Good day, ladies and gentlemen, and welcome to the Quarter 2 2018 Albemar Corporation Earnings Conference Call My name is Kathy and I will be your operator for today. At this time, all participants are in a listen only mode. We will conduct a question and answer session towards the end of this conference. As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr.
Dave Ryan, Vice President, Corporate Strategy And Investor Relations. Please proceed, sir.
Thank you, and welcome to Albemarle's 2nd quarter 2018 earnings conference call. Our earnings were released after the close of the market yesterday and you'll find our press release, earnings presentation and non GAAP reconciliations posted on our website under the Investors section at www.albemarle.com. Joining me on the call today are Luke Kasam, Chairman and Chief Executive Officer Scott Toeasure, Chief Financial Officer Rafael Crawford, President, Catalyst Neta Johnson, President Bromine Specialties and Eric Norris, President lithium. As a reminder, some of the statements made during this conference call about our outlook expected company performance as well as lithium and electric vehicle demand may constitute forward looking statements within the meaning of federal securities laws. Please note the cautionary language about forward looking statements contained in our press release that some language applies to this call.
Please also note that our comments today regarding our financial results exclude non operating, non recurring and other unusual items. GAAP financial measures and reconciliations from those to the adjusted numbers discussed today may be found in our press release and the appendix and the appendix of our earnings presentation, both of which are posted on our website. Now I will turn the call over
to Luke. Thanks, Dave. Good morning, everyone, and thanks for joining us on the call today. First, I want to welcome Neva Johnson to the team as President of Bromian Specialties and congratulate Rafael Crawford, Eric Norris and David Ryan for their new roles. I'm very excited about the leadership experience each of them bring to the team and I'm very confident in the team's ability to execute our strategy and deliver significant shareholder value today and well into the future.
Now turning to the quarter results. I'm very pleased with our strong second quarter performance. Excluding divested businesses, 2nd quarter revenue grew by 20%. Adjusted EBITDA grew by 24% and adjusted diluted earnings per share grew by 28% compared to the second quarter of 2017. All three of our businesses delivered double digit adjusted EBITDA growth.
That performance further strengthens our confidence and potential of our portfolio for the short, medium and long term. Lithium growth continues to be driven by accelerating demand for electric vehicles. The 2017 sales of plug in and pure electric automobiles were up about 56% over the prior year and sales through the first half of twenty team are up almost 90% versus the first half of twenty seventeen. Our customers are experiencing growth consistent with that data. Recently, major cathode and battery manufacturers have reported year on year sales growth ranging from 21% to 75% for the first half of twenty eighteen.
Our customers and our customers' customers continue to invest for future growth in a manner that is consistent with the Albemarle demand model. And the global environment for EV adoption continues to build momentum. Since the beginning have either proposed bans on the sale of gas powered vehicles or introduced new consumer incentives to encourage EV adoption. In the United States, 4 states have proposed or enacted legislation related to EV infrastructure or incentives with California pledging $2,500,000,000 toward their 0 emission vehicle program in the form of rebates and charging infrastructure. All of our lithium capital projects are on track.
During the second quarter, we commissioned the front end of the Xinyu II lithium hydroxide expansion and we anticipate mechanical completion and commissioning of the back end during the fourth quarter. The tie ins at La Negra II that we told you about last quarter remain on schedule for this quarter. Lastly, the design phase and pre work and pre project work for the Kemerton lithium hydroxide conversion plant are well underway. In Bromine specialties, demand for flame retardants and other bromine derivatives remain solid, and that is in spite of what I would characterize continued softness in the market for clear completion fluids used in deepwater drilling. Overall market pricing continues to be supported by constrained construction and higher than normal local elemental bromine pricing in China.
Based on the market conditions and our excellent resource and cost position, we anticipate steady cash flow from bromine for the long term. And in Catalyst, the IMO 2020 marine fuel and other low sulfur regulations should drive hydroprocessing or HPC catalyst demand. In addition, a more complex global cruise flight a continued demand for propylene and the focus at certain refineries on producing chemicals from crude should benefit an already tight FCC market. Now, I'll turn the call over to Scott.
For the second quarter, we reported net income of $302,000,000 or $2.73 per diluted share, including the gain on the sale of polyolefin catalysts and components that closed on April 3. Excluding the year on year impact of that on an increase of about $0.30 per share compared to second quarter 2017 or 28% growth. Growth in our core segments resulted in an increase of about $0.34. Business results were boosted by our share repurchase program, and offset by a net cost increase in other areas primarily due to a higher effective tax rate compared to second quarter of 2017. We have almost completed the $250,000,000 accelerated share repurchase program initiated in May.
Based on the strong performance of the company and our long term growth potential, we continue to believe that Albemarle stock is currently undervalued. Pence, subject to market conditions, we intend to initiate a second buyback of $250,000,000 of stock by our another accelerated share repurchase program. In total, that would result in a $500,000,000 of buybacks in 2018 equating to about 5,000,000 shares. We expect our average share count to be about $108,000,000. For the first half of the year, net cash from operations was $224,000,000 and we are on track to end the year between $660,000,000 $730,000,000 adjusted free cash flow for the first half was $30,000,000.
