雅保公司 (ALB) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 Albemarle Corporation Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference to your speaker today, Meredith Bandy, VP of Investor Relations and Sustainability. Please go ahead, ma'am.

Great. Thank you, Joelle. Thanks, everyone, and welcome to Albemarle's Second Quarter 2020 Earnings Conference Call. Our earnings were released after the close yesterday and you'll find our press release, presentation and non-GAAP reconciliations posted to our website under the Investor Relations section at albermarle.com.

Joining me on the call today are Kent Masters, Chief Executive Officer; and Scott Tozier, Chief Financial Officer; Raphael Crawford, President Catalysts; Netha Johnson, President Bromine Specialties and Eric Norris, President Lithium, are also available for Q&A.

As a reminder, some of the statements made during this conference call, including our outlook, expected company performance, expected impacts of the COVID-19 pandemic and proposed expansion plans may constitute forward-looking statements within the meaning of federal securities laws. Note that the cautionary language about forward-looking statements is contained in our press release and 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. A 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. And with that, I'll turn it over to Kent.

Thank you, Meredith, and good morning, everyone. On today's call, I will cover a high-level overview of the current environment, give an update on our strategy and highlight some of the actions we're taking to improve the sustainability of our business. Scott will then review second quarter financials, provide updates on our balance sheet and cost-saving initiatives and review our outlook. I want to reaffirm that the safety and welfare of our people is our highest priority at Albemarle.

Our core values always define how we operate, but even more so in the difficult situations we face today. During the pandemic, we have been able to continue to operate because we care about the welfare of each other. We humbly acknowledge that this crisis is not about us, but about everyone, and we show integrity by doing the right thing. Thankfully, the pandemic has not materially impacted our operations to date. I deeply appreciate the courage and continued support of the frontline essential workers in our communities and our dedicated Albemarle employees who continue to ensure safe operations at our facilities and offices worldwide. At this point in time, we have had relatively few diagnosed individuals out of our more than 5,600 global employees. Using our exposure protocol, we have traced the contact path for any confirmed case among employees and have isolated colleagues as needed. We are staying in close contact with impacted employees to monitor their welfare, we are grateful that previously diagnosed employees have recovered or are recovering as expected.

In areas where we are seeing unfavorable trends, such as Chile and parts of the U.S., we are extending work from home requirements for nonessential workers and working closely with our manufacturing sites to ensure safe operations can continue. At many of our locations, nonessential employees have returned to work. We continue to be in close contact with site teams to support them in a healthy and safe return process. Our global cross-functional COVID response team continues to meet weekly to mitigate the impact to our operations and manage the impacts to customer demand.

Turning to recent results. Yesterday, we released second quarter financials, including net income of $86 million or $0.80 per share and adjusted EBITDA of $185 million, down 29% from prior year. However, I'm pleased to say that these results were at the high end of our previous outlook, thanks to better-than-expected performance in lithium and in bromine.

Our primary capital priorities continued to be paying dividends to shareholders, preserving our investment-grade credit rating and maintaining our long-term growth profile. To that end, during the quarter, we announced a dividend of $0.385 per share, in line with the prior quarter and up 5% from last year. We continue to maintain adequate financial flexibility with liquidity of $1.5 billion, and our previously announced cost-saving initiatives are also on track.

At a high level, Albemarle's strategy has not materially changed. We will invest in and grow our lithium business, and we will fund lithium growth with cash flows from our more mature businesses. Historically, we've actively managed our portfolio to generate shareholder value and will continue to do so. We will also maintain a disciplined approach to capital allocation. The difference is that the COVID-19 pandemic has pushed lithium growth out by at least 1 year, while also impacting near-term cash flow from our other businesses. Our response is to broaden and accelerate our focus on operational discipline to continuously raise the bar on performance. And specifically, manufacturing excellence to drive best-in-class cost management and product quality with a relentless focus on safety, standard work, continuous improvement and the application of lean principles across our manufacturing operations.

In business excellence to deliver exceptional value and service to our customers and to capture profitable, high-value opportunities through tailored value propositions and optimized business processes and resources, so customer-facing as well as back office and capital project excellence to effectively manage capacity to demand through the use of standard, reliable designs and disciplined planning and process management.

We know that being profitable and doing what's right are not at odds with each other. We expect to do both well, and our sustainability framework is our guide. In terms of our people and workplace, we continue to advance and promote inclusion and diversity across our organization. Last year, we added 2 highly experienced female board members. Currently, 50% of our directors represent gender and racial diversity, which broadens the range of prospective experiences and insights we can leverage to benefit our organization.

Recent events of discrimination and violence against black citizens in our communities remind us that we need to work much harder to fight racism. As a result, we've introduced a multipronged strategy to refocus our inclusion and diversity efforts from the bottom-up as well as the top down. Current activities include the addition of a dedicated senior inclusion and diversity leader, unconscious bias training for leaders and incorporating inclusion and diversity into the onboarding process for all new employees.

We are also focused on responsible natural resource management. Water management is an important sustainability objective for Albemarle and to continue to grow its imperative that we manage water efficiently. One example of this is that our facility in Magnolia, Arkansas, one of the world's largest bromine and bromine chemical sites. Magnolia uses an artificial marsh as a unique water treatment facility.

We are actively collaborating, engaging with our communities. Our lithium operations at the Solarda, Atacama in Chile, works closely with the local community to promote environmental stewardship and foster the community's long-term development. We share a percentage of our revenue with local indigenous communities and more than 35% of our employees in the region are indigenous.

Finally, our sustainability business model helps create long-term value for all shareholders. For example, about 50% of our catalyst revenues are from products that reduce SOx and NOx emissions to produce cleaner transportation fuels. In 2019, the use of our catalyst prevented the release of about 10 million tons of sulfur into the environment.

In the coming weeks, we will publish an updated sustainability report to provide increased transparency and disclosure around these and other important topics, as discussed at our Investor Day late last year.

We are excited about the progress we've made on sustainability, but we also recognize that sustainability is, by its nature, a long-term journey. In 2021 and beyond, our focus will shift from setting the baseline on sustainability performance to goal setting and continuous improvement. With that as a backdrop, I'll turn it over to Scott for more detail on our recent results.

Thank you, Ken, and good morning, everyone. Albemarle generated second quarter net sales of $764 million, a decrease of about 14% compared to the prior year. This reduction was primarily driven by reduced prices in lithium as expected coming into the year and reduced volumes in catalysts and bromine related to the COVID-19 pandemic.

GAAP net income was $86 million or $0.80 per diluted share. The non-GAAP adjustments this quarter were primarily related to restructuring costs, with adjusted earnings of $0.86 per diluted share. Lower net income was primarily driven by lower net sales, partially offset by over $30 million in cost and efficiency improvements. Corporate and GS&A costs were lower versus the prior year due to these cost savings initiatives.

As Ken stated, adjusted EBITDA was $185 million, a decrease of 29% from the prior year, but at the high end of the guidance we gave in May. If you look at Slide 8 for a look at the EBITDA bridge by business segment, adjusted EBITDA was down $77 million over the prior year, reflecting lower net sales, higher freight costs and lower equity income, partially offset by the cost savings initiatives.

Lithium's adjusted EBITDA declined by $50 million versus the prior year, excluding currency. Pricing was down about 14%, partially offset by cost savings initiatives. Lower pricing reflects previously agreed battery-grade contract price concessions as well as lower market pricing. Adjusted EBITDA was also impacted by lower Talison equity income as our joint venture partner took lower volumes in the quarter.

Bromine's adjusted EBITDA was down $8 million, excluding currency. The decline was primarily due to volume reductions related to demand softness, partially offset by cost savings and efficiency improvements. In Catalyst, adjusted EBITDA declined $44 million, excluding currency. Volumes were down 22%, while pricing was down just 4%. Lower volumes primarily reflect FCC volume declines caused by reduced consumption of transportation fuel, high fuel inventories and continued travel restrictions.

HPC volumes were down due to normal lumpiness in order patterns as well as some softness related to lower oil prices and reduced fuel demand. Catalyst results were also impacted by a net $12 million correction of out-of-period errors related to inventory valuation and freight accruals. These errors occurred primarily in the first quarter of 2020, following the implementation of our ERP system.

Our corporate and other category adjusted EBITDA increased $15 million due to improved fine chemistry services results and corporate cost reductions. As Kent mentioned, we ended the quarter with liquidity of about $1.5 billion, including $737 million of cash, $550 million remaining under our $1 billion revolver and $220 million on other available credit lines.

Our short-term debt is comprised of commercial paper and the delayed draw term loan. We also have $441 million of senior notes due in late 2021. The investment-grade market is open to us, and we anticipate refinancing or rolling forward these debt maturities.

The divestitures of FCS and PCS, which is a portion of our catalyst business, are ongoing, but progress continues to be slow due to COVID-19 pandemic related travel restrictions. The potential buyers remain interested in both transactions are potential liquidity events as we get back to normal.

Turning to Slide 10 for an update on our cost savings activities. As discussed last quarter, given the current economic environment, we are executing our downturn playbook to preserve cash. We continue to expect these short-term cash management actions to save the company about $25 million to $40 million per quarter. Examples of these short-term savings include things like travel restrictions due to the COVID-19 pandemic, limited utilization of professional services and consultants and actively managing our working capital.

As previously disclosed, our two biggest capital projects, La Negra III and IV and Kemerton are being slow walked to preserve capital. We have the optionality to accelerate or stop these projects depending on market conditions. At this point, we continue to expect full year 2020 capital spending in the range of $850 million to $950 million, unchanged from our previous outlook and down 15% from our original outlook late last year.

We are also temporarily reducing some production, primarily in response to near-term demand weakness. In catalysts, we have idled one HPC production line, and FCC production line that was idled in Q2 is now back up and running. In lithium, we plan to idle portions of our Silver Peak and Kings Mountain production facilities, in response to short-term supply demand imbalances and excess inventory builds in the battery-grade channel. We remain committed to the long-term operation of these facilities and currently plan to restart them in early 2021.

