Good day, ladies and gentlemen, and welcome to the Q2 2017 Albemarle Corporation Earnings Conference Call. My name is Susan, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Matt Juneau, Executive Vice President of Corporate Strategy and Investor Relations. Please go ahead, sir.

Thank you, and welcome to Albemarle's second quarter 2017 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 albemarle.com. Joining me on the call today are Luke Kissam, Chairman and Chief Executive Officer; Scott Tozier, Executive Vice President and Chief Financial Officer; Raphael Crawford, President, Bromine Specialties; Silvio Ghyoot, President, Refining Solutions; and John Mitchell, President, Lithium and Advanced Materials. As a reminder, some of the statements made during this conference call about the future performance of the company 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 nonoperating, nonrecurring 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. With that, I'll turn the call over to Luke.

Hey. Thanks, Matt, and good morning, everybody. I'm very pleased with our second quarter results as we continued strong year-on-year growth, while meeting important milestone toward our long-term growth strategy. Excluding divested businesses and negative currency exchange impacts, revenue grew by $85 million or 13%, adjusted EBITDA grew by $29 million or 15% and adjusted earnings per share grew by $0.20 or 21% compared to the second quarter of 2016. Overall company adjusted EBITDA margins were 30%, a year-on-year increase of 77 basis points, and our three reported segments delivered improved adjusted EBITDA margins of 35%. Results were driven by strong volume and pricing growth in lithium while Refining Solutions, Bromine Specialties and TCF performed about as anticipated. The long-term secular growth trend in lithium continues to strengthen as evidenced by increasing targets across the automotive industry and the global effort for governments to support this transition to electric vehicles. The recent announcement by Volvo that they plan to make only fully electric and hybrid cars from 2019 onwards and the introduction of regulations in France and the UK to ban the sale of gasoline and diesel cars by 2040 are just a few recent examples. To support the contracted demand of our customers, we are committed to execute several expansion projects that are expected to increase Albemarle's global lithium derivative capacity to 165,000 metric tons on an LTE basis by the end of 2021, which we refer to as our wave 1 expansion. Talison is expanding its mine in Greenbushes and Albemarle is expanding the Salar brine operations in the Salar de Atacama, and maintaining current capacity in Silver Peak to produce the ore and brine concentrate volume to feed this wave 1 expansion. Additional exploration efforts are ongoing in Chile, Argentina, the U.S. and in other regions of…

Thanks Luke, and good morning, everyone. For the second quarter, we reported adjusted earnings per share of $1.13, an increase of $0.20 per share compared to the second quarter of 2016, or 21% growth, excluding the year-over-year impact of divested businesses. Growth in our businesses resulted in an increase of about $0.29. Business results were offset by a net cost increase in other areas of about $0.09 per share, primarily due to increased corporate expenses and a higher effective tax rate compared to second quarter of 2016. Business mix by country and continued strength in our Jordan Bromine Company joint venture drove a favorable effective tax rate in the quarter compared to our previous assumptions. As such, we now expect our full year 2017 effective tax rate, excluding special items, non-operating pension and OPEB items, to be just under 21%, down from prior guidance of 22%. Corporate costs were $28.2 million during the second quarter, driven by professional fees and compensation costs. Given our updated view of the rest of the year, 2017 corporate costs are now likely to reach the upper end of our expected range of $95 million to $105 million. Operating working capital ended the second quarter at 27% of revenue, in line with our 2017 guidance, and we expect to remain at a similar level for the rest of the year. In June, we completed the accelerated share repurchase program initiated in March. In total, we received and retired just over 2.3 million shares and expect our average share counts for all of 2017 to now be about 112.3 million shares. Our share counts for the second half will be 112 million even. We will continue to evaluate capital allocation opportunities between projects and transactions that accelerate our growth strategy and additional share repurchase programs. Capital…

