雅保公司 (ALB) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2017 Albemarle Corporation Earnings Conference Call. My name is Lisa, and I'll be your coordinator for today. (Operator Instructions)

And now I'd like to turn the conference over to Mr. Matt Juneau, Executive Vice President of Corporate Strategy and Investor Relations, for opening remarks. Please proceed.

Thank you, Lisa. Thank you, and welcome to Albemarle's First Quarter 2017 Earnings Conference Call.

Our earnings were released after the close of the market yesterday, and you'll find our press release, earnings presentation and non-GAAP reconciliations posted on our website under the Investors section at albemarle.com.

Joining me on the call today are Luke Kissam, Chairman and Chief Executive Officer; Scott Tozier, Chief Financial Officer; Raphael Crawford, President, Bromine Specialties; and John Mitchell, President, Lithium and Advanced Materials. Note that Silvio Ghyoot, President, Refining Solutions, is not with us today due to an important business meeting.

As a reminder, some of the statements made during this conference call about the future performance of the company 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. That same language applies to this call.

Please also note that our comments today regarding our financial results exclude nonoperating, nonrecurring and other unusual items. GAAP financial measures and reconciliations from those to the adjusted numbers discussed today may be found in our press release and the appendix of our earnings presentation, both of which are posted on our website.

Now I'll turn the call over to Luke.

Thanks, Matt, and good morning, everybody.

In the first quarter of 2017, Albemarle continued to build on the strong momentum we established last year. Excluding divested businesses and negative currency exchange impacts, revenue grew by almost $95 million or 15%, and adjusted EBITDA grew by $27 million or 14% compared to the first quarter of 2016. Growth was driven by adjusted EBITDA increases of 56% in lithium and 11% in bromine. The combined adjusted EBITDA margins for our 3 global business units reached 35%, up from 2016's average of 33%. And total company adjusted EBITDA margins remained strong at 29%.

As we discussed in our recent Investor Day, demand for lithium continues to grow rapidly, and our business team continues to focus on increasing production to meet both the current and future demand of our customers. Our bromine business is benefiting from improvement in flame retardant demand across various electronic applications and reduced bromine production in China. At the corporate level, we completed our deleveraging plan following the Chemetall divestiture during the first quarter.

As of the end of March, Albemarle net debt-to-EBITDA ratio was 0.6. We're also very pleased with the progress on our $250 million accelerated share repurchase plan and remain on track to complete the buyback by the end of June.

Now I'll turn the call over to Scott.

Thanks, Luke, and good morning.

In the first quarter, we reported adjusted net income of $1.05 per diluted share, an increase of 13% compared to the first quarter of 2016, excluding the year-over-year net impact of divested businesses. The increase was driven by an adjusted EBITDA increase of $35 million or about $0.24 per share from our 3 GBUs. Business results were countered by about $0.12 per share of negative impact from the combination of corporate costs, foreign exchange, tax, D&A and interest expense.

As Luke noted, our $250 million accelerated share buyback program is well underway. At this point, we estimate the buyback will result in an average diluted share count for the full year of 2017 of about 112.1 million shares.

We continue to expect our 2017 effective tax rate, excluding special items, nonoperating pension and OPEB items, to be approximately 22%.

Capital spending in the first quarter was $54 million, with significant commitments executed for major equipment and services for our wave 1 lithium projects.

As construction activities progress and equipment deliveries are made over the course of 2017, the spending rate will increase. We still expect total 2017 spending of $350 million to $400 million.

Corporate costs in the first quarter were $32 million, driven by compensation costs and negative currency exchange impacts. We do not expect the first quarter spending rate to continue, but given first quarter costs and our updated view on the rest of the year, 2017 corporate costs are now expected to range from $95 million to $105 million.

Operating working capital ended the first quarter at 27% of revenue, in line with our 2017 guidance, and we expect to remain at a similar level for the rest of the year.

Adjusted free cash flow in the first quarter was strong at $76 million. For the full year, we expect to -- we continue to expect adjusted free cash flow of $200 million to $300 million, with the expected ramp-up in capital spending impacting the rest of 2017.

And finally, currency exchange rates compared to 2016 negatively impacted adjusted EBITDA by $5 million in the first quarter. We currently forecast a negative full year adjusted EBITDA impact of $10 million to $15 million compared to 2016. The primary impact, both in the quarter and in the full year forecast, is from the euro. Our 2016 average rate was just over EUR 1.1 per U.S. dollar, and we currently forecast EUR 1.06 for 2017.

Now let me turn to our business units. Lithium and Advanced Materials had another strong quarter, led by the Lithium business. First quarter net sales of $284 million increased by 32% compared to first quarter of 2016. While adjusted EBITDA of $120 million was 39% higher than first quarter of 2016, adjusted EBITDA margins were strong at 42%.