Capital expenditures during the first half were $281,000,000 and will continue to ramp during 2018 reflecting growth capital deployment in our lithium business. We continue to expect full year CapEx to range between 800 and $900,000,000. We ended the quarter with operating working capital at 25% of sales, a decrease from the first quarter of 2018 on a percent of sales basis. As we work through the details of U. S.
Tax reform, we currently expect our 2018 effective tax rate excluding special items non operating pension and OPEB items to trend toward the middle of the previously provided range of 23% to 24%. Depreciation and amortization is expected to range from $195,000,000 to $205,000,000 in 2018, and interest expense is currently expected to range between $45,450,000,000 after capitalization of the In the second quarter, lithium net sales grew by 30% year over year and adjusted EBITDA increased by 23%. With adjusted EBITDA margins of 45 percent. And a 12% increase in price. All of our conversion facilities are operating at maximum rates and we continue work to maximize production.
We also expect to see an increase in tolling volumes during the second half. In bromine, 2nd quarter net sales were $221,000,000, up 8% year on year. Adjusted EBITDA was $69,000,000, up 12% and adjusted EBITDA margins were strong at 31%. The results were driven by increased volumes, higher Of our three businesses, bromine is the most exposed to products in the crude oil chain. The flame retardants demand across electronic and construction continue to be healthy.
Catalyst reported 2nd quarter net sales of $285,000,000, up 23% compared to the second quarter of 2017, excluding divested businesses. Adjusted EBITDA was $75,000,000, up 30% with adjusted EBITDA margins of 26%. The polyolefins business sold this quarter contributed approximately $10,000,000 to 2017 second quarter results. Catalysts performance was driven by increased volume in refinery catalysts and pricing in FCC catalysts. Adjusted EBITDA was unfavorably impacted by the raw material of force majeure in curatives, partially offset by insurance collections of about $2,000,000 related to Hurricane Harvey last year.
We have been able to partially mitigate the impact related to the force majeure and now expect a full year unfavorable impact of approximately $5,000,000, down from our previous estimate of $10,000,000. We also anticipate a full year Now, I'll turn the call back over to Luke.
Hey, thanks, Scott. Our strong first half has positioned 2018 as another outstanding year for Albemar In lithium, we now expect full year adjusted EBITDA growth in the low to mid 20% range year over year. The tie ins at La Negra II are currently on schedule for the third quarter. Therefore, the second half of twenty eighteen is anticipated to look a lot like the first half of lithium, with 3Q earnings similar to first quarter and 4Q earnings similar to the second. Bromine continues to benefit from favorable market conditions.
We now expect full year adjusted EBITDA growth in the high single digits on a percentage basis. Finally, with reduced impact from the force majeure in curatives, and the favorable impact for the Catalyst segment to reach high single digits, excluding divested businesses. Similar to 2017, the 4th quarter is forecasted to be stronger than the 3rd due to the timing of the CFP orders. As always with CST, there is some risk related to orders slipping from 1 quarter or 1 year to the next. As a result of all that, we are increasing our guidance for 2018.
We now expect 2018 net sales of between $3,300,000,000 to 3 $500,000,000, adjusted EBITDA of between $990,000,000 $1,020,000,000 and adjusted EPS of between $5.30 and $5.40 I'm sorry, $5.30 $5.50 per share. As Scott mentioned earlier, we believe As was the case with the buyback we initiated in May, the growth potential of our businesses, the strength of our balance sheet, and our operating cash flow give us the confidence that we can take this action, execute our capital projects maintain our long term EBITDA ratios and still have plenty of firepower left over for opportunities that are consistent with our strategy. We remain committed to and confident in our strategy and in our ability to execute that strategy in a way that should drive significant shareholder value into
you. Your first question comes from the line of Bob Koort, Goldman Sachs. Please go ahead, sir.
Hi, good morning. This is Dylan Campbell on for Bob. So we're seeing some weakness in Chinese spot lithium prices recently, but the year over year pricing remains strong for Almirall. I guess when you look forward to the second half of twenty eighteen and twenty nineteen, how are your contractor pricing discussions going with customers? And then also could we expect some further incremental pricing growth from just the laddering structure of your contracts?
Yes. If you look at, as we've always said, because of our long term contract strategy, China spot pricing has no impact on our pricing. And you shouldn't see a correlation. I think this quarter, really, you begin to see that as the China spot pricings is down in our pricing in up year over year. So we think that that's a validation and we will continue to see that.
As you look at pricing, I think we've said pricing would be in a similar range for the full year, year over year. And we don't see any change to that. It's a little too early to talk about 2019, but we're having good conversations about contracts from a volume standpoint, from a standpoint, from an extension standpoint and from a price standpoint going forward. So more on that, as we start talking about 2019, but everything looks good today.
