雅保公司 (ALB) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter 2 2018 Albemarle Corporation Earnings Conference Call. My name is Cathy, and I will be your operator for today.

(Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Mr. Dave Ryan, Vice President, Corporate Strategy and Investor Relations. Please proceed, sir.

Thank you, and welcome to Albemarle's Second Quarter 2018 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 www.albemarle.com.

Joining me on the call today are Luke Kissam, Chairman and Chief Executive Officer; Scott Tozier, Chief Financial Officer; Raphael Crawford, President, Catalysts; Netha Johnson, President, Bromine Specialties; and Eric Norris, President, Lithium.

As a reminder, some of the statements made during this conference call about our outlook, expected company performance as well as lithium and electric vehicle demand 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 some 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 in the appendix of our earnings presentation, both of which are posted on our website.

Now, I will turn the call over to Luke.

Thanks, Dave. Good morning, everyone, and thanks for joining us on the call today.

First, I want to welcome Netha Johnson to the team as President of Bromine Specialties and congratulate Raphael Crawford, Eric Norris and David Ryan for their new roles. I am very excited about the leadership experience each of them bring to the team and I'm very confident in the team's ability to execute our strategy and deliver significant shareholder value today and well into the future.

Now turning to the quarter results. I'm very pleased with our strong second quarter performance. Excluding divested businesses, second quarter revenue grew by 20%, adjusted EBITDA grew by 24% and adjusted diluted earnings per share grew by 28% compared to the second quarter of 2017. All 3 of our businesses delivered double-digit adjusted EBITDA growth. That performance further strengthens our confidence in the potential of our portfolio for the short, medium and long term.

Lithium growth continues to be driven by accelerating demand for electric vehicles. The 2017 sales of plug-in and pure electric automobiles were up about 56% over the prior year and sales through the first half of 2018 are up almost 90% versus the first half of 2017.

Our customers are experiencing growth consistent with that data. Recently, major cathode and battery manufacturers have reported year-on-year sales growth ranging from 21% to 75% for the first half of 2018. Our customers and our customers' customers continue to invest for future growth in a manner that is consistent with the Albemarle demand model.

And the global environment for EV adoption continues to build momentum. Since the beginning of 2018, another 6 countries have either proposed bans on the sale of gas-powered vehicles or introduced new consumer incentives to encourage EV adoption. In the United States, 4 states have proposed or enacted legislation related to EV infrastructure on incentives, with California pledging $2.5 billion toward their Zero Emission Vehicle program in the form of rebates and charging infrastructure.

All of our Lithium capital projects were on track. During the second quarter, we commissioned the front-end of the Xinyu II lithium hydroxide expansion and we anticipate mechanical completion and commissioning of the back end during the fourth quarter. The tie-ins at La Negra II that we told you about last quarter remain on schedule for this quarter. Lastly, the design phase and pre-work -- and pre-project work for the Kemerton lithium hydroxide conversion plant are well underway.

In Bromine Specialties, demand for flame retardants and other bromine derivatives remained solid, and that is despite of what I would characterize as continued softness in the market for clear completion fluids used in deepwater drilling. Overall, market pricing continues to be supported by a constrained construction and higher than normal local elemental bromine pricing in China. Based on the market conditions and our excellent resource and cost position, we anticipate steady cash flow from Bromine for the long term.

And in Catalysts, the IMO 2020 marine fuel and other low sulfur regulations should drive hydroprocessing or HPC catalyst demand. In addition, a more complex global crude slate, a continued demand for propylene and the focus at certain refineries on producing chemicals from crude should benefit an already tight FCC market.

Now, I'll turn the call over to Scott.

Thanks, Luke.

For the second quarter, we reported net income of $302 million or $2.73 per diluted share, including the gain on the sale of polyolefin catalysts and components that closed on April 3. Excluding the year-on-year impact of that gain and other onetime items, we have reported adjusted earnings per share of $1.36, an increase of about $0.30 per share compared to second quarter 2017 or 28% growth. Growth in our core segments resulted in an increase of about $0.34. Business results were boosted by our share repurchase program and offset by a net cost increase in other areas, primarily due to a higher effective tax rate compared to second quarter of 2017.

We have almost completed the $250 million accelerated share repurchase program initiated in May. Based on the strong performance of the company and our long-term growth potential, we continue to believe that Albemarle's stock is currently undervalued. Hence, subject to market conditions, we intend to initiate a second buyback of $250 million of stock via another accelerated share repurchase program. In total, that will result in $500 million of buybacks in 2018, equating to about 5 million shares. This will leave approximately 7.5 million shares remaining under our current authorization. We expect our average share count for all of 2018 to be about 109 million shares and our share count for the second half is expected to be about 108 million.

For the first half of the year, net cash from operations was $224 million and we are on track to end the year between $660 million and $730 million. Adjusted free cash flow for the first half was $30 million. Capital expenditures during the first half were $281 million and will continue to ramp during 2018, reflecting growth capital deployment in our Lithium business. We continue to expect full year CapEx to range between $800 million and $900 million. We ended the quarter with operating working capital at 25% of sales, a decrease from the first quarter of 2018 on a percent of sales basis. As we work through the details of U.S. tax reform, we currently expect our 2018 effective tax rate, excluding special items, nonoperating pension and OPEB items, to trend toward the middle of the previously provided range of 23% to 24%. Depreciation and amortization is expected to range from $195 million to $205 million in 2018 and interest expense is currently expected to range between $45 -- $45 million and $50 million after capitalization of the interest related to the CapEx in our guidance.

Now, moving on to our business performance. In the second quarter, Lithium net sales grew by 30% year-over-year and adjusted EBITDA increased by 23% with adjusted EBITDA margins of 45%. The growth in adjusted EBITDA was driven by a 15% increase in volume and a 12% increase in price. All of our conversion facilities are operating at maximum rates and we continue work to maximize production. We also expect to see an increase in tolling volumes during the second half.

In Bromine, second quarter net sales were $221 million, up 8% year-on-year. Adjusted EBITDA was $69 million, up 12%, and adjusted EBITDA margins were strong at 31%. The results were driven by increased volumes, higher pricing and some favorable foreign exchange, partially offset by higher input costs. Of our 3 businesses, Bromine is the most exposed to products in the crude oil chain. The flame retardants demand across electronics and construction continue to be healthy.

Catalysts reported second quarter net sales of $285 million, up 23% compared to the second quarter of 2017, excluding divested businesses. Adjusted EBITDA was $75 million, up 30%, with adjusted EBITDA margins of 26%. The polyolefins business sold this quarter contributed approximately $10 million to 2017 second quarter results. Catalysts' performance was driven by increased volume in Refinery Catalysts and pricing in FCC catalysts. Adjusted EBITDA was unfavorably impacted by the raw material force majeure in curatives, partially offset by insurance collections of about $2 million related to Hurricane Harvey last year. We have been able to partially mitigate the impact related to the force majeure and now expect the full year unfavorable impact of approximately $5 million, down from our previous estimate of $10 million. We also anticipate a full year favorable benefit of approximately $5 million from insurance settlements related to Hurricane Harvey.

Now, I'll turn the call back over to Luke.

Okay. Thanks, Scott.

Our strong first half has positioned 2018 as another outstanding year for Albemarle. In Lithium, we now expect full year adjusted EBITDA growth in the low to mid-20% range year-over-year. The tie-ins at La Negra II are currently on schedule for the third quarter. Therefore, the second half of 2018 is anticipated to look a lot like the first half for Lithium, with 3Q earnings similar to first quarter and 4Q earnings similar to the second.

Bromine continues to benefit from favorable market conditions. We now expect full year adjusted EBITDA growth in the high-single digits on a percentage basis.

Finally, with reduced impact from the force majeure in curatives and the favorable impact of the insurance settlements related to Harvey, we now expect full year adjusted EBITDA growth for the Catalysts segment to reach high-single digits, excluding divested businesses. Similar to 2017, the fourth quarter is forecasted to be stronger than the third due to the timing of the CFT orders. As always with CFT, there is some risk related to orders slipping from one quarter or one year to the next.

As a result of all that, we are increasing our guidance for 2018. We now expect 2018 net sales of between $3.3 billion to $3.5 billion, adjusted EBITDA of between $990 million and $1.02 billion and adjusted EPS of between $5.30 and $5.40 -- I'm sorry, $5.30 and $5.50 per share.

As Scott mentioned earlier, we believe the stock is currently undervalued and expect to initiate a second stock buyback. As was the case with the buyback we initiated in May, the growth potential of our businesses, the strength of our balance sheet and our operating cash flow give us the confidence that we can take this action, execute our capital projects, maintain our long-term EBITDA ratios and still have plenty of firepower leftover for opportunities that are consistent with our strategy. We remain committed to and confident in our strategy and in our ability to execute that strategy in a way that should drive significant shareholder value into the foreseeable future.

With that, we'll open it up to questions.

(Operator Instructions) Your first question comes from the line of Bob Koort, Goldman Sachs.

This is Dylan Campbell on for Bob. So we have seen some weakness in Chinese spot lithium prices recently, but the year-over-year pricing remains strong for Albemarle. I guess, when you look forward to the second half of '18 and 2019, how are your contractor pricing discussions going with customers? And then also, could we expect some further incremental pricing growth from just the laddering structure of your contracts?

Yes. If you look at -- as we've always said, because of our long-term contract strategy, Chinese spot pricing has no impact on our pricing and you shouldn't see a correlation. I think this quarter, really, you begin to see that as the Chinese spot pricing is down and our pricing is up year-over-year. So we think that's a validation and we will continue to see that.

As you look at pricing, I think we've said pricing would be in a similar range for the full year year-over-year and we don't see any change to that. It's a little too early to talk about '19, but we're having good conversations about contracts from a volume standpoint, from a commitment standpoint, from an extension standpoint and from a price standpoint going forward. So more on that as we start talking about '19, but everything was good today.

And for Lithium EBITDA, you said 3Q is going to be similar to 1Q and calling out some onetime items for the tie-in, but I'm a little bit more curious on the flat EBITDA between 2Q and 4Q. Can you provide kind of what this implies for your volume and pricing trends through the end of year in terms of sequential movement?

Yes. You'll see -- I mean, third -- second -- third quarter will be down sequentially for the reasons we talked about and then they'll be up from third to fourth quarter from a volumetric standpoint.

Yes. And this is Eric. Just to add that a part of that, remember, is we do tie-ins in the third quarter, which then allows us to bring the rates of La Negra up to the full potential. And so we -- in the fourth quarter, we'll start having the benefit of those higher production rates.

The next question comes from P.J. Juvekar, Citi.

This is Scott Goldstein on for P.J. So, I guess, when -- in Lithium, when we're thinking about your longer-term contracts, I think in the past you've mentioned the durations can range between 3 to 5 years with some going as long as 10. I was just wondering is there a particular grade of lithium, whether it be hydroxide or carbonate, where you're seeing more demand for longer-term terms than the other grades?

Go ahead, Eric.

So Scott, yes. It's Eric here. So we are seeing -- when we enter these contracts, they are specific to the project and they are -- and they're split between carbonate and hydroxide roughly, which certainly nears our production planning and our capital expansion planning. And they're not -- beyond that, they're specific to a grade of carbonate and hydroxide. We have 20 different specs across the range of products that we supply to these customers and some of them are unique to certain customers. So they're very specific and it allows us to plan accordingly. As we've said a couple of times, hydroxide is coming off a lower base. So on a CAGR basis, yes, hydroxide is growing faster, but the demand is roughly split between the 2.

Okay. And another question on Catalyst. I think at your Investor Day in early 2017, you talked about expected growth around 3% per year over the next 5 years with the rollout of IMO 2020. Could you -- maybe could you talk about how -- I guess, does that change your expectations of long-term growth in Catalysts going forward?

Scott, this is Raphael. No, I think the IMO standard, that will be a contributor to the growth. Overall, as part of a larger trend, which is really about contaminant sulfur removal from transportation fuel, that contributes to growth. The overall crude slate will be coming more heavy and sour. That's favorable for our Catalysts business, both for FCC and HPC, as well as the trends toward chemicals output from refineries. And we have specific technology, max propylene, other technologies which support that trend. So when you combine all of that together, that -- we believe that offsets whatever downsides there might be from increased fuel efficiency or EV trends. So overall, net positive.

Yes. The other thing I'd say is at our 2017, IMO 2020 was already on the rise. So I wouldn't treat that as something that's a new revelation that we didn't have in that model. So it will help us along the edges, but it won't make a step change.

The next question comes from John Roberts of UBS.

Can you tell us what the sequential price change was in Lithium? And I believe you include mix in your average selling price changes. So how do we think about mix in that business currently and as we go forward?

Yes. This is Scott. So sequentially, we're up around 2%. There is a bit of customer mix in there. That's hard to strip that out of the analytics, but generally, product mix and other types of mix are not included in that number. So it's about as pure as a price number as you're going to get from our results. But overall, good traction from pricing on a year-over-year basis as well as sequentially, reflecting that trend toward the longer-term contracts and the support that's behind this.

Okay. And then back on Catalysts. Do you envision any investment to be able to -- either on the IMO 2020 because that might go beyond maybe next year? And then secondly, on the crude to chemicals, kind of investment refiners are -- [may do]. Do you see any investment going into Catalysts? And would you even put more capital or investment into that business? Or would you just maybe not grow as fast as the market?

Yes. So let's break it down. So from a IMO, that would impact the HPC catalysts and we would have investments, but they would be more of de-bottlenecks more than anything else or changing our technology around a little bit to best fit that. That will be, as I look at it, encompassed within our continuity capital that we would spend on a regular basis that we've always talked about in the range of 4% to 6% per year.

If you look at the chemicals, I mean, the crude chemicals, you're really talking about FCC catalysts. And the fact of the matter is today -- at the prices we see today, I don't see readjust -- reinvestment economics in the price that we're seeing at FCC catalysts today. So unless we see those type -- an improvement in price to get those reinvestment economics, we would find another way to meet demand, but it wouldn't be a significant capital. It would be de-bottlenecking. It would be ways to increase our yield. It would be ways for us to be able to do that as part of our continuity capital, but a significant investment in another plant, we'd need to see higher FCC pricing, and the team is working on that. So we're seeing good traction on FCC pricing. And so we may get there, but we got a ways to go to justify reinvestment economics there.

The next question comes from the line of Jeff Zekauskas of JP Morgan.

When you look at the lithium market today, do you think the supply/demand balance is becoming looser or tighter or staying the same, say, over the next 12 months?

Jeff, Eric here. So our view is it's pretty balanced and about the same. It hasn't changed much. It continues to be challenging to produce where the growth is, which is in the [batter gray] area. You have the majors, ourselves included, expanding to meet that. But the time to bring that on as it corresponds to demand, we see that being about the same, pretty balanced.

And if you look at over the next 12 months, Jeff, I don't see a whole lot of change. If you look at the -- our forecasted growth and what our customers are saying and you look at what we're bringing online, we're going to be about where we are today from a sold-out position and still relying on some tolling. So it's about where it is now. In buckets, you can look at carbonate versus hydroxide and see a little bit different story there with one being tighter and one being a little alone. But from a pricing standpoint, from a demand standpoint, we're not seeing -- I don't anticipate anything in that next 12 months that would have a material impact.

Okay. And so as a base case, when you model the financial returns of your Lithium business, do you assume that the benefits to Albemarle over a longer period of time are really going to come from volume growth and that, as a base case, price is neutral from where we...

Absolutely. When we model it, the way we model it, to look at the investments, our returns, what we ought to do, we -- it is now, for the next few years, a volume story for us. Where we are able to achieve price in these long-term contracts, we will do so, but we've taken the philosophy on those long-term contracts, we want to have a minimum price guarantee and a minimum volume, but it will be a volume growth story more so than a massive price, which, Jeff, is consistent with what we've been saying for a couple of years. But yes, you got it right on that.

The next question comes from David Begleiter of Deutsche Bank.

Luke and Scott, just on lithium pricing in 2018. Is your guidance still up high single digits for the full year year-on-year?

Yes, that's correct, Dave. We're right on track with where we actually entered the year and are tracking right on with what we thought. So if you remember, we came into the year expecting high single-digit pricing on lithium. It would be higher on a year-over-year basis in the first half and declining as we go into second half as those comps get more difficult.

Very good. And just also on lithium volumes, are you still on track for 10,000-ton increase year-over-year in lithium?

Yes.

The next question comes from Colin Rusch of Oppenheimer.

Given the rapid pace of battery chemistry evolution, particularly for vehicles, how quickly are you seeing the need to tweak formulations on the concentrates to really meet customer specs?

Colin, this is Eric. I would say it's an ongoing evolution, right? If Glen Merfeld, our Chief Technology Officer, were here, he would tell you that what's happening is a continual effort by battery producers or cathode manufacturers that serve them to get more lithium out of the -- or get more energy against the average cell. There's a certain amount of lithium that's not used in a cell and there's opportunities to get 5%, 10%, 20% greater density per cell. And so there are incremental innovations looking at changes to potentially the anode that are -- slight doping of the anode that are going on. Some of this often will happen on the cellphone side before it happens on the EV side, but those are ongoing.

In terms of what it means from a cathode standpoint, in some cases, some observations may use the same cathode chemistry. In other cases, you will see evolution towards higher energy density cathodes. We -- 622 is definitely the trend that we see in the market today for high nickel cathodes. 811 is often talked about, but still has a lot of engineering to go around safety and, therefore, cost-effectiveness in this application. So it is an ongoing effort that requires us to be responsive, both in terms of ideas we have, but also in terms of formulations with cathode chemistry.

Okay. That's very helpful. And then just given the lifespan of most vehicle programs being 5 to 7 years, how much fluidity are you expecting within those vehicle programs? And I understand that this is really trying to get some insight into your customers' customers, but as vehicle OEMs try to extend life and lower weight requirements or extend vehicle range and lower weight requirements, how much fluidity are you seeing in terms of that evolution in terms of the chemistries that you were just talking about?

Well, it's kind of hard for me to separate your first question from your second because they are interrelated. Maybe that was your intent. So I would say that, I think, in a lot of cases, it's with -- as you said, a 5-year vehicle -- if the 5-year plan is locked down and there's certain targets in terms of energy that are expected out of the cell for a certain model. There is some -- based on the number of vendors that the OEM manufacturers go to, there is some flexibility for the battery producer to manipulate materials, manipulate chemistry to hit that target. And so, I guess, there's some fluidity there in how they get there, but the target, in terms of the range per vehicle, tend to be much more locked down over a long period of time.

The next question comes from Ian Bennett, Bank of America Merrill Lynch.

And perhaps I'm reading too much into it, but I noticed on the key messages in the beginning of this slide deck this quarter, Wave 1 expansions on track is no longer there. So just maybe I'm reading too much into it given you are still on track for La Negra.

And then, perhaps related to that question, I was wondering if you could comment in 2 of the regions where you're expanding capacity. First, in Australia, the dispute with Global Advanced Metals and that trial date, if that's having any impact at all on your ability to increase production in that region and what potential financial damage they're claiming?

And then in Chile, news articles about being slow to respond to CORFO, if that's having any effect at all? And I know that they are changing the way -- the oversight of the mineral in that country. Comments on that would be helpful.

Yes. This is Luke. You're reading way too much into the -- what the key message. We're right on track and that's what we said in the script. We're online with every -- on track to deliver everything that we've said to The Street and everything that we've said that we'll deliver to our customers. So you're not to assume any change to that. We're rolling right along.

As it relates to Australia, the dispute with GAM is against Talison. That has been a dispute we've talked about in the past and we don't see it having any impact. And our partner, Tianqi, in that would -- I think their public comments would be similar. We don't see it has an impact. It's a dispute that if it needs to get resolved, it will. If not, we're very confident in our lithium position.

From Chile, what I will tell you about Chile is we are in compliance with every term of every agreement that we signed related to lithium and I don't see any issue with our ability to get [the brine] to run our facilities in La Negra today, tomorrow and throughout the term of that agreement.

And I have a follow-up. You've accelerated another share repurchase. You made comments about Albemarle stock being undervalued. It looks like also, during the last couple of months, many of the junior companies have experienced greater declines in their equity value. I was wondering if you could update on how you think about consolidation in this industry and the relative importance between relationships with customers and low-cost assets?

Yes. I think that the low-cost assets, first of all, drives your cost position and then your relationships with your customers drives what your price is going to be and how you're going to move that supply once you have it. So I think you got to have both. And if you have one and not the other, you have a -- you may have a decent business, but you're subject to whim. So what we have is low-cost resources that are geographic-diverse with long-term agreements with the major cathode producers around the globe. So we feel like we're in the best in the catbird seat, really, as we look to that.

As I look to other juniors and what the valuations may be, there's still a difference -- what we have to look at is what do we have in front of us that we can execute on, what's the cost of that and what's the return on that to our -- for all the capital that we're going to invest and what's the time that it takes us to do that? Any acquisition needs to be, one, that accelerates de-risk and provides a better return of our capital than what we see in front of us. If we see that in front of us, we have the capability with our balance sheet and our ability to execute to be able to seize upon those opportunities, but we're going to be disciplined in doing so.

The next question comes from Joel Jackson, BMO Capital Markets.

One of your larger bromine competitors spoke about bromine, for them, overearned in Q2. They're expecting lower earnings in the second half of the year. You're assuming more to flat to up bromine earnings in the second half of the year. Can you give a little more color on that? Anything happening in Q2, a little bit stronger? It doesn't seem like for your business.

Yes. If you look at -- I don't know what happened with one of our competitors, but what we're looking at now is relatively flat second half versus first half in bromine from a bottom line standpoint. I don't see anything. If we had -- it all comes down, honestly, to the amount of product we're able to get out because we're sold out and that's how our assets are run. And if our assets run better, that may move us a little bit to the upside of our range. If they don't operate as well, that may move us to the lower side of the range. But to us, it's all in the second half. If the markets stayed -- market conditions remain similar, which what it appears to do, it's all about our ability to execute and run those sites.

And I apologize if this question was asked earlier, but to Luke and Eric, we all see the daily, the weekly, the monthly spot Chinese carbonate prices falling. There's a question about how good the information content is in that data. Can you maybe comment on that? Is there any connection between those data points and what you would see in your contract pricing in the next year or 2? You actually answered some of this, but is any of the informational content really in that data?

Yes. I don't look at it. I mean, the only time I bring it up is whenever you guys ask me about it and I have to go ask somebody what the Chinese spot price has done because it's really irrelevant. What's relevant to us is what's the cost that makes our customers -- gives them the value that they're willing to pay for and gives us the return that we need to invest the capital. So we are -- I'm the wrong guy to talk about spot pricing in China and whether it's relative or anything else because I just -- I never look at it.

The next question comes to -- from Kevin McCarthy, Vertical Research Partners.

I was wondering if you could provide an update with the progress on your contract negotiations with cathode manufacturers? I think, in the past, you had expressed a goal of converting about 80% of the contracts by the first quarter of '19. Is that still the case? And perhaps you could elaborate on the various contract features that you're seeking and how that's been received by your customer base?

Kevin, this is Eric. I think just to repeat what I recall us saying, we indicated that this was an important year because we had some contracts naturally maturing and others where we, either ourselves or the customers, proactively approaching us for contracts that weren't maturing that want to be, for one party or the other, extend it longer term. And for us, that's beneficial, obviously, to improve plant production.

So how that's going? We have a few more contracts that we've closed. Those terms are moving out to the middle of the next decade, by and large. That depends by the contract, but that's moving beyond 5 years whereas, in the past, I think we communicated 3 to 5 years, yet we still have more to go, right? It's -- I think we indicated that this will be an important year. And we're making great progress thus far and we [from the place where we see it] continue to expect to see similar progress going forward.

The terms of these aren't different than what we described before, right? There's the components of a floor price; minimum volume; a right of first refusal on additional volumes based upon the customer's growth; openers that are bidding, not the customers; and a return that gives -- a price that results in a return that's 2x our cost of capital [on an amortized] basis. So that's -- those are -- all those elements are still in place.

What's really changing is the length of that term and obviously the volumes are getting larger for those customers as well. And we'll, by the end of the year, likely therefore, on our fourth quarter call and the beginning of '19, give a more thorough update on all of those matters.

And as a follow-up, how would you compare and contrast demand for hydroxide versus carbonate? One of your peers seems to be seeing a mix shift toward hydroxide. Is that something that you observe as well? And if so, what might be driving that? And how sustainable might it be in your judgment?

Well, given our size and our position in carbonate, we have the, I'll say, the opportunity to serve both markets, right? So that may be where we differ by some of our peers. We have a significant carbonate and we're building -- and have and are building an even more significant hydroxide capacity. As you know, Kevin, the plan for building capacity has us building more hydroxide capacity going forward than carbonate and that's because we're starting from a smaller base. And that is also true of the market. The market for hydroxide overall, outside of Albemarle, is smaller and the demand growth, therefore, is growing off a smaller base.

In terms of what's happening at the customer, as I indicated in an earlier question, we're seeing demand for both. Now, what we are seeing certainly -- and this is -- we haven't had a question yet about Chinese EV policy, but in China, we're seeing a clear move to nickel chemistry and we -- it is very likely that we'll see an uptick in hydroxide needs for what's going on in China for their -- putting their EV infrastructure and vehicles in place. So -- but all that being said, the contract winners we have that go out, even into the next decade, are pretty balanced between carbonate and hydroxide. And it really does depend on the cathode or battery manufacturers' infrastructure, the know-how they have and the place to process and, therefore, the preference they have for one or the other.

The next question comes from Aleksey Yefremov of Nomura Instinet.

Sorry to come back to the China question. I recognize that you don't have exposure to China spot lithium market, but can you offer us your view of what is going on in that whole lithium to EV value chain? Is there anything that you see that has implications for EV sales in China and then, therefore, global demand for lithium?

Yes. I really -- the only thing that I could hypothesize is that there's some lower grade carbonate that is in China that, when you look at the Chinese regulations moving to a longer storage and a longer battery, that's having a tough time finding a place in the marketplace for EV because it won't meet that standard for that longer drive time under the new regulations in China. And some might -- so it's of less value than somebody is trying to find the spot for. If you -- that's the best I can offer you. I don't think it's going to have any impact at all in our business.

Got it, Luke. And then staying in China on Xinyu II, what could be the benefit in terms of volume next year? Should we think of the ramp of Xinyu II as just offsetting some of the tolling volume that you have next year? Or will this be incremental to the tolling level that you have this year?

It's going to be incremental. And so at full rate, it would be 20,000 metric tons on an annual basis. I don't think we can expect it to start up and sell out 20,000 met tons and run that way. So is it going to be -- we'll have a better handle around the second -- the next call, but my expectations will be to get something around 15,000 or something like that out of that plant next year. That would be good operations assuming that they get commissions started on the back end of that during the fourth quarter. I would hope -- that may be a stretch, but I would hope we'd be able to do that.

Okay. The next question comes from Sebastian Bray of Berenberg.

I would have 3, please. The first is on the extent of coverage of your volumes with longer-term contracts. Could you please give an idea of what percentage of your volumes are booked out for the next 2 to 3 years with longer-term contracts? I think the target, from memory, was about 50% by the end of this year.

The second one is more on the use of -- or pardon me, is more on the development of lithium demand this year. Do you have enough visibility now to say that you would expect the market to grow by, let's say, 20 or potentially even more percent? In absolute terms, would this be about 260 kilotons to 270 kilotons?

And lastly, a question on Catalysts. This business, as I think, has been mentioned in a previous question, people were typically thinking of low single-digit growth for. Suddenly, it has grown by over 10% volumes. Is this a catch-up effect? Is it some pre-stocking ahead of IMO legislation? Could you elaborate a bit, please, on why this business has grown as pleasingly as it has in Q2?

Okay. Let me take the first one. On the coverage on our long-term agreements over the next 2 to 3 years, that's probably going to be 95% plus from what we can produce. Next year, as we said, we're going to have to rely on tolling as well. So we're selling more than we can produce internally because we're still relying on tolling. Our goal long-term is to be right around 80%, but we won't get there until -- in some time -- in early the next decade if you look -- I would assume.

On the demand, Eric, do you want to start a little bit about that, please?

Yes. So I mean, I think -- I'm trying to remember what we said in the past. And what -- in the industry prognosticators often say, but it's a growth that's sort of in that neighborhood of 20% year-on-year is sort of the expectation, maybe going forward.

Now, I can tell you that this year, the demand growth, from what we see, looks stronger than that on a percentage basis. And it's coming -- if you look in the script, a reference -- on your doubling of the EV demand, there's demand that's coming from other places like e-buses. There's demand coming from -- even industrial applications with a strong mobile economy. So we're seeing demand that can approach close to 50,000 metric tons year-over-year on a market that, last year, we indicated by our estimates was 220,000 metric tons. That's stronger of a growth than we would have thought at the beginning of the year.

And then if you look at Catalysts, I would view it -- when you look at this year-over-year growth, you've got to get it back to 2017. And if you go back 2017 and look at Catalysts from a full year basis on a -- we would have been up -- we would have been down year-over-year. So 2017 was weaker than 2016. So 2018, if we're high single digits, we catch back up. And we may a little bit, maybe a little bit ahead or a little bit down.

So overall, as we've talked about, this is a lumpy business. FCC is more consistent. The CFT market and hydroprocessing catalysts, based on customer mix and product mix, and whenever they turn around, you have different costs based on where you are on that turnaround cycle. So it happens to be this year that we're up after a down there -- year last year. Overall, when you look at it over the course of 5 to 10 years, I would still expect that kind of 3% growth is where we'd end up on a CAGR basis.

The next question comes from Arun Viswanathan, RBC Capital Markets.

I just wanted to ask about the costs you're experiencing in Lithium. How would you characterize the cost curve over the last year and what's your outlook over the next year? I mean, have you seen any material changes to cash costs for yourself and you see those rising over the next year?

Yes. If you look at cash costs at plants, I mean, there are always year-on-year inflationary impacts, but if you look at that in productivity and then look more broadly at the competitive set, the nature of cost curves -- our cost position in the cost curve and our relative position relative to competitors have changed. We're still on the left-hand side of the cost curve for carbonate with brine and similarly with [broth] or hydroxide.

Now, you have to also consider -- what you can see in our results is the royalties -- the royalty structure, which also affects our cost structure. So now we're, at current volume prices, we're at the high end -- at the very high end of that royalties curve or tier. So you will see kinds -- on a comparison basis where our costs are higher because of that component, but all other components are largely as expected or similar to previous.

Okay. That's helpful. And just 2 more quick ones. So first on pricing, when you see the high single-digit price increase for this year kind of go through, does that bring your average pricing kind of more in line where it should be? Or do you still have more rollovers that would drive further price gains next year?

Yes. Well, we've still got a few rollovers, but I mean -- the only thing I would characterize is I wouldn't characterize this as not in line. It's fine in line with where we are, but when you see these contracts renew, there's some opportunity for some adjustments in price. It would be -- as we talked about with -- I think it was Jeff Zekauskas' question. What we'll see next year is more of a volume story than a price story. And that's what you'll see is we will bring this new capital alliance. Still some opportunities in price, but really, really, it's more a volume story.

Great. And last one is just that Tianqi recently announced that they're investing a little bit more to increase some spodumene production in Australia. I think it's like 1.8 million tons or so by 2021. Would you get any offtake from that? Or is that something that we could look for you to grow further in? Or is that not your market for you guys?

No, I don't know that -- it was actually Talison, not Tianqi. Tianqi is our partner. Talison made the announcement. And this is part of what's enabling the growth plan that we have that would describe its nonrecurring segments within our website the -- expanding with the conversion capacity chart we have in Wave 1 and Wave 2. And under the bylaws and the relationship we have, any increase in offtake, we get half of and Tianqi gets the other half. So it doesn't go to market, it goes to us and enables us that Wave 1 and then we will continue to plan towards Wave 2 capacity expansions as well.

The next question we have is from Mike Sison of KeyBanc.

Luke, you kind of opened up and talked a little bit more positively again on the EVs. Can you maybe just update us on your outlook for lithium? Has it increased since the beginning of the year and to what degree? And you had a lot of nice highlights on what you think the demand should be at the beginning of the year -- or beginning of the call.

Yes. No, if you look, our demand model remains fairly consistent with what we talked about earlier. And if you remember at one of our previous calls and in some of our decks that we've got online and we've used at in some of the seminars that we've been to, in 2025, we're seeing a total demand of around 800,000 metric tons. Transportation would amount to 550,000 met tons of that. Consumer electronics, 110,000, and all other industrial uses about 140,000 metric tons. So we haven't changed in that, although what I was trying to point out is the data that we've seen, the demand from our customers, the steps taken by our customers' customers committing to capital is all consistent with that demand model that we laid out early this year. So during the course of this year, we've gotten even more confident in our demand model and even more confident in the growth that we anticipate between now and 2025.

Great. Then, as a quick follow-up, there still seems to be some concern that lithium pricing could significantly fall over time. Do you see us there, where your contract pricing can fall significantly over the next couple of years?

No.

The next question comes from Vincent Andrews of Morgan Stanley.

Just a couple of quick ones. Scott, the cash flow from operations guidance stayed flat even though EBITDA, you took the bottom end and the high end up. I could see some comments in the release and such about raw materials. Is this just a working capital build or what's the story there?

Yes. Vince, this is primarily driven by -- given that earnings is up, our revenue is up as well, so we have a bit more working capital. Obviously, that's going to be a bit of a drag on our cash flow, so that's really how it reflects.

Okay. And then just I've been reading some things about worker strikes in Chile, maybe more for BHP and others, but is that something that you're concerned about at all?

We're not concerned at all. In fact, we recently just negotiated all of our union contracts for another 3 years. So we feel like we're in great shape.