And finally, our accelerated 2020 sustainable cost savings initiative is on track to achieve cost reductions of $50 million to $70 million this year and to reach run rate savings of at least $100 million by the end of 2021. These cost savings projects were already identified and underway when COVID-19 hit. For example, our lithium team has identified $11 million of annual savings related to operational excellence and supply chain optimization. We are leveraging lean principles at our plants to optimize efficiency.

Bromine and catalysts both have projects aimed at reducing annual direct material cost by almost $7 million in total. We are examining all upcoming contracts for additional cost savings. Depending on market dynamics, that may mean qualifying new suppliers and diversifying supply or consolidating spend with fewer suppliers in exchange for better pricing.

And at Corporate, our global IT group is streamlining the number of software applications that they support to reduce cost and increase productivity, resulting in a savings of about $4 million per year.

Let's turn to our outlook for the third quarter on Page 11. Based on our current order book and cost reduction actions, we expect Q3 2020 adjusted EBITDA in the range of $140 million to $190 million. Lithium's Q3 2020 EBITDA is expected to be down about 10% to 20% sequentially. We continue to see the impact of contract price concessions agreed upon in late 2019, and as well as lower market prices. Q3 results are also expected to be impacted by continued low OEM automotive production, higher inventory in the battery chain and reduced demand in the glass and ceramics markets.

Bromine Q3 EBITDA is expected to be roughly flat sequentially, as we continue to see COVID-19 pandemic related impacts, which began in late Q2. Stabilization in some markets, like construction, offset continued weakness in other areas, including flame retardants and drilling fluids.

Finally, Catalyst Q3 EBITDA is expected to remain down about 50% to 60% from the prior year. FCC demand is expected to partially recover in the second half, as travel resumes and global gasoline inventories continue to deplete. Conversely, the HPC business is expected to be negatively impacted in the second half, as refiners defer spending and push turnarounds into 2021 and 2022.

Looking beyond Q3 2020, continues to be challenging with limited visibility for most of our businesses. We're staying in close contact with customers and suppliers and reviewing various economic forecasts as we continue to navigate through this uncertain environment. Albemarle benefits from strong business positions across a wide range of end-user markets. About 1/4 of our revenues are from transportation fuels. These revenues are largely tied to miles driven or fuel consumption. U.S. miles driven dropped off sharply in March with stay at home orders around the country and has rebounded since, but remains well below a normal summer season. EIA forecast suggests that U.S. miles driven won't return to 2019 levels until late next year.

Electric vehicle sales are a key driver for our energy storage business. We look at a variety of auto production and sales forecasts, including IHS Markit's forecast. IHS expects 2020 electric vehicle production of 3 million units, down significantly from their pre-COVID forecast, but up about 20% from 2019. Expected 2021 EV production of 5.2 million units is also down from previous forecasts, but represents a significant rebound from current EV production levels. Of course, ultimately, what matters is consumer behavior and automotive sales. And to that end, we are also encouraged by recent green incentives we are seeing around the world, which are supportive of EV demand. Many of our end markets, such as electronics, chemical synthesis and construction, are driven by broader consumer sentiment and global GDP. Consumer sentiment is rebounding in all regions, but remains below pre-COVID levels.

In 2020, GDP forecasts have stabilized or represent fairly significant year-over-year declines. These forecasts and leading indicators help gauge the outlook for our end-use markets, but a variety of factors, including order lags, inventory changes and regulatory changes, could cause our own results to differ from the underlying market conditions. And of course, secondary ways of infection could also cause setbacks in demand. Nevertheless, we are cautiously optimistic that many of our end-use markets are at least stabilizing, if not starting to recover.

Thanks, Scott. As we all know, economic conditions remain very challenging. Albemarle is an industry leader in all three of our core businesses. We believe in the long-term growth prospects of these businesses, but our immediate challenge is to manage through this crisis. In the meantime, we will focus on controlling what we can control. That means, first and foremost, working hard to keep our people safe. It also means building operational discipline to improve cost and efficiency to deliver exceptional value and service and to optimize our capital spending. We remain confident in our strategy, and we will modify execution of that strategy to further position Albemarle for success.

All right. (Operator Instructions) And with that, operator, please proceed with the Q&A.

(Operator Instructions) Our first question comes from David Begleiter with Deutsche Bank.

This is David Wang here for Dave. I guess, first, just given the timing lag and probably some lower fixed cost absorption. Can lithium EBITDA be up sequentially in Q4?

It's really going to depend -- this is Scott. It's really going to depend on what the volume environment looks like in Q4. The team has done a great job on cost reduction. I'm not expecting any incremental -- sequential cost reduction going into the fourth quarter at this point in time unless demand starts to decline further. But at the end of the day, dependent -- fourth quarter growth is going to depend on what the volume looks like coming out of our customers.

Okay. And then, I guess, do you have any early view on how your lithium prices could trend in '21?

