雅保公司 (ALB) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2018 Albemarle Corporation Earnings Conference Call. (Operator Instructions) As a reminder, this conference may be recorded.

I would now like to introduce your host for today's conference, Mr. David Ryan, Vice President, Corporate Strategy and Investor Relations. Sir, please go ahead.

Thank you, and welcome to Albemarle's Fourth 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 Investor section at www.albemarle.com.

Joining me on the call today are Luke Kissam, 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, including our outlook, expected company performance, production volumes, expansion projects and our proposed lithium hydroxide joint venture 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 some of our comments today refer to financial measures that are not prepared in accordance with GAAP. The reconciliation of these measures to GAAP financial measures can be found in our earnings release and the Appendix of our earnings presentation, both of which are posted on our website.

Before I turn the call over to Luke, I would like to remind you that we closed on the divestiture of our Polyolefin Catalyst and Components business on April 3, 2018. This business was part of our reported results in the Catalysts segment. For simplicity in comparison of our results and guidance for 2019, all adjusted results and comparisons will be stated on a pro forma basis excluding results from that divestiture.

Please see our earnings presentation for more information on these excluded results. Now I will turn the call over to Luke.

Hey, thanks, David. The fourth quarter marked our ninth consecutive quarter of year-over-year EBITDA growth, ending what was the most profitable year in the history of Albemarle.

In 2018, net sales were up 13%; adjusted EBITDA, up 17%; and adjusted EPS, up 23% versus the prior year on a pro forma basis, all of our reported segments contributing with each delivering double-digit adjusted EBITDA growth on a percentage basis. And our EBITDA margin for the year was right at 30%, highlighting the quality of our businesses.

2018 was also another step forward in the 4-pronged strategy that we laid out at our 2017 Investor Day. As you can see on Pages 5 and 6 of our earnings presentation, we continued to make progress in each of our focus areas. Lithium delivered 19% year-over-year adjusted EBITDA growth in 2018, and our major capital investments in Lithium remain on track to ensure that growth continues well into the future.

We addressed some debottlenecks at La Negra II during the year, and we were able to operate near nameplate rates by year-end.

In 2019, we expect to produce close to 40,000 metric tons of lithium carbonate in La Negra in spite of the significant rain event in the Salar de Atacama in January and February of this year that will cost us about 3,000 metric tons of production in 2019, all of which will occur in the first half.

La Negra III and IV, which will increase lithium carbonate capacity in Chile to a total of 85,000 metric tons, remains on track to begin commissioning in 2020.

In Xinyu, China, we achieved mechanical completion and started commissioning activities of the 20,000 metric ton lithium hydroxide expansion, taking our total China capacity to 35,000 metric tons annually. Earlier this year, we shipped battery-grade qualification samples from Xinyu, and that team has exceeded each commissioning milestone to date. While it's still early, we expect this site to meet its production goals for 2019.

In January, we began the site work related to the lithium hydroxide complex in Kemerton, Western Australia. This complex, which should be the largest lithium hydroxide complex in the world when fully built out, will use spodumene concentrate from Talison as a feedstock. The first phase of the complex will be 3 trains of 20,000 to 25,000 metric tons capacity each, with the ability to add 2 additional trains over time if market demands require such additional capacity. The commissioning of this site is expected to start in stages during the second half of 2021 and continuing into 2022.

Finally, the expansion of Talison, our spodumene joint venture in Greenbushes, Australia remains on schedule to be commissioned in the second quarter of 2019. That expansion will result in a total production of about 160,000 metric tons on an LCE full year run-rate basis, with Albemarle's annual share being 80,000 metric tons on an LCE basis.

Each of our other businesses maximized their returns in 2018. Bromine and Catalysts delivered double-digit percent year-on-year adjusted EBITDA growth on a pro forma basis and provided the cash flow needed to fund the capital expansions in Lithium. The tetrabrom expansion, which came online at JBC midyear in 2018, provides low-cost production flexibility between our JBC and Magnolia sites. This expansion will also enable us to manage bromine allocation and derivative production more efficiently and profitably.

Additionally, on January 1, we successfully implemented the first of 4 deployments of a new global ERP platform. This platform will be fully implemented by year-end and will give us the tools to be much more efficient and effective in our end-to-end business processes. We continue to assess our portfolio of business and other resource opportunities.

In April, we closed on the sale of our Polyolefin Catalyst and Components business to W.R. Grace. In December, we exercised an $18 million option to acquire 100% ownership of a lithium brine resource in Antofalla, Argentina. We believe this asset has the potential to be the largest Lithium resource in Argentina.

We also completed a drilling program at our hard rock site in Kings Mountain, North Carolina, to allow us to more fully characterize that opportunity. Both of these assets will be kept available for development in the future based upon market demand.

Also in December, we signed a definitive agreement to form a lithium hydroxide joint venture with Mineral Resources Limited. We made the necessary regulatory filings and pending those approvals, expect to close the transaction in the second half of 2019. This transaction will combine the mining and operational expertise of MRL with our lithium hydroxide production and marketing expertise.