Lithium had another outstanding quarter with first quarter net sales up 58% and adjusted EBITDA up 56% compared to the first quarter of 2016. Adjusted EBITDA margins were 46%, above our long-term expectations of the low 40s for this business.

Volume growth for the first quarter was 39%, with pricing up 21%. Battery grade products drove essentially all of the volume growth and most of the pricing improvement. Most of the volume growth came from our recently acquired spodumene conversion assets, but we also continue to utilize total conversion as well.

Also, La Negra II in Chile began initial commercial production with a strong ramp expected as 2017 progresses.

We are pleased with the initial performance of our new spodumene conversion assets in China. Production rates in the first quarter were outstanding, and operations at both sites are undergoing rapid integration with the rest of Albemarle. We are already utilizing Albemarle systems to manage and report production activities, and most back-office functions are running through our regional shared services center. The capital project to expand production by 20,000 to 25,000 metric tons of lithium hydroxide at the Xinyu site is already underway.

Compared to the first quarter of 2016, PCS sales were down $11 million, and adjusted EBITDA was down $2 million. Weakness in our polyolefin catalysts and organometallics businesses and impact from the SunEdison bankruptcy was partially offset by initial results from our cost savings program and stronger year-over-year performance in curatives.

Bromine Specialties' first quarter sales of $219 million and adjusted EBITDA of $68 million were up by 12% and 11%, respectively, compared to the first quarter of 2016. Increased demand for flame retardants across various electronics applications was the major driver of sales growth, but we also benefited from sales improvement in elemental bromine and specialty bromine derivatives. High operating rates and continued productivity improvements in manufacturing also contributed to the year-over-year improvement.

First quarter adjusted EBITDA margins of 31% were over 300 basis points above the 2016 average of 28%. While it is still early, we are encouraged by the favorable trends we saw in bromine in 2016 and have continued in the first few months of 2017.

Refining Solutions reported first quarter net sales of $185 million and adjusted EBITDA of $50 million. Compared to the first quarter of 2016, sales were up 9%, and adjusted EBITDA was down 10%.

Fluid catalytic cracking, or FCC catalysts, and clean fuels technologies, or HPC catalysts, contributed about equally to sales growth. FCC sales increases were driven by strong demand in North America, while solid demand globally, especially in the heavier feed resid segment, drove HPC revenues. Adjusted EBITDA was down, as expected, driven by the impact of customer turnarounds and competitive trials at FCC, less favorable product mix in CFT and higher input costs.

Now I'll turn the call back over to Luke to update our 2017 outlook.

Thanks, Scott.

Our strong first quarter results have positioned Albemarle for another outstanding year in 2017. Lithium and bromine both outperformed our initial expectations in the quarter, with Refining Solutions and PCS performing about as expected.

Lithium is forecasted to drive second quarter results, with year-over-year growth similar to the first quarter. Bromine faces tough comparisons both sequentially and against the second quarter 2016, but favorable market trends appear to be continuing.

In Refining Solutions, negative mix comparisons in CFT and FCC and some cost increases are expected to impact adjusted EBITDA compared to last year.

Finally, PCS is likely to continue a relatively flat year-over-year performance as competitive pressures continue to impact the base organometallics segment.

At a company level, our overall expectations have strengthened since the beginning of the year.

More favorable outlooks for lithium and bromine are forecasted to overcome expected weaker performance in refining. We now expect 2017 net sales of between $2.9 million to $3.05 billion and adjusted EBITDA of between $835 million and $875 million. Adjusted EPS should range from $4.20 to $4.40, up from our initial guidance of $4 to $4.25.

As we noted in our recent Investor Day, we are very excited about the growth potential of Albemarle's businesses. First quarter results demonstrate our continued pivot to a higher growth profile, and we expect that to continue going forward. Our business teams are focused on meeting the growth challenge by driving results for the second quarter and the rest of 2017 and by executing on our capital projects and business strategies to drive long-term opportunities for our business.

Operator, we're ready to open the lines for Q&A. (Operator Instructions) Please proceed.

(Operator Instructions) And your first question is from the line of Arun Viswanathan for RBC Capital.

Just wanted to confirm what kind of price and volume expectations are embedded in your updated guidance. You said 21% price growth in lithium for Q1. Do you see that continuing?

This is John Mitchell. As you know, from a pricing perspective, we're focused on long-term agreements with our customers. We now have over 80% of our volume under agreement in the 2017 year. And you've seen that we've been able to secure 21% increase in pricing in Q1. We expect that to continue and that pricing to hold for the remainder of the year. From a volume perspective, we've always messaged that we expect to bring on about 10,000 metric tons or more per year of additional incremental volume. So we're on track to do that or better in 2017.

Great. And then as a follow-up, could you just give us an update on projects in the industry? I understand you guys are bringing on 10,000, but what about the other projects that you're seeing in the industry? Do you see those coming to fruition? And what's the cadence of that through the year?