Have a wonderful working relationship with our employees, both in the Salar in Santiago and La Negra. There's a lot of activity down there right now, so working with them together to get that contract -- get those contracts renewed to [provide] great leadership from both the employee side on the union's and ours, so kudos to all of those guys.

The next question comes from Mike Harrison of Seaport Global Securities.

You mentioned in Catalysts that the FCC prices had moved a little bit higher. Can you just give us a little bit more detail on what you're seeing in the FCC pricing environment and your utilization rates in FCC right now?

Sure, Mike. This is Raphael. FCC utilization rates are fairly high right now. They're actually, for the major players, it's very high. In China, utilization is lower by Chinese FCC producers. But overall, it's a good market for FCC given where utilization is. That's been favorable for pricing. We've seen pricing trending upwards in most of our established markets and I think that's a good sign. A lot of -- pricing is a function not just of utilization rates, but it's also in the value you could deliver to your customers. And we're fortunate to have good technical products and technical people to help settle the solutions to our customers.

And was also hoping, Raphael, that you could break out the 16% volume growth that you saw year-on-year in Catalysts. What were the separate volume growth rates for FCC versus HPC?

It's Scott. Yes. So, Mike, we don't normally split those out, but we saw volume growth in both businesses.

The next question comes from Jim Sheehan of SunTrust.

Could you talk about lithium margins over the next -- let's say, in 2019, you have shifting and moving parts throughout the year. How should we think about the seasonality or cadence of margins quarter-by-quarter?

Yes, this is Luke. We look at it normally on an annual basis because if we got -- you got a plant that's running 40,000 met tons and you shut it down for a week or 2 -- or 2 weeks for something, you can see a change. So what I would say is what we've always said. We expect the margins would be north of 40% and we believe we'll be able to hold that well into the future. If we look last year, I think our overall lithium margins on an EBITDA basis were roughly 43% to 44% on a round. And if I look at it this year, first quarter, it was kind of 44%. Second quarter was 45%. So we're kind of right on where we said we're going to be. I think, overall, for the full year, you'll see similar margins that we saw in the first quarter. And I would expect, as we guide in 2019, we would see similar type margins.

Great. On the IMO fuel standards for marine fuels, are you seeing any impact in your business this early? Any impact on demand or pricing? Or is that something that is going to ramp slowly over time as the regulation is implemented?

Jim, we haven't seen -- this is Raphael. We haven't seen any impact to that yet. And to your point, I think it will ramp slowly over time. It's an overall trend in the industry towards lower sulfur transportation fuels, not just in marine, but around the world, but it's a slow ramp.

The next question comes from Chris Kapsch of Loop Capital Markets.

My questions are follow-ups around the increased activity with tollers. I guess, tolling has always been part of the mix and I think, indeed, it was a tolling relationship with Jiangxi Jiangli, which ultimately led to the acquisition of -- at the time, what was probably one of the best converters in China.

So the questions are a couple of things. One, are these tollers that you're working with now, are they totally focused on battery-grade lithium products and you're comfortable with them hitting those specs? And then, given that these tolling pounds are part of the mix, is it having any sort of dampening effect on margins currently? And if that's the case, as you expand your in-house conversion capacity and shift more of that volume back in house, will that have an influence on the margin outlook?

Chris, this is Eric. So with regard to tolling, we -- as you know, we qualify and spend a lot of time working on getting the right tollers. We make sure we're working with folks we know and really have the right quality. All of that being said, it is not used in battery-grade products, right? We use these largely for technical-grade product lines or customer relationships that we have.

As we've said off and on over the past couple of quarters and years, we'll continue to use that as swing capacity as we bring on plants and bring off to support ourselves because it is a lower-margin business, right? It does have a margin dampening effect. And you're seeing a little -- and we expect a little bit of that in the coming quarter, right? We will have tolling volumes that's offsetting some of the lack of volume we otherwise would have had coming out of La Negra because we're having a tie-in at La Negra. So our expectation is you'll probably see more of a margin impact from the -- from what goes on there in the sales impact with La Negra because of that tolling phenomenon, being that swing capacity we bring on to buffer the situation.

That's helpful. And then just as a follow-up, I mean, given that most of these relationships are not focused on the battery grades then, is it fair to assume then that you -- the strategy will be to build out organic in-house conversion capacity as opposed to considering maybe another converter acquisition?

We will look at that as it comes and it depends upon what the timing is. It depends upon what the capabilities of that toller is and it depends upon what return on invested capital would be, so -- and what we would have to invest in there. So it -- we look at that, obviously, but the returns have got to be right for us to do an acquisition given where we are from an organic. And as we look at it as well, we've talked about the importance of having assets within China and outside of China because within China, any export of lithium hydroxide has a 17% non-recoverable VAT and we just want to be sure we can service our customers efficiently and effectively outside China and inside of China.

Thank you, ladies and gentlemen. That concludes the presentation. You may now disconnect. Thank you for joining and have a good day.