Albemarle will have exclusive marketing rights for all spodumene and lithium hydroxide produced by the joint venture. This will allow Albemarle to continue to support our customers' growth under our long-term agreements with increased volumes and provides for an effective channel to market for this capacity addition.

Finally, in 2008 [sic] [2018], we stayed committed to our discipline capital allocation strategy. We increased our dividend to $145 million, repurchased $0.5 billion worth of stock, invested $700 million in CapEx, primarily in pursuit of our lithium growth plan, and still completed the year with a net debt-to-EBITDA ratio of 1.2x.

With that, I'll turn the call over to Scott.

Thanks, Luke, and thank you, everyone, for joining the call this morning. As Luke said, 2018 was the most profitable year in the history of Albemarle, with each business delivering growth in both volume and price for the year.

We generated unadjusted U.S. GAAP net income of $130 million during the fourth quarter, bringing full year 2018 net income to $694 million. This is up from $55 million in 2017.

Net income during 2018 benefited from the growth of our businesses and the gain on the sale of the polyolefins and components business. 2017 was negatively impacted by the transition tax charge related to U.S. tax reform.

We generated net sales growth of 11% and adjusted diluted earnings per share of $1.53 for the fourth quarter, an increase of 27% -- $0.27 per share or 21% compared to fourth quarter 2017 excluding divested businesses.

All 3 of our recordable segments performed well, providing about $0.25 of that growth.

Full year 2018 pro forma adjusted earnings were $5.43 per diluted share, an increase of $1.03 or 23% over the prior year. Our businesses delivered about $0.96 per share and our share repurchase program contributed about $0.14.

Net cash from operations nearly doubled to $546 million in 2018. The increase was driven by higher earnings and lower cash taxes compared to 2017 when we made the tax payment on the sale of Chemetall.

Operating working capital continued to be a use of cash in 2018, primarily due to increased inventory of spodumene in the Lithium segment in preparation for the startup of the Xinyu II expansion in China.

Capital expenditures in total ended 2018 at $700 million, up from $318 million in 2017. Spending on our lithium growth projects continued on a successful ramp rate with total capital expenditures reaching $228 million during the fourth quarter, right on track with expected levels in 2019.

Now let me move on to the business performance. Lithium ended the full year with sales of $1.23 billion and adjusted EBITDA of $531 million, an increase of 21% and 19%, respectively, compared to 2017 and an adjusted EBITDA margin of 43%.

Volume growth for the full year 2018 was 10% and prices improved by 9%, driven by the increasing demand of our contracted customers for battery-grade materials. Fourth quarter volume was strong with 14% growth compared to prior year and 25% growth sequentially. Average lithium pricing for the fourth quarter was 4% higher than the fourth quarter 2017 and flat sequentially.

In Bromine Specialties, full year sales of $918 million and adjusted EBITDA of $288 million were up by 7% and 11%, respectively, compared to 2017. Full year adjusted EBITDA margin was 31%. The market for flame retardants remained healthy, and the demand for clear completion fluids picked up slightly in the second half. Overall, pricing continued to be supported by constrained production of elemental bromine in China.

Catalysts reported strong fourth quarter net sales of $305 million and adjusted EBITDA of $79 million. Excluding divested businesses, full year Catalysts sales of about $1.1 billion increased by 11% compared to 2017. Adjusted EBITDA was $273 million, also up 11% from 2017.

Growth was driven by our refining catalyst products due to favorable mix in hydroprocessing catalysts and growth in volume and pricing in fluid catalytic cracking, or FCC catalysts, as a result of strong demand for transportation fuels.

Turning to the future. Since we last updated you on our lithium demand forecast in the first quarter of 2018, the momentum around electric vehicles has continued to accelerate. Although global automotive sales slowed by over 8% during the fourth quarter of 2018, sales of electric vehicles rose by 98% over that same time period.

Globally, the number of the available plug-in hybrids and battery electric models announced by automotive manufacturers for 2021 has grown by almost 40% since mid-2017. The increase in new models announced for the U.S. is even more dramatic. In mid-2017, auto manufacturers announced that almost 40 new models were expected to be available over the next 3 years. Now that number is over 60, and all of the new additions are pure battery electric.

Likewise, for the European market, the announced new models targeted for availability in the next 3 years has grown from a little over 40 to around 80, almost double.

And then there's China. Annual sales of new energy vehicles in China doubled during 2018. And while China has not yet released their specific subsidy plan for 2019, all indications suggest that the policy will continue to incentivize the shift to vehicles with longer-range, larger batteries, a good trend for lithium.

We are also beginning to see an upward trend in large scale batteries for utilities, buildings and power installations. To support the auto manufacturers, the battery supply chain has responded by increasing capacity targets in just 1 year from 270 to about 400 gigawatt hours by 2021. And the target for 2023 is now more than 800 gigawatt hours growing to roughly $1.5 billion by 2028.