So with regard to additional capacity filling the demand need in 2017, we see principally the mines in Western Australia providing some of that capacity in conjunction with some Chinese extra capacity that's out there in the market. And then also, Albemarle is playing a big role in meeting the demand need as well as a result of the 2 Chinese assets that we have that are -- that we're ramping up in Xinyu and Chengdu and then also our ramp-up in La Negra, our La Negra II plant.

The only thing I'd add to that was -- it is consistent with the expectations and the discussions we had at Investor Day is playing out pretty much as we expected it would.

Our next question is from Alex Yefremov of Nomura Instinet.

Could you give us your latest view of lithium demand in China, specifically in the EV market. We had a pretty slow start of the year, January and February, but a bounce-back in March. What are your customers telling you? Do they see reacceleration going forward or fairly slow environment?

Yes, this is John. Yes, we see -- it was just really a short lift, no real concern by our cathode and battery customers. If you look at the number of units sold and the breakdown of EVs and plug-in hybrid sales in 2016, China was about 45% of the market. In Q1, they're about 30% of the market, and that's really just off of a strong March. So we see a good rebound in China. They're going to be a significant player in terms of the overall EV and plug-in hybrid growth going forward, and no concern from the customer base.

And then if I look at your new financial guidance, 35% plus for Lithium segment, for EBITDA growth, I think those guidance suggest that $100 million in the first quarter could be the high watermark for this year. Is that correct? And if it is, why is that?

Yes. Scott. Yes, I think -- so one of the key things that drove our first quarter were great performance out of our factories. So we're a little bit hedging on that just to make sure that we're -- if that continues, we have a bit of an upside that's baked into that range. So we continue to think that we'll have $100 million to $100 million-plus in the following quarters or so.

Our next question is from Robert Koort of Goldman Sachs.

John, I had a question for you on the Jiangli assets under the Albemarle fold. Can you talk a little bit about operating rates and how much more you could ramp those before your expansion? And then do you expect most of that production to stay within China? Or would that also be an export engine for you?

So the nameplate capacity of the 2 combined plants, the Chengdu is 5,000 metric tons; and Xinyu, 10,000. So we have room to continue to ramp up in 2017. And then we've already begun the expansion of another 20,000 to 25,000 metric ton expansion in Xinyu, bringing total capacity there to 30,000 to 35,000 metric tons by probably early 2018. And in terms of where are we placing products, it's a combination. I mean, it's -- that product is qualified with our key battery customers. And so we're able to export it to even customers with the most stringent quality metrics. So we worked hard through the integration period and the negotiation period to ensure that those plants were qualified.

So John, just a follow-up on that is, you can provide lithium hydroxide or lithium carbonate from any of your locations to your customers? Or is it -- there are some customers where you come from Chile or elsewhere. How does that specification flexibility for you work?

So it is true that certain customers have specifications that may lend itself to only being supplied from certain assets. However, we are trying to make sure that we have as much flexibility in our Albemarle supply chain as possible so that we can supply customers from multiple facilities. So in the specific case of lithium hydroxide, we have a single battery customer that we can supply from Kings Mountain, from Xinyu and from Chengdu, but we have to make sure that each of those plants are qualified to the specific customer's specification. But we're taking those decisions, what makes sense, what's economical, what's efficient for us and making sure that we have as much flexibility in our system. But it is true, each individual plant, no matter, whether it's Albemarle or through someone else, has to get qualified to a specific customer's specification.

Our next question is from the line of Kevin McCarthy of Vertical Research Partners.

If we look at your lithium results on a sequential basis, your sales increased $8 million, and yet the EBITDA increased $11 million, implying a contribution margin of more than 100%. Just wondering if you could walk us through some of the moving parts and elaborate on how you were able to accomplish that.

So one of the key things is the acquisition of our Chinese assets. As you recall, last year, they were part of our tolling portfolio. So there's a bit of an arbitrage in terms of taking them into the Albemarle portfolio. And then also, we're getting better performance out of those assets than the old owners were getting out of it, and it's a great team that we have there in China. So we're getting better performance, and we're also getting the effect of arbitrage around the tolling fee. And then, obviously, we have better pricing this quarter versus last quarter.

That's helpful. And as a follow-up, you'd commented you plan to increase production by 10,000 tons or more this year. I was wondering if you could comment on the composition of the positive increment there. For example, how much are you ramping at La Negra II and other sources of new supply this year?

So I believe on previous calls, we hinted that La Negra will be ramping up kind of the 1/3, 1/3 and 1/3, so this year, bringing 6,000, 7,000 metric tons of carbonate coming on from La Negra and then the balance coming from the Chinese assets in Xinyu and Chengdu. So that's -- we're pretty much on track. You might see some extra volume coming out of the Chinese assets going forward, though.

Our next question is from the line of Vincent Andrews of Morgan Stanley.

This is Neel calling in for Vincent. It looks like your guidance for lithium for the balance of the year is down a bit versus the growth you experienced in Q1. So I was wondering if you can just touch on that a bit.

Can you repeat that? We can't hear anything you're saying. It's really -- I don't know whether you're playing with the microphone or something, but can you repeat that, please?

Sure. Can you hear me now?

Yes.

Okay. I was just saying it looks like your guidance for lithium for the balance of the year is down versus the growth you experienced in Q1. So I was wondering if you can just touch on that a bit.

Yes. I think that's -- similar question was asked earlier. If you really look, what we said, we had a really strong performance out of our Chinese assets in the first quarter. And 1 quarter does not a year make. So we have to make sure that we can operate those assets on a consistent level during the course of the year. If we do that, we can be able to achieve better than we did for the first quarter. If we don't, we're going to have a little downside. So what we try to do is range what a regional expectation will be for the operation of those assets, and that's how we get to the forecast that we've got. But we will have a very strong growth year-over-year in lithium, both on the top line, volume and on the bottom line.

All right. And another question on bromine. Given the strong quarter, have your longer-term expectations for bromine, flattish to low single-digit (inaudible) EBITDA growth that you gave in your Analyst Day, has that changed at all?

This is Raphael. I think that we are pleased with our Q1 results. We do think that we'll perform better than what we originally expected for the full year. But on a long-term basis, bromine is still a low-growth business from a volume and an EBITDA standpoint. But we're certainly doing all the things we can to keep our margin profile high. And if there's additional volume opportunities in some of our markets, we'll be looking to capture those opportunities.

And Raphael, I might add, too, we're in a favorable electronics tech market right now as well. I think you've got some favorable tailwinds from that. As we know, that's a quite cyclical industry that we just got to be cautious that we take this trend as being long term. Eventually, that's going to turn and cycle back down. So...

Our next question is from the line of John Roberts of UBS.

China, apparently, is considering mandating electric vehicles as a percent of each manufacturer sales within a couple of years. Do you have any insights into what percent that they're thinking about targeting and how quickly they might implement something like that?

Yes -- no, we don't. We don't have any insight on what the Chinese government would do there other than what we would read in the press. So we don't know. But anything that they do in such [as that] is going to be a continuation of what we've seen around the world from a regulatory standpoint. They encourage the use of electronic vehicles, and we see it as something that could positively impact our lithium business and the growth prospects.

Our next question is from the line of Jim Sheehan of SunTrust.

One of your competitors announced that they're looking into a major capacity expansion in Argentina, about 20,000 tons, in the next 2 or 3 years. So if they move ahead with that project, does that change your view on the supply-demand balance over that time frame? And how do you see supply-demand being impacted by that much capacity?

Yes. I think we're going to add -- we've announced that we're going to add between now and 2021 roughly another 100,000 metric tons of capacity in lithium carbonate and lithium hydroxide. And we've got that we're back integrated into resource to give us guarantees if we've got the feedstock for that. So we've always said we're going to capture 50% of the growth, and we look to the other majors to step up and fill that other gap. So I think this is consistent. I think, John, you'd still see -- I mean, supply-demand staying relatively consistent throughout this period, is that right?

Yes, Luke. Just to second what Luke said, we track all the projects around the world. We make sure that they are considered in terms of the supply-demand balance. So I think the project you're referring to is included in the model. We don't see any change in terms of our outlook, in terms of supply-demand balance.

Great. And in bromine, you mentioned you've got high operating rates. So I was wondering if you could just quantify what your utilization is on the bromine assets currently. And are you seeing -- when do you expect to see any pickup in the clear brine fluids demand?

Sure, Jim. So without commenting directly on what our operating rates are, I will go back to what we have said at Investor Day, which is one of the core strategies within our bromine business is to focus on productivity improvements. So what we've been able to do in -- through the course of last year, and in the first quarter, we're seeing the benefit of that, is really to be able to get more out of the existing asset base we have, and that's had a very positive effect on our ability to capture demand that would exist. And we'll continue to do that, and we'll continue to be able to get more out of our asset base at the same or lower cost than what we've had. So that's really a favorable piece for what we've been able to accomplish. But, Jim, what was your second piece of your question? I'm sorry. Clear brine fluid. Yes, I'm sorry. On clear brine, we still see good demand in the Middle East. We saw that through last year. We see that in the first quarter. But if you remember, Albemarle was strategically advantaged with having a plant, both in North America as well as in Jordan. So we're able to capture opportunities in clear brines as they come up. We see the Middle East is still fairly good. The Gulf of Mexico, we should see that coming back at the end of 2017 or, let's say, the second half into 2018. And the rest of the world is soft, at least from our perspective.

Our next question is from the line of P.J. Juvekar of Citi.

