Albemarle Corporation's operator, Sheryl, welcomes everyone to the company's Q3 2023 earnings call. Meredith Bandy, Vice President of Investor Relations and Sustainability, introduces the speakers for the call, including CEO Kent Masters and CFO Scott Tozier. Bandy reminds listeners that some statements made during the call may be forward-looking and that non-GAAP financial measures will be discussed. Masters acknowledges that this will be Tozier's last quarterly call as CFO and announces that Neal Sheorey will be joining the company in that role. Masters praises Tozier's impact on the company and their commitment to growth and sustainability.

In the third quarter, Albemarle's net sales were up 10% from the previous year, but adjusted EBITDA was down due to market pricing and inventory impacts. The company remains optimistic about its long-term growth and recently signed agreements with Caterpillar to collaborate on sustainable mining operations and battery production. They also received a $90 million grant from the U.S. Department of Defense to support the expansion of domestic mining and production of lithium for the nation's battery supply chain.

In the third quarter, Albemarle finalized simplified commercial arrangements related to their joint venture transaction with Mineral Resources. This includes taking full ownership of the Kemerton lithium processing facility and 50% ownership of the Wodgina spodumene mine in Australia. Scott Tozier then discussed the company's financial results, including a 10% increase in net sales, but a 66% decrease in net income due to higher cost of goods sold and timing impacts. Adjusted EBITDA for the third quarter was $453 million, a decrease of 62% compared to last year. However, for the first three quarters of 2023, adjusted EBITDA was more than $3 billion, reflecting significant growth in the energy storage sector. The company is lowering its total outlook for 2023 due to softer lithium market pricing.

The company has decreased its range for net sales for the year, assuming that lithium market prices will remain constant. They expect a 30% to 35% increase in net sales, driven by the ramp of energy storage volumes. Adjusted EBITDA is expected to be in the range of $3.2 billion to $3.4 billion, with a margin of 34% to 35%. Adjusted EPS outlook has also been adjusted, and net cash from operations is expected to be between $600 million to $800 million. The decrease in adjusted EBITDA and net cash from operations is due to lower expected sales volumes at their Talison joint venture. CapEx guidance remains the same, and the company will provide their full year 2024 outlook in February. In terms of segments, they expect energy storage net sales to be in the range of $7 billion to $7.2 billion, with flat to slightly down adjusted EBITDA. Average realized pricing is expected to increase by 15% to 20% year-over-year, and energy storage volume growth is projected to be between 30% to 35% year-over-year.

In the fourth quarter, there is expected to be a significant increase in production volumes due to project ramps, with continued growth in 2024. In the Specialties division, net sales are projected to be $1.5 billion with a decrease in adjusted EBITDA due to softness in some markets. The company is closely monitoring the situation in the Middle East but operations are currently running smoothly. Inflation in material and energy costs is expected to moderate. The company is implementing cost and efficiency improvements to support profitability and cash flow. The Albemarle Way of Excellence is the company's standard for operation.

Slide 10 provides an update on our manufacturing and procurement targets, with a goal to exceed $170 million in productivity benefits by 2023. We expect improvements in overall equipment effectiveness and strategic sourcing to contribute to these benefits. Our sales mix for 2023 remains unchanged and we anticipate a 30-35% increase in energy storage volume. By 2027, we expect to triple our volumes to over 300,000 tons. Slide 13 shows the updated bridge for our energy storage adjusted EBITDA margins, with an expected normalization to the 40% range in 2023. Talison equity income is included in our adjusted EBITDA, which has a tax drag of 7-10%. The largest impact to our margins is a 20% spodumene inventory lag.

The company acknowledges that predicting inventory lag is difficult and that their access to a top lithium resource through a joint venture helps with earnings. The timing of inventories and sales can affect margins, but excluding these impacts, they expect margins to remain steady. The company recognizes profit from their partner's offtake immediately, but their own profit is recognized after 6 months. This resulted in an $800 million benefit to EBITDA in the first half of 2023, but this effect is expected to reverse as spodumene market prices decrease. However, this is expected to be temporary and will not impact adjusted EBITDA at steady market prices. The company's capital allocation priorities remain unchanged.

