted $75 million in productivity improvements this year. We expect to continue to build on these improvements as we implement our operating model and build a culture of continuous improvement.

Third, we are maintaining our disciplined approach to investments and continue to optimize shareholder value by actively managing our portfolio of assets, including the recently completed FCS divestiture. Finally, all of our efforts are being driven with sustainability in mind. At our annual sustainability report published at the beginning of June, we disclosed initial sustainability targets, including plans to reduce greenhouse gas emissions and freshwater use. We are also working closely with customers, investors and ESG rating companies to make sure they are up to speed on all these developments and have a full appreciation for our efforts. So with that, I'd like to open the call for questions.

[Meredith H. Bandy, Vice President Investor Relations & Sustainability at Albemarle]

Operator, we're ready for questions now.

Questions and Answers

[Operator]

[Operator Instructions] Your first question comes from the line of P.J. Juvekar with Citi.

[P.J. Juvekar, Analyst at Smith Barney Citigroup]

Great. Good morning. Kent and Scott. Congrats on finishing La Negra three and four. Now that's done, are you looking for new hydroxide convergent capacity either in China or elsewhere? And would you consider building a convergent plant in the U.S.?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

So P.J., and thanks for that. We are -- so we're -- we've completed construction. We're still commissioning. So still a little bit to go at La Negra. And then as you see in the plans that have the Phase III, it's mostly about hydroxide capacity in the near term. So Kemerton will be coming on in the next year. And then the next wave of investments at the moment are focused on China, and we're -- we do look for acquisition of conversion capacity, but it's a bit of a challenge just to find the assets that we want and that are for sale.

So you kind of have a meeting of minds there. But we're also in parallel, we're progressing our plans to do greenfield projects as well. And if we were able to find an acquisition, we continue to progress the greenfield plans that we have. So they would be -- they're not -- if we did an acquisition, that doesn't mean we stop our greenfield plans and projects, but we would just do them in parallel. And then the last part -- I'm sorry, a lot about the U.S. So I mean, we will look at the U.S., but it's not in the next year or so, right?

So it's -- there's time. And our view is most of the cathode capacity that's being built and will be producing for the next several years, it's going to be in China or at least Asia. And so we have time before we have to see if we need capacity in North America or Europe.

[P.J. Juvekar, Analyst at Smith Barney Citigroup]

Okay. And then next question is, I want to go back to comments that you had made, Kent, I think on the last call, about sort of market segmentation of customers that some customers will have a long-term contract, some will have more market-related contracts, especially customers like those who negotiated prices down in 2019. I was just wondering if either you or Eric could add some color on this sort of market segmentation of customers?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

Sure. So yes, I don't know if we can add much more than we talked about previously, but we're -- in the past, we had kind of a long-term contract formula and it was -- we were trying to use that strategy for all of our customers. And what we've learned is that not all customers want to buy that way. So we're trying to segment on how they want to buy. And actually, we think it's good for us as well. So we're -- we have longer-term contracts that look more like a fixed price. And ideally, we want those contracts to move with the market but slightly with the market, but it looks more like a long-term contract.

On the other extreme, we'll have contracts that look more like spot. They're probably it's not -- probably not a one-year contract, it's probably more than that, but it moves with the market or closely with the market. Still may be dampened a bit and then you'll have some in the middle. Where that shakes out from a portfolio standpoint until we settle all that with our customers. I can't tell you, but for lack of anything else, it's probably 1/3, 1/3, 1/3 is kind of how we see it now.

[P.J. Juvekar, Analyst at Smith Barney Citigroup]

Thank you.

[Operator]

Your next question comes from the line of John Roberts with UBS.

[John Roberts, Analyst at UBS Group]

Thank you. On the delay at Kemerton II, if you're having delays, is the entire industry having significant delays here? I mean, we've got the car companies accelerating their demand plans here as the supply actually going to undershoot what the industry needs?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

Well, I can't speak to the other projects. But I mean, if you're building in Western Australia, the availability of labor, the tightness is extreme. And Western Australia is kind of famous for labor market that gets difficult if you're doing large projects just because of the resource industry draws all of the resources if their prices go up and their prices have gone up significantly for to say, iron ore is probably the biggest example, and they're drawing all the resources away. That's always been an issue in Western Australia, but today, we have COVID.

So they locked down not only Australia but about state by state. So we can't move -- not only can we not get resources from China or Thailand or even the U.K., we can't get resources from the east part of Australia. So we're kind of stuck with what's in Western Australia. So -- and I think that will affect anyone doing a big capital project in Western Australia or Australia. I'm not sure that it applies, say, in China, for example.

