Good day, ladies and gentlemen, and welcome to the 1st Quarter 2018 Albemarle Corporation Earnings Conference Call. At this As a reminder, this conference is being recorded for replay purposes. Would now like to turn the conference over to your host for today, Mr. Eric Norris, Chief Strategy Officer. Please proceed.
You, Jasmine, and welcome everyone to Albemarle's first quarter 2018 earnings conference call. Our earnings were released after the close of the market yesterday, You'll find our press release, earnings presentation and non GAAP reconciliations posted on our website under the Investors section at www.avomarle.com. Joining me on the call today are Luke Khazam, Chairman and Chief Executive Officer Scott Tozier, Chief Financial Officer Rafael Crawford, President, Bromine Specialties Sobioke, President, Catalyst and John Mitchell, President, Lithium. As a reminder, some of the statements made during this conference call about the future actions or performance the company as well as lithium 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 same 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 reconciliation 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. Finally, As announced during the third quarter 2017 earnings conference call, we are now reporting segment revenues and earnings in a new format. Performance Catalyst, which previously had been consolidated with lithium is now consolidated with Refining Solutions in a segment titled as catalysts.
Please refer to our 8 K filing of March 12, 2018 for the restatement of segment revenue and earnings in prior periods under this new reporting format. Also note that most external databases that provide consensus earnings estimates have not yet updated their estimates for this new segmentation format.
Now, I'll turn the
call over to Luke. Thanks, Eric, and good morning, everyone. I'm very pleased with our start to 2018 which highlights the growth of our lithium business the strong cash generation of our portfolio, the strength of our balance sheet and our ability successfully execute our capital expansions in lithium. 1st quarter net sales grew by 14% and adjusted EBIT DOG grew by 18% over the prior year. Lithium delivered double digit adjusted EBITDA growth of 31% and both Bromine and Catalyst delivered solid results with strong cash flow.
Our adjusted diluted earnings per share grew by 24% compared to the prior year. Consistent with our efforts We closed on the sale of our polyolefin catalysts and components business to WR Grace for a sum of $416,000,000 on April 3rd. Our lithium capital projects remain on track at a planned spending of between $550,000,000 $675,000,000 for 2018. Page 6 of the earnings presentation deck outlines the progression and timing of expansion plans for carbonate and a drop side conversion capacity. Let me provide a brief update on project.
We're in the construction phase for the Cindy-two lithium hydroxide expansion in China, and plan to commission the plant in early 2019. During the second half of twenty eighteen, we expect to make electrical tie ins in La Negra related to the expansion. La Negra II is on track to reach nameplate run rate 2019, and we have moved from engineering to construction for the La Negra 34 lithium carbonate expansion. We still expect to commission La Negra III in 2020. In the Salar de Atacama, by the end of the fourth quarter 2018, We expect to reach the full pumping rate of 442 liters per second, which is the rate needed to supply the additional capacity in 2020.
Engineered Activities have commenced in Kemerton, Australia for a new lithium hydroxide plant with expectations to commission the first 40,000 metric times in 2021. During the past quarter, we received approval from Corfo to increase our lithium production quota in Chile to as much as 145,000 metric tonnes of lit incarbonate equivalent. In parallel, we progressed engineering for our prime yield enhancement project in the Atacama and began feasibility work for additional lithium carbonate conversion capacity in Chile. Now let's look at lithium demand. During the past quarter, we outlined a global market of over 800,000 metric tons on an LCE basis by 2025.
Those assumptions are on Page 7 of our earnings presentation debt. We continue to see validation of these demand assumptions. During the past few months for example, both Volkswagen and Volvo made commitments to significant electrification of their vehicle fleet by 2025. These recent announcements are good indicators of not only the size of the investments along the value chain but also of the timing. Commitments throughout the supply chain are now being made for 2025 supply.