These trends have had a marked impact on our demand outlook, which is based on inputs from multiple sources, including automotive OEM announcements, industry forecasts, research reports and discussions with our customers. As you can see on Page 14 of our earnings presentation, each time we have updated our outlook, the demand curve has shifted higher and steepened. In our current view, the LCE demand is expected to be around 475,000 metric tons by 2021, growing to around 1 million in 2025.

From a 2018 base of about 270,000 metric tons, this represents a 21% CAGR, primarily driven by EV battery demand. In 2019, we expect new supply brought on by the major integrated producers will be about sufficient to meet market demand growth of roughly 21%. The market could see nonintegrated converters in China bring on capacity in excess of that. These converters would need access to spodumene concentrate sources out of Australia for feedstock. This capacity will largely be carbonate, will take time to scale up and likely will not be of EV-grade quality, but may result in a carbonate oversupply in the short term.

Given our long-term contract strategy and our customer base of top-tier cathode producers, we do not expect this situation to impact our volume or price.

As we discussed in November, we are already at our goal of having about 80% of our 2021 nameplate volume secured under long-term agreements with floor pricing for both lithium carbonate and lithium hydroxide. We remain ahead of schedule on 2025 lithium hydroxide and the volume under negotiation continues to increase.

This market demand and the status of our long-term agreements gives us confidence in our capital investment plans as we look to meet customer demand in lithium. In total, you can expect capital spending of $800 million to $900 million in 2019, with over 75% of that dedicated to Lithium growth. We'd expect capital to remain in that range or slightly higher in 2020 and 2021, assuming we close on the JV with Mineral Resources.

We are confident that our businesses will continue to perform at a level that funds the cash needed for this growth plan. Net cash from operations is expected to range between $700 million and $800 million in 2019, exceeding the pro forma of $535 million of 2018, free cash flow is expected to remain about the same as 2018.

And as a final note, on Page 19 of our earnings deck, we provided some additional data points that may be helpful for modeling purposes.

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

Thanks, Scott. By now you've probably heard some mixed messages on other earnings calls about the economic uncertainty for 2019. The fact of the matter is that the EV supply chain has not lived through a general automotive slowdown, so there is no past experience on which to rely. It's also a fact that Bromine is the Albemarle business that historically has felt the impact from an economic slowdown the earliest and the most intensely. To date, we have seen no evidence of a slowdown in the order pattern from our customers across our businesses, but we do have some customers in Bromine who indicate they are watching the second half carefully. With that in mind, let me try to frame up our business outlook for 2019.

In Lithium, 2019 is a volume story, and our 2019 production is almost fully committed under our long-term contracts. There was a significant rain event in the Atacama in January and February. The resulting dilution in the pond system will likely cost us about 3,000 metric tons of production during the first half of the year, but we're still expecting volume growth of over 20,000 metric tons from 2018, with 10,000 to 15,000 metric tons coming from internal production and the rest from tolling. We would expect to see flat to inflationary pricing trends with any variant from that coming as a result of customer mix. We expect Lithium adjusted EBITDA to increase by a little more than 20% year-over-year. Quarterly adjusted EBITDA will increase through the year as we recover from the rain event in Chile and qualify lithium hydroxide from Xinyu II with customers and ramp production and sales. Adjusted EBITDA margins should exceed 40%, but could be below 2018 levels, largely due to increased tolling volumes to support customer demand and startup costs related to Xinyu II.

For Bromine, we expect 2019 performance to be about flat compared to 2018. Demand for flame retardants and other bromine derivatives is expected to remain stable despite some caution coming out of the construction, automotive and electronics markets for the second half. We expect Catalysts to be about flat year-over-year with adjusted EBITDA in the second half somewhat stronger than in the first.

Refinery Solutions (sic) [Refining Solutions] is expected to provide mid-single-digit percentage adjusted EBITDA growth, excluding the onetime settlement of about $9 million received during 2018. FCC catalysts are expected to continue to benefit from strong demand, high utilization rates and an improved product mix with increased sales of our max propylene product line.

We also expect a similar trend in clean fuels technologies during 2019, particularly in distillates and FCC pretreat units. The growth in Refinery Solutions (sic) Refining Solutions is expected to be largely offset by a decline in PCS during 2019 due to pricing pressures and the loss of a large customer contract, which contributed about $11 million in EBITDA in 2018.

When we add all of this together, we expect pro forma net sales growth in the range of 9% to 15%. Adjusted EBITDA should range from just over $1 billion, up to $1.14 billion. We expect overall corporate adjusted EBITDA margins of around 30%. This would result in adjusted diluted earnings per share of between $6.10 and $6.50, a pro forma growth rate of $0.12 to $0.20 (sic) [12% to 20%] over 2018.

With the new Lithium capacity weighted to the back half of the year, the rain event in the Salar and the Catalysts shipments weighted to the second half, we currently expect the cadence of earnings to ramp through the year with growth in the second half stronger than the first. And we expect the first quarter of 2019 to be about equal to the first quarter 2018. As always, normal fluctuations in our business could have an impact on quarterly results.