[John Roberts, Analyst at UBS Group]

Okay. And then when CATL announced it sodium ion battery, all the lithium stocks popped, including Albemarle, is sodium ion is something that we need to pay more attention to?

[Eric Norris, President, Lithium at Albemarle]

John, it's Eric. Sorry, as you may know, isn't a new chemistry. The CATLs innovation is on a matrix that may make it more effective. It is a chemistry that is lower energy density, heavier material. So it's applicable probably for the low -- very low end of EV ranges and maybe grid storage. I think one of the attractiveness components of it is -- its sodium is abundant, right? So it's -- so it may alleviate at that low end of the market -- given alternative if lithium supplies become tight as they have been in the past year or so.

[John Roberts, Analyst at UBS Group]

Thank you.

[Operator]

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

[Bob Koort, Analyst at The Goldman Sachs Group]

Thank you very much. Good morning. Kent, I was wondering you mentioned that La Negra's completed, takes six months to commission. Is that a function of just the qualifying process? And can you inventory production while you're doing that and then have a nice buffer of inventory to start selling from as soon as the qualification is complete? Or is it a function of making sure the process works properly?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

It's both. So we're commissioning and qualifying in parallel. So we can kind of -- we do early commissioning to get qualification samples, but the plant has not been operating at rates so that it takes us time to get it to operating at rates. So we -- kind of long pole in the tent, so to speak, is the qualification process, but we're commissioning during that same time, and we run them in parallel so that we -- to save time. So it's -- I think the answer is both.

[Bob Koort, Analyst at The Goldman Sachs Group]

Okay. And on Wodgina we've seen some pretty spectacular spot prices out there, some north of $1,000. When do you turn that on? And -- do you imagine that would ever feed the Kemerton plants? Or will you feed Kemerton through Talison for the foreseeable future?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

Yes. So yes, we'll see how that goes. I mean our plans are to feed Kemerton from Talison. And then as we either bring on other capacity or do an acquisition, we would use Wodgina for that. and our strategy about selling spodumene hasn't changed.

[Operator]

Your next question comes from the line of Edlain Rodriguez with Jefferies.

[Edlain Rodriguez, Analyst at Jefferies Financial Group]

Thank you. Good morning guys. A quick one on bromine. So you've talked about the chlorine issue you have in there. Like when do you expect that to correct itself?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

So I'll start and Netha can add a little bit. So -- and I think there's a broader issue in the chlorine space, but I mean our suppliers had some equipment failures, and we expect that to last -- they're telling us a couple of months, right? So they've got a short-term fix. We hope we'll get us back up to some higher rates and then the permanent fix is going to take kind of -- I think they told us two to three months.

[Netha Johnson, President of Bromine Specialties business at Albemarle]

As we look at the broader chlorine market, we think there'll be opportunities to get it back in balance by Q4 that we're hopeful for that.

[Edlain Rodriguez, Analyst at Jefferies Financial Group]

Okay. Makes sense. Another one. Like in terms of M&A, like -- you've done the FCS deal. So you monetize that. But when you look at the rest of the portfolio, like is there anything else in there that you think might be better with somebody else? No? Can you talk about the rest of the portfolio, what you see in there?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

Yes. So we -- I mean we were looking at our PCS business and we ran a process and we didn't get the pricing we wanted for it. So it's performing well, and we've pulled back -- that is no longer for sale, and we're running as part of the portfolio. We're running as part of our catalyst business. So we'll hold on to that. And then for the broader part of the portfolio, the three primary businesses, bromine, lithium and catalyst. We see those as core businesses. So that's kind of our fundamental portfolio and now PCS is part of Catalyst.

[Edlain Rodriguez, Analyst at Jefferies Financial Group]

Okay. Thank you very much.

[Operator]

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

[Joel Jackson, Analyst at BMO Capital Markets]

Good morning everyone. My first question, I'll follow up on spot. I mean, you as we've seen pretty interesting surges in spodumene prices in the last bunch of weeks. I know there's lags on contracts and stuff. But I think if we also -- it seems like conversion margin, the proxy conversion margins have been extremely strong. So are those -- as carbon hydroxide prices have been really strong. So do you see the spodumene price increases more of a lagging indicator? Or do you think that they're setting off to be another run-up in spot prices sparked up lithium derivative prices?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

Look, I'll make a broad comment and let Eric can try a little bit of detail. It's hard for us to project where the market is going. And we see prices both spodumene and carbonate and hydroxide prices being up. The only place you really have visibility of spot prices is in China for the carbonated hydroxide. And so you see that. You see the same numbers that we do. Those have not fully translated into the contract prices, but we do see contract prices moving up. And spodumene, I mean, it has gone up, come back down a little bit. I don't know that we're in what you would call a super cycle or headed toward that. But I think -- I do think prices will be higher than they have been in the last couple of years.

[Eric Norris, President, Lithium at Albemarle]

Yes, Joel, what I would -- this is -- and I think your question reflects this. This is a China market phenomenon. The China market is very dependent for its growth on imported spodumene. So -- and there is a shortfall of available supply to meet demand given the rapid growth post pandemic, particularly in carbonate in China. So in that regard, maybe spodumene is a bit of a lead because it's the short supply. But I think what we expect to happen is more supply to come into China from other parts of the world.

We've seen prices go up and stay up with demand. It's hard to say what's going to happen with spodumene prices. From an Albemarle perspective, the way we take advantage of that is we don't sell spodumene or that's right, we don't sell chemical grade spodumene to say we sell a specialty spodumene for the glass market. But for us, it's tolling. So you've heard us talk about looking at tolling opportunities, and that's part of our improved guidance. And for that, we're able to participate in that spot price market, which is, as I've said earlier, very favorable.

[Joel Jackson, Analyst at BMO Capital Markets]

So my follow-up would be just looking out to 2022 for LCE volume increases, I think you talked about maybe gaining about 30,000 tonnes LCE volume for next year with the different expansion ramping on. Kemerton II has delayed a few months maybe you've been pushing it a little more tolling now this year. Is it about 30,000 tonnes still the right number to think about for next year?

[Eric Norris, President, Lithium at Albemarle]

So Joel, I mean, I think it's -- you have to break it down. First of all, I don't think we've said 30,000 tonnes. We've talked about ramp rates on plants. So the Kemerton plant with a start-up in the early part of next year, there is a three-month delay to the second unit. We've talked about getting to full run rate capacity by the end of the second year in that facility. Similarly, in carbonate, you'd see a phenomenon that is somewhat like that. I would say our run rate for carbonate by the end of 2022 will probably be at the 30,000-run rate basis at the end of the year, that ramps.

It's a little bit different, ramping brine versus spodumene because brine is obviously a harvested material versus a fixed input. But that roughly should -- between those two should be able to calculate sort of our guidance. The change would be a slight delay at Kemerton. And then a year-on-year growth that we can achieve in tolling. And that's going to be -- it's harder for us to predict now because it's a function of what's available in the market for us to toll with.

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

Yes. It's also a function of how fast we ramp up, right, so how well commissioning goes. And then there's -- when you'll commission, you'll be able to make products, but at lower rates, and that will ramp up over time, and it's how well we do in that ramp curve. And it's hard to speculate on that.

[Joel Jackson, Analyst at BMO Capital Markets]

Thank you.

[Operator]

Your next question comes from the line of Arun Viswanathan with RBC Capital Markets.

[Arun Viswanathan, Analyst at RBC Capital Markets]

Great. Thanks for taking my question. I guess I just wanted to get your thoughts. We've had some differing views, I guess, maybe you could just provide your color on spodumene, carbonate and hydroxide. Spodumene, obviously, there was some oversupply in years past, but it seems like most of that is slowly working itself out. Maybe you can just characterize supply and demand in each of those areas?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

Okay. And again, I'll start. Eric can fill in where I miss things. But I think in the past, the industry is growing, right? So as the industry grows, you bring on capacity, it's a smaller percentage of the industry. So I don't think we're going to have those periods of oversupply, undersupply is tight, as they were in the past with the extremes showing up in pricing. So I think that applies across for hard rock as well as kind of the salt -- conversion capacity for the salt. So I think as the industry gets bigger, each addition is a smaller percentage of the total industry, it has less of an impact.

That said, where we are, I mean, spodumene is tight. And I think that the conversion capacity as the growth rates that we see, which you kind of see in as an indicator, EV sales is the forward-looking growth curve for lithium. Those are pretty tight and you've got to make investments, and you've got to be good at executing those projects and commissioning them and then ramping them up to full capacity, which is we think we're good at that, but we're in the process of proving it.

[Eric Norris, President, Lithium at Albemarle]

And I would just add, Arun, that today, as we sit here today, all three are extremely tight. If we had more carbonate that we could produce and sell, we could sell it readily, same with hydroxide. We don't have the disadvantage. We have the ability. We have idle capacity on the spodumene side. So we are not feedstock limited. That's a strength we have going forward. What we're limited on is our ability to get conversion capacity in the ground quickly. So -- and that's part of our plan for next year.