I'd like to use Volkswagen's announcement as an illustration of what's happening in the supply chain. To reach their targeted sales of $2,000,000 to $3,000,000 electric vehicles by 2025, Volkswagen announced that they expect to invest about $25,000,000,000. Volkswagen will convert 9 production lines to electrical vehicles by 2020 and another 7 lines by 2022 for a total of 16 electric vehicle production lines. Volkswagen plans to contract for approximately 150 gigawatts hours of battery capacity per year to supply those lines. They have already awarded about $25,000,000,000 in battery contracts and expect to award additional supply contracts soon.
Battery cell producers are expected to invest between $9,000,000,000 $12,000,000,000 to meet this 150 gigawatt per year supply commitment for Volkswagen. To put this in perspective, Tesla's Nevada factory is targeted for 35 gigawatts of capacity at full rates. Using our assumptions for lithium intensity showed on page 7 of the earnings presentation deck, 150 gigawatt hours equates to roughly 140,000 metric tons of new lithium capacity. That's equivalent to about 2 thirds of the 2017 global demand of about 220,000 metric tons. And this is for an OEM which had about 11% Now Volkswagen may or may not hit their 2025 electric vehicle target, but the point of this illustration is that companies and supply chain need to lock up commitments for each critical raw material to meet this This dynamic should benefit lithium producers for years to come.
Albemarle has a track record of being able to build and operate large scale production facilities that provide a reliable supply of high purity derivative products That track record, combined with our technical expertise and our ability to fund growth, makes us an ideal partner for the OEM supply chain. Others have tried to enter this supply chain in the past. To date, only the May have consistently demonstrated an ability required us that our lithium expansion plans are not about market share gain. In fact, we expect that full implementation of our capacity expansions will result in Albemarle only maintaining its market share. Our strategy is to build out capacity to meet long term commitments to our customers with floor price economics that provide a strong return to our shareholders.
With that, I'll turn the call over to Scott.
Thanks, Luke, and good morning, everyone. In the first quarter, we reported adjusted diluted earnings per share of $1.30, an increase of 24% compared to the first quarter of 2017. The increase was driven by an adjusted EBITDA increase $31,000,000 or about $0.21 per share from our lithium business. Lower corporate costs and favorable foreign exchange contributed about $0.08 per share. We continue to expect our 2018 effective tax rate Excluding special items, non operating pension and OPEB items to trend toward the lower end of the previously provided range of 23% to 24%.
Operating working capital ended the quarter at 26.3 percent of sales, an increase from the fourth quarter of 2017. Capital expenditures during the first quarter were $132,000,000 and will continue to ramp during 2018, reflecting growth capital deployment our lithium business. We continue to expect full year CapEx to range between $800,000,001,000,000. Net cash from operations was $122,000,000, which was about 50% ahead of first quarter 2017. And we still expect to end 2018 between $660,000,000 $730,000,000 more than double our 2017 results.
And finally, currency exchange rates compared to 2017 were a tailwind to adjusted EBITDA of about $6,000,000 in the first quarter. Dollars per euro and Q1 2018 averaged about $1.22. Now moving on to our business performance. Lithium sales increased by 38% compared to the first quarter of 2017 and adjusted EBITDA increased by 31% with adjusted EBITDA margins of 44%. Volume growth for the first quarter was 19% with pricing improving by 14% driven by the increasing demand from our contracted customers.
All of our conversion facilities are operating at maximum rates as we work to bring additional capacity online. In bromine, 1st quarter sales of $226,000,000 and adjusted EBITDA of $70,000,000 were up 3% 2% respectively compared to the first quarter of 2017. Adjusted EBITDA margins were strong at 31%. Sales growth was driven by moderate price increases, partially offset by freight and raw material costs, and by lower volumes caused by constraints in elemental bromine, which we expect to continue through Q2. The market for flame retardants from primarily in electronics, automotive and construction remained solid.
Catalysts reported 1st quarter net sales of $261,000,000 and adjusted EBITDA of $68,000,000. Resulting in adjusted EBITDA margins of 26%. Year on year adjusted EBITDA was negatively impacted due to a shortage of raw materials used in curatives and lower volumes in hydroprocessing catalysts or HPC catalysts. The decline was partially offset by gains in volume and price for fluid catalytic cracking or FCC catalyst, which were both up about 2%. And just as a reminder, Q1 included around $11,000,000 from the polyolefin catalysts and components business, that won't continue in the future
we look to the rest of 2018, lithium remains on an aggressive path to deliver at least 20% adjusted EBITDA growth during 2018. We expect 2nd quarter EBITDA I'm sorry, we expect lithium 2nd quarter EBITDA to be sequentially stronger than Q1. Further, we anticipate the second half of twenty eighteen that is fairly equal to the first half of lithium with Q3 possibly weaker than Q4 due to downtime needed for the La Negra tie ins. In Catalyst, we continue to expect good EBITDA growth in our Refining Solutions business. However, curatives is expected to face pressure as a result of raw material challenges, which could unfavorably impact EBITDA by as much as for the full year.
As a result, The favorable market trends in flame retardants rates for elemental bromine and some derivatives, our plants continue to run very well. Pricing and operational efficiencies currently expected to offset higher costs for raw materials, freight and distribution. We now expect full year adjusted EBITDA growth in the low to mid single digits on a percentage basis. The upside in bromine specialties is expected to offset the headwinds in the curative portion of Catalyst. From a longer term perspective, we believe that Albemarle stock is currently undervalued.
Hence, subject to market conditions, we intend to buy back $250,000,000 of stock via an accelerated share repurchase program that was recently approved by our leaving ample headroom should we deem additional action to be warranted. The strength of our balance sheet, combined with the operating cash flow from our businesses, give us the confidence that we can take this action, execute our capital projects, maintain our long term debt to EBITDA ratios and still have plenty of firepower left over. In fact, absent any further corporate actions, such as M and A or additional stock buybacks, We would expect to end 2018 at a net debt to EBITDA ratio of around one times. Given all of this for the full year 2018, we now expect adjusted EPS to be between $5.10 $5.40. I'm confident that Albemarle is well positioned to maximize shareholder value in the short, medium and long term.
We have a clear and straightforward strategy, grow our lithium franchise, leverage our strong cash flow from Bromine and Catalyst and deliver strong margins and returns on our capital growth investments. We believe we have the people, the balance sheet flexibility and the focus on execution to drive strong and profitable growth over the foreseeable future.
Jasmine, that concludes our prepared remarks. We're now ready for Q and
And our first question comes from the line of Bob Hort with Goldman Sachs. Please proceed.
Hi, good morning. This is Dylan Campbell on for Bob. Could you help bridge us to 2 half twenty eighteen lithium EBITDA is flat relative to first half twenty eighteen. I guess taking into account what I would presume to be higher volume levels in 2018 and I guess what would essentially offset those higher volumes in the second half of the year?
Yes. Hi, Dylan. This is John Mitchell. Yeah, so for the second half of the year, I mean, we have what we have baked into the second half of what we think we have in terms of production. And also on the pricing side, our guidance hasn't changed with regard to full year price effect of the high single digit pricing.
As we see more capacity coming online, we can adjust our expectations and guidance going forward.
Got it. Thank you. And then I guess after completing the sale part of the PCS business in April, Can you update us on, I guess, your strategic or your long term strategic plans for the Callus and bromine businesses? And how they fit into the long term strategic plans of the consolidated business?
Sure. This is Lee. As we've talked about how each piece of this puzzle fits together, we need to free cash flow from the bromine and the catalyst business to be able to find the capital that we see in the growth of lithium. Lithium today doesn't free cash flow in and of itself with investments that we have. So we look at it and all those pieces fit together.
Now, there'll be a point in time in the future where we'll continually assess that portfolio to determine if that is the best path to drive shareholder value. We've not hesitated to I make portfolio adjustments when we thought we could drive higher shareholder value by doing so and we would continue that assessment on an ongoing basis
And our next question comes from the line of P. J. Juvekar with Citi. Please proceed.
Hi, this is Scott Goldstein on P. J. Good morning. Just maybe on the I'm looking for more color on lithium pricing. Just seemed a little more modest than some of what your competitors realized.
