Good day, ladies and gentlemen, and welcome to the Albemarle Corporation Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference Mr. Dave Ryan, Vice President of Corporate Strategy and Investor Relations. You may begin.

Thank you, and welcome to Albemarle’s second quarter 2019 earnings conference call. Our earnings were released after the close of the market yesterday and you will find our press release, earnings presentation and non-GAAP reconciliations posted on our website under the Investors section at www.albemarle.com. Joining me on the call today are Luke Kissam, Chief Executive Officer; Scott Tozier, Chief Financial Officer; Raphael Crawford, President, Catalysts; Netha Johnson, President, Bromine Specialties; and Eric Norris, President, Lithium. As a reminder, some of the statements made during this conference call about our outlook, expected company performance, planned joint ventures as well as lithium production capacity end 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 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. Now, I will turn the call over to Luke.

Hey. Thanks, Dave. Good morning, everybody, and thanks for joining us on the call today. In the second quarter, excluding currency impacts, excuse me, Albemarle grew revenue and adjusted EBITDA by 6% and adjusted diluted EPS by 20%, compared to the second quarter of 2018. Volume and pricing contributed to the year-over-year growth in lithium and bromine, while pricing was up year-over-year in catalysts. Scott will go into more detail on our quarterly performance and outlook for the rest of the year in a minute. I want to focus my comments on why we are adjusting our lithium capital expansion plans to significantly reduce capital expenditures in the medium-term. The potential impact of EV subsidy changes in China, possible shifts in cathode chemistry, excess inventory held in spots along the supply chain and the current oversupply of lithium carbonate in the market has caused some caution in the energy storage value chain. All of this has put downward pressure on price, and we expect to see this pressure on carbonate pricing continue in the near-term, but we also expect supply demand dynamics to tighten in 2020. We have always stated that we would add production capacity to meet demand. As you can see on Page 8 of our earnings presentation, Albemarle has decided to delay all work related to planning, engineering and construction of approximately 125,000 metric tons of previously announced additional conversion capacity. We anticipate that these changes will reduce our capital expenditures by approximately $1.5 billion over the next five years and allow Albemarle to become free cash flow positive in 2021. As part of this strategic pivot, we recently announced amendments to the transaction with MRL. The joint venture will now be owned 60% by Albemarle and 40% by MRL. Albemarle will pay $820 million in cash…

Thanks, Luke, and good morning, everyone. For the second quarter, we reported unadjusted U.S. GAAP net income of $154 million, or $1.45 diluted earnings per share. We reported adjusted earnings per share of $1.55, an increase of about $0.19, or 14% compared to second quarter 2018, or 20% excluding currency effects. Growth and bromine, lithium and fine chemistry services resulted in an increase of about $0.19. Earnings per share also benefited $0.06 from our 2018 share repurchase programs and $0.10 from a more favorable effective tax rate than was the case in 2018. These gains were partially offset by unfavorable currency exchange of about $0.08 and unfavorable results in the Catalysts business compared to second quarter 2018, which was a particularly strong quarter for Catalysts. Now I’ll cover a few financial details. Based on current geographic sales and production mix year-to-date and our expectations for the rest of 2019, we currently expect our full-year effective tax rate to range between 20% and 22%, excluding special items, non-operating pension and OPEB items. Corporate costs in the second quarter were $39 million, an increase over the same period in 2018, primarily driven by an increase in unfavorable currency losses of approximately $8 million. Full-year 2019 corporate costs are now expected to range from $130 million to $140 million. For the first-half of the year, net cash from operations was $199 million, down $25 million from last year, impacted by higher cash taxes and increased working capital to support increased sales in lithium in the second-half of 2019. Capital expenditures during the first-half were $416 million, and we now expect full-year CapEx for 2019 to range between $900 million and $1 billion. Expenditures for the Kemerton project remain on track. However, some expenditures that were planned for 2020 are now expected to occur…

Thanks, Scott. Before we get to Q&A, I want to call your attention to our press release of August 6, announcing that we will host an Investor Day in New York City on the morning of December 12, 2019. Additional details will be forthcoming, but we look forward to the opportunity to provide a detailed update on Albemarle and the strategy and priorities for the company and each of our global business units. Operator, we are now ready to open the lines for Q&A. But before doing so, I’d like to remind everyone to please limit questions to two per person to ensure that all participants have a chance to ask questions, then feel free to get back into the queue for follow-ups if time allows. Please proceed.

[Operator Instructions] Our first question comes from Josh Spector with UBS. Your line is now open.

Hey, guys, can you hear me?

Yes, we can hear you.

Okay, great. Yes, sorry, it’s a patchy connection. Just a question on CapEx kind of over the next five years. So I understand you took down the number, and I – so I wonder, if demand does materialize kind of over the next two or three years, either at or ahead of your expectations, do you see some of that CapEx coming back into your planning? So I guess, I’m thinking, if you’re adding new capacity in the mid-2020 timeframe, you probably need to start building or spending on that in early 2020, and kind of how do you balance that versus what you said on the release earlier?

Yes, great question. If you look – what you see is, we are building out Kemerton, which would add another 50,000 met tons of lithium hydroxide. And then in the chart, we show that we are assuming we will build out another 50,000 metric tons with our partner, MRL, once that deal closes. So that will reduce the capital that we will have to expand for that next 50,000 metric ton of capacity. We’re essentially sharing that capacity with our partner. So we believe that when we look at the demand that it would be out further past that 2021 timeframe, where we would have to commit any more capital. So we’re very comfortable with the free cash flow number that we say and being free cash flow positive in 2021. And then as our EBITDA grows, we will selectively buy or build additional capacity if the market demands it at a lower capital intensity than what we we’re seeing today.

Okay, great. Thanks. And just on – so first, Mineral Resources and the spodumene availability, how does the change in the JV impact any of the plans there to the extent you can provide any color on what’s going to happen with the capacity, which you aren’t going to be allocating to Kemerton at the start?

Yes. Upon the closing of that transaction, we’ll work with MRL to determine the best approach on that spodumene. But it certainly appears to us today that the market is adequately supplied with spodumene today.

Okay, great. