Good day, ladies and gentlemen, and welcome to the Q2 2018 Albemarle 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. If at any time during the call you require assistance, please press star zero and an operator will be happy to assist you. As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. David Ryan, Vice President, Corporate Strategy and Investor Relations. Please proceed, sir.
Thank you. Welcome to Albemarle's second quarter 2018 earnings conference call. Our earnings were released after the close of the market yesterday, and you'll find our press release, earnings presentation, and non-GAAP reconciliations posted on our website under the investors section at www.albemarle.com. Joining me on the call today are Luke Kissam, Chairman and Chief Executive Officer, Scott Tozier, Chief Financial Officer, Raphael Crawford, President, Catalysts, Netha Johnson, President, Bromine Specialties, and Eric Norris, President, Lithium. As a reminder, some of the statements made during this conference call about our outlook, expected company performance, as well as lithium and electric vehicle demand, may constitute forward-looking statements within the meaning of federal securities laws. Please note the cautionary language about forward-looking statements contained in our press release, that some language applies to this call.
Please also note that our comments today regarding our financial results exclude 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 of our earnings presentation, both of which are posted on our website. I will turn the call over to Luke.
Thanks, Dave. Good morning, everyone. Thanks for joining us on the call today. First, I want to welcome Netha Johnson to the team as President of Bromine Specialties, and congratulate Raphael Crawford, Eric Norris, and David Ryan for their new roles. I am very excited about the leadership experience each of them bring to the team, and I'm very confident in the team's ability to execute our strategy and deliver significant shareholder value today and well into the future. Turning to the quarter results. I'm very pleased with our strong second quarter performance. Excluding divested businesses, second quarter revenue grew by 20%, adjusted EBITDA grew by 24%, and adjusted diluted earnings per share grew by 28% compared to the second quarter of 2017. All three of our businesses delivered double-digit adjusted EBITDA growth.
That performance further strengthens our confidence in the potential of our portfolio for the short, medium, and long term. Lithium growth continues to be driven by accelerating demand for electric vehicles. The 2017 sales of plug-in and pure electric automobiles were up about 56% over the prior year, and sales through the first half of 2018 are up almost 90% versus the first half of 2017. Our customers are experiencing growth consistent with that data. Recently, major cathode and battery manufacturers have reported year-on-year sales growth ranging from 21%-75% for the first half of 2018. Our customers and our customers' customers continue to invest for future growth in a manner that is consistent with the Albemarle demand model. The global environment for EV adoption continues to build momentum.
Since the beginning of 2018, another six countries have either proposed bans on the sale of gas-powered vehicles or introduced new consumer incentives to encourage EV adoption. In the U.S., four states have proposed or enacted legislation related to EV infrastructure or incentives, with California pledging $2.5 billion toward their zero-emission vehicle program in the form of rebates and charging infrastructure. All of our lithium capital projects 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 remains solid, and that is in spite of what I would characterize as continued softness in the market for clear completion fluids used in deepwater drilling. Overall market pricing continues to be supported by 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. In catalysts, the IMO 2020 marine fuel and other low sulfur regulations should drive hydroprocessing or HPC catalyst demand. In addition, a more complex global crude slate, a continued demand for propylene, and the focus at certain refineries on producing chemicals from crude should benefit an already tight FCC market. Now I'll turn the call over to Scott.
Thanks, Luke. For the second quarter, we reported net income of $302 million, or $2.73 per diluted share, including the gain on the sale of polyolefin catalysts and components that closed on April 3rd. Excluding the year-on-year impact of that gain and other one-time items, we have reported adjusted earnings per share of $1.36 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 million accelerated share repurchase program initiated in May.
Based on the strong performance of the company and our long-term growth potential, we continue to believe that Albemarle stock is currently undervalued. Hence, subject to market conditions, we intend to initiate a second buyback of $250 million of stock via another accelerated share repurchase program. In total, that would result in a half a billion dollars of buybacks in 2018, equating to about 5 million shares. This will leave approximately 7.5 million shares remaining under our current authorization. We expect our average share count for all of 2018 to be about 109 million shares, and our share count for the second half is expected to be about 108 million. For the first half of the year, net cash from operations was $224 million, and we are on track to end the year between $660 million and $730 million. Adjusted free cash flow for the first half was $30 million.
Capital expenditures during the first half were $281 million and will continue to ramp during 2018, reflecting growth capital deployment in our lithium business. We continue to expect full year CapEx to range between $800 million and $900 million. We ended the quarter with operating working capital at 25% of sales, a decrease from the first quarter of 2018 on a percent of sales basis. As we work through the details of U.S. tax reform, we currently expect our 2018 effective tax rate, excluding special items, non-operating pension, and OPEB items to trend toward the middle of the previously provided range of 23%-24%. Depreciation and amortization is expected to range from $195 million to $205 million in 2018. Interest expense is currently expected to range between $45 million and $50 million after capitalization of the interest related to the CapEx in our guidance. Moving on to our business performance.
In the second quarter, lithium net sales grew by 30% year-over-year, and adjusted EBITDA increased by 23%, with adjusted EBITDA margins of 45%. The growth in adjusted EBITDA was driven by a 15% increase in volume and a 12% increase in price. All of our conversion facilities are operating at maximum rates, and we continue work to maximize production. We also expect to see an increase in tolling volumes during the second half. In Bromine, second quarter net sales were $221 million, up 8% year-on-year. Adjusted EBITDA was $69 million, up 12%, and adjusted EBITDA margins were strong at 31%. The results were driven by increased volumes, higher pricing, and some favorable foreign exchange, partially offset by higher input costs. Of our three businesses, Bromine is the most exposed to products in the crude oil chain.
The flame retardants demand across electronics and construction continue to be healthy. Catalysts reported second quarter net sales of $285 million, up 23% compared to the second quarter of 2017, excluding divested businesses. Adjusted EBITDA was $75 million, up 30%, with adjusted EBITDA margins of 26%. The polyolefins business sold this quarter contributed approximately $10 million to 2017 second quarter results. Catalysts performance was driven by increased volume in refinery catalysts and pricing in FCC catalysts. Adjusted EBITDA was unfavorably impacted by the raw material force majeure in curatives, partially offset by insurance collections of about $2 million related to Hurricane Harvey last year. We have been able to partially mitigate the impact related to the force majeure and now expect a full year unfavorable impact of approximately $5 million, down from our previous estimate of $10 million.
We also anticipate a full year favorable benefit of approximately $5 million from insurance settlements related to Hurricane Harvey.
I'll turn the call back over to Luke.
Thanks, Scott. Our strong first half has positioned 2018 as another outstanding year for Albemarle. In lithium, we now expect full year adjusted EBITDA growth in the low to mid 20% range year-over-year. The tie-ins at La Negra II are currently on schedule for the third quarter. Therefore, the second half of 2018 is anticipated to look a lot like the first half for lithium. With 3Q earnings similar to first quarter and 4Q earnings similar to the second. Bromine continues to benefit from favorable market conditions. We now expect full year adjusted EBITDA growth in the high single digits on a percentage basis. Finally, with the reduced impact from the force majeure and the favorable impact of insurance settlements related to Harvey, we now expect full year adjusted EBITDA growth for the Catalyst segment to reach high single digits, excluding divested businesses.
Similar to 2017, the fourth quarter is forecasted to be stronger than the third due to the timing of the CFT orders. As always with CFT, there is some risk related to orders slipping from one quarter or one year to the next. As a result of all that, we are increasing our guidance for 2018. We now expect 2018 net sales of between $3.3 billion-$3.5 billion. Adjusted EBITDA of between $990 million and $1.02 billion, and adjusted EPS of between $5.30 and $5.50 per share. Scott mentioned earlier, we believe the stock is currently undervalued and expect to initiate a second stock buyback.
As was the case with the buyback we initiated in May, the growth potential of our businesses, the strength of our balance sheet, and our operating cash flow, give us the confidence that we can take this action, execute our capital projects, maintain our long-term EBITDA ratios, and still have plenty of firepower 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 the foreseeable future. With that, we'll open it up to questions.
Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch-tone telephone. If your question has been answered or you wish to withdraw your question, press star followed by two. Press star one to begin. Please stand by for your first question. 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. We have seen some weakness in Chinese spot lithium prices recently, but the year-over-year pricing remains strong for Albemarle. When you look forward to the second half of 2018 and 2019, how are your contractor pricing discussions going with customers? Could we expect some further incremental pricing growth from just the laddering structure of your contracts?
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. You shouldn't see a correlation. This quarter really you begin to see that as the China spot pricing is down and our pricing is up year-over-year. We think that's a validation, and we will continue to see that. We've said pricing would be in a similar range for the full 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 commitment standpoint, from an extension standpoint, and from a price back standpoint going forward.
More on that, as we start talking about 2019, but everything looks good today.
Got it. Thank you. For lithium EBITDA, you said 3Q is going to be similar to 1Q, calling out some one-time items for the tie-in. I'm a little bit more curious on the flat EBITDA between 2Q and 4Q. Can you provide kind of what this implies for volume and pricing trends through the end of the year in terms of sequential movements?
Yeah. You'll see, third quarter will be down sequentially for the reasons we talked about, and then they'll be up from third to fourth quarter from a volume metric standpoint.
Yeah. This is Eric. Just to add that a part of that, remember, is we do tie-ins in the third quarter, which then allows us to bring the rates of La Negra up to the full potential. In the fourth quarter, we'll start having the benefit of those higher production rates.
All right. 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. I guess in lithium, when we're thinking about your longer term contracts, I think in the past you've mentioned the durations can range between three to five years, with 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 for longer-term terms than the other grades?
Go ahead, Eric.
Scott, yes. It's Eric here. We are seeing, when we enter these contracts, they are specific to the product, and they're split between carbonate and hydroxide roughly, which certainly mirrors our production planning and our capital expansion planning. Beyond that, they're specific to a grade of carbonate and hydroxide. We have 20 different specs across the range of products we supply to these customers, and some of them are unique to certain customers. 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. On a CAGR basis, yes, hydroxide will be growing faster, but the demand is roughly split between the two.
Okay. Thank you. Another question on catalysts. I think at your Investor Day in early 2017, you talked about expected growth at around 3% per year over the next five years. With the rollout of IMO 2020, maybe could you talk about how, I guess, does that change your expectations of long-term growth and catalysts going forward?
Scott, this is Raphael. 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. When you combine all of that together, we believe that offsets whatever downside there might be from increased fuel efficiency or EV trends. Overall net positive.
The other thing I'd say is when at our [2017 model, IMO 2020] was already on the horizon. I wouldn't treat that as something that's a new revelation that we didn't have in that modeling. 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? I believe you include mix in your average selling price changes. How do we think about mix in that business currently and as we go forward?
Yeah, this is Scott. Sequentially, we're up around 2%. There is a bit of customer mix in there. It's hard to strip that out of the analytics. Generally, product mix and other types of mix are not included in that number. It's about as pure as a price number as you're going to be able to get from our results. Overall, good traction from pricing on a year-over-year basis as well as sequentially reflecting that trend towards the longer term contracts and the support that's behind this.
Okay, back on catalysts. Do you envision any investment to be able to either on the IMO 2020, because that might go beyond maybe next year. Secondly, on the crude to chemicals kind of investment refiners are making, do you see any investment going into catalysts? Would you even put more capital or investment into that business? Would you just maybe not grow as fast as the market?
Yeah. Let's break it down. From a IMO, that would impact the HPC catalyst, 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 would 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%-6% per year. If you look at the chemicals, I mean the crude to chemicals, you're really talking about FCC catalysts. The fact of the matter is, today, at the prices we see today, I don't see reinvestment economics in the price we're seeing to FCC catalysts today.
Unless we see those type an improvement in price to get to those reinvestment economics, we would find another way to meet demand, but it wouldn't be a significant capital. It would be debottleneckings. It would be ways to increase our yield. It would be ways for us to be able to do that as part of our continuity capital. A significant investment in another plant, we'd need to see higher FCC pricing, and the team's working on that. We're seeing good traction on FCC pricing. We may get there, but we got a ways to go to justify reinvestment economics there.
Great. Thank you.
The next question comes from the line of Jeff Zekauskas of JPMorgan. 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. 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, ourselves included, expanding to meet that. The time to bring that on as it corresponds to demand, we see that being about the same, pretty balanced.
If you look at it over the next 12 months, Jeff, I don't see a whole lot of change. If you look at our forecasted growth of what our customers are saying, and you look at what we're bringing online, we're going to be about where we are today from a sold-out position and still relying on some tolling. It's about where it is now. In buckets, you can look at carbonate versus hydroxide and see a little bit different story there with one being tighter and one being a little long. From a pricing standpoint, from a demand standpoint, I don't anticipate anything in the next 12 months that would have a material impact.
Okay. 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 are?
Absolutely. When we model it, the way we model it to look at the investments, our returns, what we ought to do, 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. We've taken the philosophy on those long-term contracts. We want to have a minimum price guarantee and a minimum volume, but it will be a volume growth story, more so than a massive price, which, Jeff, is consistent with what we've been saying for a couple of years. Yeah, you got it right on that.
Okay, good. Thank you so much.
Thank you. 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-on-year?
Yep, that's correct, David. We're right on track with where we actually entered the year and are tracking right on with what we thought. 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 get more difficult.
Very good. Just also on lithium volumes, are you still on track for a 10,000-tonne increase year-over-year in lithium?
Yes.
Thank you very much.
Thank you for your question. 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?
This is Colin. This is Eric. I would say it's an ongoing evolution, right? If Glen Merfeld, our Chief Technology Officer, were here, he would tell you that what's happening is a continual effort by battery producers or cathode manufacturers that serve them to get more 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 five, 10, 20% greater density per cell. There are incremental innovations looking at changes to potentially the anode that are slight doping of the anode that are going on. Some of this often will happen on the 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'll see evolution towards higher energy density cathodes. 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. 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 cathode chemistry.
Okay. That's very helpful. Just given the lifespan of most vehicle programs being five to seven years, how much fluidity are you expecting within those vehicle programs? I understand that this is really trying to get some insight into your customer's customers. As vehicle OEMs try to extend life and lower weight requirements or extend vehicle range and lower weight requirements, how much fluidity are you seeing in terms of that evolution in terms of the chemistries that you were just talking about?
It's kind of hard for me to separate your first question from your second because they're interrelated. Maybe that was your intent. I would say that I think in a lot of cases, as you said, the five-year plan is locked down and there are certain targets in terms of energy that are expected out of the cell for a certain model. Based on the number of vendors that the automotive motor manufacturers go to, there is some flexibility for the battery producer to manipulate materials, manipulate chemistries to hit that target. I guess there's some fluidity there in how they get there. 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, I noticed on the key messages in the beginning of the slide deck this quarter, wave one expansions on track is no longer there. Maybe I'm reading too much into it, given you are still on track for La Negra. Perhaps related to that question, I was wondering if you could comment in two 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. 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.
Yeah. Hey, this is Luke. You're reading way too much into what the key message. We're right on track, and that's what we said in the script. We're on track to deliver everything that we've said to the street and everything that we've said we'll deliver to our customers. You ought not assume any change to that. We're rolling right along. As it relates to Australia, the dispute with GAM is against Talison. That has been a dispute that we've talked about in the past, and we don't see it having any impact. 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 Chile 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. As a follow-up, you've accelerated another share repurchase. You made comments about Albemarle stock being undervalued. It looks like also during the last couple of months, many of the junior companies have experienced greater declines in their equity value. I was wondering if you could update on how you think about consolidation in this industry and the relative importance between relationships with customers and low-cost assets. Thanks.
I think that the low-cost assets, first of all, drive your 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 supply once you have it. I think you got to have both. If you have one and not the other, you may have a decent business, but you're subject to whim. What we have is low-cost resources that are geographic diverse with long-term agreements with the major cathode producers around the globe. We feel like we're in the catbird seat, really, as we look to that. As I look to other juniors and what the valuations may be, there's still a difference. What we have to look at is what do we have in front of us that we can execute on?
What's the cost of that, and what's the return on that for our capital that we're going to invest? What's the time that it takes us to do that? Any acquisition needs to be one that accelerates, de-risk, and provides a better return of our capital than what we see in front of us. If we see that in front of us, we have the capability with our balance sheet and our ability to execute, to be able to seize upon those opportunities, but we're going to be disciplined in doing so.
Thank you. The next question comes from Joel Jackson, BMO Capital Markets.
Hi, good morning. One 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 seem to be modeling more to flat to up bromine earnings in the second half of the year. Can you give a little more color on that? Anything happening in Q2 a little bit stronger? It doesn't seem like for your business.
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 flat second half versus first half in bromine from a bottom-line standpoint. I don't see anything. It all comes down, honestly, to the amount of product we're able to get out because we're sold out, and it's how our assets run. If our assets run better, that may move us a little bit to the upside of our range. If they don't operate as well, that may move us to the lower side of the range. To us, it's all in the second half. If the 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. There's a question about how good the information content is in that data. Can you maybe comment on that? Is there any connection between those data points and what you would see in your contract pricing in the next year? You've answered some of this, but is there any informational content really in that data?