Can you maybe break out how much of the growth was from change in mix and How do you expect that mix to change for the remainder of 2018 and perhaps 2019?
Hi, this is John. So, in terms of the product mix, most of our incremental additional volume is on the carbonate side. But I think the difference in pricing philosophy is between the different lithium companies is really what's driving differences in pricing guidance. Again, our focus on long term contracts We have certainly clear visibility in terms of the value of the products that we're selling to customers We want to make sure we're taking a fair and balanced approach with our customers who are the leading cathode and battery producers of the world. And we are fixated on making sure that we have an excellent risk adjusted return on our investments.
And so Our pricing guidance is essentially what's baked into our long term agreement. So we have good visibility in terms of our approach to pricing. The other benefit in terms of our approach is that we don't see risk in terms of pricing going down. So we have very we have good visibility in terms of stability of the pricing and we do not expect our prices to be volatile in terms of going. Going down versus others in the looking space have a different approach in terms of maybe trying to play spot market pricing and other ways to look at pricing in the market.
Okay. Thank you. And maybe just follow-up So I think a little more than 80% of your lithium volumes are committed through long term contracts. Can you just remind us how that trend has changed maybe over the past year? And are you seeing more demand for longer term contracts in your negotiations currently?
Yes, great question. In 2018, I'd say actually almost 100% of our volume is under long term contract. We had moved our customer base to 3 to 5 year agreements and now we see a strong pull from the leading providers of batteries and cathodes to go to as long as tenure agreements. And the rationale for that is really around security of supply and not just security of supply of any type of molecule, but security supply of an EV grade that meets their specification for a battery that they can make a 10 year warranty on. So I think we have selected a really great basket of leading providers in the cathode and battery space And we're working together to plan the investments in lithium capacity for EV grade batteries and they're planning to produce more cells for the OEMs.
So we see our long term agreements getting longer. Toward 10 years.
And our next question comes from the line of David Begleiter with Bank. Please proceed.
Hey, this is David Huang here for David. I guess first on lithium, can you talk about maybe your updated views withium hydroxide versus carbonate, I guess you previously said you wanted to be in both, but is there an increase preference for one or the other? And also if you have any views on vertical integration and further consolidation sector?
Hey, I'm going to let John take the first one and then I'll talk about consolidation.
So with regard to preference on carbonate and hydroxide, again, the largest battery and cathode producers at depending on the type of battery that they're producing for the specific application. They have a demand for both carbonate and hydroxide and they're able to forecast for both types of molecules. Of course, in terms of increasing energy density, there are many battery producers that are going to, to hydroxide in order to go to the high nickel base or high metal base cathode materials. So we do see on a percentage basis higher growth in hydroxide, but our long term agreements have both carbonate and hydroxide in them. And we don't see a decrease in demand for carbonate.
We just see an acceleration of demand for hydroxide.
Yes. And if you look at consolidation, I think that There's a lot of noise out there in the marketplace about consolidations up and down the value chain. And I think that just gives us signal to how tight it is and how people are scrambling to get the supply that they need in order to make their commitments throughout the chain. So we're consistently looking. We believe we sit on the best resources in the world in the Salar de Atacama and in our site in Western Australia.
We have untapped resources in Kings Mountain, North Carolina as well as an option for resources in Argentina. We feel great about where we are for the geographic diversity as well as the brine and rock balance where we can go carbonate or hydroxide. As the market dictates. So I think you're going to see continual discussion out there in the marketplace about suppliers lining up with with our customers and their raw material suppliers. But we love the spot we're in with our resources.
And with our customer contacts. So we feel like we're partnered in the right area. And if those decisions should change, then there will be an opportunity as I've said before, our balance sheet gives us plenty of firepower to take actions that could strengthen, strengthen even further our portfolio in lithium business.
FCC price increases and also ex security impact? Or do you more, I mean, incrementally more positive?
Sylvia? Good morning, Sylvia. Thanks for the question. As you know, the price increase for FCC is an ongoing exercise. It's it's never finishing, but I can confirm that right now we're getting traction, one hand still based on the philosophy that we are trying to get the right price for the value we are providing to the refiner.
