The operator welcomes listeners to Albemarle Corporation's Fourth Quarter 2023 Earnings Call and introduces the speakers. The company's earnings were released yesterday and can be found on their website. CEO Kent Masters discusses the company's strong results, with the highest net sales and second highest EPS in its history. The company's global team has succeeded in a challenging macro environment. Net sales were $9.6 billion, with 21% growth attributed to volume. The Energy Storage sector saw a 35% increase in volume.

In 2023, Albemarle's adjusted EBITDA was $2.8 billion, which exceeded expectations when excluding a non-cash charge. The company has taken proactive measures to optimize its cost structure and unlock $750 million in incremental cash. They will provide initial thoughts on their 2024 earnings and introduce scenarios based on recent lithium market prices. The company remains confident in its future and the demand for its essential elements in clean energy, electrification, and digitalization. Neal Sheorey, who has recently joined the company, will discuss the financial results.

In the fourth quarter, the company reported a decrease in net sales of 10% compared to the previous year due to lower lithium market pricing. However, there were increases in volume and pricing in Energy Storage and Ketjen. The company also recorded two charges, a lower of cost or market charge of $604 million and a tax valuation allowance in China of $223 million, due to the rapid decline in market prices. Excluding these charges, the company's full year results met expectations with a 31% increase in net sales and adjusted diluted EPS of $22.25. The fourth quarter adjusted EBITDA was $289 million, reflecting a decrease in Energy Storage and Specialties.

In the fourth paragraph, the speaker discusses the increase in Ketjen's adjusted EBITDA, attributing it to higher sales and pricing. They also mention an upcoming change in the definition of adjusted EBITDA to include Albemarle's share of earnings from their Talison joint venture. This change is meant to better reflect their vertical integration and smooth out the impact of price variations. The speaker then provides three different lithium market price scenarios for investors to consider when modeling Albemarle's earnings in 2024.

The company has provided three scenarios for its Energy Storage business, all of which show resilience and solid margins despite lower lithium pricing. The company also provided outlooks for its Specialties, Ketjen, and Corporate segments, with expected net sales and adjusted EBITDA figures. The Corporate outlook reflects a planned decrease in capital expenditures and Corporate costs are expected to be relatively flat year-over-year. Approximately two-thirds of Energy Storage volumes in 2024 are expected to be sold on index-referenced contracts, with the remaining one-third on short-term purchase agreements.

The company may consider adding more long-term contracts if they align with industry trends. Energy storage and Specialties results are expected to be stronger in the second half of 2024. The Specialties segment is facing challenges in some markets but is seeing growth in others. The company is closely monitoring the situation in the Middle East and experiencing some shipping delays. Ketjen is expected to see increased volumes and higher pricing. The company is on track to achieve a 20% volume growth CAGR from 2022 to 2027. The 2024 volume growth is driven by ongoing projects and prioritization of capital spending. This includes commissioning and startup of new facilities and expansions at existing ones.

The company's expected lithium sales volumes are mostly unchanged due to flexible tolling arrangements and pacing supply to market conditions. The inventory lag seen in the second half of 2023 is expected to be reduced due to a lower of cost or market charge and a change in spodumene pricing. However, this will not completely offset the inventory lag and the first half of 2024 margins in Energy Storage are expected to be impacted. The company is committed to maintaining a solid investment-grade credit rating and has completed an amendment to their revolving credit facility to ensure financial flexibility.

Albemarle has received unanimous support from their bank syndicate for their amendment, which demonstrates their focus on maintaining financial flexibility and exercising investing discipline. The company is taking proactive steps to modify their cost and capital spending, including reducing their CapEx in 2024 by $300 million to $500 million and aligning their OpEx to a slower pace of investment. They are also taking action to reduce costs by nearly $100 million and evaluating the sale of non-core investments.

Albemarle is taking various actions to optimize their cash flow and preserve financial flexibility during the market downturn. This includes shortening the time from mine to customer in their supply chain and re-phasing their 2024 CapEx plan to prioritize critical projects and hold capital if pricing remains low. The company remains committed to their operational excellence standard and has identified plans to achieve $280 million in productivity benefits in 2023.

The company is implementing initiatives to improve overall equipment effectiveness and procurement to achieve expected benefits of $80 million and $150 million, respectively. They have also made adjustments to their capital allocation priorities and will focus on maintaining financial flexibility, selectively investing in high return growth, and actively assessing their portfolio. Despite a temporary softening in the pricing environment, there is still significant long-term growth expected in demand for limited supply of lithium, with a projected 2.5 times growth from 2024 to 2030 and a need for 300,000 metric tons of new capacity every year.

The paragraph discusses the need for long-term pricing to incentivize producers to meet demand for green energy. Albemarle, a leader in the market, has competitive advantages such as vertical integration and partnerships with strategic customers. They are committed to operating sustainably and are confident in their ability to adapt to market dynamics and drive value for shareholders. The call then opens for Q&A.

Kent Masters and Neal Sheorey from the company are discussing sales volumes and growth projections for the upcoming year. They mention a 10% to 20% growth expected in 2024, but do not specify quarterly numbers. They also provide an update on the Salar expansion in Chile, stating that they are operating at capacity and have completed expansions at La Negra. They are currently commissioning the Salar Yield Project, which will provide additional brine, but there is a six-month lag before it can feed the La Negra project.

The company is expecting growth in the range of 10-20%, with a significant portion coming from a plant in Chile enabled by Salar Yield. When asked about triggers for re-accelerating investments, the company states that it will depend on pricing trends and demand, and they need to see sustainable long-term prices before investing. There is no specific price that will trigger investment, as it varies by project and location.