Thanks, Scott. Up first half in position: 2017 is another outstanding year for Albemarle. The Lithium business performed very well in the first half of 2017. We remain on track with our aggressive capital and exploration projects in lithium, and are meeting the demand needs of our customers today. Bromine Specialties, PCS and Refining Solutions performed as anticipated. In addition, we returned $320 million to our shareholders through buybacks and dividends in the first half of 2017, and net debt-to-EBITDA ratio remains a very healthy 0.9. As we look to the second half of 2017, in Bromine Specialties, favorable market trends in flame retardants appear to be continuing and our plants continue to run very well. We expect full year adjusted EBITDA growth in the mid- to high-single digits on a percentage basis. In Refining Solutions, we expect on improved second half, with the fourth quarter forecasted to be much stronger than the third due to the timing of some larger CFT orders. As always with CFT, there is some risk related to orders slipping from one quarter to the next. In FCC, we continue to see strong demand in North America, driven by Tier 3 gasoline standards and the success of our action technology in that application. Finally, lithium continues on the path for full-year adjusted EBITDA growth of more than 35% versus 2016, with the third and fourth quarters expected to be similar to the first quarter of 2017. For the second half, we expect EPS in the third quarter to look similar to that in the first, and EPS the fourth quarter to be higher, driven largely by the timing of the orders in Refining Solutions. Based on the strong first-half results and our expectations for continued business strength in the rest of 2017, we are reaffirming our 2017 full year guidance for net sales of $2.9 billion to $3.05 billion, adjusted EBITDA of $835 million to $875 million and adjusted diluted EPS of $4.20 to $4.40 per share. In closing, I am pleased with our overall execution in the first half of this year and with the progress the teams have made in our capital and exploration projects in our lithium business. We remain very focused on meeting the needs of our customers and execution of our strategy, which we expect to deliver significant value to our shareholders over time.

Operator, we're ready to open the lines for Q&A. But before you do so, I'd like to remind everyone to please limit your questions to 2 at one time so that everyone has a chance to ask questions [Operator Instructions] Please proceed.

[Operator Instructions] Your first question comes from the line of Arun Viswanathan, of RBC Capital Markets.

I wanted to ask a question just on the footnote 1 on the release, it talks about the inventory valuation method. Can you just explain a little bit more on how that impacted your results and what the implications are for the rest of the year?

Sure. I mean, from an adjusted perspective, we're taking inventory revaluation out of context, out of the number. So it really does not affect our adjusted EBITDA at all. If you look at our U.S. GAAP basis, the valuation related to our Chinese acquisition at the end of 2016, when you do an acquisition, you have to mark up the inventory that's being purchased to market value, and that flows through your results until that was out of them. So that's really what that relates to.

And the only thing I would add is that did give us some additional volume in Lithium in the second quarter because of the amount of inventory that we acquired in the transaction.

Right, that was I was actually asking. And then the other question I ask was a follow up, was just on your second half outlook, maybe could just describe some of the issues that you've been experiencing weather-wise or if there was higher exploration cost or anything else that would lead you to believe the second half performance would be about the same as first half?

Yes, this is John. So in the second half, we're going to have a product mix and also a customer mix that is going to lead to a slightly lower average sales price, as well as we have been ramping up exploration efforts so we have added costs in the second half. As Luke mentioned in his opening remarks, we have a number of exploration efforts going on around the world, and those efforts are ramping up. So the combination of those issues leads to the forecast that Luke and Scott mentioned earlier.

One thing I'll add on that is when you look at it in a full year basis. I know you've got it to look at it quarters and a half years and all that. When you look at it on a full year basis, we are right on track. We're doing exactly what we anticipated, the numbers may be moving around a little bit for the quarter. But for the full year, we feel great about where we are in Lithium. The exploration projects and really, all of our businesses, firing on all cylinders right now.

And our next question comes from the line of John Roberts, UBS.

I think there's been some comments made about possible consolidation within the lithium competitive landscape here. How do you think about concentration in the industry and whether consolidation can occur?

What I think that for every -- as we've said, if you look at our balance sheet, our balance sheet is in very good shape. If you look at the acquisitions we've done, I think we've demonstrated the ability to integrate those businesses and get a return on the capital that we've invested in those businesses to drive long-term shareholder returns. And where there is an opportunity for us to acquire assets, be they a technology or a reserve or an operating assets, that allow us to de-risk and strengthen our strategy, we're certainly interested in doing it.