Question on lithium. I know you have long-term contracts with your customers. So what portion of your contract would you say having repriced in the last 12 months?

I mean, it's a significant portion of, I mean, the last 12 months we've seen it. If not all, it's pretty damn close. So we've had good pricing over the last one and it doesn't -- I actually don't think it does you any good to go contract by contract, P.J. But we're getting price increases across the board on battery grade products. Probably not as much, John, I would say, on the technical grade products. Maybe you can comment some more on that. But I think on battery grade, it's safe to say the entire industry is seeing pricing increases.

Yes, P.J. Just to reiterate what Luke just said, I would say, mostly all of our battery grade customers have seen some pricing movement. As you get into [up] markets, as we've said before, we typically price the value. And you look at a lot of other external factors like energy prices and things like that to make sure that the value of our products makes sense for the customer. And again, in terms of our long-term view with customers, we're going to treat our customers in a very fair way where we can work together to supply the needs of the industry, the energy storage market, and we're going to grow together. And so that's really a key part of our overall strategic approach and partnership approach with the leading battery producers in the world.

Great. And then there are certain junior miners trying to advance projects in Australia as well as in the Americas. Would you look at M&A, what it's doing in your greenfield project in Argentina?

Yes, I think, P.J., what we've said at the Investor Day still holds. We're going to look to deploy the cash that we have in a way that creates the greater shareholder value. We're obviously looking for M&A opportunities that would de-risk or expedite our strategy, that could certainly become with -- resources where we believe they are viable resources that put us at a cost position that would allow us to be competitive and maintain a market leadership globally, that are priced at a point, that we can get a better return on that and we can own other investments that we see. So it all comes down to what's the viability of the resource and what kind of return can we get on their assets. But John talked in Investor Day about our resource team. We're out scouring the globe for resources. That includes new resources. That includes companies that are in start-up phase that are looking to attract dollars. So we're very active. But just because something is for sale and somebody's talking about it, it doesn't mean it's a quality asset. It doesn't mean you can meet the value expectations of that particular owner.

This is John. Just one other quick comment, and again, we mentioned this during Investor Day, but I think it's important in terms of our approach. I mean, we are only building out capacity on the back of long-term agreements, which is different than maybe others in the market. So it's really going to come down to our partnership arrangements with our customers, what their demand is, and then that's going to lead to us building out capacity, whether it's through greenfield, brownfield or M&A.

Our next question is from the line of David Begleiter of Deutsche Bank.

Luke, on refining, I believe your guidance implies a better back half than the first half of the year. Can you discuss the drivers of that improved performance? And is that sustainable into 2018 as well?

I didn't hear the last piece of it.

Is that improved second half performance sustainable into 2018 as well?

Yes, okay. I'm sorry. I think as I look overall at refining, it's doing about what we would thought. I think both from a margin standpoint as well as from the EBITDA standpoint, you're going to see a stronger end of the year. And it's just until you see the mix. I think FCC will be strong in 2018, it is in 2017, from what I see today. And then when I look at HPC, it just depends what that mix is going to be. How much of it's going to be resid. Are we going to get a good mix for some of our high profit or not. So I would say, on FCC, for what I would see, it would be stronger -- strong and continue that in '18. But for HPC, it's just too early for me to call right now, David.

Very good. And Luke, you mentioned bromine reduced production in China. Can you discuss that, quantify that and how that might impact pricing and margins in this business going forward?

Yes. I think we're getting a little -- I'll just start off and let Raphael get into details. But I think part of what we're seeing now is a -- is some tailwinds from what's going on in China right now. That was reflected in our earlier calls -- earlier comments, I'm sorry. So I believe we're seeing tailwinds there. But Raphael, I think, could go into more detail.

Yes, David. I would agree with what Luke is saying. There's a tailwind on the tightness of bromine availability in China. And that has an effect on local Chinese pricing, which continues to be favorable. We're still -- compared to last year's average, we're about 15% better on local bromine pricing in China. So that's helpful for our element of bromine business into China, so that's still relatively small. The real tailwind that we've seen recently is on the limited exports of flame retardants out of China, which should take a little bit of the pressure off in some of our other markets. So that's been favorable to us on a volume standpoint as well as holding pricing constant. But all this -- we watch this closely. We have folks on the ground in China. We get all major reports. We're always watching this. And we're always cautious coming out of the winter months where production is low. And as we look at the summer, we really need to get through the summer, see how production might ramp back up in China. If it does, what the impact would be before we can settle on the real impact here.

Our next question is from the line of Mike Sison of KeyBanc.

One quick question on lithium. When you think about the battery grade [capacity] for you guys, are you essentially sold out for the year? And is the industry essentially sold out for the year?