Yes. I don't look at it. The only time I bring it up is whenever you guys ask me about it and I have to go ask somebody what the Chinese spot price has done, because it's really irrelevant. What's relevant to us is what's the cost that makes our customers, gives them the value that they're willing to pay for and gives us the return that we need to invest the capital. I'm the wrong guy to talk about spot pricing in China and whether it's relative or anything else, because I never look at it.
Thanks.
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. I think in the past, you'd expressed a goal of converting about 80% of the contracts by the first quarter of 2019. Is that still the case? Perhaps you could elaborate on the various contract features that you're seeking and how that's been received by your customer base.
Yeah, Kevin, this is Eric. I think just to repeat what I recall us saying, we indicated that this was an important year because we had some contracts naturally maturing, and others where we, either ourselves or the customers proactively approaching us for contracts that weren't maturing that wanted to be, for one party or the other, extended longer term. 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 the next decade, by and large. It depends by the contract, but we're moving beyond five years, whereas in the past, I think we've indicated three to five years. Yet we still have more to go, right?
I think we indicated that this will be an important year, and we're making great progress thus far, and we, based on what we see, continue to expect to see similar progress going forward. The terms of these aren't different than what we described before, right? There's the components of a floor price, minimum volume, a right of first refusal on additional volumes based upon the customer's growth. Openers that are bidding, not the customers, and a price that results in a return that's 2X our cost of capital on an after-tax basis. All those elements are still in place. What's really changing is the length of that term, and obviously then the volumes are getting larger for those customers as well.
We'll, by the end of the year, likely therefore in our fourth quarter call in the beginning of 2019, be able to give a more thorough update on all of those matters.
Okay. 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? If so, what might be driving that, and how sustainable might it be in your judgment?
Well, given our size and our position in carbonate, we have the, I'll say, the opportunity to serve both markets, right? That may be where we differ by some of our peers. We have a significant carbonate and are building an even more significant hydroxide capacity. As you know, Kevin, the plan for building capacity has us building more hydroxide capacity going forward than carbonate, and that's because we're starting from a smaller base. That is also true of the market. The market for hydroxide overall, outside of Albemarle, is smaller, and the demand growth, therefore, is growing off a smaller base. In terms of what's happening at the customer, as I indicated in an earlier question, we're seeing demand for both.
What we are seeing, certainly, and we haven't had a question yet about Chinese EV policy, but in China, we're seeing a clear move to nickel chemistry. It's very likely that we'll see an uptick in hydroxide need for what's going on in China, where they're putting their EV infrastructure and vehicles in place. All that being said, the contract movements we have that go out into the next decade are pretty balanced between carbonate and hydroxide. It really does depend on the cathode or battery manufacturer's infrastructure, the know-how they have in place to process, and therefore the preference they have for one or the other.
That's helpful. Thank you.
The next question comes from Aleksey Yefremov of Nomura Instinet.
Good morning. Thank you. I'm sorry to come back to the China question. I recognize that you don't have exposure to China spot lithium market, can you offer us your view of what is going on in that whole lithium EV value chain? Is there anything that you see that has implications for EV sales in China and therefore global demand for lithium?
Yeah. The only thing that I could hypothesize is that there's some lower grade carbonate that's in China, that when you look at the Chinese regulations moving to a longer storage and a longer battery, that's having a tough time finding a place in the marketplace for EVs because it won't meet that standard for that longer drive time under the new regulations in China. It's of less value, and somebody's trying to find a spot for it. That's the best I can offer you. I don't think it's going to have any impact at all on our business.
Got it. Thank you, Luke. Staying in China on Xinyu II, what could be the benefit in terms of volume next year? Should we think of the ramp of Xinyu II as just offsetting some of the tolling volume that you have next year, or will this be incremental to the tolling level that you have this year?
It's going to be incremental. At full rates, it would be 20,000 metric tons on an annual basis. I don't think we can expect it to start up and sell out 20,000 metric tons and run that way. We'll have a better handle around the next call, but my expectations would be if you get something around 15 or something like that out of that plant next year, that'd be good operations. Assuming that they get commissioning started on the back end of that during the fourth quarter. That may be a stretch, but I would hope we'd be able to do that.