And on the other hand, the effort to offset the inflationary pressure that we are facing, but the prices are holding. Okay.
And our next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed.
Thank you and good morning everyone. Just a clarifying question and maybe it relates to the 3Q led network costs. Don't know if you can size those for us at all. And I just I assume the answer is yes, but do you still expect lithium margins for the full year to be 40%. I just asked because it came out of this quarter's slide versus last quarter's?
Yes. From a lithium margin standpoint, we still believe the full year will be above 40% from a margin standpoint. We've not laid out what the costs are in that third quarter. But we have an opportunity to come in and make tie ins for that site overall that we're going to need to do at some point in time. As I said in my prepared remarks, we we're going to be able to pump at full rates in the fourth quarter.
We think it makes sense for us to go ahead and make these tying now so that whenever that front, we start up in full rates. Those ponds get filled up. We won't have to do it later in the year, but we'll have later during 2019 or 2020 when we'll have the full brine. So we believe it's prudent to do that. It's just a movement between quarters.
It's not going to impact the year in any way, but it could make 3rd quarter weaker than the 4th. So that's why we brought it up and let you guys know about it, Vincent.
All right.
Very, very helpful. And just to follow-up on the, the now longer 10 year contracts that you have, Is there anything different about, I know this is sensitive, but anything different about the terms versus the existing contracts? And I guess in particular, is there any sort of take or pay component to these longer contracts or any being different about your ability to adjust price or anything like that that you can share?
Yes, philosophically, we've kept the same approach that we have on contract the bigger differences. It's a whole lot more volume.
And our next question comes from the line of Lawrence Alexander with Jefferies. Please proceed.
Hi guys, it's Dan Rizzo on for Lawrence. How are you? Well. So in terms of, I was wondering how much of the impact of the change in refiner activity due to the marine fuel standards have on the Refinery Cattle's business?
Sylvia? Okay. All you're referring to the gasoline standards?
Yes, correct. The Marine? Okay.
Oh, the Marine deal. Well, I'll try to stay brief on that one. There is a large amount of fuel oil that could not be used anymore in 2020. When those standards are coming on. And there were different tracks to address this.
One could be that you have scrubbers in the boats, which you cannot install overnight. So there will be a requirement of a additional amount of diesel or mid distillate hyper treated mid distillate that is being added to the pool of marine fuel. So to the allude aspects and to half for the next couple of years, the boat sailing are not necessarily pure heavy fuel, gusts on blended fuels. That's one of the ways together. Like I said, the other one is a big infrastructure to clean the fuels on the boat.
The future will tell us which direction it will ultimately be, but we can be firm that there will be an additional amount of diesel required around the 2019, 2020 period and maybe the years that are offered to address that sudden change in specifications.
So, Sylvia will give you the detailed answer at a high level anytime there's a regulation that tightens up the specifications from a diesel standpoint, it benefits the hydro treaty part of our business. So we would expect that to be positive news for our HPC and clean fuels.
Okay. Thank you for the clarification. And then you mentioned before that, that part of the bromine and catalyst business is really to generate cash for lithium growth. That would suggest, I guess, that you're not really going to be spending CapEx on those 2 businesses, just maintenance. And I was just wondering how much you have to spend yearly to kind of maintain what you're doing there or if you're spending more to grow it as well?
Yes. So if you look at that business historically, both of those businesses, we've been able to run those businesses between 4% 6%. Of revenue as a CapEx. Sometimes it pops up below, sometimes it pops down below. We always have small projects that debottleneck or some and that'll allow us to get a little extra yield that our cost improvement projects will really be paid back.
And we're certainly continuing to do that. And we'll continue to invest in those business to allow them to maintain their competitive edge. There will be debottlenecks necessary. There'll be new wells drilled and I know you that are necessary. There'll be additional SDC capacity that that we would may need to bring online for some need to bottleneck to be able to serve our customers.