Got it. Thank you. And for lithium EBITDA, you said 3Q is going to be similar to 1Q. I'm calling out some one time items with a tie in, but I'm a little bit more curious on the flat EBITDA between 2Q and 4Q. Can you provide kind of what this applies for volume and pricing trends through the end of the year in terms of sequential movements?
Yeah, you'll see, I mean, 3rd second, 3rd quarter will be down sequentially for the reasons we talk about and then they'll be up, from 3rd to 4th quarter from a volumetric standpoint.
Yes. And just this is, this is Eric. Just to add a part of that, remember, as we do tie ins in the third quarter, which then allows us to bring the rates of La Negra up to the full potential. And so we in the fourth quarter, we'll start having the benefit of those higher production rates.
Thanks.
Thank you.
The next question comes from P. J. Juvekar Citi. Hi,
this is Scott Goldstein on for P. J. Thanks for taking my question. So I guess when in lithium, when we're thinking about your longer term contracts, I think in the past, you've mentioned the durations can range between 3 to 5 years. Some going as long as 10.
I was just wondering, is there a particular grade of lithium, like whether it be hydroxide or carbonate where you're seeing more demand through longer term, longer term terms than the other grades?
Go ahead, Eric. So, Scott, yes, it's Eric here. So, we are seeing when we enter these contracts, they are specific to the product and they are split between carbonate and hydroxide roughly, which certainly mirrors our production planning and ARC capital expansion planning. And they're not beyond that, they're specific to a grade of carbonate hydroxide. We have 20 different specs across the the range of products we supply to these customers and some of them are unique to certain customers.
So they're very specific and allows us to plan accordingly. As we've said a couple of times, the hydroxide is coming off a lower base. So on a CAGR basis, yes, hydroxide is growing faster, but the demand is roughly split between the 2.
Another question on Catalyst. I think at your Investor Day in early 2017, you talked about expected growth at around 3% per year over the next 5 years with the rollout of IMO 2020, could you maybe could you talk about how I guess does that change your education to long term growth in Catalyst going forward?
Scott, this is Rafael. No, I think the IMO standards that'll be a contributor to the growth. Overall, it's part of a larger trend which is really about contaminant sulfur removal from transportation fuel that contributes to growth The overall crude slate becoming more heavy and sour, that's favorable for our catalyst business, both for FCC and HPC as well as the trends toward chemicals output from refineries. We have specific technology, max propylene, other technologies, which support that trend.
So when you combine all
of that together, that we believe that offsets whatever downsides or might be from increased fuel efficiency over EV trends. So overall net positive Yes.
And the other thing I'd say is when in our 2017 IMO 2020 was already under the horizon. So, I wouldn't treat that as something that's a new relevant that we didn't have in that modeling. So it'll help us along the edges, but it won't make a step change.
Okay, got it. Thank you very much. The
next question comes from John Roberts of UBS.
Can you tell us
what the sequential price change was in lithium? And I believe you include mix in your average selling price changes. So how do we think about mix in that business currently and as we go forward?
Yes, this is Scott. So sequentially, we're up around around 2% There is a bit of customer mix in there. So it's hard to strip that out of the analytics, but generally product mix and other types of mix are not included in that number. So it's about as pure as a price number as you're going to go and get from our results. But overall, good traction from pricing on a year over year basis as well as sequentially, reflecting that trend toward the longer term contracts and the support that's behind us.
Okay. And then back on Catalyst, do you envision any investment to be able to, either on the IMO 2020, because that might go beyond maybe next year. And then Secondly, on the crude to chemicals, kind of investment refiners, I mean, do you see any investment going into catalyst? And would you even put more capital or investment into that business or would you just maybe not grow as fast as the market?
Yes. So let's break it down. So from from a IMO that would impact the HPC Catalyst. And we would have investments, but they would be more debottlenecks more than anything else or changing our technology around a little bit to best fit that. That will be, as I look at it, encompassed within our continuity capital that we would spend on a regular basis that we've always talked about in the range of 4% to 6% per year.
If you look at the chemicals, I mean, the crude chemicals, you're really talking about FCC catalysts. And the fact of the matter is today at the prices we see today, I don't see reinvestment economics in the in the price we're seeing at FCC catalyst today. So unless we see those type an improvement in price to get those reinvestment economics, we would find another way to meet demand, but it wouldn't be significant capital. It would be debottlenecking. It would be ways to increase our yield.
It would be ways for us to be able to do that as part of our continuity but a significant investment in another plant, we need to see higher FCC pricing and the team's working on that. So we're seeing good traction on FCC pricing. So we may get there, but we got a ways to go to justify reinvestment economics there.
The next question comes from the line of Jeff Zekauskas of JP Morgan. Jeff, your line is now live.
Sorry about that. When you look at the lithium market today, do you think the supply demand balance is becoming looser or tighter or staying the same, say over the next 12 months?