And then you gave us an update on your Wave 1 projects. Could you give us your understanding of competitor Wave 1 projects? And are there any periods that look unbalanced with respect to supply and demand over the next couple of years?

Yes, I can't comment anything more than what you've already read publicly about what the competitors may be doing. I think John can give you a pretty good view of our view of the supply and demand balance.

Yes, I think our view on net supply and demand remains consistent. We see more product coming in from the Australian hard rock mines and China. Of course, the capacity that we are bringing on between now and 2020 and a few others. Overall, we see the market continue to be roughly in balance. There will be short periods of time where there could be some lumpiness in terms of capacity coming online. But really, overall, through the midterm, the market, overall in balance.

And your next question comes from the line of David Begleiter of Deutsche Bank. Please go ahead.

Luke and John, looking at lithium EBITDA guidance, the second half, is that good run rate for full year 2018? And if it's not, why not?

No, it's early to talk about 2018, but I wouldn't think that would be the guidance. I'd be very disappointed if that were our guidance for the full year, that run rate. Remember, we're talking about adding 10,000 metric tons a year. So we'll obviously have significant more volume in the second half in 2018, from a brine standpoint, we'll have more brine available, we'll be running La Negra, produce higher volumes out of that. So we still remain on track. We said our goal was to get 10,000 metric tons of additional volume in 2017 and 2018, and we believe we'll still be able to do that. So you shouldn't look at the second half of 2017 as a run rate from an EBITDA perspective, not at all.

Good. And John, just on La Negra 2, are there any operating or ramp-up issues that could be impacting second half production rates or supplies to customers?

So Q2, we produced more out of La Negra 2 than we did in Q1. We talked about the split of the 10,000 metric tons in previous calls, we're probably tilting a little bit a more toward lithium hydroxide versus lithium carbonate in the second half, in the overall year. But La Negra 2 continues to ramp up. We're managing the brine situation based on our commitments in our environmental permit. And as many know, there have been rain events in the Atacama, we're just really managing the brine situation there. But we continue to be focused on meeting the commitments of our customers and especially, the customers that have signed long-term agreements with us, and we're confident were going to make sure that we take care of them.

Yes, David, this is Luke. There's still a lot of noise out there about whether or not we're meeting our customers needs, or we declare force majeure. First of all, we have not declared force majeure. Second of all, every commitment that our customer has made to us, we fulfill that commitment. And we've seen no reason we won't be able to do that for the remainder of the year. The customers that are committed to us, we are going to meet their supply demands.

Thank you. And your next question comes from the line of Bob Koort of Goldman Sachs. Please go ahead.

Luke, I was wondering if you can characterize or maybe John, what your battery customer base looks like in say, 2018 or '19 versus where it is today in terms of scale of customers, diversity of customers, and where along the supply chain you might be getting inquiries? How would you expect that to transition if you become a much bigger part of that market?

Bob, this is John. So we've worked really hard over the last couple of years in terms of developing relationships with the leading cathode and battery producers in the world. And I think as we go forward, our long term agreements and commitments are primarily, will primarily stay with that basket of customers as we go forward. As we evaluate the performance of different cathode and battery suppliers out there, we could engage them and bring them into our customer base. But we've been focused on really very high quality customer set and customers that have the same philosophy in terms of long-term planning and long-term commitments. And so we see going forward, at least, as far as I can see, a consistent set of customers going forward.

Yes, Bob. There's one thing I will say, I think this is accurate, although it may be anecdotal, we're seeing in Lithium, particularly in the battery space, more interest in the OEMs having discussions to make sure they understand the supply side of the business, maybe more so than we did in some of our other businesses. So we're having those conversations because it's always good. But right now, the supply chain over the next 2 years, at least, we see more in line with where we are today.

And if I could follow up on the pricing side, I realize it's a pretty significant jumps in pricing. I know you've also talked about securing longer term contracts. How should we think about how your price dynamic moving forward either from restructuring contracts, writing new contracts or echoing maybe market price moves. How should we think about price flows through the line?