So we're going to continue to do that to keep those businesses strong because they're great businesses with good EBITDA margins. But we're blessed in the fact that they have high margins low capital requirements and we're able to harvest that cash and put it in our organic growth for lithium.
Thank you very much.
And our next question comes from the line of John Roberts with UBS. Please proceed.
Thank you. Can you hear me? Sorry, I jumped in late, but the slide with EV penetration in lithium, obviously, there's no correlation in that chart. Is that more because of the different assumptions on average battery size or full electrics? Or is it different assumptions on HEV?
Penetration? Or maybe if you could comment a little bit on what's driving that variation, but results, obviously, no correlation there.
John, this is, this is Eric speaking. The answer to your question fortunately is yes, right? I mean, the dispersion that's shown on that slide of estimates comes from as we look at those models, the penetration differences between the amounts of full electric, which is hybrid plug in hybrid electric. It also comes from battery sizes, depending on the analysts and the firm providing that. And in some cases, comes from a lithium content, believe it or not.
So it does come from all three of it. It's one of the reasons we put this slide out is because I think it's important for you to know the assumptions we believe which are based on a platform by platform only and by OEM basis that are built up. Does that answer your question? John?
John line has disconnected.
Thank you, Jeff.
You're welcome.
And our next question comes from
the line of Arun Viswanathan with RBC Capital Markets. Please proceed.
Thanks. Good morning. Maybe you can just give us an update on, appreciate the update on demand and maybe just give us an update on what you're seeing on the supply side as well. There was some issues with weather earlier this year in Latin America and Chile and Argentina, was that effective negative for you guys or not? And then Secondarily, maybe just update on your projects as well as what you're seeing from competitors?
Okay. Thanks. This is John. With regard to the weather comment, no impact on Albemarle operations with regard to weather. So far in 2018.
We've also taken some added steps as mitigation in the event there are any rain events particularly in the Atacama. So I think we're well prepared with regard to the overall supply dynamic in the marketplace. In 2018. It's as expected, as we track all the projects around the world going forward beyond 2018, nothing new that changes our supply demand outlook. As we look at the materials that are required for our customers, which are EV grade, performance materials, carbonate hydroxide, we feel that the market remains in balance through 2021 and don't see any increase in supply that gives us any concerns in terms of oversupply dynamic, etcetera.
Even if there were issues with regard to oversupply, we have long term agreements that does not affect Albemarle in terms of its own supply demand dynamic as we are contracted with the market leaders going forward. So you're not going to see any impact regarding supply demand dynamic in Albemaros pricing.
Great. Thanks. And as a follow-up, there has in recently, some plateauing, it looks like in covenant pricings. So I guess the rate read is we shouldn't assume that impacts you. And, even so, maybe you can just describe what you think that resulted from the between carbon and hydroxide pricing?
Thanks.
So, in terms of the marketplace and the difference between carbon and hydroxide. Hydroxide has always been sold at a higher price given the cost buildup of hydroxide versus carbonate. Certainly around the world as different producers are going into new resources the cost structure of their products will change because every natural resource around the world is different. The cost to mine, the cost to extract the cost to refine and the cost to make the specialty product is going to vary. So looking back in terms of historical norms, is a little bit faulty as we go forward and we're bringing on more and more capacity.
I'd I don't think that there's going to be any kind of, I don't know if you're alluding to a contraction in terms of hydroxide and carbonate price. We certainly don't see it. And again, our pricing models are based on pricing to value and also pricing to the specific terms and conditions in terms of our long term agreements.
Thanks.
And our next question comes from the line of Alexi Yefremov with Nomero. Please proceed.
Thank you. Good morning, everyone. I think in the during the fourth quarter, earnings call, you were talking about high single digit lithium price increase expectations for 18, has it changed in any way?
No, it's not changed. What you're saying that we're higher in the first quarter, but as you go through the year, it'll be lower on year over year comparison. So we'll end the year about where we thought we would.
Thank you, Luke. And Xinya 220K80 hydroxide commissioning in 2019, is there a qualification period or a ramp period? So in practical terms, what should we think about how should we think about EBITDA contribution at a full rate? Is it by the middle of 2019 by the end of 2019?
