Good day, ladies and gentlemen, and welcome to the Q4 2018 Albemarle Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. 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. Welcome to Albemarle's fourth quarter 2018 earnings conference call. Our earnings were released after the close of the market yesterday. You'll find our press release, earnings presentation, and non-GAAP reconciliations posted on our website under the Investors section at www.albemarle.com. Joining me on the call today are Luke Kissam, 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. 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. Before I turn the call over to Luke, I would like to remind you that we closed on the divestiture of our polyolefins catalysts and components business on April third, 2018. This business was part of our reported results in the Catalysts segment. For simplicity and 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. I will turn the call over to Luke.
Hey, thanks, Dave. 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. Our EBITDA margin for the year was right at 30%, highlighting the quality of our businesses. 2018 was also another step forward in the four-pronged strategy that we laid out at our 2017 Investor Day. As you can see on pages five and six 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 debottlenecking at La Negra 2 during the year, and 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 3 and 4, 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 three trains of 20,000-25,000 metric tons capacity each, with the ability to add two 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 % 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 mid-year 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 four 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 continued to assess our portfolio of business and other resource opportunities. In April, we closed on the sale of our polyolefin catalysts 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. In December, we signed a definitive agreement to form a lithium hydroxide joint venture with Mineral Resources Limited. We've 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.
In 2018, we stayed committed to our disciplined capital allocation strategy. We increased our dividend to $145 million, repurchased a half a billion dollars 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 1.2 times. 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 US 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 charge related to US 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 $0.27 per share or 21% compared to fourth quarter 2017, excluding divested businesses.
All three 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 2 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. 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. 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 of 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 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 three years. 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 three years has grown from a little over 40 to around 80, almost double. Then there's China. Annual sales of new energy vehicles in China doubled during 2018. While China has not yet released their specific subsidy plan for 2019, all indications suggest that the policy will continue to incentivize a 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 one year from 270 to about 400 gigawatt hours by 2021. 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 non-integrated 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-$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. As a final note, on page 19 of our earnings deck, we've 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's 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. 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. We're still expecting volume growth of over 20,000 metric tons from 2018, with 10,000-15,000 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 2 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 2. 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 is expected to provide mid-single-digit percentage adjusted EBITDA growth, excluding the one-time 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 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%-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-$0.20 over 2018.
With the new lithium capacity weighted to the back half of the year, the rain event in the Salar, and the catalyst 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. We expect the first quarter of 2019 to be about equal to the first quarter of 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. 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 and our businesses and the opportunities I see for our stakeholders.
Operator, we are now ready to open the lines for Q&A. Before doing so, I'd like to remind everyone to please limit questions to two per person to ensure that all participants have a chance to ask questions. Feel free to get back into the queue for follow-ups if time allows. Please proceed.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star followed by the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from John Roberts from UBS. Your line is open.
Thank you. On the Mineral Resources JV, is it just financing and legal work that needs to be completed for the closing later this year, or are there any sticking points left to be done there? 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'll overlap?
Hey, this is Luke. We've got two regulatory filings that we had made, one in Australia and one in China. We expect to get those approvals, but that's always a condition of a closing, John. That's an open item. I would expect that the Wodgina phase 2, it would be sequential. It would come after the phase 1.
Okay. Is there any near-term anecdotal guidance you can give us on the China EV market? You're 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's going through any short-term transition period here.
Hey, John, this is Eric. We continue to see, we saw this last year as well, Chinese government creating incentives for longer range, higher energy density batteries. 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. On the other hand, EVs continue to grow, and the incentives that the government is putting in place 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'll see a BEV battery has four times the amount of lithium in it that a PHEV battery would have, right?
That incentive to longer range is beneficial to us and to the industry.
Okay. Thank you.
Thank you. Our next question comes from Robert Koort from Goldman Sachs. Your line is open.
Thanks. Good morning. 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 them. Just wondering if you could help differentiate what you produce at Xinyu and why you're 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're 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. We have an advantage there. It starts with the feedstock, and it rolls into the know-how of how we developed the design as well as the improvements we made since we purchased Xinyu.
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're 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. One of the things I just want to be clear is you talked about the share of Talison. 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.
Got it. Thanks very much.
Thank you. Our next question comes from Laurence Alexander from Jefferies. Your line is open.
Good morning. Could you clarify two issues? One is, can you talk a little bit about what the impact 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? Secondly, when you mentioned that you expect pricing to be flat, just to be clear, that is reported realized prices, not just the prices embedded in the contracts?
Laurence, this is Eric. I'll answer the first question. I may need some clarification on the second. Far as mix in Q4, as you may recall, Q3, we had troubles 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 of 25%, has everything to do with those plants running very well. China plants ran very well consistently through each of the three months. The La Negra or Chilean operations ran well during that time. The only thing that happened in Chile, it might be slightly different, is that we were ramping up Xinyu, or excuse me, La Negra 2 in that period of time.
We did get very close to capacity design rates there, so we had a successful startup, but there was a slight disruption there. It was a fairly balanced mix is the bottom line. As you look forward into this year, you're going to see as Luke mentioned, we're challenged in the first quarter on carbonate because of the rain event. We though will not see necessarily a mix shift to hydroxide, because hydroxide, that ramp up of Xinyu 2, 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're going to see is a lot more tolling. That's going to benefit largely carbonate. That's mostly what we toll.
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. It's a complicated story, but those are the factors.
Okay, great.
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 absent mix effects. I just wanted to clarify that comment pertains to your reported Lithium pricing that you'll report on the quarterly calls, it's 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, Laurence, this is Scott. The pricing guidance that we gave is across the Lithium segment, it's not just related to our contracted business, nor is it just related to our battery-grade business. It is intended to be across the business.
Perfect. Thanks.
Thank you. Our next question comes from Arun Viswanathan from RBC Capital Markets. Your line is open.
Great. Thanks. Good morning. I just wanted to ask a question about the long-term outlook. It seems like you've provided a range that's maybe in the 850 to 1.25 million tons of lithium demand in 2025, and 610 of that would be coming from the EV side. Then you also provided supply of your own, meaning more capacity being 325 to 350. Would you be in a position to comment on what you're seeing from an industry capacity standpoint? Would it be balanced in that 850 to kind of 1.25 million range? And furthermore, do you see around 600 or six ton of supply of battery-grade lithium, or would it be less than that? Thanks.
Yes. Lot of questions. What I'd say is this. If you look around and you look at 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. I think what you're going to see is you'll continue to see in the long run, the big players, the Albemarle's, the SQM's, Tianqi, the Ganfeng's, those are the ones that are going to have to expand to bring this capacity online with the knowhow of how to do it, in 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. 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. What you're going to see is the markets are going to continue to tighten up. I did some research on new technologies that come into the marketplace. If you look at every new technology and you go back and look what the demand forecast was, every year when they came out at a new demand, it always got higher and the curve got steeper. I think that's what we're going to see.
I think that we've got a realistic but probably overly conservative demand outlook out there. I think we're going to be, in the long run, fairly tight. That's why it's so important for us to 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.
As just a quick follow-up on the spodumene issue. Prices are down a fair amount year-over-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, input prices from spodumene, if at all. Thanks.
Well, this is Eric. It's pretty simple answer. It's supply, right? As we all know, or it's been publicly published, there's new supply of spodumene coming into the market. I'd point out, though, that that is of varying unproven quality, right? I think that some of that supply will work better than others in meeting the converter demands inside China. The mere presence of more supply coming on has had the effect of creating somewhat lower prices.
What I'd point to on that is the strategy of the long-term agreements really comes into play when you have a situation like we have today. We're very confident in what our pricing model's going to be for 2019. We're very confident in the demand. We're very confident in being able to place the volume that we can produce in 2019 with customers under long-term agreements at set prices.
Okay, thanks.
Thank you. Our next question comes from Ian Bennett from Bank of America Merrill Lynch. Your line is open.
Hi. Thank you. Your guidance calls at the midpoint for sales to be up around $400 million, EBITDA is only up close to $100 million, which is a little bit less than what I would've thought. Could you outline some of the increasing costs that are occurring this year? As we look forward in time, given you know your volumes and price in lithium, should EBITDA margins in lithium be increasing or stable? Just some context there would be helpful.
Hey, Ian. This is Scott. The big driver for us on a year-over-year basis is the tolling mix that we're seeing in lithium. All of that growth is not coming from our internal production. It's about 60%-70% of it will be internal, and the remainder will be based on tolling. As a result of that, the tolling margins are quite a bit lower than our normal internal margins. In 2019, we do expect that we'll maintain margins north of 40%. It'll 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'll drive margins that'll start to creep up over time.
Okay. In the hydroxide market, we've seen some industry players talking about a slower adoption of NMC 811. I was wondering, given your position in the supply chain, if you're seeing that same kind of slower shift to the higher nickel cathodes and if that's having any effect on your relative mix of carbonate and hydroxide.
Yeah. This is Eric speaking here. On that, I'd point out that 811 is a potential consumer of hydroxide, and NCA is a consumer of hydroxide, right? Yes, in 811, we are not seeing a rapid move to 811. The technology is interesting, at 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. 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.
Thank you very much.
Thank you. Our next question comes from Colin Rusch from Oppenheimer. Your line is open.
Thanks so much. Could you guys talk a little bit about seasonality with the battery purchasing from the battery OEMs, given that about two-thirds of China's demand is coming in the back half of the year, and they're 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's an ever-increasing demand, so you're 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-February timeframe that have to do with the Lunar New Year festivals, of course. Outside of that, there is no seasonality. We see some seasonality, as do other brine producers in the production of brine, that has to do with making a carbonate in solar evaporation. Outside of that's the only seasonality we could ever point to in our business.
Okay. Great. Then 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?
This is Eric. I would say 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 five to seven years. It's built into our demand forecast. It's not a big driver of lithium carbonate equivalents for us, but it is happening. Many of our R&D efforts are directed at trying to enable that to happen. It's happening with the large producers that represent our current customer base for carbonate and hydroxide.
Great. Thanks so much, guys.
Thank you. Our next question comes from David Begleiter from Deutsche Bank. Your line is open.
Thank you. Good morning. Luke, can you comment on what your lithium sales volume was in 2018 and what you think it'll be in 2019?
Yeah. Somebody's looking at what the volume was in 2018. I think what we said is our volume's going to be up around 20,000 metric tons, at least 20,000 metric tons in 2019 from that 2018 base.
If you don't have the 2018 basic, do you have that?
It's around 75,000 to 80,000, I think. Is that right, Scott?
Yeah.
Yeah, that's right. Around 75,000 to 80,000, and we ought to be up at least 20,000 metric tons in 2019, about 10 to 15 of that coming from internal production and the rest of it coming from tolling.
Great. Luke, maybe Scott and Eric, the impact of the 3,000 tons of rain impact production in Chile, is that about $35 million of sales and $15 million of EBITDA?
You have to put in whatever you got as your lithium carbonate sales price, and just because it'll all be carbonate, multiply that by 3,000. You'll get a revenue number, and then whatever you got for our margins, it's not dissimilar from what our overall margins are. That would get you to the EBITDA number. You're probably not far off.
Thank you very much.
Thank you. Our next question comes from Aleksey Yefremov from Nomura Instinet. Your line is open.
Thank you. Good morning, everyone. How should we think about the ramp of the 40-kiloton La Negra 3 and 4 in 2020? Related to that, would your overall volume growth accelerate in 2020 versus 2019?
I think that 2020, you wouldn't see that much of a ramp, not a significant ramp in 2020 because we're starting commissioning activities. What you would see there would be commissioning in 2020, and see a bigger ramp in 2021 from La Negra 3 and 4. 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'd be able to run La Negra 1 and 2 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. We're certainly not going to be able to run Xinyu 2 at full rates this year because we're just doing qualifications right now. You'll see an additional, I would expect, nameplate next year out of Xinyu.
We'll get some for La Negra 3, but not a significant ramp. Let us get through the year. Let us get more timing on the mechanical completion of 3 and 4 and the commission, we'll have more data for you towards the middle to the end of the year.
Great. Thank you, Luke. Could 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 under contract or under fixed price?
Yeah, we hadn't seen a significant change. It's a 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 additional volume than we had at that time, but no material new contracts that have been signed.
Thank you.
Thank you. Our next question comes from Chris Kapsch from Loop Capital Markets. Your line is open.
Yeah, good morning. You kind of touched on this, the follow-up question is about the partial reliance on tolling volumes and the impact on mix and margins, I guess, in 2019. Is it right to assume that those tolling volumes would be for production and addressing non-battery grade applications?
Hey, Chris, this is Eric Norris here. In the past, that has been the case. It's been non-battery carbonate, and increasingly now in some of the lower-end battery grade carbonate applications, we're fulfilling some of our agreements using tolled material. The third use of the destination of that tolled material is internal consumption for our downstream uses.
Okay, it's a relationship with the toller years ago that ended up resulting in your acquisition of Jiangxi Jiangli, I'm just wondering if there's 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. We made the decision at that point in time with what we saw that it was better for us to move forward in Western Australia as opposed to attempting to acquire a converter. We always look to see what options we have that would accelerate, de-risk our strategy and drive a better return, and we'll continue to do that.
Thanks.
Thank you. Our next question comes from Joel Jackson from BMO Capital Markets. Your line is open.
Hi, good morning. Mineral Resources last night talked about they expect 20,000 to 30,000 tons of LCE contents of 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 hadn't closed the deal yet.
As a follow-up to that, would that mean that knowing your numbers, do you have the incremental about $1 billion and one of debt baked into your interest expense projections for the second half?
Joel, this is Scott. Yeah, we've not baked in anything on closing the m ineral Resources deal. No volume upside or the debt purchase at this point in time.
Would you be owed some deferred payments in 2020 on some of the initial spodumene sales in 2019?
I'm not sure I follow your questions.
Well, if Wodgina starts to sell spodumene before the deal closes, will those accrue to you later on a payment?
No, that does not. That all accrues to Mineral Resources, although we're marketing that.
Okay. Thank you.
Thank you. Our next question comes from P.J. Juvekar from Citi. Your line is open.
Hi, this is Scott. I'm from P.J. Thanks for taking my question. I just want to take a look at the tax rate. I think your outlook for 2019, you mentioned that the shift in geographic mix 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? If it is, can you talk about what countries you're shipping more lithium products to?
Yeah, Scott. This is Scott Tozier. The growth that we're seeing geographically is in Chile, of course, as well as China. In both of those cases, you've got tax rates that are above 30%. As you grow in those areas, you're going to have natural pressure up. I would say the other factor that we've got in the tax rate is as the final regulations and rules in the U.S. tax reform get settled out, we do see some effects from the so-called BEAT and GILTI taxes that flow through in 2019, and hopefully get stabilized at that point in time. 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, does your increase in tolling cost this year kind of reflect the impact from the Talison expansion starting up? Does that tolling cost headwind persist into 2020 given that your own conversion capacity may not start up until the 2021 timeframe?
Yeah. First of all, it's got nothing to do with Talison. What this is after we take the Talison spodumene concentrate, and we look to convert that to lithium carbonate or lithium hydroxide to meet the demand that we've promised our customers. Where we don't have that conversion capacity, we have to toll it. What we're saying is the actual cost being charged by the toller is up, and the amount of volume that we're having to have tolled is up. That puts downward pressure on our margins as you move more volume through that.
Okay. Thank you.
Thank you. Our next question comes from Kevin McCarthy from Vertical Research Partners. Your line is open.
Yes, good morning. With regard to your catalyst business, I was wondering if you could comment on what you're 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. We're expecting increase in volume and a nominal increase in price for HPC catalyst for 2019. As Luke had mentioned at the start, relatively more strength in distillates and in FCC pretreat is driving the volume side. Distillates is one of our more profitable segments. That's contributing to a price mix effect. With regard to IMO, that's generally a positive trend for us. IMO, it 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. In total, we expect mid-single digit demand increase for HPC catalyst.
Okay. 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 under contract. It's committed. This makes it difficult for us to manage because we are sold out, and we have to manage to meet the demand, but it has no issue really on price because we're contracted.
Understood. I guess I was thinking more in lines of the future contract discussions or tightness in the broader market.
Yeah. I think if you listen to one of the earlier questions, Kevin, I think in the short term, that spodumene rock going into China is probably going to be converted into lithium carbonate. I don't see 3,000-6,000 met tons across. It'll be soaked up. I mean, somebody will be able to supply it. 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. For us, we don't look at it that way. We look at it, the impact on our long-term agreements, don't see any. We still have a number of conversations going on with customers who are interested in those long-term agreements. I don't see an impact in that at all as well.