Yes, so -- yes, this is Kent. Yes, so that's the magic question. And it's going to depend on volume, right? As volume comes back and the market gets tighter, but we know there's inventory in the supply chain. It's going to take a little bit of additional volume to work that off before prices move. So that's the inflection that we're looking for, but it's too early for us to call that.

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

This is Robin on for Joel. Can you describe the magnitude of the current LC inventory dynamic, if you could break it down both regionally and by end product versus feedstock, if possible?

Robin, this is Eric Norris here. I'll do as best I can. I can't give all the granularity that you're asking. But we definitely saw during the second quarter, inventories continue to build in the channel. This is because, as we all know, automotive producers were shut down for a good part of the second quarter. Our demand in the industrial sectors has weakened. And when those automotive producers reopen, they reopened at lower rates. So that inventory rose to levels that are in excess of 5 months above normal levels for refined lithium products. That's largely -- almost entirely in the battery channel. I mean, there may be some inventories in industrial, but that's being worked off. So it's really the battery channel. And most of the battery industry today is Asia. So regionally, it's going to be in Asia, although some of that inventory is in suppliers' hands as well. We talked about an action we're taking to reduce some of our inventory by idling facilities, but some of our competitors, we believe, may have excess inventories as well. So that would be -- it's hard to say where that might be. That might be in the region of Asia, it might be at their production sites. But that's our view now, and we're obviously watching very closely as we look towards a recovery, to see that peak and then begin to get drawn down as demand improves. The question is, of course, as Scott indicated, visibility to that demand improvement at this point.

Great. And just one quick follow-up. So can you just quantify the magnitude of the reduced production is about a few thousand tons or...

Yes. So the production that we're talking about is for -- is going to be down for, call it, the beginning of September, through -- at this point the end of the year, depending on market conditions. So approximately 4 months of production on a plant that annually -- it was really driven by our Kings Mountain facility, which produces hydroxide. What supplies that plant is silver peak, the carbonate that feeds it. So on an end hydroxide basis, annualized, you're talking about 4,000 to 5,000 tons a year. And so we're going to be down for 4 months of that, at this point.

Our next question comes from Mike Sison with Wells Fargo.

Nice quarter. In terms of -- you have a nice slide talking about the potential demand for lithium out to 2025. I think the base case was 1 million tons. Can you sort of walk us through what you think that long-term potential is? Has it changed materially? Is it about the same? And how do you think that will work through over the next couple of years?

So I'll start with that, and then Eric can fill in the details to the extent we can. So we've said and we still believe kind of the demand profile has been pushed out by about a year. So and so we don't think kind of the long-term demand is affected, but the curve has changed, probably steepened, but it's been pushed out a year during this. And we continue to watch the forecast and how the EV penetration happens around the world to see if it changes that profile. But today, we believe it's the -- kind of the curve 4, 5 years out. The volume is the same. Curve is a little steeper to get there and starts about a year later.

Yes, I don't know -- there's not much to add to that comment. But if you do look at Slide 12, you can see the steepness of that curve in the following way. We've said that demand we thought would materialize in 2020 before the crisis, that growth has shifted a year. Originally, we thought that'd be 4.1 million vehicles, if you want to put on a vehicle -- electric vehicle basis. And so that didn't materialize. We're looking -- IHS is currently forecasting something closer to 3 million vehicles. But if you look out to the next year, where we said that demand has shifted to, it's 5.2 is what IHS being. So that's obviously higher than 4.1. So that's the point at which this curve is getting steeper. We believe that the stimulus measures that have been added on top of the already measures that are there on the OEMS, the CO2 reductions. Now you have consumer-based incentives in Europe that have been added on top of those are part of what's driving the steepness of that curve and allow us to stay on that projection. We've got a detailed modeling of it all the way up to 2025 and it's right around that 1 million met tons that we talked about for the industry driven by electric vehicles.

Got it. And then, Eric, as a quick follow-up. The price concessions, how does that get negotiated? As I recall, that was sort of a fourth quarter event, right? So can you sort of walk through, kind of, the semantics of what will happen with those price concessions as you head into '21?

Yes. You're right, Mike. It's a bit early to say what's going to happen. I can say this is we were doing the same thing last year. We were looking at a falling set of market prices last year, and we're trying to figure out how we're going to approach the year, and that's what led to the 2021 year concessions on these long-term agreements. As we sit here and look at 2021, the price in the market now is far lower than it was a year ago. So that, I guess, would be the negative on this. The positive in that negotiation is what I just talked about, is the steepness of that growth curve suspected or projected for next year, which there are other indications that are -- that is happening. If you look at some of the Korean automotive public releases about what they see -- not the Korean automotive, excuse me, the Korean battery producers, what they're projecting for their second half of the year, they're already starting to see and believe they're going to start to see the leading edge of that demand in terms of demand for their product. So that -- I can't tell you how the negotiation is going to play out in terms of the exact way price will look in 2021. As Ken said earlier, that's the that's the big question. But -- and those are the positives and the negatives. Our LTAs have helped, right? And we use them as part of the commercial negotiation to find a good solution going forward that honors the spirit of agreements we have with them, right, with these customers. So we'll be able to give more detail later in the year or earlier in the coming year.