As we close, we have a clear and simple strategy, and we are well positioned for growth in the short, medium and long term. We've outlined our growth plan well into the next decade, driven by capacity expansions in Lithium and steady profits and cash flow from our other businesses.

Now it's all a matter of execution, and I believe that we have the people, the tools and the financial flexibility to be able to execute successfully and deliver stakeholder returns now and well into the future.

I have never been more excited about the potential I see in our employees, in our businesses and the opportunities I see for our stakeholders.

Operator, we are now ready to open the lines for Q&A. (Operator Instructions)

(Operator Instructions) And our first question comes from John Roberts from UBS.

The Mineral Resources JV, is it just financing and legal work that needs to be completed for the closing later this year? Are there any sticking points left to be done there? And just related to that, could you just remind us again, does Wodgina Stage 2 capital spending come sequential to Stage 1? Or is it likely that they will overlap?

This is Luke. We've got 2 regulatory filings that we have made, one in Australia and one in China. We expect to get those approvals, but that's always a condition of a closing, John. So that's an open item. And I would expect that the Wodgina Phase 2, it would be sequential. It would come after the Phase 1.

Okay. And then is there any near-term anecdotal guidance you can give us on the China EV market? You were quite bullish here over the next couple of years in your slide, but things have been pretty choppy in the overall automotive market in China in recent months. I don't know if the EV market is going through any short-term transition period here.

Hey, John, this is Eric. We continue to see, and we saw this last year as well, a Chinese government creating incentives for longer range, higher energy density batteries. And that's what we expect, as Scott referenced, to happen in the next set of subsidy changes for this year. You're right, the Chinese automotive market has been choppy. The global market has been choppy. It's been down, as Scott has pointed out. But on the other hand, EV has continued to grow and the incentives that the government is putting in place are, we believe, will continue to drive the kind of range batteries that will drive a lot of lithium consumption. If you look at the chart, the demand chart we have in our presentations, you will see a BEV battery has 4x the amount of lithium in it that a PHEV battery would have, right. So that incentive to longer-range is beneficial to us and to the industry.

Our next question comes from Robert Koort from Goldman Sachs.

Scott, I think maybe you or Luke talked about the conversion capacity that might expand in China, but maybe not pressure your business because they have challenges qualifying. Wondering if you could help differentiate what you produce out of Xinyu and why you are able to get that qualified and maybe some of these peripheral parties have a harder time?

Well, first of all, we're starting with a better feedstock because we are taking the Talison rock, which is the best spodumene concentrate in the world and we've got it dialed in. We also have the process engineers from around the globe that have a history with operating within the Lithium business. So we have an advantage there, but it starts with the feedstock and it rolls into the know-how of how we developed the design as well as improvements we've made since we purchased Xinyu.

And, Luke, if the Wodgina deal closes and they start producing spodumene later this year, what are you going to do with your share of that spodumene? Where will that be placed? And will it be converted by you or by tollers or sold into the merchant markets?

We've got a marketing plan that we are working with right now. Some of it, obviously, we'll toll and we will work to place that volume with strategic converters in the marketplace. So -- and one other thing I just want to be clear is that you talked about the share of Talison. We -- I'm sorry, the share of MRL. We have marketing rights to 100% of that. We will market all of the spodumene, not just a portion of it.

Our next question comes from Laurence Alexander from Jefferies.

Could you clarify 2 issues? One is, can you talk a little bit about what the impacts of mix was on the Lithium business in Q4 and what you expect in Q1, just so we can get a sense for how much it's swinging results? And secondly, when you mentioned that you expect pricing to be flat, just to be clear, that is reported realized prices, not just the pricings embedded in the contracts?

So Lawrence, this is Eric. I'll answer the first question and I may need some clarification on the second. So, so far as mix in Q4, we -- as you may recall, Q3, we had troubles in -- from an operating standpoint for different reasons in both China, which is largely all hydroxide for us, and in Chile, which is carbonate. The reason for the results we saw, the strong results we saw in Q4 versus Q3 and the sequential volume increase to 25% has everything to do with those plants running very well. China plants ran very well consistently through each of the 3 months. And the La Negra or Chilean operations ran well as -- during that time. And the only thing that happened in Chile that might be slightly different is that we had to tie -- we are ramping up Xinyu -- or excuse me, La Negra II in that period of time. We did get to very close to capacity design rates there, so we had a successful startup, but there was a slight disruption there. It's a fairly balanced mix is the bottom line. As you look forward into this year, you are going to see, as Luke mentioned, we're challenged in the first quarter on carbonate because of the rain event. We will not see a, necessarily, a mix shift to hydroxide because hydroxide, that ramp up of Xinyu II is a staircase, if you will. It gradually steps up through the year with its weakest portions from a volume contribution standpoint to growth in the first half of the year. The other thing we are going to see is a lot more tolling. That's going to benefit largely carbonate, that's mostly what we toll. So you might see a shift towards carbonate and that would have, in the earlier parts, maybe a depressive effect on mix in the first half of the year. So it's a complicated story, but those are the factors. Your second question, could you repeat it please, for the benefit of all of us here?