Eric Norris, speaking on behalf of the company, discusses the inventory levels in the industry and their impact on the market. He mentions that there has been a drawdown effect in the past year, but the inventory levels at the top of the supply chain are now normalized. However, there is a drawdown effect happening at the battery and EV level, which is harder to predict. This has led to a difference in demand forecast for lithium and EVs. When asked about the glut of inventory driving down spot prices, Neal Sheorey clarifies that it is not upstream, but rather in spodumene projects that are going into care and maintenance.

The speaker discusses the current state of the lithium industry in Australia and Canada, noting that there are some questionable operations being closely monitored. They also mention that while EVs are growing at a healthy rate, the spot price of hydroxide is lower than carbonate in China due to the trend towards LFP production. They expect this to balance out over time as the industry grows. Kent is asked to comment on the broader supply question.

Kent Masters, CEO of Albemarle, discusses the company's supply of hydroxide and carbonate, with a focus on the growing trend of hydroxide. He also addresses the question of whether they should lower rates to bring the market into balance, stating that they are still ramping up and demand is expected to catch up without adjusting operating rates. In response to a question about pricing scenarios, Neal Sheorey, CFO of Albemarle, explains that their pricing is generally higher than the index due to floors and their mix.

An analyst asks about the company's EBITDA ranges and points out a discrepancy in the math. The company's CFO clarifies the calculations and the analyst follows up on the issue offline. Another analyst asks about the company's Specialties forecast for the upcoming year and questions how they can achieve flat EBITDA when there was a steep decline in the first quarter of the previous year due to pricing. The company's representative explains that the first quarter may be challenging but overall, the projection takes into account pricing throughout the year.

The company believes they can reach last year's level of performance with some potential for improvement or decline, depending on market pricing and volume. This is driven by positive indicators in the semiconductor industry. The company is also focused on improving cash flow through aligning operating expenses, reducing inventory, and reducing capital expenditures. They are also exploring other ways to generate financing from their working capital balances.

The speaker discusses how to think about the company's cash conversion and mentions that over the past few years, the company has averaged a conversion of about 50%. The next question asks about the increase in working capital despite a decrease in lithium prices. The speaker explains that the increase is due to several factors, including the startup of new facilities and timing of shipments. This may not accurately reflect the company's supply chain at the end of the year.

The speaker answers a question about the potential impact of lithium prices on the company's working capital and cash release in 2024. They also discuss the expected return on invested capital for their Energy Storage business and mention that their EBITDA guidance for Energy Storage may be lower if current prices remain unchanged for the rest of the year.

Eric and David are discussing lithium prices and the potential impact on the market. Eric cautions David to consider the floors in their contracts when interpolating lower price scenarios. David also asks about the shut-in of lepidolite production in China and Eric explains that about 200,000 tons of production has come offline, with lepidolite accounting for a significant portion. However, it is unclear why some production is still active despite being unprofitable.

The speaker is discussing the operation of a market and the pricing of a product. They mention that there is still capacity in the market, but the cost is higher than the current prices. A question is asked about the sales for Energy Storage, and the speaker clarifies that there is no accounting issue and the difference in sales may be due to other products in the Energy Storage category. The speaker also mentions the company's U.S. strategy and the status of their plans for Kings Mountain and U.S. Mega-Flex.

Eric Norris discusses the impact of the slow permitting process in the United States on the company's strategy. He explains that with current low prices, the economics do not support investments in projects like Kings Mountain. However, the company is still progressing with long lead time permitting in anticipation of prices improving. Norris also mentions that the company needs more support and better pricing to execute on projects in North America.

Eric Norris discusses the company's new CapEx plans and how they will impact their capacity over the next several years. Depending on where they land in the range of 10% to 20%, they could have close to 200,000 tons of capacity by 2024. This growth will be driven by increased production in Chile and Australia, as well as the ramp-up of various projects. However, the company has paused or idled some longer-term investments, which may impact their capacity in the latter part of the decade when industry supply is expected to become tight.

The company sees strong growth in the North American market, but there are also weaknesses. They have investments planned for the future, but it will take time to execute them. The current low lithium prices are causing projects to be cancelled, and the company hopes for a more stable market in the future. They believe that if prices remain low, enough projects will be cancelled to create a supply shortage in the middle of the decade.

The speaker explains that excessively low prices can lead to excessively high prices in the future, and they hope to reduce volatility in their mix as the market recovers. They clarify that the 10% volume growth in 2024 includes a seasonal drop in January and that full electric vehicles are expected to surpass hybrids in growth before the end of the decade, with China seeing a growth in plug-in hybrids last year.

The speaker discusses the expected growth of plug-in hybrid vehicles in different markets and their impact on lithium demand. They also mention the expected quarterly cadence and margin escalation for adjusted EBITDA and Energy Storage in a $15 per kilogram scenario. Most of the volume growth for Energy Storage is expected to occur in the second half of the year as plants ramp up.

The company is ramping up production in the first half of the year, which will lead to increased volume in the second half. However, in the first quarter, margins will be impacted by higher-priced inventory. As the year progresses and inventory is normalized, margins are expected to improve and reach a strong 30% by the end of the year. Looking at past cyclical troughs, the company's segment margins were around 34-35%, but it is difficult to predict what they will be in the future due to various factors.

The speaker discusses how the factors affecting Albemarle's lithium prices are similar to those in the past, but with some differences due to changes in the company's sales mix and the presence of new plants being commissioned. These factors are expected to result in a 30% EBITDA margin, slightly higher than the previous cyclical trough. The speaker emphasizes Albemarle's commitment to sustainability and responsible resource management.

The company's strategy for taking advantage of the opportunities of electrification is well-defined and they will continue to operate with discipline to drive growth and sustainability. They aim to be the preferred partner for customers and the preferred investment choice. The conference call concludes with a thank you to all participants.

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