In this paragraph, the speaker discusses Albemarle's three main areas of investment: high-return organic and inorganic growth, maintaining financial flexibility and credit rating, and funding dividends. They also mention their decision not to pursue a potential acquisition and their disciplined approach to capital allocation. The speaker then turns to the company's balance sheet flexibility and their expected leverage ratio. Finally, they provide a market update on the growth of EV sales and the long-term growth opportunity for the company.

The article discusses potential challenges for EV growth in Europe and the US due to economic softness and higher interest rates. However, the company remains optimistic about long-term growth in the EV market and other sectors. They also mention their strong net sales growth and competitive advantage, as well as recent actions taken to further capitalize on growth opportunities. The call then moves on to the Q&A portion.

During a conference call, an operator directs a question to Kent Masters from Albemarle Corporation. The question is about the company's joint venture partner not taking their full allocation at Greenbushes and whether Albemarle plans to take their full volume allocation. Masters responds by saying that they do plan to take their full allocation and do not see any risk of production cuts in the first quarter. He also mentions that the company is reviewing their growth investments and may delay some projects to cut capital without impacting long-term growth. Another question is asked about lithium pricing and what would happen if spot prices dropped to $18 per kilogram. Masters explains that they have contracts with floors and are at the high end of the cost curve, but does not go into further detail.

Albemarle does not provide specific pricing guidance, but their spot prices in China may differ from those in other markets due to transactional and VAT considerations. They have floors on 80% of their index reference contracts to protect their margins and continue pursuing growth. Despite the current low prices, they have a double-digit growth plan and a low-cost position in their portfolio. The company previously talked about maintaining margins of 45% or higher in a lower price environment, but the current margin range is lower and it is unclear what accounts for the difference.

Eric Norris is responding to a question about the recent decrease in lithium prices. He explains that their company has been modeling supply and demand and that the industry is currently operating at a mid-90s capacity utilization rate. He also mentions an inventory correction in the supply chain as a factor in the price decrease.

The speaker discusses the recent inventory correction in the cathode market and the potential for further corrections in the supply chain. They express concern about future availability and investment in supply to support the transition to electric vehicles. The company may slow down their growth plans if lithium prices are lower than expected, but they remain confident in their longer-term plan.

Kent Masters, the speaker, talks about the balance between overspending and maintaining market share. He mentions that they will cut back on capital programs and be cautious in investing while the market is down. The next speaker, Joel Jackson, thanks the speaker and introduces the next question from Michael with Wells Fargo Securities. Michael asks about the demand for 2024 and the potential for a 30-40% EBITDA margin. Eric Norris responds by stating that all contracts are performing well and they are able to sell product in the spot markets. He also mentions that there is negative sentiment in the media, but the bigger markets like China are continuing to grow their output, which is driving healthy demand.

The demand for new production in the EV market has underperformed, leading to a 35% growth in consumption. However, this is due to an inventory correction and is not a sustainable trend. The company is confident in their long-term growth and plans to bring on more capacity in 2024. In terms of margins, they expect to see some impact from spodumene inventory lag in the first half of next year, but should reach normalized margins by the second half. The industry is still in its early stages, making it difficult to predict potential pricing changes.

The speaker discusses the volatility in the current cycle and how it has not been as anticipated. They also mention the difficulty in predicting the duration of this volatility. The next question is about the company's cash flow for the year and why it is expected to be negative in the fourth quarter. The speaker explains that this is due to lower EBITDA, increased working capital, and one-time items such as a settlement. They also clarify the impact of these factors on the company's EBITDA margin, excluding equity income.