As to the long term, my guess would be that our view would be, I should say, that hydroxide will probably see the higher rate of growth going forward off a smaller base. Carbonate has done well in the near term based upon the LFP trend for lower-end vehicles, particularly in China, and we see that starting to take root in some other regions as well for the low end. But the key to high EV penetration is higher energy density.

And the key to that is hydroxide and ultimately, potentially solid-state chemistries. So that's going to require a heavier burden on hydroxide. We see that being the tighter market on a long-term basis going forward.

[Arun Viswanathan, Analyst at RBC Capital Markets]

Great. And just wondering if there's any concern from elevated logistics costs for the next little while, also, maybe you can just address if there's any concerns on the container shortage issue?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

Well, I think across all of our businesses, the supply chain is a challenge and a concern. So oceangoing freight probably the biggest, but well, chemicals supply in the U.S. is hitting us and particularly chlorine at the moment, but it's tight in a number of chemicals, but oceangoing freight is a big concern for us and something that we are working pretty hard to try to manage. We spent a lot of time trying to streamline that supply chain, digitize it, so we have much better visibility on it. So we're making progress on that, but it's still a concern.

[Arun Viswanathan, Analyst at RBC Capital Markets]

Okay. Thanks.

[Operator]

Your next question comes from the line of Vincent Andrews with Morgan Stanley.

[Vincent Andrews, Analyst at Morgan Stanley]

Thanks and good morning. If I could just ask in bromine, it doesn't sound like in either your sort of electronic sales or your auto sales that you're seeing any real volume issues from the shortage of Microchip. So is that just something that it's either being offset by other parts of the business or it's just not an issue either year-to-date or into the back half of the year?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

Yes, Vincent, from where we sit in the supply chain, we're not seeing that at all and from a demand side, our demand in those areas have been steady.

[Vincent Andrews, Analyst at Morgan Stanley]

Okay. Great. And if I could just ask, you have the Analyst Day coming up and you're also concurrently working on the Wave III projects and looking to move forward thus. I mean, should we be expecting a material update on those at the Analyst Day? Or are those two events unique?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

So a material update. I'd say it depends on the definition. So we'll give you progress on where we are, but we're not -- but we're still in the planning phase. We're not moving dirt on any of the projects yet.

[Vincent Andrews, Analyst at Morgan Stanley]

Okay. So no FID -- we shouldn't be expecting an FID decisions then?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

No. I mean we're progressing as we go, and we'll tell you the plans that we have, but it's not a -- we will not have a final investment decision by -- in a month.

[Vincent Andrews, Analyst at Morgan Stanley]

Okay. Very good. Thanks so much.

[Operator]

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

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you, good morning. Eric, a couple of questions for you. Just on lithium pricing in Q3. Is your guidance for that pricing to be up year-over-year in Q3?

[Eric Norris, President, Lithium at Albemarle]

Yes. The second half, we were down 10% to recount a little history here to put it in perspective. We're down 10% across the board in the first quarter, 4% in the second quarter, and we're saying flat for the year. So it will be up year-over-year. Another way to think about our lowest price point over the past 24 months or including the rest of this year, so over 2020 and 2021, we expect to be the fourth quarter of last year. And ever since then, we sort of bottomed and we're seeing as spot prices move up for that small amount of our business is exposed to that, such as battery grade in China or tech grade.

And as concessions to contracts given during the height of the pandemic roll off, we see those prices rising in -- into the second half of this year. And given the tightness in the market, we expect into next year as well.

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Very good. And also, there's been some progress on a DLE project near your operations in Southern Arkansas. Can you discuss the viability of a DLE project for you guys in Southern Arkansas going forward?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

Well, yes, so I'll say that for us, we continue to look at Magnolia brines, where we operate our bromine operation as being a spot where we could process lithium and DLE's a potential technology for that. DLE, just -- it's a bandied-about term, most often here in the U.S. with many of the projects, what they're talking about is absorption resins. And so it's a mechanical operation for extracting brines. It's a mechanical operation as opposed to an evaporation effort such as we do in Chile, that you would only apply if you have to apply, meaning if you apply it to resource that are of lower quality or have higher impurities present, which is generally true with both oilfield brines, which is what we have in Magnolia, or geothermal brines.

So it's more intensive. It actually also consumes a lot more water and energy given the -- so it has some drawbacks from it. We're studying what alternatives we could deploy to a resource like that, that could include absorption that optimize those factors of cost and sustainability. Given where we are with our high-quality resources and then what we can do in the year to drive our growth in the next five years, we put that as a resource later in the decade that we would consider for that given those technical challenges and given its cost profile.