Hey, Jeff, Eric here. So our view is it's pretty balanced and about the same. It hasn't changed much. It continues to be challenging to produce where the growth is, which is in the battery grade area. You have the majors, our sales included, expanding to meet that.
But the time to bring that on as a corresponds to demand, we see that being about the same pretty balanced.
And if you look at over the next 12 months, Jeff, I don't see a whole lot change you look at our forecasted growth, what our customers are saying and you look at what we're bringing online, we're going to be about where we are today sold out position and still relying on some tolling. So it's about where it is. Now in buckets, you can look at carbonate versus the drop side and see a little bit different story there with one being tighter and one being a little along. But from a pricing standpoint, from a demand standpoint, where we're not seeing, I don't anticipate anything in the next 12 months that would have a material impact.
Okay. And so as a base case, when you model the financial returns of your lithium business, do you assume that the benefits to Albemarle over a longer period of time are really going to come from volume growth and that as a base case price is neutral from where we
Absolutely. When we model it, the way we model it to look at the investments, our returns, what we ought to do, we had it is now for the next few years a volume story for us. Where we are able to achieve price in these long term contracts, we will do so. But we've taken the the philosophy on those long term contracts, we want to have a minimum price guarantee and a minimum volume, but it will be a volume growth story more so than a massive price, which Jeff is consistent with what we've been saying for a couple of years. But yeah, you got it right on that.
Okay, good. Thank you so much.
The next question comes from David Begleiter of Deutsche Bank.
Thank you. Good morning. Luke and Scott, just on lithium pricing in 2018, is your guidance still up high single digits for the full year year on year?
Yes, that's correct David. We're right on track of
where we actually entered the year
and our tracking right on what we thought. So if you remember, we came into the year expecting high single digit pricing lithium, it would be higher on a year over year basis in the first half and declining as we go into the second half as those comps more difficult.
Very good. And just also on lithium volumes, are you still on track for 10,000 ton increase year over year in lithium? Yes. Thank you very much.
The next question comes from Colin Rusch of Oppenheimer.
Thanks so much. Given the rapid pace of battery chemistry evolution particularly for vehicles, How quickly are you seeing the need to tweak formulations on the concentrates to really meet customer specs?
Hi, with that, this is Colin. This is Eric. I would say it's an ongoing evolution, right? If Lynn Murphill, our Chief Technology Officer, we're here. He would tell you that that what's happening is a continual effort by battery producers or cathode manufacturers that serve them.
To get more lithium out of the or get more energy density out of the cell. There's a certain amount of lithium that's not used in the cell and there's opportunity to get 5 and 20% greater density per cell. And so they're incremental innovations looking at, changes to potentially the anode that are slight doping of the anode that are going on. Some of this often will happen on the cell phone side before it happens on the EV side. But those are ongoing.
In terms of what it means from a cathode standpoint, in some cases, some of those innovations may use the same cathode chemistry. In other cases, you will see evolution towards higher energy density cat foods. We 622 is definitely the trend that we see in the market today. For high nickel cathodes. 811 is often talked about, but still has a lot of engineering to go around safety and therefore cost effectiveness in its application.
So it is an ongoing effort that requires us to be responsive both in terms of ideas we have and also in terms of formulation tweaks with the cathode chemistry.
Okay, that's very helpful. And then just given the lifespan of most vehicle programs being 5 to 7 years, how much fluid are you expecting within those vehicle programs? And I understand that this is really trying to get some insight into your customers' customers. But as vehicle OEMs try extend life and lower weight requirements or extend vehicle range and then lower weight requirements. How much fluidity are you seeing in terms of that evolution in terms of the chemistries that you were just talking about?
Well, kind of hard for me to separate your first question from your second because they're interrelated. Maybe that was your intent. So I would say that I think in a lot of cases, it's, with the, as you said, the 5 year vehicle, the 5 year plan is locked down and there are certain targets in terms of energy that are expected out of the sale for a certain model. There is some based on a number of vendors that the automatic modem manufacturer go through, there is some flexibility for the battery producer to manipulate materials, manipulate chemistries to hit that target. And so I guess there's some fluidity there and how they get there.
But the targets in terms of the range per vehicle tend to be much more locked down over a long period of time.
Okay. Thanks so much guys.
Thank you. The next question comes from Ian Bennett, Bank of America Merrill Lynch. Thank
you. Perhaps I'm reading too much into it, but I noticed on the key messages in the beginning of the slide deck this quarter wave 1 expansions on track is no longer there. So maybe I'm reading too much into it, given you are still on track for La Negra. And then perhaps related to that question, I was wondering if you could comment in 2 of the regions where you're expanding capacity. First in Australia, the dispute with Global Advanced Metals and that trial date, if that's having any impact at all on your ability to increase production in that region and what potential financial damage they're claiming.
And then in Chile, news articles about being slow to respond to Corfo, if that's having any effect at all. And I know that they're changing the way the oversight of the mineral in that country. Comments on that would be helpful. Thank you.