I can't really comment on the overall industry, but I can comment on the fact that every metric ton that we bring on the market is sold. So it's sold, be our long-term agreements. Some of those agreements have options. If we're able to produce more volume, we can place it directly with those customers. So as much as we can make in the battery grade will be placed into the market to our long-term customers.

And as a quick follow-up in terms of battery grade, is all the incremental demand coming from EVs? Or are you seeing some growth in consumer products as well as other areas as well?

Yes. So as we outlined in Investor Day, we continue to see growth in consumer products area, these are cellphone, power tools, that type of thing, of 7% to 8% per year. The big growth is obviously coming from the transportation space, automobiles, buses, that type of thing. Small contribution from grid storage, really very, very small and that type of thing. That's more of a story that's 5 to 10 years out type of thing.

Our next question is from the line of Mike Harrison of Seaport Global.

John, I was hoping that you could comment a little bit on whether you've seen the impact of the higher cost out of Chile related to the royalty payments. And also, can you talk about the contribution of potash in the quarter?

So Mike, the royalty payments, community payments, are all fully baked into Q1 results. So that went into effect January 1. So it's all part of the mix now. With regard to potash, as you know, potash is a pretty small part of our business in terms of the way it contributes, 5%-ish -- around 5%. As we actually extract more brine out of the Atacama, we'll have the ability to expand on a potash basis. But right now, we're essentially maxed out in terms of our potash plant. And we'll evaluate as we extract more brine what the opportunities look like for potash going forward.

All right. Then I was also hoping that you could comment on what you're seeing in terms of lithium carbonate versus lithium hydroxide pricing in your outlook. I assume that the 20-ish percent growth number for the rest of the year is kind of a blended average for everything. Is one of them significantly stronger and increasing? Can you just give us some color on that?

With regard to pricing, I would say no. I mean, one isn't necessarily stronger or weaker on an incremental basis. As you know -- may know that the price for hydroxide trends higher than carbonate. But on a year-on-year basis, it's not that one is performing better than the other at this point.

Our next question is from the line of Dmitry Silversteyn of Longbow Research.

A couple of questions, if I may, revisiting the refining catalyst business. First of all, in the first quarter results, you talked about customer trials and a couple of other things that (inaudible) EBITDA, but I would have thought that would've also impacted revenue. So was it most fixed then that (inaudible) margin supply?

Yes. It was mainly, Dmitry, price and mix, call it a disconnect. And remember, at our Investor Day, we talked about moving in and trying to get more into the resid market, distillates and (inaudible) resid markets and hydrotreating catalyst. We had good volume in hydrotreating catalyst, but more of it was in that resid where we make our margins less and if we sell into the distillates market. So that was a piece of it. And we also had, with our joint venture, sold more resid out of that, too, in Japan. So that was really a mix issue.

Okay. So the turnarounds that you mentioned that impacted your profitability, should we sort of keep that in mind for a year from now when they may not happen in the first quarter as an adjustment to our expectations? Or is it just to run through sort of forecast beyond the current quarter?

Dmitry, this is Matt. Since Silvio is not here, Luke asked me to take this one. If you look at what we've said about FCC from the beginning of the year, we knew that some of our major customers were going to be going -- undergoing turnarounds and doing competitive trials in FCC. And that's why our Refining Solutions guidance have been back-ended a little bit second half versus first half. It's -- kind of like Luke said earlier in response to '18, it's probably a little too early to get into detail in '18. But right now, our view of '18 in FCC is favorable.

Fair enough. And then as my follow-up question, just talk -- a really quick one, and I understand it's a small business, the PCS portion of the company. But I mean, we haven't had (inaudible) that business in probably 2 to 3 years. If (inaudible) change or whether it's something you should (inaudible) something that the market needs to change for both the polyolefin piece and the organometallic piece to actually become something that we can talk about positively?

Yes. Go ahead, John.

So first off, I do think that this business has growth potential. It suffers from some overcapacity in the organometallics, so we're seeing volume growth. We're just seeing price decline over the last number of years. Hopefully, we hit a bottom. But its growth -- the overall business will continue to grow based on the growth of plastics and the new and more high-performance types of plastics and resins that are going into packaging. So it does have -- as we outlined in Investor Day, we do believe that it does have a nice growth profile. We've suffered also from a significant customer bankruptcy. And so we're kind of in a turnaround year where, hopefully, will bottom out, and then the business will be back on a nice trajectory going forward.

Okay. So 2018 when we should see at least the polyolefin turn around, and it sounds like maybe a couple of more years for organometallics?

That's right.

Our next question is from the line of David Wang of Morningstar.

I have 2. First is on the guidance that you're (inaudible). EBITDA guidance was raised by about $35 million, but the net cash from operations and adjusted free cash flow remain the same. Is there some additional cash uses that, for example, like working capital, that's playing into this? Or is it more so that lower -- the net cash from operations and free cash flow lines have a wider range, so this adjustment doesn't really move a needle?