[Eric Norris, President, Lithium at Albemarle]

Yes. And I would just add, so we've -- we didn't -- that wasn't included in our Phase III but it's something that we look at. We're looking at the technology. We have access to the brines and we have the operation. We're already kind of pumping the brines around. So we'd be in a good position to leverage it if we think that get the technology right, and we believe the cost position is right. But it's something that comes probably in Phase IV if we get that technology right.

[David Begleiter, Analyst at Deutsche Bank Aktiengesellschaft]

Very helpful. Thank you.

[Operator]

Your next question comes from the line of Jeff Zekauskas with JPMorgan.

[Jeff Zekauskas, Analyst at JPMorgan Chase & Co.]

Thanks very much. In your Talison operation in equity income in lithium, sometimes you earn $30 million and sometimes you earn $15 million or $16 million. What's the difference between the two? And we've had some 15s and 16s. Are there any 30s to come?

[Scott Tozier, Executive Vice President and Chief Financial Officer at Albemarle]

Jeff, this is Scott. So the equity income in Talison is affected by two things. One is the volume that's being shipped both to ourselves as well as to Tianqi, our partner. And of course, that has been either flat or rising over time. The bigger impact that you're seeing through the equity income is coming from the transfer price, which is affected by that -- by the spodumene market price that's out there. So when that price is high, you're going to see a higher equity income. When it's lower, you'll see a lower equity income.

And generally, that's going to track on about a six-month lag to the market indicators that are out there. So as we've talked about in some of the prior questions, because the spodumene price is higher or going higher right now, you should expect in the second half that, that equity income would also track to that.

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

You should just keep in mind, though, that then our input cost for conversion goes up when that price goes up. So we don't really -- it doesn't matter so much to us because it's all -- it washes through. But it's the difference between equity income and what shows up in the lithium P&L.

[Jeff Zekauskas, Analyst at JPMorgan Chase & Co.]

Then for my follow-up, I think over the past several years, if you had to describe the contractual terms of your long-term lithium contracts. I think you would have said that they were above market. Given the changes in the lithium market and its tightness or snugness, is it now the case that your long-term contracts are more comparable to current prices?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

It depends on what you call -- yes, I think it depends on what you're calling current prices. So if you're talking about spot prices in China, which is what everyone can see, that's probably correct. But I think if you were to think about contract prices over time -- contract prices outside of China that different suppliers have, it's probably in line or above those, I would say probably still above those.

[Jeff Zekauskas, Analyst at JPMorgan Chase & Co.]

Okay. Thank you very much.

[Operator]

Your next question comes from the line of Ben Kallo with Baird.

[Ben Kallo, Analyst at Robert W. Baird]

Thanks. Good morning guys. Thanks for taking my question. Just maybe two on the lithium and then one on bromine. Lithium, you get this question a lot, but just on recycling, we saw Redwood materials raised a large sum of money. I want to understand how you see the players in the recycling as they either work with you or competitors, is number one. Number two, on the Tesla call, and then -- and I think before that, Musk was talking about the LFP and the increase there. And I just wanted to understand, I think you talked a little bit about this, but how you make investments into carbonate versus hydroxide with that background, looking like there's a large increase in demand for LFP?

And then on bromine, just how comfortable you are around the timing of the expansion? And I think it's really chemical expanded already earlier. So I just want to see how strong do you think that market is for bringing on new capacity?

[Eric Norris, President, Lithium at Albemarle]

Ben, this is Eric. On recycling, recycling is happening around the world. And so the companies you're referring to are largely here in the U.S. There's a set of companies similarly in Europe. It's a regional business model because of the collection and nature of different regulations around the world. As a global player, we're engaged with all of these companies. We view them in almost every case as a partner, not a competitor. And we bring process technology and know-how that -- what we deploy in some of our existing virgin brine operations that could be a partnership approach to helping to remove the lithium and/or take a byproduct that comes out of their operations, which is lithium rich.

So that's the way we work with them. You have to remember, a lot of these companies got set up, and this is -- and then Europe is ahead on this, largely to go after the nickel and the cobalt not lithium. Lithium is usually the byproduct of the recycling operation, that's where we fit in. And so as we look at trying to partner with our customers and drive their success from a sustainability standpoint, we view this as an important part of the value mix we bring is helping them recycle the lithium and recycle it back to them for their continued growth.

On the Tesla side, we view what Tesla has described as very -- generally very consistent with our market outlook. It's going to continue to shift, and I think, expand, meaning the size of the EV market, which by 2025 might be at one level, but by 2030, I think you're going to have a larger proportion of vehicles that are electrified. Some news out about -- some intentions around that here in the U.S. today. And for the lower end, LFP is the applicable technology. I mean it gives you a lower range.