Understood. Thank you.
The next question comes from Sebastian Bray of Berenberg.
Good morning, thank you for taking my questions. I would have three, please. The first is on the extent of coverage of your volumes with longer term contracts. Could you please give an idea of what percentage of your volumes are booked out for the next two to three 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 development of lithium demand this year. Do you have enough visibility now to say that you would expect the market to grow by, let's say, 20% or potentially even more percent in absolute terms? Would this be about 260 to 270 kilotons? Lastly, a question on catalysis. This business, as I think has been mentioned in a previous question, people were typically thinking of low single digit growth for.
Suddenly it has grown by over 10% volumes. Is this a catch-up effect? Is it some pre-stocking ahead of IMO legislation? Could you elaborate a bit, please, on why this business has grown as pleasingly as it has in Q2?
Okay. Let me take the first one. On the coverage on our long-term agreements over the next two to three 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. 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 the next decade, if you look, I would assume. On the demand, Eric, you want to talk a little bit about that, please?
Yeah. I'm trying to remember what we said in the past or what industry prognosticators often say, but it's a growth that's in the neighborhood of 20% year-over-year is sort of the expectation maybe going forward. Now, I can tell you that this year, the demand growth from what we see looks stronger than that on a percentage basis. Luke, in 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. We're seeing demand that can approach close to 50,000 metric tons year-over-year on a market that last year we indicated by our estimates was 220,000 metric tons. That's a stronger growth than we would have thought at the beginning of the year.
If you look at catalysts, I wouldn't view it when you're looking at this year-over-year growth, you got to go back to 2017. If you go back to 2017 and look at catalysts from a full year basis, we would've been down year-over-year. 2017 was weaker than 2016. 2018, if we're high single digits, we catch back up, or we may be a little bit ahead or a little bit down. Overall, as we've talked about, this is a lumpy business. FCC is more consistent. The CFP 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. It happens to be this year that we're up after a down year last year.
Overall, when you look at it over the course of five 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.
Good morning.
Just wanted to ask about the costs you're experiencing in lithium. How would you characterize the cost curve over the last year, and what's your outlook over the next year? Have you seen any material changes to cash costs for yourself, and do you see those rising over the next year?
If you look at cash costs at plants, there are always year-on-year inflationary impacts. If you look at a VAT productivity and then look more broadly at the competitive set, [the nation cost curves], our cost position and the cost curve and our relative position relative to competitors hasn't changed. We're still on the left-hand side of the cost curve for carbonate with brine and similarly with rock or hydroxide. You have to also consider that what you're going to see in our results is the royalty structure, which also affects our cost structure. Now at current volume prices, we're at the very high end of that royalty curve or tier. You will see times on a comparison basis where our costs are higher because of that component. All other components are largely as expected or similar to previously.
That's helpful. Just two more quick ones. First on pricing. When you see the high single-digit price increase for this year kind of go through, does that bring your average pricing kind of more in line where it should be? Or do you still have more rollovers that would drive further price gains next year?
Well, we still got a few rollovers, the only thing I would characterize is I wouldn't characterize this as not in line. It's fine in line with where we are. When you see these contracts renewed, there's some opportunity for some adjustments in price. It'll be, as we talked about with, I think it was Jeff Zekauskas's question, what we'll see next year is more of a volume story than a price story. That's what you see as we bring this new capital online. Still some opportunity from price, but really it's more a volume story.
Great. Thanks. The last one is just Tianqi recently announced that they're investing a little bit more to increase some spodumene production in Australia. I think it's like 1.8 million tons or so by 2021. Would you get any offtake from that, or is that something that we could look for you to grow further in, or is that not your market for you guys?
No. That it was actually Talison, not Tianqi. Tianqi's our partner. Talison made the announcement. 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 it's certainly on our website, the expanding lithium conversion capacity chart that we have in wave 1 and wave 2. Under the bylaws and the relationship we have, any increase in offtake we get half of, and Tianqi gets the other half. This doesn't go to market, it goes to us and enables that wave 1 and the continued plan towards wave 2 capacity expansions as well.
Okay, thanks.
The next question we have is from Michael Sison of KeyBanc.
Hey, guys. Nice quarter. Luke, 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? You had a lot of nice highlights on what you think demand should be at the beginning of the call.