Yes. Hey, this is Louie. You're reading way too much into the what the key message we're right on track and that's what we said in the script. We're online with every on track to deliver everything that we've said to the street and everything that we said will deliver our So you ought not to assume any change to that. We're rolling right along.
As it relates to Australia, the dispute in with GAM is against Talison. That has been a dispute that we've talked about in the past. And we don't see it having any impact And our partner Tianqi in that would, I think, their public comments would be similar. We don't see it having an impact It's a dispute that if it needs to get resolved, it will. If not, we're very confident in our legal position.
From Chile, What I would say about Tilly is we are in compliance with every term of every agreement that we sign related to lithium and I don't see any issue, with our ability to get the brine to run our facilities, in La Negra today, tomorrow, and throughout the term of that agreement.
Thanks. And as a follow-up, you've accelerated another share repurchase. You made comments about Almirall's stock being undervalued. It looks like also during the last couple of months, many of the junior companies have experienced greater declines in their equity value. Wondering if you could update on how you think about consolidation in this industry and the relative importance between relationships with customers and low cost assets?
Thanks.
Yes. I think that the low cost assets, 1st of all, driving cost position. And then your relationships with your customers drive what your price is going to be and how you're going to move that, move that supply once you have it. So I think you've got to have both. And if you have one and not the other, you have a you may have a decent business, but you're subject to win.
So what we have is low cost resources that are geographic diverse with long term agreements with the major cathode producers around loves. So we feel like we're in the best in the Catbird seat, really, as we look to that. As I look to other juniors and what the valuation may be. There's still a difference. What we have to look at is what do we have in front of us that we can acute on, what's the cost to that and what's the return on that to our to for the capital that we're going to invest and what's the time that takes us to do that.
Any acquisition needs to be one that accelerates derisk and provides a better return of our capital than what we see in front of us. If we see that in front of us, we have the capability with our balance sheet and our ability to execute to be able sees it from those opportunities, but we're going to be disciplined in doing so.
Thank you. The next question comes from Joel Jackson BMO Capital Markets.
Hi, good morning. 1 of your larger bromine competitors spoke about bromine for them over earned in Q2, they're expecting lower earnings in the second half of the year. You're seeing new modeling more to flat to up from my earnings in the second half of the year. Can you give a little more color on that? Anything happening in Q2 a little bit stronger?
Doesn't seem like for your business?
Yeah. If you look at it, I don't know what happened with one of our competitors, but what we're looking at now is relatively relatively flat, second half versus first half in Bromine from a bottom line standpoint. I don't I don't see anything. If we had it all comes down honestly to the amount of product we're able to get out because we're sold out how our assets run. And if our assets run better, that may move us a little bit to the upside of our range.
If it if they don't operate as well, that may move us to the lower side of the range. But to us, it's all in the second half. If the market stays market conditions remain similar, which what it appears to do, it's all about our ability to execute and run those sites.
I apologize. This question was asked earlier, but Luke, Eric, we all see the daily, the weekly, the monthly spot Chinese carbonate prices falling. This question about how good the information content is in that data. Can you maybe comment on that? Is there any connection between those data points and what you would see in your contract pricing in the next year.
You've answered some of this, but is there any informational content really in that data?
Yes. I don't look at it. I mean, the only time I bring it up is whenever you guys ask me about it and I'll have to go ask somebody what's what the Chinese spot price has done because it's really irrelevant. What's relevant to us is what's the cost that makes our customers gives them the value that they're willing to pay for and gives us the return that we need to invest the capital. So we're on the wrong guy to talk about spot pricing in China and well relative or anything else because I just I never look at it.
The next question comes from Kevin McCarthy Vertical Research Partners.
Yes, good morning. I was wondering if you could provide an update with the progress on your contract negotiations with cathode manufacturers. Think in the past, you had expressed a goal of, converting about 80% of the contracts by the first quarter of 2019. Is that still the case and perhaps you could elaborate on the various contract features that you're seeking and how that's been received. By your customer base?
Yes, Kevin. This is Eric. I think just to repeat what I recall it saying, we indicated that this was an important year because we had some contracts naturally maturing, and others where we either ourselves or the customers proactively approaching us for contracts that weren't maturing that one part of the other extended to longer term. And for us, that's beneficial, obviously, so we can plan production. How that's going?
We have a few more contracts that we've closed. Those terms are moving out to the middle of of the next decade, by and large, it depends by the contract, but that's, we're moving beyond 5 years, whereas in the past, I think we've indicated 3 to 5 years. Yes, we still have more to go, right? And I think we indicated that this will be an important year. And we're making great progress, thus far.
And we place what we're seeing, continue to expect to see similar progress going forward. The terms of these aren't different than what we described before, right? There's the components of a of a floor price minimum volume of right of first refusal on additional volumes based upon the customer's growth. Openers that are bidding, not to customers, and a return that gives a price that results in a return that's, 2x our cost of capital and after tax basis. So that's those are all those elements that are still in place.