We still believe, though, that for the mid and the higher range vehicles, you're going to need -- in order to get -- you need higher energy density to get the range. And you can drive good cost if you can get good technology and then get the cost per kilowatt hour down, you don't get the kilowatt hours up per unit weight. So that's the mix we see. And it's very consistent the way Tesla is approaching the market as well. Turn it over to Netha for bromine.

[Netha Johnson, President of Bromine Specialties business at Albemarle]

If you talk about the timing of our bromine expansions, I think we feel really good about the markets that we participate in and their projections over the next few years. And we're really just executing the company's strategy, building capabilities to accelerate lower capital intensity, higher return growth. And for us, what we're doing it at is Magnolia. And that's a great place for us to do it because we have great jurisdiction. We've been there for over 50 years. We know the asset well and we can produce every product that we make out of that facility.

So that leads us to have high confidence in those projects, and the timing of execution. And we feel really good about the plan there and our ability to deliver what we want out of those expansion projects.

[Ben Kallo, Analyst at Robert W. Baird]

Great. Thank you very much.

[Operator]

Your next question comes from the line of Matthew DeYoe with Bank of America.

[Matthew DeYoe, Analyst at Bank of America]

Thank you. So as you ramp Talison to meet Kemerton demand, what do you expect your partner to do? I know they have their own kind of hydroxide plans. Those have been pushed a bit. Do you expect Talison output to increase by the 50,000 metric tons you're going to need? Or will it be closer to 100,000 metric tons? And just how do you see that timeline playing out, can you move as fast as you think you'll need if it's a joint discussion versus your singular desires, I guess?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

Yes. Well, it's definitely a joint discussion. It's a JV. And I think we'll optimize the supply. So the product at Talison our portion or half of that with spodumene that's ours. But we have JV product at Wodgina. They have their own product in other parts of Australia, and we'll swap product to kind of optimize economics. I think the way you would think about it as Talison goes to feed our portion and then some other product feeds their portion at Kemerton. However, physically, it probably won't work that way. We'll swap product to optimize the economics.

[Matthew DeYoe, Analyst at Bank of America]

I guess I meant more what you expect Tianqi to do versus this time. I have a question about this.

[Eric Norris, President, Lithium at Albemarle]

This is Eric jumping in. We can't predict what Tiangi is going to do. I mean they have some public statements out there around their Kwinana facility, which is really very -- in terms of its potential over time, similar in size to Kemerton, at least our first investment in Kemerton. And the JV is owned by the two of us. So it produces a budget to what we need. So you really need to talk about what's on the ground there CGP1 and CGP2. We feel with CGP2 being fully ramped, we'll meet the needs of what we have invested in and allow us to ramp at Kemerton.

And if they don't have the need on their side, they won't take their share, right, is how it comes down to it. So that's how it works. We're always entitled to at least 50%. It could be of what's available. It could be more if they don't need to take more and vice versa on the other side.

[Matthew DeYoe, Analyst at Bank of America]

Okay. And if I could just follow up. So the new pricing approach you talked about, I understand it's still in the works. But theoretically, I guess, if you were to look over the last cycle, maybe peaks in 2018 and trough more in 2020. Can you provide some context as to like how much your realized price would have been higher in 2018 had you chosen this path versus how much lower you would have been in 2020? Like how much higher are the peaks and how much lower were the trough? I would imagine some sort of analysis has been done to kind of get a sense for if this was a net winner or a loser over time?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

Yes. So we've not done analysis that we can share about what our price would have been under the new model. But you're right, it would have been higher toward the peak and lower during the trough. So which is the point we're trying to move a little bit more with the market but not expose ourselves fully to the commodity price. But I don't have the numbers to share with you to exactly what it would be. And the other part of that question, which we don't really know the answer to is how is the portfolio, what does it look like?

How much of that bot-type pricing will we end up with versus that long-term contract pricing. Because during the last peak and bottom they were pretty much -- were all on the long-term contracts.

[Eric Norris, President, Lithium at Albemarle]

I think it's also important that in the last peak and Bob, there were no automotive producers involved at all in the cycle. There are now and there's a lot more demand now. And I'll reference the remark Kent made earlier that given the size and maturity of -- we've only gone through one cycle before, really, since the dawn of the EV, and now we're moving through the next part of the cycle. It's going a little different. It probably won't have the same volatility it did before. We don't know. But I think the size of growth is such that -- and supply additions is such that it's going to change with time.

So the pricing structure we're putting in place is going to continue to evolve. We have contracts that fit the structure. So we know it works. We have customers paying fixed prices. We have customers who are only -- we're only going to give them a year commitment and they'll take -- they'll want to ride the wave. And at that point, that wave is going up. So it's -- how it settles out over time, we'll have to continue to dimension for you, but we're at the early stages.