Yes, Bob. This is Luke. I don't want to talk about what pricing is going to be in '18 and '19. What I will say is that we pretty clearly articulated what our strategy was. Where we want to ensure that we're getting value today as well as long-term sustainable value for this business going forward, and I don't see anything that's going to change that strategy. We have big volume customers, the bigger the volume as a general rule, the lower the price. It's how we've operated and we're going to continue to look towards our margins in that 40% range. We believe we'll be able to keep that and where it makes sense to take pricing actions, we will. But we are focused on this short and long term, I don't see that strategy changing so long as the market dynamics that we see proceed as we expect.

And our next question comes from the line of Dmitry Silversteyn of Longbow Research. Please go ahead.

Just wanted to understand your guidance for the second half of the year, Lithium pricing. It sounds like if you just kind of averaged the first half, and which are guiding for the year, we're looking at kind of mid- to high-single-digit year-over-year growth in Lithium pricing in the second half of the year. So first of all, I want to make sure that my math is right. And then secondly, I'm just wondering if that's a question of just comps being more difficult in the second half of the year because that's where you started to ramp up pricing or if pricing is actually expected to decline a little bit because of the mix?

This is John. As we mentioned a couple of moments ago, because of the product mix and the customer mix, we see average selling price across this past quarter, quarter 2, going down a little bit in Q3 to Q4. It's not anything related to how we negotiate, or the fact that we're lowering the price in the market. It's strictly just based on our contractual commitments and where we see [indiscernible] hydroxide carbonate and types of customers that we are obligated to supply, there's a slight decline in terms of average selling price versus what we are able to accomplish in Q2.

Dmitry, as you alluded to, this is Scott. As we ramped up the contract negotiations last year, we're filling up those contracts in the price moves that happened in 2016, the year-over-year comparison going into 2017 starts to get more and more difficult and I think that's really what you're seeing reflected in our guidance in the second half.

Got you. And then just a follow-up on the Fine Chemical, chemistry services, that market has been heating up a little bit, probably over the last year, year and a half. I know you tried to sell that business once, didn't come to an agreeable outcome. Are you also [indiscernible] are you seeing more activity in there, a little more, stronger performance out of that business in the second half of the year and into 2018? And secondly, has the consolidation environment in the industry prompted you to take a look at monetizing that asset again?

Yes, we're not planning any increase in FCS in the second half. We'll look to see what happens in '18. I mean, Dmitry, those are long-term contracts that you've got to go out and get commitments for and then roll into. So I'm not expecting to see anything that's going to move the needle from a profitability standpoint in '17 -- in the rest of '17 or in '18. But they do take steps to continue to improve that business. We need to rebuild that business before we talk about any type of looking at any type of strategic options for it right now, Dmitry.

And your next question is from the line of Kevin McCarthy of Vertical Research Partners.

Luke, would you comment on the viability or lack thereof of direct shipments of ore by your competitors from Australia to China. Is that something that you would expect to be ongoing over the medium-term or more of a short-term phenomenon?

Yes, I think it's more of a short-term phenomenon, I think. But I'll let John go ahead and talk, you're talking about DSO, you're talking about concentrate, just so we're clear, Kevin?

DSO.

Go ahead, John.

Kevin, this is John. So just so everyone understands what we were talking about, DSO is essentially a blasted rock, totally unprocessed, it's not upgraded at the mine in any way. And so in order to actually produce a usable product, first have to have an asset that can actually upgrade this rock to an ore concentrate of a certain quality and then that ore concentrate then has to be converted or refined into a lithium salt battery-grade or tech grade salt. And so our view is that the economics, if you think about the economics of just shipping raw rock that's blasted out of the ground, it's definitely not sustainable. And so how long will someone ship DSO and how long will someone pay kind of the high prices and the high shipping costs, our view would be relatively short-lived. So just based on the pure economics of it.

A second question, if I may, on hydroprocessing catalyst. Luke, I think you mentioned that you anticipate a strong fourth quarter of 2017. Recognizing that shipments can be lumpy and timing can be variable, do you think the greater risk would be acceleration of those shipments into 3Q or postponement back into the first quarter of '18 as you see it today?

Yes, I think it's always an issue. It's hard to tell, but I think we highlight for the fact that there's a lot built into the fourth quarter and it can slide into the first quarter. It depends on what happens with a capital budgets of the refiners, where they are and what that need is. I think there's a risk it could slide into the first quarter of next year, more so than being pulled forward.