What I was trying to get at there is there was a comment in your prepared remarks about how pricing lithium will be flat to up adds some mixed effects. But I just wanted to clarify that, that is your comment -- that comment pertains to your reported needs and pricing that you report on the quarterly calls, not just a comment about the pricing embedded in the part of the business that is contracted with the EV market. It's across the entire business, including the industrial grade.

Hey, Lawrence, this is Scott. So the pricing guidance that we gave is across the Lithium segment, and it's not just related to our contracted business nor is it just related to our battery-grade business, so it is intended to be across the business.

Our next question comes from Arun Viswanathan from RBC Capital Markets.

I just wanted to, I guess, ask a question about the long-term outlook. It seems like you've provided a range that's maybe in the 850,000 to 1.25 million tons of Lithium demand in 2025. And 610 of that would be coming from the EV side. And then you also provided supply of your own, meaning your capacity, being 325 to 350. I mean, would you be in a position to comment on what you are seeing from an industry capacity standpoint? Would it be balanced in that 850,000 to kind of 1.25 million range? And furthermore, do you see around 600 or 610 of supply of battery-grade lithium or would it be less than that?

Yes, that's a lot of questions. What I'd say is this. If you look around and you look at the announcements that have been issued over the last month or so, as we've always said, it's harder to bring this capacity online. It's one thing to issue a press release, it's another thing to go out and raise a little money. It's more difficult to do it. So I think what you are going to see is you will continue to see, in the long run, the big players, the Albemarles, the SQMs, Tianqi, the Ganfens. Those are the ones that are going to have to expand to bring this capacity online with the know-how of how to do it and the time frame they can do it with the volume that's going to meet the big customers out there to meet that demand. As you look out long term, the market tightens up, is our belief. We believe there'll be enough to meet demand, but it's going to be tight. And in some instances, like we talked about in 2019, there's going to be a little bit of overhang. There's going to be some overhang of spodumene rock, and carbonate could be long in some applications in 2019. That's going to burn off. And what you are going to see is the markets are going to continue to tighten up, and I did some research on new technologies that come into the marketplace. And if you look at every new technology and you go back and look what the demand forecast was, every year when they came out a new demand, it always got higher and the curve got steeper. And I think that's what we are going to see. I think that we've got realistic, but probably overly conservative demand outlook out there. So I think we are going to be, in the long run, fairly tight. That's why it's so important for us have resources on the balance sheet that we control that we can execute additional capital to bring it to the market if we see the demand out there. If we don't, we just got resources for the future.

And just as a quick follow-up on the spodumene issue. Prices are down a fair amount year-on-year. And just wanted to get your thoughts on maybe what's driving that and your own view that flat to up pricing in your overall portfolio, why that wouldn't be impacted by lower, I guess, prices of spodumene, if at all.

Well, this is Eric. It's a pretty simple answer, it's supply, right. As we all know or has been publicly published, there's new supply of spodumene coming into the market. I'd point out though that, that is of varying and unproven quality, right. So I think that some of that supply will work better than others in meeting the conversed demand inside China. But the mere presence of more supply coming on has had the effect of creating somewhat lower prices.

And what I'd point to you on that is the strategy of the long-term agreements really comes into play when you have a situation like we have today. We are very confident in what our pricing model is going to be for 2019. We are very confident in the demand. We are very confident in being able to place the volume that we can produce in 2019 with customers under long-term agreements at set prices.

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

Your guidance calls at the midpoint for sales to be up around $400 million, but EBITDA is only up close to $100 million, which is a little bit less than what I would have thought. So could you outline some of the increasing costs that are occurring this year? And as we look forward in time, given you know your volumes and price in lithium, should the EBITDA margins and Lithium be increasing or stable? Just some context there would helpful.

Ian, this is Scott. The big driver for us on the year-over-year basis is the tolling mix that we are seeing in Lithium. So all of that growth is not coming from our internal production. It's about 60% to 70% of it will be internal and the remainder will be based on tolling. And as a result of that, the tolling margins are quite a bit lower than our normal internal margins. So in 2019, we do expect that we'll maintain margin north of 40%. It would likely be below what we had in 2018. Longer term, as you see that tolling mix change as well as the customer mix change, that will drive margins that will start to creep up over time.

Okay. And in the hydroxide market, we've seen some industry players talking about a slower adoption of NMC 811. And I was wondering, given your position in the supply chain if you are seeing that same kind of a slower shift to the higher nickel cathodes? And if that's having any effect on the relative mix of carbonate and hydroxide?

This is Eric speaking here. So on that I'd point out that 811 is a potential consumer of hydroxide, and NCA is a consumer of hydroxide, right? So yes, in 811, we are not seeing a rapid move to 811. The technology is interesting. On an experimental level and a commercial level, it's proving difficult to process from a safety standpoint. It's having to be calcined several times versus a straight 622 chemistry. So -- and it does require hydroxide, but it has been challenged. The growth in hydroxide is being driven by NCA. The poster company for that is Tesla, of course, but there are other automobile manufacturers who are looking at NCA or incorporating NCA as well, and that is 100% hydroxide-based chemistry.