The speaker explains that their strategy is to make money throughout the production chain, but their joint venture with Talison is currently making a significant portion of their operating income due to low prices. The company is experiencing losses in the second half of the year due to timing of processing spodumene inventory, but in a flat rate and price environment, margins would be normal. The speaker also confirms that the expected EBITDA impact of this timing difference in the fourth quarter is around $300-400 million. Additionally, the speaker mentions the impact of lower equity income due to their partner not taking their full allocation.

Eric Norris, speaking on behalf of the company, was asked about the impact of the fourth quarter and their expectations for equity income. He mentioned that the impact would vary, but in the fourth quarter alone, it was over $100 million. The next question was about producers in China shutting down, and Eric explained that this phenomenon had occurred during the first quarter as well. He noted that merchant spodumene producers were facing negative margins at current price levels and would need to shut down unless they could obtain lower-cost spodumene. Lepidolite producers were facing a different situation.

The company has faced challenges in producing a high-cost material and has seen a moderation of capacity due to environmental and start-up issues. Un-integrated lepidolite producers have also seen a similar margin loss. The closure of some Chinese producers is due to these factors, but they may come back if prices recover. The company has not given a full guidance for energy storage volumes, but expects a similar growth rate as this year. The demand for lithium consumption is projected to be in the 30s for next year. The company previously considered divesting the catch in business, but there has been a rebound and a robust outlook for the fourth quarter.

Kent Masters, CEO of Albemarle Corporation, discusses the company's energy storage business and its plans for the future. He mentions that they considered divesting the business last year but were unable to get the desired value, so they are currently treating it as a wholly owned subsidiary. Eric Norris, President of Lithium, comments on the company's partnership with Talison and the possibility of building inventory in the fourth quarter. He explains that they anticipate a double-digit growth in demand for spodumene, which will be needed to serve their capacity additions and expansion plans in the coming year.

The company's main goal is to run efficiently and preserve cash in order to support growth. They do not want to carry excess working capital and instead focus on ramping up production to meet demand. They will provide more guidance on this in a few months and plan to give an update during the February earnings call. On Slide 11, the company states that a $10 per kilogram change in market indices would result in a $5 to $7 per kilogram change in realized pricing for the year. This rule of thumb should also apply to 2024, unless there is a significant change in the contract.

The speaker asks the CEO about the quarterly margin pattern and when the trough margin quarter might occur due to the expense of spodumene. The CEO responds that the trough will likely be in the first quarter of 2024, but there may be some impact in the first quarter of 2023. The next question is about the company's balance sheet and how they plan to use it for M&A and growth CapEx. The CEO explains that their plans may change depending on market conditions and they are open to using debt financing for both organic and acquired growth. They may also be willing to let leverage increase if necessary.

The company aims to maintain an investment grade rating and a debt ceiling of 2.5x. They will make adjustments to achieve this and will continue with their organic growth plan, but will scale back on M&A. The current spodumene prices could potentially decrease, but market demand for salts may counteract this. The overall market for lithium is soft, not just the trade market.

The speaker discusses the current state of global markets and stock markets, noting that demand for EVs is not as weak as portrayed. However, the unpredictability of demand makes it difficult to predict the future of spodumene prices. The speaker also addresses concerns about inventory levels and supply chain disruptions in the EV industry.

The speaker discusses concerns about the sustainability and responsibility of operating a supply chain for security purposes. They also mention that there is continued demand from global OEMs for securing supply of lithium for electric vehicles. The speaker also mentions that their company has a broad research and development program focused on extracting and converting lithium.

The speaker discusses Albemarle's program focused on direct lithium extraction, which involves a variety of technologies unique to each brine resource. The program is currently focused on the Salar de Atacama and Magnolia, Arkansas, but could apply to other brine resources as well. The company is confident in their market opportunity and strategy to achieve short-term and long-term results. They strive to be the preferred partner for customers and the preferred investment choice.

This summary was generated with AI and may contain some inaccuracies.