Yes, David. As you look at that guidance, so EBITDA is up, you're correct, $35 million, but that comes on the back of increased revenue and as a result of that, increased working capitals. And since most of the guidance increases in the second half of the year, not in the second quarter, but in the second half, the working capital really stays out there on our balance sheet at year end. So as a result, our cash flow -- we're expecting our cash flow to be about the same, maybe a little bit bitter, but about the same, so in that range of $200 million to $300 million. There really are no other spending changes, if you will, captured in that guidance. CapEx is about where we thought it was going to be. Other items are where we thought they were going to be.

All right. Great. And then it looks like -- so we had discussed Chinese EV sales were maybe a little weak in January and February but bounced back in March. But they are stepping down their incentives this year versus the previous year, are you concerned at all about that? And what's your outlook for Chinese EV sales for the remainder of '17?

Yes. As we've said a little bit earlier on the call, in talking to our cathode and battery customers and just having spent a little bit of time in Asia, no concern on our end that the actions by the Chinese government or the incentives will in any way affect our guidance for the remainder of 2017.

Our next question is from the line of Laurence Alexander of Jefferies.

This is Dan Rizzo on for Laurence. The cyclicality that you mentioned in bromine before, is that lessening with your reduced exposure for electronics end market?

This is Raphael, Dan. I don't think it's -- that we've reduced our exposure to the electronics. But what I would say is that the -- there's been a greater diversification of applications within electronics that has given us more confidence going into the future. As Scott had mentioned, there's still a cyclicality in electronics overall, but we're no longer as dependent, for example, on PCs and TV sales, and now we've diversified, where the market has diversified into wire and cable for automotive. So transportation, wire and cable and circuit boards has really increased, and some of the end markets have changed. So we feel like it's in a more stable position going forward.

Yes. So from my standpoint, Raphael -- I think Raphael made some really critical point there. I think we had de-risked that bromine business on the downside because of the broad applications that we have in that business and how it has evolved over the last 5 to 10 years.

With the diversification and the Internet of Things, I mean -- and just a broad use of different semiconductors, electronics within cars and then everything, I mean, would that be a growth driver for bromide? Or I might be just overthinking it?

I mean, look, I don't think you're overthinking it. I think that everywhere that you have a connector or -- and where you need more computing power, where you have a printed wiring board, that's an opportunity for bromine for that application today. The question becomes, over the next decade, do they become smaller or do they stay the same size or what's the new technology out there. So I think we feel very positive about that business. We continue to operate it as a key to our strategy. It continues to generate excellent cash flow. And we continue to harvest that cash and invest in the maintenance in -- of our bromine business so that we can guarantee the prompt response that our customers need and to continue to grow as best we can. But do not expect bromine to grow high single and double -- low double digits for the next 5 years. It will not do it. We've said it will grow around GDP, up some, down some. This year, it's going to be [an up]. I don't know what the future holds. But we -- within what we can control, we're going to make this the best bromine business in the world.

Our next question is from the line of Chris Kapsch of Aegis Capital.

I had a follow-up on the lithium business and perhaps the margin profile there. You mentioned that -- I mean, obviously, strategically, you're shifting a bunch of your tonnage to captive conversion from toll, but you did mention toll conversion is still part of the mix. So I'm just wondering, how far along are you in shifting overall toll volumes to captive conversion? And what sort of effect that the toll volumes that are still there have on margins? And then how do you see that playing out over time?

So this is John. The shift from toll to captive happened as a result of the acquisition of the 2 Chinese facilities that we acquired. So they were tolling facilities for us originally. Then through the acquisition, now they're producing volumes that are part of our portfolio, plus we're expanding the volumes within those assets. Tolling will always be a part of our portfolio. And we continue -- we have a couple other tolling partners that we continue to do business with this year. The tolling volumes this year for those other tolling partners are not necessarily growing, but we continue to maintain those relationships going forward and expect to for a long time.

And just the influence on margins, I guess, apples-to-oranges, now that you have those significant chunks of conversion capacity, effectively captive via the acquisitions?

Yes. So margins from a tolling facility, as you can imagine, will be lower than margins from facilities that we own because the toll needs to make some kind of profit in terms of operating that asset for us. So yes, so you end up improving your margin by shifting from tolling to captive assets.

So what you got to look at overall when you look at that is what's your capital cost, what's your cost of depreciation that goes in there, how do you operate the assets versus how they were operated before, what are our HS&E standards and the other process standards that we have, how does that impact that margin. We obviously, as you would expect, believe that resin rely on tolling that we make more money and we derisk the strategy by [having it]. So you saw some improvement in our first quarter margin. And if you look at it, we said a good deal of it was driven by the operation of those Chinese assets that we own. So it's a positive move, and as we bring on more and more capacity and reduce our unit costs down, we will be able to continue to deliver the best-in-class type of margins that we did in the first quarter.