Our next question comes from Colin Rusch from Oppenheimer.

Could you guys talk a little bit about seasonality with the battery purchasing from the battery OEMs, given that about 2/3 of China's demand is coming in the back half of the year, and they are constituting about 60% of the overall EV and PHEV demand at this point.

This is Eric again. I don't know that there's really seasonality in buying patterns. There is an ever-increasing demand, so you are going to see demand increase as we go through each year being larger at the second half of the year. There are certainly effects in China, in the January and February time frame that has to do with the Lunar New Year festivals, of course, but outside of that there's no seasonality. We see some seasonality, as do other brine producers, in the production of brine. It has to do with making a carbonate and solar evaporation, but outside of that, that's the only seasonality we could ever point to in our business.

Okay, great. In terms of just total Lithium content per kWh, can you talk a little bit about the opportunities to start doping the anode layers with lithium? Is that a near-term opportunity? Or is it something a little bit more longer term?

Well, I would say -- this is Eric again. I would say that solid state, that holy grail solid state is a longer term phenomenon. What we are seeing to your point is the gradual doping of the anode increasing and the amount of lithium increasing as we go forward over the coming 5 to 7 years. It's built inside demand forecast. It's not a big driver of lithium carbonate equivalence for us, but it is happening. And many of our R&D efforts are directed at trying to enable that to happen, and it's happening with the large producers that represent our current customer base for carbonate and hydroxide.

Our next question comes from David Begleiter from Deutsche Bank.

Luke, can you comment on what your Lithium sales volume was in 2018? Or what you think it will be in 2019?

Somebody is looking at what the volume was in 2018. I think what we said is our volume is going to be up around 20,000 metric tons. At least 20,000 metric tons in 2019 from that '18 base.

And you don't have the '18 base -- do you have that?

It's around 75,000 to 80,000, I think. Is that right, Scott?

Yes.

Yes, that's right. So was around 75,000 to 80,000, and we ought to be up around at least 20,000 metric tons in 2019. About 10,000 to 15,000 of that coming from internal production and the rest of it coming from tolling.

And, Luke, and maybe Scott and Eric, the impact of this 3,000 tons of rain impacts production in Chile. Is that about $35 million of sales and $15 million of EBITDA?

Well, you have to put in whatever you've got as your lithium carbonate sales price and -- just because it will all be carbonate. Multiply that by 3,000, you will get a revenue number. And then whatever you got for our margins is not dissimilar from what our overall margins are, so that would get you to the EBITDA number. So you are probably not far off.

Our next question comes from Aleksey Yefremov from Nomura Instinet.

How should we think about the ramp of the 40-kiloton La Negra III and IV in 2020? And related to that, would your overall volume growth accelerate in 2020 versus 2019?

Yes, I think the 2020, you wouldn't see that much of a -- not a significant ramp in 2020 because we're starting commissioning activities. So what you would see there would be commissioning in 2020 and see a bigger ramp in 2021 from La Negra III and IV. Let us get through this year and see where that commissioning comes and you'll see it. What I would expect next year is we wouldn't we be able to run La Negra I and II at full flat-out rates, which ought to give us about 45,000, at that kind of level, 44,000, 45,000, something like that. And we will certainly not will be able to run Xinyu II at full rates this year because we are just doing qualifications right now. So you will see an additional, I would expect, nameplate next year out of Xinyu. And then we'll get some for La Negra III, but not a significant ramp. But let us get through the year. Let us get more time in on the mechanical completion of III and IV and the commissioning, and we'll have more data to you towards the middle to the end of the year.

Great. Can you give us a quick update on the state of your lithium hydroxide and carbonate contracts over the long term? Have you been able to extend the portion of your future business on the contract or on the fixed-price?

Yes, we haven't seen a significant change, so slight change up from what we talked about and what we presented in the third quarter. I think that was as of November. We gave you an update. It's relatively similar to what it was then. What I would say is there are more discussions going on, on additional volume than we had at that time, but no material new contracts that have been signed.

Our next question comes from Chris Kapsch from Loop Capital Markets.

So you kind of touched on this, but the follow-up question is about the partial reliance on tolling volumes and the impact on mix and margins, I guess, in 2019. So is it right to assume that those tolling volumes would be for production and addressing nonbattery-grade applications?

Hey, Chris, this is Eric Norris here. So it is -- in the past, that has been the case, it's been nonbattery carbonate and increasingly now in some of the lower-end battery-grade carbonate applications, we are fulfilling some of our agreements using tolled material. And then the third use of destination of that toll material is internal consumption for our downstream uses.

Okay. And then is the relationship with the toller years ago that ended up resulting in your acquisition of Jiangxi Jiangli, and I'm just wondering if there are other toll converters that have that sort of quality capability in terms of conversion that you may think about that? Or is your conversion strategy focused totally on just expanding the existing capabilities you have?