We just got to be able to produce the volume, because 2019's a volume story. If we can't produce it in the slot, we got to go get a toll to produce it. We got to replace it, and that may mean toll volume, which could be lower margins and push our margins down a little bit. Overall, we still believe all that's within the range of the estimates that we've provided to you today.
All right. Thank you so much.
Thank you. Our next question comes from Jim Sheehan from SunTrust. Your line is open.
Morning. Could you discuss your recent agreement with Corfo in Chile, some of the details around that. If you could clarify how would you expect to establish terms for local cathode manufacturers in that market over time?
Yeah. This is Luke. We did reach an agreement with Corfo, and it related to the price and the terms, how it would be calculated. We've got an agreement. We're comfortable with it. It's figured into our short, medium, and long-term analysis and forecast, it doesn't change our view of the market, our profitability, or Chile in any way.
Thanks. In the bromine segment, you talked about how you're not really seeing any impact yet from macro pressures. Historically, this segment has seen such pressure. Could you frame what you think the downside could be? Do you see any changes in enforcement of Chinese pollution standards?
Hi, Jim, this is Netha Johnson. Yeah, as we look out, we did have a couple customers express concerns. At this time, our flexibility in production and business model allows us to incorporate that, 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.
Yeah. Any downside that we see today, we've included it in the downside piece of the earnings. To the extent that changes during the course of the year, because you're right, bromine is the first business that we have that normally feels that pressure. We'll obviously update everybody.
Thank you.
Thank you. Our next question comes from Michael Harrison from Seaport Global Securities. Your line is open.
Hi, good morning. Wondering if you can give us a little bit more detail about the customer contract loss in the PCS business and just kind of overall what you're seeing in that business. It sounds like that's going to be quite an offset to otherwise solid growth in the refinery catalyst business.
Mike, this is Raphael. We're not at liberty to disclose the specifics on the customer. There is pricing pressure on the PCS business, and this is a consequence of that. That being said, we're 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. It is a circumstance that we're dealing with. On the whole, Refining Solutions is doing very well. Did well in 2018. Will continue to do well into 2019.
A question about your lithium business in China. One of your competitors referred to some uncertainty related to potential changes in EV subsidies. Just wondering if you've 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. I think we've said, and it is still true today, most of our business is biased outside of China in the EV value chain. 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. That, in periods of time when there is uncertainty in their home market, and certainly there's been macroeconomic weakness in China and changing subsidies which don't necessarily advantage local manufacturing, which is largely carbonate-based as opposed to hydroxide-based. It creates uncertainty for them. I don't doubt, and we've certainly seen that, but it's part of a longer-term trend that we also note in terms of their preference for partnering on long-term contracts.
All right. Thanks very much.
Thank you. Our next question comes from Sebastian Bray from Berenberg. Your line is open.
Good morning, and thank you for taking my questions. I would have two, please. The first is on the evolution of the lithium demand forecast that you set out at the start of your presentation. I think the guidance over the last two years has been that the lithium market is broadly in balance, which would imply that the upward revisions to demand have been matched by increases in supply. Where exactly is this 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. My second one is on the de-levering profile laid out after the call late last year for the Wodgina joint venture acquisition.
If you're going to spend about $800 million of CapEx per annum, I have difficulty getting to the rate of de-levering guided, which is from memory to about 1.5-ish, 1.6 times post 2021. Could you step me through the moving parts? Thank you.
This is Eric. I'll answer the first one on supply. The way both this year and in prior years and future years, we see the growth being met, knowing that growth is largely EV growth and increasingly for higher quality batteries, hydroxide, high- nickel-based chemistries, is coming from what we call the integrated majors. There's about five of us. Luke referenced their names earlier, ourselves, Livent, SQM, and in China, Ganfeng and Tianqi. These companies benefit not only from an integrated resource in most cases, but also secondarily from a processing knowhow over time in terms of how to tune their conversion assets to their specific resources. Then finally, they have the financial capabilities to fund what are 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?
Yeah, Sebastian, on the de-leveraging 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 2.1 times. As you think about the de-leveraging, there's 2 components to it. One is that the Wodgina JV will start to produce earnings immediately because of the spodumene sales, so that helps. The second part to this is just our growth as a company overall drives a significant amount of that de-leveraging. As you look at our earnings growth with no change in debt level, we're about to drop down into that 1.5 to 1.6 times that you referenced in 2021.
Thank you. 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.