What's really changing is the length of that term and obviously in the volume. Are getting larger for those customers as well. And we'll, by the end of the year, likely, therefore, in our fourth quarter call, in the beginning of 'nineteen, be able to get a more thorough update on on all of those matters.
And then as a follow-up, how would you compare and contrast demand for hydroxide versus carbonate, one of your peers seems to be seeing a mix shift toward hydroxide? Is that something that you observe as well? And if so, what might be driving that and how sustainable might it be in your judgment?
But given our size and our position carbonate, we have the I'll say the opportunity to serve both markets. Right? So that maybe where we differ by some of our peers, we have a significant carbonate and we're building a has and are building an even more significant hydroxide capacity. As you know, Kevin, the plan for building capacity has us building more hydroxide paths going forward, than carbonate. And that's because we're starting from a smaller base.
And that is also true of the market. The market hydroxide for hydroxide overall outside of our model is smaller and the demand growth therefore is growing off a smaller base. Terms of what's happening at the customer, as I indicated in an earlier question, we're seeing demand for both. Now what we are seeing certainly And this is we haven't had a question about Chinese EV policy, but in China, we're seeing a clear move nickel chemistry and we is very likely that we'll see an uptake in hydroxide needs for what's going on in China. We're there putting their EV infrastructure and vehicles in place.
So, all that being said, the contract movements we have that go out to the into the next decade are pretty balanced between carbonate and hydroxide. And it really does depend on the cathode or battery manufacturer's infrastructure to know how they have in place to process and therefore the preference they have for 1 or the other.
The next question comes from Aleksey Rosenof of Nomura Instinct.
Good morning. Thank you. Sorry to come back to the China question. I recognize that you don't have exposure to China spot lithium market, but can you offer us your view of what is going on in that whole lithium TV value chain, is there anything that you see that has implications for EV sales in China and therefore global demand for lithium?
Yes. I really, the only thing that I could, hypothesizes is that there's some lower grade carbon that's in China that when you look at the Chinese regulations moving to a longer storage and a longer battery, is having a tough time finding a place in the marketplace for EV because it won't meet that standard for that longer drop time. Under the new regulations in China. And somebody so it's a less value and somebody's trying to find a spot for it. If you that's the best I can offer you island is going to have any impact at all in our business.
Got it. Thank you, Luke. And then staying in China on Xinyu II, What could be the benefit in terms of volume next year? Should we think of the ramp of ZENEW2 as just offsetting some of the tolling volume that you have next year or this be incremental to this whole level that you have this year?
It's going to be incremental. And so at full rates, it would be 20,000 metric tons on an annual basis. I don't think we can expect to start up and sell out 20,000 net tons and run that way. So is it going to be we'll have a better handle around the second that the next call, but my expectations would be if you get something around 15 or something like that out of that plan next year, that'd be good, that'd be good operations. Assuming that they get commission and started on the back end of that during the fourth quarter.
I would hope that that may stress, but I would hope we'd be able to do that.
Okay. The next question comes from Sebastian Bray of Berenberg.
My questions. I would have 3 please. So first is on the extent of coverage of your volumes with longer term contracts. Could you please give an idea of what percentage of your volumes are booked out for the next 2 to 3 years? With longer term contracts.
I think the target from memory was about 50% by the end of this year. The second one is more on the use of Apartment is more on the development of lithium demand this year. Do you have enough visibility now to say that the expect the market to grow by, let's say, 20 or potentially even more percent in absolute terms, would this be about to And lastly, a question on Catalysis. This business as I think has been mentioned in a previous question, people would typically thinking of low single digit growth for suddenly it has grown by over 10% volumes. Is this a catch up effect?
Is it some pre stocking of IMO legislation. Could you elaborate a bit please on why this business has grown as pleasingly as it has in Q2?
Okay. Let me let me take the first one. On the coverage on our long term agreements over the next 2 to 3 years, that's probably going to be 95% plus from what we can produce. Next year, as we said, we're going to have to rely on tolling as well. So we're selling more than we can produce internally because we're still relying on tolling.
Our goal long term is to be right around 80%, but we won't get there until sometime early in the next decade. If you look, I would assume. On the demand there, do you want to start a little bit about that, please? Yes.
So, I mean, I think, I'm trying to remember what we said in the past in the industry prognosticators often say, but it's a growth that's sort of in the neighborhood of 20% year on year. It's sort of the expectation, maybe going forward. Now I can tell you that this year that demand growth from what we see looks stronger than that on a percentage basis. And it's coming Luke and his script referenced a near doubling of EV demand. There's demand that's coming from other places like e Buses, there's demand coming from even industrial applications with a strong global economy.
So we're seeing demand that could approach close 50,000 metric tons year over year on a market that last year we indicated by our estimates was 220,000 metric tons. So that's a stronger growth than we would have thought at the beginning of the year.