Our next question comes from Jim Sheehan with Truist Securities.

So can you talk about what downside and upside are from your segment guidance? So it looks like your full year EBITDA -- sorry, your full company third quarter EBITDA guidance varies significantly from the segments. I'm just trying to figure out either whether you have downsides and upsides baked in? Or is this coming from corporate and all other?

Yes, Jim, this is Scott. So if you look at the segments, for lithium, we're expecting a range of being down sequentially by around 10% to 20%. So that kind of bounds what's happening there. Most of that's going to be volume related. Overall, for lithium. For bromine, it's relatively tight right now. They've got pretty good visibility into their order book, at least through the end of August and so flat sequentially. It could be down a little bit or up a little bit, but flat sequentially.

And then catalyst is expected to be down between 50% and 60% on a year-over-year basis, really on the back of hydro processing orders and the timing of those as well as the recovery of FCC on the back of increased fuel demand globally. And so that kind of balance the range.

Corporate is pretty well bound in with the cost reductions that we have out there and the small business fine chemistry services is doing well in the U.S.

And as it pertains to capital allocation, you've listed M&A in your slide on capital allocation. Maybe you could talk about the pipeline what type of acquisitions you might be considering? What size? And what region in the world? Or is that process really slowed down the same way that your asset sale process is?

Yes. So we continue to look for those opportunities, but they're going to be bolt-on, nothing dramatic. And -- but I would say it's probably fair to say that process has slowed down, but we continue to look for opportunities in the down market, and that would probably -- most likely be around lithium conversion assets that were available in the markets where we find that attractive.

Our next question comes from Vincent Andrews with Morgan Stanley.

This is Angel Castillo on for Vincent. I just had a quick question. In terms of the technical grade, how much is that [link in] demand down this year versus battery-grade demand? And how fast do you expect technical grade to come back? And kind of what are the signposts that we should be watching to track that?

It's a smaller market for us. I would say -- this is Eric speaking. I would say that the technical grade market, if you look at any industrial indicator for a recession. It's going to be representative of what that technical grade market is doing. I've seen some external statistics that say, that the glass and ceramics industry -- as an example, is contracted by 25% in the second quarter. So that is -- that's not obviously inconsistent with what's happened economically around the world. So that's the order of magnitude of what we're seeing. It's a small part of our business, right? It's less than 20% of our sales overall, and it's very mixed. It's not just glass and ceramics, there are other segments that are doing better than in the glass and ceramics sector. We aren't seeing any sign of recovery in that yet as we roll here into the third quarter. And as what we expect in the fourth quarter, again. That just comes on to the header of what we talked about earlier. It's very murky and hard to tell at this point, which is why we're cautious to give more detailed guidance on Q4.

Understood. And then in terms of the idling facilities, what is the cost of temporarily idling these? And how quickly can they both be taken down and brought back up? And I guess just part of that, what is kind of the lowest that utilization rates that they can run at before it becomes a unit cost [prohibited?]

Yes. I'll take the cost of idling. It's relatively small. So these are smaller plants with a relatively small workforce. So really, in total, less than $10 million to actually idle the plant itself. And Eric, if you want to just talk about utilization and recovery.

Yes. We just told the workforce yesterday about this, right? And we expect to be fully idled safely down by September 1. So that gives you some idea of the down, and then there will be a comparable period to come up, once we see the demand signals to come back up. It is -- I'm sorry, the second question, I guess, was utilization. This is a fairly small part of our mix, but an important part of being able to supply 2021, we believe, provided recovery takes root as we expected to. So it's -- I guess, on a utilization basis, it's not a lot, but here's a point that I think is also implied in your question. It is not -- this is a product that, given the weakness in the market, while our contracts are being upheld, any opportunities outside of those and the opportunities in China and the opportunities in industrial markets is limited for all the reasons we've discussed because of the contraction in the marketplace. So this is a product that would have gone to inventory. So there's not an EBITDA impact in our guidance associated with what of our guidance otherwise would have been associated with this. This is just a reduction in inventory. And during this period of time that we're down, we'll continue to make investments to prepare these assets to run full out when the recovery does occur, which we, again, hope will be and anticipate will be in 2021.

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

I guess, I just wanted to get your perspective on lithium markets. I understand that your overall view has maybe been pushed out a year. But has there been any change in, I guess, how you're looking at supply demand? I mean, I appreciate that the automakers may not be coming back at full, but are they potentially coming back with greater focus on EVs and if so, would that be a positive tailwind for you? So that's my question on lithium. And then I had one more question on catalysts. If you could maybe just characterize how you're thinking about that business. On the surface, it looks like there could be some structural impairment that could last for quite a while. I guess, is that a fair characterization? So yes, maybe you can just give your medium-term thoughts on both businesses.