Yeah. This is John. You should think that there is a qualification period for Xinyu II. So as we start commissioning and producing products, at quality, then we have to ship quantities to our customers and they're going to have to qualify that facility and that production facility. And so I think you should look at mid-twenty 19 in terms of getting the full rates.
And our next question comes from the line of Colin Rusch with Oppenheimer. Please proceed.
What are you seeing in terms of the number of customers, potential customers for lithium versus a quarter ago or 2 quarters ago? Are you seeing an increased decrease kind of flattish just in terms of volume of customers?
Yes, it's about the same number of customers from a material standpoint. There hasn't been that many new entrants into that cathode and we're dealing with the big players and it had changed over the last 12 months.
Okay. And then in terms of moving volumes around customers taking all the volumes? Are you seeing any movement from one customer to another customer or folks not taking volumes or asking for incremental volumes versus our contracts on a regular basis?
Yes. It's all over the map. As a general rule, we haven't seen a customer through not saying we don't want what we've committed. All our customers are saying we want more.
Okay, great. I'll take the rest of it offline.
And our next question comes from
the line of Joel Jackson with BMO Capital Markets. Please proceed.
Hi, good morning. One of your bromine competitors talked about today that they've been signing 1 year contracts for the derivatives and for almenopromine at double digits.
I think we lost some Jasmine. I don't know whether or not you may want to go into the next question if they just had to put it back in the queue.
Thank you. And our next question comes from the line of Kevin McCarthy with Vertical Research Research. Sorry, please proceed.
Yes, good morning. Thank you. I was wondering if you could provide some thoughts on the potential for a shift in the battery market to it state technology. Do you anticipate that? If so, what would be the associated timing and your level of confidence?
And importantly, what might it mean for an uplift in lithium demand?
This is John. Great question regarding solid state battery technology. With regard to an uplift in lithium demand, yes, because solid state battery technology has more lithium molecules in it to increase energy density And so yes, we would see an uplift in lithium demand as the market goes to solid state. Regarding timelines, although we're seeing an increase in R&D activity and product development activity in terms of commercial application we see it more as a 5 to 10 year horizon regarding solid state.
Very good. And then I had a question on lithium EBITDA margin, if I look at it on a sequential basis, your level 44.0 percent improved about 300 basis points from what you posted in the fourth quarter of 2017. And it looks like you managed that notwithstanding a smaller contribution from price.
And so I was wondering if
you could help us understand some of the moving parts there. Was was there a shift in mix or cost considerations that helped to explain that?
Yeah. Well, there are a few things that are always going on in the lithium business. I mean, certainly there's a mix issue. There's a mix of products, there's mix of customers and pricing We are always also working on productivity improvements in terms of the ongoing operations and the cost structure. But then you have a couple different elements, one on the natural resource side, whereas we do exploration efforts There are certain costs that cannot be capitalized and so we have to take them to the expense line.
Also on the refinery assets, there are certain costs that as you're developing and you start the early stage engineering on different projects, there are costs that again, you have to drop to the expense line versus capitalization. So there are a number of moving pieces And as we said, from time to time, we'll see fluctuations in the margins in that low to mid-forty range, but you should count on averaging out in the lower 4 weeks.
And we do have Mr. Joel Jackson back on the line with BMO Capital Markets. Please proceed.
Hi. Can you hear me now?
Yes. We can hear you fine. All right.
Great. Okay. So one of your bromine competitors this morning indicated that they're seeing double digit price increases on some 1 year contracts that are signing an element of bromine and bromine derivatives. Are you seeing similar pickup on some of your pricing right now on contracts? Guess, there's some cost offset.
Maybe you could talk about both of those.