Thank you. And your next question comes from the line of Mike Harrison from Seaport Global Securities. Please go ahead.

You guys mentioned that there's been some rain down in the Chile, Argentina area. And it sounds like you've been able to work and still be able to meet your customer needs without putting everybody on allocation. Was wondering though, have you incurred any higher costs associated with being able to meet all those customer needs, and is the weather affecting your expected mix that you referred to of shifting more toward hydroxide and away from carbonate?

So first off, Mike, with regard to the rain event, we always have contingency plans from an operating perspective. The team has done a great job to ensure that we can meet our stated goal of 10,000 metric tons. And we have taken specific action to just make sure that we're smart about managing the brine system and the brine quality. We can actually make more carbonate today, but we wanted to make sure that we we're managing the pond system, we're managing the brine as best possible to make sure we have the most favorable economics and outcome.

And then you also mention the exploration efforts and kind of said that you're going to update us in 2018. But could you just maybe give us a little bit of color on exactly where the efforts are [indiscernible] most intensively as we look at the second half?

Yes, their ramping up all over. I don't know how else to say it. We started in the first half of the year. So we've got exploration work ongoing in numerous spots in the United States. We've got exploration in Argentina as we've talked about, we've got an option for rights in the Catamarca region there, that are very promising. We're also doing work in the Salar, in other areas of Chile as well as work being done in Australia, at our Talison facility. So we are ramping up everywhere. What's important for us is also to understand the quality of the reserves and to quantify the quality of those reserves by sometime in the first half of next year. So we can put some priorities and decisions and capital plans going forward. It just takes a long time to bring those types of resources online. Some would obviously be quicker than others but in the first half, first 9 months of 2018, we need to be making some decisions, and we'll update you when we know what we're going to do.

And our next question comes from the line of Mike Sison with KeyBanc.

Your outlook for Lithium in second half, certainly, year-over-year is still pretty impressive. But it was wondering if you could just help us understand a little bit of how mix, maybe some of the variables that change mix for that business, meaning is more hydroxide better for mix, less hydroxide and where you're making it from, different type of customers, just to better understand what changes in the second half versus the first half?

Yes, so let's just start on the customer side. So different customers, depending on the volume commitments and the long term commitments have different pricing, and that is a big part of kind of what's driving it as some large-scale customers are beginning to ramp up the take. So you have just a customer mix there in terms of different agreements that are negotiated. And then in terms of the economics, again it really, it's tough to paint a product, lithium hydroxide versus lithium carbonate, with the same brush because you really have to compare it against a specific customers in terms of whether margins are being impacted or not. So I would say that there is a mix issue in terms of carbonate hydroxide. That's probably even more importantly is the customer mix is really driving the overall average selling price, difference between Q2 and Q3 and 4.

Right. That's helpful. Just shifting gears a little bit, I think you guys mentioned that an FCC, that trials are more competitive. It's that right? Is that causing some margin pressure? And if so, why do think the trials -- trialing is more competitive these days?

I'm not sure it's more competitive. I'll let Sylvia talk about how competitive they are. If you look at the margin pressure, what happens is if you look across the industry, the max propylene is probably the highest value because it gives the highest upgrade to the refinery, so they get more value out of that. Whenever you're in a unit that is a max propylene unit and then a customer trial comes in for that unit, you drop down to a VGO or some other level, you're going to get margin pressure on that. So that's really what's causing the pressure that we're seeing on margins in the second quarter and FCC. But with regard to the competitive nature of the trials, I'll turn you over to Silvio.

Silvio. Luke is correct that the higher-margin segments like a max propylene have been affected due to those scheduled trials and turn around and some of our key customers. Worthwhile to note is also the fat that even in the higher-margin market like the VGO application, you start seeing that -- and we are always doing this, that our customers are expecting high performing rate, while we build in more activity so there is somewhere a cost pressure together with some inflation that is also having a negative effect on those margins.

And your next question comes from the line of Tyler Frank from Robert Baird. Please go ahead.