So again, I'll comment on that. And Eric can fill in if I miss the piece on lithium. So as we said before, we really don't think it's changed the dynamic for the EV market long term. So we kind of fundamentally believe in the EV market and the lithium demand that's going to go into that. So the one thing that has happened, I guess, that is quite different is their incentives becoming -- they're becoming more incentives associated with electric vehicles, and that's primarily in Europe. That's probably -- it's going to drive that a little differently than it was before. So previously, you didn't have the dip, but the curve was a year earlier. The demand coming out now you've got a dip, but comes back a little stronger, primarily on those incentives. And trying to figure out exactly what that curve looks like. We just -- we don't know. And regardless of incentives and the demand that's going to happen. I mean, the consumers still have to buy cars, and that's the fundamental thing we don't really know. And I think the people forecasting that don't know as well. So Eric, anything on top of that?

No, nothing to add, other than you just -- you all have to be conscious of the fact that just like the impact that happened in the second quarter aren't really hitting us into the third quarter, so to the recovery. Just as I said, we have the Korean manufacturers out saying that they see a significant uptick in their sales. That's probably and hopefully related to these -- what's going on in Europe. And there's obviously a corresponding lag, particularly with excess channel inventories there for it to come back and hit us. So that's why in the longer term, we're pretty optimistic. But in the next 6 months, it's very hard to say. Very hard to say.

Yes. And then on your catalyst question, kind of the same approach. I'll do a high level, Raphael can fill in. But -- so oil prices are down and then the miles driven are pretty dramatic change. And you could see on that slide, I think it was Slide 12, how dramatic that was, the miles driven. And that's changed that. We don't really see it changing the fundamentals of that business long term, but it is going to take some time for that to come back. Before people go back to work and commute, and maybe they don't commute as much as they did after this. There's maybe less miles driven, maybe more vacation by driving rather than flying. But then again, that's air travel. So we think that's been pushed out for some period of time, but peak oil probably it doesn't change. We knew that was coming. In some period of time, has that been pulled forward by a little bit, we don't know that. Most of the forecast say maybe a year, maybe not. So I don't think it fundamentally changes the business that we have. Clean fuels continue to be important. Our businesses are based on innovation around clean fuels. So we don't think it fundamentally changes it or structurally changes it, but it might change kind of the dynamics of where our markets are geographically and which of our customers do better, do worse during this.

Yes. This is Rafael, Arun. To add to that view, certainly, this is a time for our business to take action to mitigate the impact, whether it be cost, working capital, capital for the near-term because it has -- COVID-19 has had an acute impact on our customers and -- suppliers to our customers. That being said, as Kent said, there is a bright future for refining catalysts when positioned correctly. And our strategy is really all around positioning our business to take advantage of trends in emerging markets where fuel consumption will continue to grow beyond global peak gasoline as well as emerging chemicals applications from refineries where we already have a position of strength, and we need to advance that. So with all the challenges that COVID-19 brings, it is a great motivator for us as a company, to stay on strategy and accelerate that strategy to be in more resilient spaces as we progress.

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

Rafael, maybe kind of continuing on the catalyst discussion, can you talk about the FCC pricing outlook? I believe you saw pricing in your catalyst business overall declined by 4%. I'm not sure if that's pricing or mix, but are you seeing resilient FCC pricing? And are you seeing any trading down as you look at your overall mix in catalysts?

Mike, thanks for the question. So when we look at it, pricing does -- there has been some downward movement on price, but not for the value-oriented products that are the bulk of our portfolio. So as you know, in the FCC industry, you certainly have contracted business. You have business that's not on contract, and then there are trials. And trials are a period of time within a contract when a competitor can bring a catalyst into a refinery to test performance. Trial pricing is lower. So to the extent that within our mix, we have trials and we are pursuing trials with new refineries or refineries we don't have. Yes, that pricing is going to be lower than what we've typically seen. But for the business that's our core business on performance products, that pricing has been stable. And I would even think -- if I looked at prior quarter and looking ahead as we are negotiating for contracts, where we're demonstrating value or increased value, we're able to gain on price. So I would say it's sort of the mix between trial pricing and contract pricing and what we generate on value has the biggest impact on that.

All right. And then on lithium, I was wondering if you can give a little more color on where you're seeing the greatest concern in terms of inventories in the lithium channel and in the battery channel? Is it with finished catalyst material at the battery makers? Is it hydroxide? Is it carbonate? Spodumene? Maybe some more detail there?

Mike, it's Eric here. So look, it's -- I would say we have -- and you can sort of interpret this by the action we've taken with our plants. It's both hydroxide and carbonate. And it's with our customers, be they cathode customers or battery accounts. And with -- we believe, with suppliers in the channel. We understand that there are probably potentially even some excess inventories from a cathode standpoint. So I mean, you have an industry that during the second quarter screeched to a halt, right? Nothing was happening for -- depending on the plan, it could have been a month or more in terms of the OEM closures. So it's in the battery channel, and it's at various points in the battery channel. And so I think it's -- that's about the most color I can give you at this point in time. Spodumene is -- there continues to be excess spodumene in China. Some of that is below grade spodumene and meaning below 6%. Some of it's even the DSO variety, which is just raw rock that's not processed. And some of it by its purchasers has purchased prior high prices for spodumene rock, so it's uneconomic in the current situation. So there's some excess spodumene there as well. That is a lot more opaque and hard to tell exactly how much, however.