Hey, Joel, this is Rafael Crawford. We do see We do see an increase in the number of contracts that we have with our customers versus prior year. So because of the tighter situation on bromine, not necessarily elemental bromine, that's actually a very small piece of our portfolio, but on the derivatives, namely flame retardants, we are signing more contracts with price increases. The amount of the price increase really depends on the specific product in the specific market, but it has been favorable In these tight market situations, we have been able to raise price, get more volume under contract and where possible also get more favorable terms with our customer
I had a second question. It's a bit nitpicky, but in your prior presentation, you talked about 2025 lithium demand being about greater than 800,000 tons and now you're seeing 800,000 tons. Again, this is nitpicky. This is many years to now, it's a big number, but any reason why you changed that that wording that estimate? Yes.
It's around
800,000 metric tons. I mean, that's I can't within the range of what it is, it don't lead anything into that at all, okay. Our range is around 800,000 tons. And all I can tell you is if we do it in another year when we come out with these numbers, it'll be different because what was so early in the S curve and it's so early in the adoption that we're giving the information that we have on page 7 of our presentation so that every shareholder and every analyst understands what's in our numbers so that you can make your own judgment as to whether where we are. We believe we're taking the best approach we can, but don't split words or add or over or about or any of that.
It's just that's the range that we think it's going to be. And there's nothing to be read into that.
Thanks.
And our next question comes from the line of Chris Kapsch with Loop Capital Markets. Please proceed.
Yes, good morning. I had a follow-up on the hydroxide versus carbonate, discussion. And really in the context of your CapEx plans as you build out your conversion capacity, So when your customers contract, with you on these in these longer term agreements, I assume they specify what grades they think they're going to want. And I'm just wondering, how much wiggle room do they have to shift? For example, if their demand for, for, you know, the batteries or their model shifts more towards those, designs that take hydroxide?
Do they have wiggle room to shift that? And then how much, how much latitude do you have to adjust your conversion capacity build out plans?
But if you look out to 2021, we've said and you look at the presentation on page 6 of our present of our earnings deck, you'll see word about 85,000 met tons of carbonate and about 80,000 met tons of hydroxide by 2021. So that gives us we're very well balanced on hydroxide and carbonate. The contracts specify the whether how much carbonate they want and how much hydroxide they So once they do that, you have to be able to do that for planning purposes because if you're going to build a carbonate plant versus build a hydroxide plant, you need to know in advance. So, we're trying to build in some flexibility there, but they're the customers, they're planning for models that are going to be 3 5 years out. So they have a good visibility for that period of time, whether they're going to use carbonate or a drop shot.
And they don't have a problem. In telling us for that level, that amount of time, what they expect there, demand is going to be for the specific product. Okay.
So and then just to follow-up on the notion that some of these agreements are shifting from call it 3 to 5 years to as long as 10 years. Are those additional battery customers that are coming in saying, Hey, we want a 10 year or is it the same ones that contracted for 5 years or saying Hey, we're we have a better understanding of how this market's developing and we'd like to change the terms and extend it to 10 years.
As I said, it's generally the same customers that are extending their contracts. There may be a 1 or 2 new ones around the edge, but as a general rule, it's the same same customers.
Okay. And then just one last one. Any update on the efficacy of your your new brine extraction technology?
Yes. We're meeting the metrics that we anticipated meeting, is going well. And we still believe that that's a viable project and we'll continue pursuing it.
And our final question comes from
the line of Jim Sheehan with SunTrust. Please proceed.
Good morning. This is Pete Osterland on for Jim. What is the raw material involved in the shortage for curatives and broadly speaking, who are the main buyers with the impacted products?
Good morning. This is Sylvia. If you see that our curatives are all based on tolling wind diamonds, so it's pretty easy to figure out what was the short pitch in. It has to do through a handful of major producers of this material over the world. And the shortage is called by the major turnarounds and changes in the upstream manufacturing facilities.
So it's something that is temporary. And like we have in our earnings call, we are that it's going to have an effect of a 1,000,000 ish on yearly basis.
Jazz, is that all we have in the queue?
Yes, sir. There are no further questions at this time.
Okay. Thank you, everyone. We appreciate the questions and look forward to visiting with many of you over the coming quarter. Jasmine, we may connect the call now.
Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. You all have a great day.