There were a few reports recently about global advanced metals, potentially filing an injunction to halt your expansion in Talison. Could you discuss that and any thoughts you can provide there will be helpful. And then the bromine market, it seems like overall, things continue to stabilize there, but can you provide just your current thoughts on the second half and heading into 2018? What you're seeing for overall demand in that market and the ability, you think, to potentially raise price and bromine, will be great.

Yes, let me take the GAM injunction. GAM and Talison operate right there together. They have the Tantalum mines, I think, John, isn't that right? And Talison is operated from years. There's historically been some back and forth between the two companies. There's been discussions in the past. This is just an escalation of that. It's really kind of business as usual and we feel very confident in Talison's position as do our partners and we are united in that we will vigorously defend this and it won't have a material impact on the plans that we have for Talison going forward. With that, bromine question, I'll turn that over to Rafael.

So to give you perspective on bromine. From a market perspective as you would ask, what does that look like in going into 2018, end of 2017, we still see flame retardant growth in the low single digits, that's been driven by server demand, really the automation of automobiles, the Internet of Things. So that's been a positive. So it continues the trend from last year to this year. We would expect that over the next several years to continue on flame retardants. If you'll remember that we're very much electronics-oriented in our flame retardants business and some exposure to the construction market. Bromine supply in China remains tight. Lower production in China, prices have remained fairly good. They dipped down in Q2, but have come back up. And I think that the piece of uncertainty for us and of 2017 and 2018 is really on completion fluids. So that's what's going into drilling markets and oil field. Rig counts are low, we do benefit from having geographic diversity in our manufacturing sites. We're the only producer with a site in the Middle East and in the United States. So we're able to counterbalance trends in that area. But overall, I think bromine remains strong. We'll have mid- to high single-digit EBITDA growth this year doing a lot on our own productivity and efficiency improvements. That's gone very well so far this year and we'd expect that to contribute into next year. Just real quick on pricing. You asked a question about price. While we're always looking for opportunities to capture value. Some markets will be up. We've been able to capture some additional price in flame retardants, but we do see cost pressure continuing in the completion fluids market going forward. But they seem to net out this year and where there is an opportunity, we'll certainly look to capture those.

Your next question comes from the line of Lawrence Alexander from Jefferies. Please go ahead.

This is Nick Sucera on for Laurence. So I just have a quick question in catalyst, how do you see the set up for FCC and HPC for 2018, should be think about it, about a mid-single-digit cadence from this year?

This is Silvio. Can you repeat that question, please?

Sure. So how do we see the set-up for FCC in HPC catalyst in 2018? Should we think about it on a mid-single digit [Indiscernible] year?

Yes, and this is Luke. Let me take that one. It's a little too early to talk about 2018. What we've said, I think in the past, is we expect to see low to mid-single-digit kind of growth and right now, what I would do is given where oil prices are and that the impact can have on HPC I think it's probably toward the lower to mid single-digit, that would be below 5%. So that's how I would look at it right now. Haven't seen the AOP roll up yet, but that will be my anticipation.

Okay, and maybe just an updated view on taxes and cash taxes this year and next.

Scott?

Yes, cash taxes. As I mentioned, we paid a significant amount of cash taxes in the second quarter, so $255 million related to the Chemetall sale and the gain on that sale, that was as scheduled. And as we highlighted in prior calls, ongoing cash taxes remain in that mid-teen type of level, right where it's been the past several years, so right on tract. So no other surprises and no other large transactions coming through this year.

And your next question comes from the line of Jim Sheehan of SunTrust. Please go ahead.

When I think back to 2016, I recall you raising your guidance based on some concurrency tailwinds you were seeing -- looks like currency is going to be another benefit here going forward in the second half. Are you incorporating a currency tailwind into your current outlook? Or why wouldn't you have [Indiscernible] considering what the dollar has been doing?

Yes, so far we obviously, watched the euro continue to strengthen as well as some other currencies, but primarily, euro for us. As you look at our range, we anticipated that the euro could strengthen. It's certainly not something that we bank on, not being FX traders at all. But at the end of the day, it's certainly in our range. So if the euro were to stay at the high end of where it is today, you should expect our guidance to be at the higher end of the range versus where we are at the midpoint. So but let's see how the year ends up because it certainly could go back the other direction between now and year-end. So right now, it's certainly looked at as part of what are, in our range.