Our next question comes from Matt DeYoe with Bank of America.

I wanted to hit a little bit on the Catalyst trial pricing issue. I mean, why are your trial prices lower? Are refineries just kind of trialing lower quality products? Is the way to temporarily lower costs? Do you see risks that these get adopted because refineries don't need better utilization rates right now that your higher FCCs would deliver?

Matthew, this is Rafael. The -- some of it has to do with just the dynamic that every -- the market is down, and every catalyst producer would like to look for new volume opportunities and the most accessible way to go and do that is to participate in trials. So I think the activity and the eagerness of the market around trials has increased. And when in that competitive space, certainly, folks are -- and Albemarle included, are willing to price lower than what we normally would still at positive margin to participate in a trial to prove out value to a refinery over what they might already have with their current supplier. That being said, with trials, I mean you get in the door, to some extent, that trial sets a benchmark for future pricing, but most refineries understand that pricing and catalysts is very much tied to value. And if you're generating value, over time, you're able to raise the price to what you're able to justify with your performance. Albemarle has been very good at doing that. And where we participate in markets related to max chemicals, bottoms cracking, which is really our strength within FCC. We're able to demonstrate value and capture price over time.

Okay. And then if I were to just circle back on the excess spodumene comment. I know there's a fair amount that you mentioned below 6 in this DSO, but how much excess spodumene is out there that is above 6% and like is feasible product? I think that was sized before at about 3 to 6 months of excess inventory. Is that still the case? Has any of that been worked down at all?

I'll have to go back to the kind -- this is Eric, again. The comment maybe for, it is incredibly opaque. And even to the point where sometimes inventory is counted twice depending on who you're talking to. So I really couldn't tell you. I can tell you that 6% -- the 6% spodumene that has been produced for integrated producers. Like Albemarle, our partner and obviously, competitors as well Tianqi, potentially for some of the other producers that are integrated like Kemerton. I doubt that they would be carrying a lot of excess inventories because we've been -- I'm assuming that those competitors are doing the same thing that Albemarle is doing, which is we're trying as a as a leader in the industry trying to assist the challenge by reducing inventories and the output, as you can see from our equity income is substantially reduced from Talison. A big part of that actually is Tianqi and the challenges they've had. So it's -- that 6%, which is very high-quality rock, that, I think, has been coming down. But as for the rest, the majority of which is below 6% or barely 6%, that's probably where more the excess is because that's the less economic product in today's market with today's prices.

Our next question comes from Bob Koort with Goldman Sachs.

A couple of lithium questions. How do you guys think about reconciling what seems to be some odd financial math when I guess in China, we're seeing battery-grade material under 6,000. You got spodumene market prices under 400. And I think, Eric, you're talking about inventories might be bloated everywhere. So can your competitors in China make money? Is there the risk that they try to liquidate those inventories more aggressively in a weak period? Do you see a bifurcated market? Is China different than Japan and Korea? Can you just give us a little color there?

Well, on -- Bob, it's Eric here. On the first part of your question, I would say that what you're seeing is nothing has changed in the cost curves that we talked about. You go back and look at the Investor Day, look at where we thought marginal cash costs are between $6 and $7 in that range. That hasn't changed. There's nothing that's changed in that regard. And so effectively, at prices you're seeing in the China market now spot prices, the whole white hand side of the cost curve is underwater. They're not able to make money. They'll lose money selling product. So I can't explain why that's happening other than it's a market that has gone through a compression that we talked about because of the COVID crisis in the second quarter, that start working its way out of as we go into the second half of the year. And you have lower cost producers, particularly on the carbonate side. And remember, China is largely a carbonate market who have lower cost positions, brine-based rock -- or brine-based carbonate has a much lower cost position are able to sell well below the cash cost of those who are rock-based producers in the region. So I think that's what's happening. It sort of shows sort of the stress in the system. Will Chinese producers start to unload inventory? I think potentially in a desperation move, but I think at this point, most of that rock is sitting stationary until market values improve at this point. You had a second part of your question -- oh, it was about -- was there a difference between China and elsewhere? No -- yes, there's a difference. Again, it's largely a carbonate market. More of the high nickel chemistry today that hydroxide base has made outside of China. Some of it is maybe produced in China, but most of the demand for that is outside China. And of course, there are structural differences. There's VAT difference between China and inside and outside of China as well. But again, I don't know that anything has changed other than the fact that we've had a demand crisis, and that's really put pressure on the system.

And Eric, you mentioned that your LTAs have largely held. I think maybe the last couple of quarters, you talked about you want to sell to your customers in the manner that they want to buy in terms of contract dynamics. What's your expectation for the desire for those LTAs as you start to get the exponential part of that demand curve? Because it would seem the cathode folks are looking at this volatility in pricing and obviously, resets on pricing. But then you've got some pretty dangerous implications for them if the industry curtails its expansion activity, where there may be a scarcity value sometime down the road. So I guess what I'm asking is we could game plan it. You think you'll have a lot more LTAs at fixed prices 2 or 3 years from now or a lot fewer because your customers are maybe moving away from that. Can you give me your sense of how this market develops from a very weak pricing period to a potentially very tight market in a few years?