Yeah. No. If you look, our demand model remains fairly consistent with what we talked about earlier. If you remember at our previous calls and in some of our decks that we've got online, and we've used at 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, and all other industrial uses, about 140,000 metric tons. 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 committing to capital is all consistent with that demand model that we laid out early this year.
During the course of this year, we've gotten even more confident in our demand model, and even more confident in the growth that we anticipate between now and 2025.
Great. 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, 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. Is this just a working capital build, or what's the story there?
Vincent, this is primarily driven by, given that earnings up, our revenue's up as well, so we have a bit more working capital. Obviously, that's going to be a bit of a drag on our cash flow. That's really all it reflects.
Okay. Just, I've been reading some things about worker strikes in Chile, maybe more for BHP and others, 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 three years. We feel like we're in great shape. Have a wonderful working relationship with our employees, both in the Salar, in Santiago, and La Negra. There's a lot of activity down there right now. Working with them together to get those contracts renewed took a lot of great leadership from both the employee side on the unions and ours. Kudos to all those guys.
Okay, good to hear. Thanks very much, guys.
The next question comes from Michael Harrison of Seaport Global Securities.
Hi, good morning. You mentioned in Catalysts that the FCC prices had moved a little bit higher. Can you just give us a little bit more detail on what you're seeing in the FCC pricing environment and your utilization rates in FCC right now?
Sure, Mike. This is Raphael. FCC utilization rates are fairly high right now. They're actually for the major players
China utilization is lower by Chinese FCC producers. 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 of utilization rates, but it's also in the value you can deliver to your customers, and we're fortunate to have good technical products and technical people to help sell those solutions to our customers.
I was also hoping, Raphael, that you could break out the 16% volume growth that you saw year-over-year in Catalysts. What were the separate volume growth rates for FCC versus HPC? Thank you.
Great, Scott. Mike, we don't normally split those out, but we saw volume growth in both businesses.
Thank you.
The next question comes from James 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?
Yeah, this is Luke. We look at it normally on an annual basis, because if you got a plant that's running 40,000 met tons and you shut it down for a week or two weeks for something, you can see a change. What I would say is what we've always said. We expect the margins to be north of 40%. 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%-44% on a round. If I look at it this year, the first quarter was kind of 44%, second quarter was 45%. 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.
I would expect as we get out in 2019, we would see similar type margins.
Great. On the IMO fuel standards for marine fuels, are you seeing any impact in your business this early, any impact on demand or pricing? Is that something that is going to ramp slowly over time as the regulation is implemented?
Hey, Jim, this is Raphael. We haven't seen any impact of that yet. To your point, I think it'll ramp slowly over time. It's an overall trend in the industry towards lower sulfur transportation fuels, not just in marine, but around the world, but it's a slow ramp.
Thank you.
The next question comes from Chris Kapsch of Loop Capital Markets.
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 Jiangxi Jiangli, which ultimately led to the acquisition of, at the time, what was probably one of the best converters in China. The questions are a couple things. One, are these tollers that you're working with now, are they totally focused on battery-grade lithium products, and you're comfortable with them hitting those specs? Given that these tolling pounds are part of the mix, is it having any sort of dampening effect on margins currently? 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 Eric. With regard to 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 believe have the right quality. All that being said, it is not used in battery-grade products. 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 plants and bring off to support ourselves because it is a lower margin business. It does have a margin dampening effect. We expect a little bit of that in the coming quarter.
We will have tolling volumes that's offsetting some of the lack of volume we otherwise would have had coming out of La Negra because we're having a tie-in at La Negra. Our expectation is you'll probably see more of a margin impact from what goes on than a sales impact with La Negra because of that tolling phenomenon being that swing capacity we bring on to buffer the situation.
That's helpful. Just as a follow-up, given that most of these relationships are not focused on the battery grades, is it fair to assume then that 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. It depends upon what the timing is. It depends upon what the capabilities of that toller is. What the return on invested capital would be. What we would have to invest in there. We look at that, obviously, but the return's 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 of lithium hydroxide has a 17% non-recoverable VAT. We just want to be sure we can service our customers efficiently and effectively outside of China and inside of China.
That's helpful. Thank you.
Thank you, ladies and gentlemen. That concludes the presentation. You may now disconnect. Thank you for joining, and have a good day.