Great. And on Lithium margins, the 40% range, I guess, is a pretty wide range to think about. How should we think about these margins progressing in 2018, given that your La Negra 2 will be filled up and your spending for La Negra 3 shouldn't have really have started yet. So does that imply your margins expanding in 2018?

Yes, I think there's a whole lot of give and takes in that. So what we've always said is that we expect margins to maintain in that 40% range, maybe a little bit higher, 1 quarter. But if we get a mix of customers, maybe a little bit lower than other customer, maybe a little bit lower than other customers. And that's what I continue to model it. I wouldn't get margin creeping there. We've got additional cost that we'll have next year, and so because we'll have more exploration work. We'll have more work that will hit the P&L with regard to the early work on those new resources that we're bringing in and then we'll have the higher volume to offset that. So when we say kind of in that range of 40%, we mean that for the long term.

And our next question comes from the line of Vincent Andrews for Morgan Stanley.

Just on the exploration costs, can you just dimentionalize for us roughly, what the impact to margins is? And then also help me or remind me, I guess that you can't CapEx it or treat it as CapEx, because it's hypothetical at this point, the projects. But what's the trigger that allows that to become CapEx rather than an expense?

Yes, Jim, or Vince, such a good question. As you look at first half versus second half from the resource spending, I'm expecting that the margin degradation is somewhere in, I don't know, the 4 percentage point range is what I'm expecting from those resource explorations. The accounting for this is obviously, tied into the mining industry. And generally what will happen is you're expensing the cost of exploration until you get to the point of having a proven and probable reserve. That there is an accounting definition around that as well, a mining definition or actual engineering definition. And after that, it's basically the value added spend that goes into it. So it will not be at 100% of what we spend that gets capitalized but only a portion of that. So as we get closer to actually developing those mines in the resources, we'll have a better sense of exactly what we'll need to spend in each side whether it's expense or capital.

Just as a follow-up. The reduction CapEx for the year, I assume that's just that timing issue and probably would just flow into 2018? Nothing's changed but that's you think the projects are going to cost?

That's exactly right. It's really just the timing of when we're receiving equipment. But actually, more importantly, in the adjustment that we've made, it's the payment terms that we've actually been able to secure are actually a bit longer than we normally have. So those cash dollars will actually go out early in 2018 versus what we originally thought in 2017.

Your next question comes from the line of Chris Kapsch from Aegis Capital.

Just a slightly more nuance follow-up on the sequential pricing commentary. The mix of customers that you're referring to that leads to down pricing in the second half versus what you saw in the second quarter. Is this a function of just strategic customers hitting volume rebate thresholds? Or is it -- does it have to do with the mix of customers that whereas maybe more significant customers are getting, with pricing, are getting a more disproportionate amount of the volumes in tonnage?

This is John. It has to do really with the latter. Certain customers are ramping up at a faster rate than others, and it's just that. And our long-term contracts have that ramp built into them. And so when you look at what our obligations are to serve and based on their pricing levels, we can calculate what the average selling price is expected to be going forward into Q3 and Q4. So it's really just the demand profile of our contracted customers.

And if I could just follow up on that. Can you -- I know it's early to talk about 2018, but since these are contracted customers, maybe you can just extrapolate what the thinking is on pricing looking to 2018 based on those contracts and seeing which customers, I guess, are ramping more quickly and doing better than others. And then also along those lines, you commented you're more engaged with OEMs, not just the supply chain customers. At this juncture, do feel good about your strategic choices in terms of customers based on the winners and maybe those that aren't doing as well, as the EV market develops further?

First off, I said earlier, we feel really good about the customer base that we've formed long-term partnerships and long-term supply arrangements with, I mean these are the leaders in the industry. So we're going to work really hard to make sure that they're as successful as they can be. Second part, just on pricing, keep in mind, our long term agreements have pricing flexibility built into them. As Luke said earlier, it's a little bit early to start talking about what does pricing look like in 2018, but our long-term agreements do give us pricing flexibility going forward.

Thank you for your questions, ladies and gentlemen, and your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you for joining in, and have a very good day.