[Matthew DeYoe, Analyst at Bank of America]

Understood. Thank you.

[Operator]

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

[Mike Sison, Analyst at Wells Fargo & Company]

Good morning, nice quarter. Just curious what your thoughts on the lithium demand whether percent or tons in 2022 is expected to be for the industry?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

Yes. It's a question, Mike, that I may have to go back and look at our demand model because we do have a model we put out -- and it's still consistent with what we think today. And it was some months ago earlier this year, we did that. We're seeing a much bigger demand year in 2021 overall this year than last because of the post-pandemic recovery. The overall market growth is 25% plus. So we're going to be at least in that order of magnitude for 2022, I'd say, on a year-on-year basis.

[Mike Sison, Analyst at Wells Fargo & Company]

Got it. And then I know there's some timing in terms of getting the volume on for Wave II, but when do you think, roughly, you'll have all the capacity available to sell? Is it 2023, 2024, 2025, just curious on the -- when you'll be able to sell it all?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

And when you say the capacity, you mean La Negra and Kemerton?

[Mike Sison, Analyst at Wells Fargo & Company]

Yes. Yes.

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

Okay, because we're -- I mean, our plants, we're going to be building plants over time. It's going to be ramping up over time. But La Negra -- between La Negra and Kemerton at full rates ramped up selling everything, 2024 for the full year.

[Mike Sison, Analyst at Wells Fargo & Company]

Great. Thank you.

[Operator]

Your next question comes from the line of Chris Kapsch with Loop Capital Markets.

[Chris Kapsch, Analyst at Loop Capital Markets]

Good morning. Just a slightly more nuanced follow-up on this discussion around the increased volumes implied in your guidance. And -- so I surmise, most of that is coming from more volumes from via Greenbushes and that spodumene being converted downstream via tollers. First, is that an accurate characterization? And then with that in mind, Eric, I'm pretty sure you've stated in the past that you don't rely on toll conversion for battery-grade chemicals, but only for technical grade lithium products. But in this case, it seems like the extra volumes are carbonate feeding into the LFP cathode market.

So just wondering if that also is accurate? And if that's the case, should we be thinking of these carbonate grades via tollers as just -- or maybe just the LFP market being more of a technical grade market? And then finally, just -- it seems like this is part of the market you'll address once La Negra is ramped next year. But will then -- will you then say the current toll relationships that you're leaning into currently to opportunistically address these volumes?

[Eric Norris, President, Lithium at Albemarle]

There are a bunch of questions there, Chris. Let me go to the first one, which had to do with -- help me here, I'm just stuck on the LFP, but you had something before that. What was that? What was your first question, Chris?

[Chris Kapsch, Analyst at Loop Capital Markets]

Yes. So the tolling volumes...

[Eric Norris, President, Lithium at Albemarle]

Our volume, yes. Yes. Sorry. Senior moment there, I guess. The -- if you look at our produced volumes, we're going to be fairly flat first half to second half. Maybe slightly better in the second half because we have a little bit better production. We have some better production in Chile in the fourth quarter seasonally, just by a tad. What the real difference in our volume first to second half and our volume growth year-over-year is -- on the first half, second half is the tolling -- increased tolling. Year-over-year is tolling because we did none last year, as well as plants come back online and efficiencies in the plants, better operation in the plants year-over-year.

So there's a bit of difference between first half, second half and year-over-year there. On what we're using that carbonate for when we told it in China, it's going into the LFP market. I think what we've -- I don't know what we said year's ago, but what we said more recently is that the carbonate market, the tolling network is able to produce sufficient battery grid quality to supply the LFP market for batteries in China. So that's where we are selling that material currently. And then I'm going to ask your help again. The last question was...

[Chris Kapsch, Analyst at Loop Capital Markets]

Yes. So since you're addressing that via the tolling relationships currently when you ramp La Negra next year, will you fade those relationships? Or do you still intend to participate via tolling? Obviously, this has mix implications given the higher feedstock costs and the fact that tollers need to make a margin. So curious if you'll fade those tolling relationships? Or maybe would there be a bare hub like you've done in the past with tolling partners that you're comfortable with?

[Eric Norris, President, Lithium at Albemarle]

It will be a bit of both. I mean our strategy for a lot of what we produce out of La Negra's growth, La Negra three and four, is to put it under a contract commitment in some form. That might be for price by only a year and for performance might be a couple of years. But that's our strategy for that volume. Our strategy for the toll volume is either to use it as a bridge to build a customer relationship when we have a La Negra three and four. Some of those customers we're currently selling total volumes for, we will take advantage of selling La Negra three and four to it as well.