And then if you look at Catalyst, I wouldn't view it when you look at this year over year growth You got to go back to 2017. And if you go back 2017 and look at catalyst from a full year basis, on up, we would have been up, we would have been down year over year. So 2017 was weaker than 2016. So 2018, if we're high single digits, we catch back up, but we may a little bit maybe a little bit ahead or a little bit down. So overall, as we've talked about, this is a lumpy business.
FCC is more consistent the CFT market in hydroprocessing catalysts based on customer mix and product mix. And whenever they turn around, you have different comps based on where you are in that turnaround cycle. So it happens to be this year that we're up after a down layer year last year. Overall, when you look at it over the course of 5 to 10 years, I would still expect that kind of 3% growth is where we'd end up on a CAGR basis.
All right. Thank you very much.
The next question comes from Arun Viswanathan RBC Capital Markets. Great,
thanks. Good morning. I just wanted to ask about the, the costs you're experiencing in lithium, how would you characterize the cost curve over the last year and what's your outlook over the next year? I mean, have you seen any material changes to cash costs for yourself, and you see those rising over the next year?
If you look at a cash cost at plants, I mean, yes, there are always year on year inflationary impacts. But if you look at that productivity and then look more broadly at the competitive set, the nature of cost curves. Our cost position and the cost curve and our relative position relative to competitors doesn't change. We're still on the left hand side. The cost curve for carbonate with frying and similarly with raw or hydroxide.
Now you have to also consider what you're going to see in our results is the royalties the royalty structure, which also affects our cost structure. So now we're at current volume prices were at the high end, at the very high end of that royalties, curve, or tier. So you will see times on the comparison basis where our costs are higher because of that component. But, all other components are largely as expected. Or similar to previous.
Okay, that's helpful. And just two more quick ones. So first on pricing, when you see the high single price increase for this year kind of go through. Does that bring your average pricing kind of more in line where it should be or do you still have more rollovers that would drive further price gains next year?
We've still got a few rollovers. But I mean, the only thing I would characterize, I would characterize this is not in line. It's bond in line with where we are. But when you see these contracts are new, there's some opportunity for some adjustments in price, but it'll be, as we talked about with I think it was just to Caucus this question. What we'll see next year is more of a volume story than a price story.
And that's what you see as we bring this new capital online, still some opportunity from price, but not really, really, it's more a volume story.
Great. Thanks. And last one is just chunky recently announced that they're investing a little bit more to increase some spodumene production in Australia, I think it's like 1,800,000 tons or so by 2021. Would you get any offtake for that or is that something that we could look for you to grow further in or is that not earmarked for you guys?
No, under the under the so that it was actually Talison, not Terence, which actually is our partner Talison made the announcement. And this is part of what's enabling the growth plan that we have that we've described, it's not in the current earnings deck, but certainly in our website, the expanding lithium conversion capacity chart, we have way 1 way too. And under the bylaws and the relationship we have, any increase in offtake we get half of and beyond you get the other half. So this doesn't go to market. It goes to us.
And enables that wave 1 and the lead will continue to plan towards wave 2 capacity expansions as well.
The next question we have is from Mike Sison of KeyBanc.
Hey, guys. Nice quarter. Look, you kind of opened up and talked a little bit more positively again on EVs. Can you maybe just update us on your outlook for lithium, has it increased since the beginning of the year? And to what degree?
And you had a lot of nice highlights on what you think demand should be at the beginning of the year beginning of the call?
Yes. No, if you look, our demand model remains fairly consistent with what we talked about earlier, And if you remember at one of our at our previous calls and in some of our debt that we've got online and we've used that some of the seminars that we've been to in 2025, we're seeing a total demand of around 800,000 metric tons transportation would amount to 550,000 met tons of that. Consumer electronics, 110,000 and all other industrial uses about 140,000 metric tons. So we haven't changed in that. Although what I was trying to point out is the data that we've seen, the demand from our customers, the steps taken by our customers, customers committing to capital, is all consistent with that demand model that we laid out early this year.
So during the course of this year, we've got even more confident in our demand model and even more confident in the growth that we anticipate between now 2025.
Great. Then as a quick follow-up, there still seems to be some concern that lithium pricing could significantly fall over time. Do you see a scenario where your contract pricing can fall significantly over the next couple of years? No. Great.
Thank
you.
Thank you. The next question comes from Vincent Andrews of Morgan Stanley.
Thank you and good morning everyone. Just a couple of quick ones. Scott, the cash flow from operations guidance stayed flat even though EBITDA, you took the bottom end and the high end up, I did see some comments in the release and such about raw materials. So is this just a working capital build or what's the story there?
This is primarily driven by, given that earnings up, our revenue is up as well. So we have a bit more working capital. Obviously, that's going to be a bit of a drag on, on our cash flow. So that's really all it reflects.
Okay. And then just
I've been reading some things about worker strikes in Chile, maybe more for BHP and others, but is that something that you're concerned about at all?