We've laid out a plan on Kemerton. That was a build or buy decision. So we made a decision at that point in time with what we saw it was better for us to move forward in Western Australia as opposed to attempting to acquire a converter. So we always look to see what options we have that would accelerate, derisk our strategy and drive a better return, and we'll continue to do that.

Our next question comes from Joel Jackson from BMO Capital Markets.

Mineral Resources last night talked about the expected 20,000 tons of LTE spodumene coming out this year from Wodgina. Do you have any of this baked into some of your numbers in 2019 guidance? Or none of it?

It's not baked in because we haven't closed the deal yet.

And then as a follow-up to that, would that mean that knowing your numbers, do you have the incremental about $1.1 billion of debt baked into your interest expense projections for the second half?

Joel, this is Scott. We've not baked in anything on closing the Mineral Resources deal. So no volume upside or the debt purchase at this point.

Would you get -- be owed some deferred payments in 2020 on some of the initial LTE spodumene sales in 2019?

I'm not sure I follow your questions.

If Wodgina starts to sell spodumene before the deal closes, would you expect that to be attributable to you later on the payment?

No, that does not. That all accrues to Mineral Resources, although we are marketing that, so.

Our next question comes from P.J. Juvekar from Citi.

This is Scott on for P.J. I just wanted to take a look at your tax rate in your outlook for 2019, you mentioned that the shift in geographic might push it higher compared to last year. Given that Lithium appears to be driving most of the growth in 2019, is it safe to say that lithium is responsible for most of that geographic mix shift? And if it is, could you talk about what countries you are shifting more lithium products to?

Yes, Scott, this is Scott Tozier. So the growth that we are seeing geographically is in Chile, of course, as well as China. And so in both of those cases, you have got tax rates that are above 30%. So as you grow in those areas, you are going to have natural pressures up. I would say the other factor that we have got in the tax rate is as the final regulations and rules in the U.S. tax reform get settled out, and we do see some effects from the so-called BEAT and GILTI taxes that flow through in 2019 and hopefully gets stabilized at that point in time. But we'll have to keep you updated, because those rules don't get finalized until the end of June.

Okay, got it. I don't mean to belabor the tolling point here, but I guess one, the tolling -- your increased tolling cost this year reflect the impact from Talison expansion starting up, and does that tolling cost headwind persist into 2020, given that your own conversion capacity demands start up until the 2021 time frame?

First of all, it's got nothing to do with Talison. What this is, is after we take the Talison spodumene concentrate, and we look to convert that to lithium carbonate and lithium hydroxide to meet the demand that we promised our customers. When we don't have that conversion capacity, we have to toll it. And what we're seeing is the actual cost being charged by the toller is up and the amount of volume that we are having to have tolled is up, so that puts downward pressure on our margins as you move more volume through that.

Our next question comes from Kevin McCarthy from Vertical Research Partners.

With regard to your Catalysts business, I was wondering if you could comment on what you are baking into guidance for price and volume on the HPC side? I think you've got a strong position in distillates. And perhaps you can put your outlook into context as it relates to the pending IMO 2020 regulations that kick in next year?

Hey, Kevin, this is Raphael Crawford. So we are expecting increase in volume and a nominal increase in price for HPC catalysts for 2019. As Luke had mentioned at the start, relatively more strength in distillates and in FCC pretreat as we're driving the volume side. And distillates is one of our more profitable segments, so that's contributing to our price mix effect. With regard to IMO, that's generally a positive trend for us. IMO increases the demand for diesel as a substitute for low sulfur fuel oil. And it's also going to increase the need for catalysts for the conversion of high sulfur fuel oil to meet those specifications. So in total, we expect mid-single digit demand increase for HPC catalysts.

Okay. And the second on lithium, I appreciate the demand detail on Slide 14. I was wondering if you could speak briefly to the near-term supply considerations, you mentioned the rain event in Chile. I think a few of your competitors have cited similar dynamics in Argentina. Is that enough to have any impact short term on either market pricing or customers' willingness to engage in long-term contract discussions? How would you characterize those events in the first half?

Well, Kevin, one can speculate about the market, but let me talk about us. I mean, our volumes are all under contract, it's committed. So this makes it difficult for us to manage because it's -- we are sold out. And so we have to manage to meet the demand, but it has no issue really on price because we are contracted.

Understood. I guess I was thinking more in line sort of the future contract discussions or tightness in the broader market.

I think if you listened to one of the earlier questions, Kevin, I think in the short term that spodumene, right, going into China is probably going to be converted into lithium carbonate. So I don't see 3,000 to 6,000 met tons across -- it will be soaked up. I mean, somebody will be able to supply it. So could it have an impact on price for those people who are out there, short term, trying to move some carbonate short term? It could. But for us, we don't look at it that way. We look at it the impact of -- on our long-term agreements don't see any, and we still have a number of conversations going on with customers who are interested in those long-term agreements, so I don't see an impact in that at all as well. We just got to be able to produce the volume. 2019 is a volume story. So if we can't produce in the stall, we've got to go get a toll to produce it and we've got to replace it. And that may mean total volume, which would be lower margins and push our margins down a little bit, but overall, we're going to be -- we still believe all of that is within the range of the estimates that we provided to you today.