And again, I go back to our philosophy and strategy to secure long-term agreements with customers on a long-term basis, multi-year basis, and bring on capacity to meet those contracts. And so as we bring on, on our own captive capacity, essentially sold out day 1. So we need the relationships with the tolling partners to give us some flexibility as well.

But Chris, the other -- hey, Chris, if I can make one other point. I know everybody is trying to triangulate what our margins are or what our margins are going to be. You can't just look at it in one avenue and say you're moving now to your own conversion assets, so your margins ought to be better. We've got additional costs that are -- that we're going to be running through, that will ramp up over the course of the year from the expiration standpoint. That didn't hit as much in the first quarter as you're going to see it hit in the next 3 quarters. And we have got to spend that money to understand the quality of the potential resources that we could bring on in the next decade. And that money -- that spend in the ramp-up over the course of the rest of the year. So we -- as we look at our margins overall, this year, our margins in lithium could be a little bit higher than the targets that we set. But I don't see the first quarter repeating every quarter for the rest of the year from a margin perspective.

Okay. That's helpful. It makes sense. And then just one quick follow-up for Raphael. Raphael, a lot of airtime today. Just real quick, though. Just on the strength you're seeing in flame retardants, brominated flame retardants specifically, and I understand the rising tide of an overall more healthy electronics end market. But can you talk about specifically where you're seeing strengths for BFRs? Is it across the board? Or is it more specifically PWBs versus enclosures versus connectors for automotive?

Yes. Sure, Chris. It's mostly in the printed wire board market as well as the connector space. That's what we're seeing the strength in flame retardants. It's not so much in enclosure. It is good news that when we look at the statistics, certainly, we've seen a bottoming out or leveling out on the enclosures market, but it's not what was the meaningful contribution to our improved performance. And not what we think it will drive the rest of the year.

Our next question is from the line of Tyler Frank of Robert Baird.

Just on the bromine market, are you seeing strength in any other markets besides electronics that are notable? And then how long do you expect the lower volumes out of China to last? Is it a 1- to 2-quarter thing? Or do you think it might be longer term?

So the other markets -- I mean, the largest market for Albemarle is our flame retardants market. The largest market for the industry is flame retardants for bromine. Next is completion fluids. And then we have a whole host of specialty applications. And those have been -- they're smaller in volume, but in total, they performed pretty well. But overall, the strength of our business -- because of the importance of flame retardants, the strength of our results in Q1 and when we look out for the year, it's really going to be driven by flame retardants and then some recovery in clear brines later in the year. With regard to China, as I had said, I think that we -- we're expecting prices on average to still be higher than what we've seen on the average of the previous 5 years. I mean, we think it'll still remain strong on the year, but we don't know what the second half of the year will look like when [summer] production could come back up in China. Again, their volume -- when production has been low, the demand has been fairly good. And therefore, that's been -- what's driven up prices. We expect it to be good, but we're not banking on it on the long term. Hence why we continue to work on all the things we do on productivity within our assets to make sure we stay competitive whether the market is up, whether the market is down.

Our next question is from the line of Robert Koort of Goldman Sachs.

This is Ryan Berney. Just wanted to get one more in for John, if I can. John, I wanted to ask you about -- I know you've got a couple of questions answered already, but I think there were some chatter that perhaps there -- you got some inventory that maybe was on a lower COG basis coming out of last year. So I guess, can you talk about the $60 million to $70 million in the royalties and the other costs this year? And your guidance for the back half seems to be somewhat flat with the first half. Really, that's kind of the read we're getting from you. So I guess I think about production growth presumably at La Negra II in the back half, you should be getting some significant help there. So I'm wondering if those $60 million to $70 million in earnings headwinds there that you called out are a little more back-half weighted than -- maybe if you can give some granularity on how much you see and you saw in the first quarter?

Yes. So, Ryan, this is Scott. So specifically, on the lower cost inventory, one of the key things, remember with the Chilean concession and the royalty that we're paying as well as the community payments, that's tied to production that started in 2017. So we did not see a full run rate, if you will, of that royalty in the first quarter. So we saw something like, I don't know, $7 million to $8 million in the first quarter. We're still expecting to see a full year of around $50 million. So that certainly had some support for that margin in the first quarter. And maybe, John, you can talk a little bit about the production ramp-up at La Negra II and how that layers in for the rest of the year.

Yes. So we started production in Q1, certainly going to continue to ramp from a volumetric perspective, increasing throughout the year. And as we said, we're going to probably bring 6,000, 7,000 metric tons on this year and then another 1/3 in 2018. So it'll be a continuous ramp through 2017.

So Lisa, this is Matt. I think we're at our time limit. Thank you. You could close the call for us.

Thank you. Ladies and gentlemen, that concludes today's conference call. You may now disconnect your lines. Have a great day. Thank you.