We're not concerned at all. In fact, we recently just, negotiated all of our union contracts for another 3 years. So we feel like we're in great shape. Have a wonderful working relationship with our employees, both in the Salar and Santiago and La Negra, you know, there's a lot of activity down there right now. So working with them together to get that contract, get those contracts renewed to a lot of great leadership from both the employees out on the unions and ours.
So kudos to all of those guys.
Okay. Good to hear. Thanks very much guys.
The next question comes from Mike Harrison of Seaport Global Securities.
Hi, good morning. You mentioned in Catalyst that the FCC prices had moved a little bit higher just give us a little bit more detail on what you're seeing in the FCC pricing environment and your utilization rates in FCC right now?
Sure, Mike, this is Rafael. FCC utilization rates are fairly high right now. They're actually for So the major players, it's very high. In China, utilization is lower by Chinese FCC producers. But overall, it's a good market for FCC given where utilization is.
That's been favorable for pricing. We've seen pricing trending upward in most of our established markets. And I think that's a good sign. A lot of pricing is a function, not just utilization rates, but it's also the value you can deliver to your customers who are fortunate to have good technical products and technical people to help sell those solutions our customers.
And was also hoping Rafael that you could break out the 16% volume growth that you saw year on year catalysts, what were the separate volume growth rates for FCC versus HPC? Thank you.
Great, Scott. Yeah. So,
yeah, so, Mike, we don't normally split those out. But we saw volume growth in both in both businesses.
The next question comes from Jim Sheehan of SunTrust.
Good morning. Thanks for taking my question. Could you talk about lithium margins over the next say in 2019, you have shifting and moving parts throughout the year. How should we think about the seasonality or cadence of margins, quarter by quarter?
Yes, this is Luke. We look at it normally on an annual basis. Because if we got a plant that's running 40,000 met tons and you shut it down for a week or 2 or 2 weeks or something, you can see a change So what I would say is what we've always said. We expect these margins to be north of 40%. And we believe we'll be able to hold that well into the future.
If we look last year, I think our overall lithium margins on an EBITDA basis were roughly 43% to 44% on a round. And if I look at it this year, first quarter was kind of 44%. 2nd quarter was 45%. So we're kind of right on where we said we were going to be. I think overall for the full year, you'll see similar margins that we saw in the first quarter.
And I would expect as we get in 2019, we would see similar type margins.
Great. And on the IMO fuel standards for marine fuels, are you seeing any impact in your business this early, any impact on demand or pricing? Or is that something that is going to ramp slowly over time as the regulation is implemented?
Hey, Jim, we haven't seen this is Rafael. We haven't seen any impact of that yet. And to your point, I think it'll ramp slowly over time. It's an overall trend in the industry towards exportation fuels, not just in marine, but around the world, but it's a slow ramp.
The next question comes from Chris Kapsch of Loop Capital Markets.
Yeah, good morning. My questions, are follow ups around the increased activity with tollers. I guess, tolling has always been part of the mix. And I think indeed it was a tolling relationship with Zijiang Li, which ultimately led to the acquisition of at the time what was probably one of the best converters in China. So the questions are a couple of things.
1, are these tollers that you're working with now? Are they totally focused on battery grade lithium products and you're comfortable with them hitting those specs. And then given that these tolling pounds are the mix, is it having any sort of dampening effect on margins currently? And if that's the case, as you expand your in house conversion capacity and shift more of that volume back in house, will that have an influence on the margin outlook?
Hey, Chris. This is, this is Eric. So, so, with regard to, with the tolling, as you know, we qualify and spend a lot of time working and getting the right tollers. We make sure we're working with folks we know and the ability to have the right quality. All that being said, it is not used in battery grade products, right?
We use this largely for technical grade, product lines or customer relationships that we have. As we've said off and on, over the past couple of quarters and years, we'll continue to use that as swing capacity as we bring on plan to bring off, to support ourselves because it is a lower margin business, right? It does have a margin dampening effect. And you're seeing a little and we expect a little bit of that in the coming quarter, right? We will have tolling volumes.
It's offsetting some of the lack of buying we otherwise would have had coming out of La Negra because we're having a tie in at La Negra. So our expectation is you'll probably see more of a margin impact from mucklosone and then a sales impact with La Negra because of that tolling phenomenon. Being that sweet capacity, we bring on to buffer the situation.
That's helpful. And then just as a follow-up, I mean, given that most of these relationships are not focused on the battery grades and Is it fair to assume then that you the strategy will be to build out organic in house conversion capacity as opposed to considering maybe another converter acquisition?
We will look at that as it comes and it depends upon what the timing is. It depends upon what capabilities that total is and it depends upon what the return on invested capital would be. So, and what we would have to invest in there. So it we look at that obviously, but the returns got to be right for us to do an acquisition given where we are from an organic as we look at it as well, we've talked about the importance of having assets within China and outside of China because within China, any export lithium hydroxide has a 17% non recoverable VAT, and we just want to be sure we can service customers efficiently and effectively outside of China and inside of China.
Thank you ladies and gentlemen. That concludes The presentation, you may now disconnect. Thank you for joining and have a good day.