Our next question comes from Jim Sheehan from SunTrust.

Could you discuss your recent agreement with CORFO in Chile? Some of the details around that. And also, if you could clarify how would you expect to establish terms for local cathode manufacturers in that market over time?

Yes, this is Luke. We did reach an agreement with CORFO and it related to the price in the terms, how it would be calculated. And so we've got an agreement. We are comfortable with it. It's figured into our short, medium and long term analysis and forecast and it doesn't change our view of the market, our profitability on Chile in any way.

And then in the Bromine segment, you talked about how you are not really seeing any impact yet from macro pressures. But historically, the segment has seen such pressure. So could you frame what you think the downside could be? And also do you see any changes in the enforcement of Chinese pollution standards?

This is Netha Johnson. Yes, as we look out, we did have a couple of customers express concerns. But at this time, our flexibility and production and business model helps us to incorporate that, and we don't see a change from our guidance in that in 2019. In terms of the Chinese environmental regulators, we see a continued enforcement of the current standards that they have, which puts pressure on the Chinese bromine manufacturers.

Yes, any downside that we see today, we've included it in the downside piece of the earnings to the extent that changes in the course of the year because you're right, Bromine is the first business we have that normally feels that pressure. We'll obviously update everybody.

Our next question comes from Mike Harrison from Seaport Global Securities.

Wondering if you can give us a little bit more detail about the customer contract loss in the PCS business. Just kind of overall what you are seeing in that business? It sounds like that's going to be quite an offset to otherwise solid growth in the refinery Catalysts business?

Yes, this is Raphael. We're not at liberty to disclose the specifics on the customer, but there is pricing pressure on the PCS business, and this is a consequence of that. That being said, we are taking action to continue to operate that business efficiently, looking for ways to fill volume and make up some of that gap in the future. But it is a circumstance that we are dealing with. On the whole, Refining Solutions is doing very well, did well in 2018. We'll continue to do well into 2019.

And then a question about the -- your Lithium business in China, one of your competitors referred to some uncertainty related to potential changes in EV subsidies. Just wondering if you have seen some reluctance among your Chinese customers to sign longer-term contracts? And if so, how have you responded to that trend?

Mike, this is Eric. So I think we have said through today, most of our business is biased outside of China. In the EV value chain that's both because of the type of demand we play into from a quality perspective. And it's also a reflection of the fact that the Chinese accounts, customers have been reluctant for some time to commit to longer-term agreements. So that and periods of time when there is uncertainty in their home market and certainly there has been macroeconomic weakness in China and changing subsidies. Some of these don't necessarily advantage local manufacturing, which is largely a carbonate based as opposed to hydroxide based. It creates uncertainty for them. So I don't doubt, and we are certainly seeing that, but it's a part of a longer-term trend that we also note in terms of their preference for partnering on long-term contracts.

And our next question comes from Sebastian Bray from Berenberg.

I would have 2, please. The first is on the evolution of the lithium demand forecast that you have set out at the start of your presentation. I think the guidance over the last 2 years has been that the lithium market is broadly imbalanced, which would imply that the upward revisions to demand have been matched by increases in supply. Where exactly is the supply coming from? And why has it proven easier, if this is the case, for larger manufacturers to bring this online? That's my first question. And my second one is on the delevering profile laid out after the call late last year for the Wodgina joint venture acquisition. If you are going to spend about $800 million of CapEx per annum, I have difficulty getting to the rate of delevering guided, which is from memory, 1.5-ish, 1.6x post-2021. Could you step me through the moving parts?

So this is Eric. I'll answer the first one on supply, but the way both this year and in prior years and future years we see the growth being met knowing that, that growth is largely EV growth and increasingly for higher-quality batteries, hydroxide high-nickel based chemistries. It's coming from the integrated, what we call the integrated majors. There's about 5 of us. Luke referenced their names earlier, ourselves, Livent, SQM and in China, Ganfen and Tianqi. These companies benefit not only from an integrated resource in most cases, but also secondarily from a processing know-how over time in terms of how to retune their conversion assets to their specific resources. And then finally, they have the financial bank -- capabilities to fund our significant capital expansions required to meet end use markets. These are the companies that are meeting that demand, and we see likely being the ones that will provide that increasing demand into the future. Scott?

Yes, Sebastian. On the deleveraging question, assuming we close on the Wodgina deal in the fourth quarter, we'd expect to have a net-debt-to-EBITDA ratio of around 2 to 2.1x. And as you think about the deleveraging, there's 2 components to it. One is the Wodgina JV will start to produce earnings immediately because of the spodumene sales, so that helps. And then the second part to this is just our growth as a company overall drives a significant amount of that deleveraging. So as you look at our earnings growth with no change in debt level, we're about to drop down into that 1.5 to 1.6x that you referenced in 2021.

And that does conclude our question-and-answer session for today's conference. Ladies and gentlemen, thank you for participating in today's call. Everyone, have a great day.