Well, I don't think the security of supply and the notion of that has changed. But we do see our contracts starting to evolve from there. Do you want to comment, Ken?

Yes. I would say that security and how our customers look out a year or 2 and looking for guaranteed supply out in that time frame is part of that dynamic. And we -- but we're seeing it as a portfolio with the percentage, and there'll be those long-term contracts, but with slightly different terms across the portfolio. Some would guaranteed promises of supply a couple of years out and some without that. And some more spot based and others more contracted with a formula that may indicate spot, but not move with spot.

Yes. And what's happening now is, I think you've put your -- started to put your finger on it, Bob, is that short-termism is an interesting strategy. Now it will save you some money because spot prices are really low. But as you've also pointed out, capacity is being withdrawn from the market. The economics to support expansion are not there today in the market for almost every producer, except for the very lowest cost producers. And so there's a scarcity value at some point, it starts to shift. We think the supply chain, particularly those most invested in the supply chain, all the way to the top of it, the automotive producers, are increasingly focused and will become increasingly focused on this issue, which is why I think there's always a value for security supply. And to Ken's point, we always want a portfolio. We're always going to want some of those price buyers because that those that there's a value to that when the market goes up, right, in terms of what it means to your EBITDA, and we don't want a majority of our business there, but we'll have some of it there.

Our next question comes from Matthew Skowronski with UBS.

Can you give us an update on when we should expect to see sales from La Negra III and IV? And if you've changed your view at all about the timing of the ramp of additional capacity, given the demand disruption you've seen this year?

Well, we had said last quarter, we've kind of slowed down the execution of those -- of our 2 big projects, La Negra III, IV and Kemerton. And so that really hasn't changed. We've slowed that down basically because we see demand being pushed out that gap. And we did that to kind of preserve cash, but it also matches what we see as supply demand. And obviously, given the discussion you've seen today, we're -- we've got our forecast, and we have our view, but it's a bit of a shot in the dark. But we see volume to your question from La Negra III and IV capacity coming on late next year and then the qualification period after that.

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

Questions probably for Eric and slightly nuanced follow-up to some of the stuff you've talked about. But just on the comments about excess inventory in the battery supply chain, with hydroxide, there's a limited shelf life, given its hydroscopic nature and no such issue with carbonate. So I'm just wondering if your comments about inventory, if that dynamic is more pronounced for carbonate grades versus hydroxide grades. Maybe's you guided this a little bit by suggesting that some of the excess inventories at the cathodes level. But just wondering, given that a lot of these newly introduced EV models, particularly in Europe, are definitely deploying higher energy density cathodes that require hydroxide. Wondering if there is a little bit of a bifurcation in those dynamics?

So you're right. Chris, this is Eric. There is sure shelf life for hydroxide, which is -- but it's also a smaller market. So it's a more -- as we look at our customer base, the number of customers that use hydroxide to a large degree and would have high inventory levels. It's a more manageable group of folks to work with. And it's also the reason that the motivator for the idlings that we did, that we announced to our employees yesterday in our release last night, is driven first and foremost by hydroxide. Carbonate is a bigger market. And the shelf life considerations aren't the same. So you do manage them differently. But because it's bigger, there's a lot of carbonate inventory out there, too, right? The more people produce it and more people buy it. So there's a differentiated way in which we manage it, but the challenges are the same and that they're elevated for both.

Okay. And my follow-up is -- and you got at this a little bit in response to Bob's question on your long-term agreements. But there's obviously this [acquisition] where there's acute near-term oversupply, probably amplified by the COVID dynamic, but then the increasing steepness of the EV adoption curve a couple of few years out. So I'm just wondering, again, probably looking at maybe the conversation around carbonate versus the conversations around long-term sourcing of hydroxide. Is there -- can you just provide any color on -- as some of those customers are looking for a little relief on the previously agreed to pricing floors, is there still anxiousness about the ability to source on a long-term basis, hydroxide? And is that more noticeable with the conversation around hydroxide vis-à-vis carbonate?

I would say that because the steepness in the growth curve that we -- that IHS is projecting, and it's a guidepost for us, provided it happens when it does. And that's also what our customers are seeing and it's driven largely by -- a big chunk of it is driven by Europe. And that is also a big hydroxide opportunity that, yes, there's probably increased -- I don't know I think anxiety is the right word, but statement around -- from customers around they're going to need more -- a lot more hydroxide in the coming year or so. And they're banking on Albemarle to be able to bring Kemerton, in particular online to meet that. Now all of this is tempered about when, right? The steepness of that curve feels right based on what we're seeing. The timing of it is consumer spending driven, so we just keep a careful eye on that up and down the supply chain.

This concludes the question-and-answer session. I would now like to turn the call back over to Meredith Bandy for closing remarks.

All right. Thank you all for your questions and participation in today's call. As always, we appreciate your interest in Albemarle, and this concludes our call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.