But in today's market, which is particularly tight is also opportunistic to play in what is a pretty tight market. And there, we're really playing on a spot basis. So while we have higher cost to produce this total volume, we're taking advantage of currently higher spot prices than contract.

[Chris Kapsch, Analyst at Loop Capital Markets]

That's helpful Thanks a lot.

[Operator]

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

[Kevin McCarthy, Analyst at Vertical Research]

Good morning. Thank you for squeezing me in. I wanted to ask about your Catalyst business. If we look at margins in the first half of the year in broad strokes, they're running maybe half of historical levels yet. In the prepared remarks, I think you indicated you anticipate a strong rebound in the business. So -- just wondering if you could flesh that out in terms of what you're seeing in your refinery catalyst order books? And when might we expect those margins to get back to historical levels, might that be as soon as 222 or more likely 2023 or later?

[Raphael Crawford, President of the Catalysts business unit at Albemarle]

Kevin, this is Raphael. Just to respond, one, there's been a series of effects. I mean in the first half of the year, we certainly had an impact from the winter storm. We have residual impact from the pandemic. A lot of that pandemic impact was a down trade of high-performance catalysts to maybe more workhorse catalysts, that has an effect on margins and as well as on our mix. Looking forward, I think we would see recovery. I mean some of our best products, what we're known for, for example, is our high-performance hydro-processing catalysts.

As the market is recovering as change out start to a faster clip in 2022, we're going to start to see that come back. Again, we have great partnerships for great performance catalyst. Those are the higher margin that will improve our mix. And I think it's that mix impact going into 2022, you'll start to see that improvement in our margins. We already see it today, Kevin. We have customers that are -- they down traded to lower performance catalysts when they were under margin pressure. We just had a customer meeting this week with a large North American refiner who was telling us that because they're starting to operate at higher rates, they're needing to run under more severe conditions, they need higher-performance catalysts.

Those command higher margins for us. So we think it's a favorable trend. It will probably start to materialize in 2022 where you'll start to see them.

[Kevin McCarthy, Analyst at Vertical Research]

And then secondly, if I may, for Eric, in a prior answer, I think you alluded to the news out today that the U.S. is now targeting 40% to 50% of new auto sales as EVs by 2030, although I thought I read that it might be non-mandatory. So just curious about your view on that? Is it incrementally accretive to your demand outlook in any way? Or are the U.S. automakers already tracking the similar levels? Or what do you think about the potential market impact of that announcement?

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

Yes. So this is Kent. It's early news. It's just out today. And I don't -- from my understanding was it's not mandatory. It's kind of something that is trying to lead legislation to something maybe like that. It's -- so I'd say it's early days. And I'm not -- and it's probably in the ballpark of what the car companies are already thinking. Maybe it's a little more aggressive, but it doesn't shift the model from our perspective. I don't think -- I think our view would be that's neutral.

[Kevin McCarthy, Analyst at Vertical Research]

Thank you very much.

[Operator]

And now we will -- I would like to turn the call over to Kent Masters for closing remarks.

[Kent Masters, Chairman, President and Chief Executive Officer at Albemarle]

Thank you, Carol, and thank you all again for your participation on our call today. As you can see, we have a lot to be excited about at Albemarle, and we see extraordinary opportunities for growth. We are implementing a comprehensive operating model that will enable us to execute on our objectives effectively and efficiently. We look forward to discussing this in greater detail during our Investor Day on September 10, and we hope you will all be able to join us then. Thank you, and that concludes our call today.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Meredith H. Bandy, Vice President Investor Relations & Sustainability
• Kent Masters, Chairman, President and Chief Executive Officer
• Scott Tozier, Executive Vice President and Chief Financial Officer
• Eric Norris, President, Lithium
• Netha Johnson, President of Bromine Specialties business
• Raphael Crawford, President of the Catalysts business unit

Analysts

• P.J. Juvekar, Smith Barney Citigroup
• John Roberts, UBS Group AG
• Bob Koort, The Goldman Sachs Group, Inc.
• Edlain Rodriguez, Jefferies Financial Group Inc.
• Joel Jackson, BMO Capital Markets
• Arun Viswanathan, RBC Capital Markets
• Vincent Andrews, Morgan Stanley
• David Begleiter, Deutsche Bank Aktiengesellschaft
• Jeff Zekauskas, JPMorgan Chase & Co.
• Ben Kallo, Robert W. Baird
• Matthew DeYoe, Bank of America Co.
• Mike Sison, Wells Fargo & Company
• Chris Kapsch, Loop Capital Markets
• Kevin McCarthy, Vertical Research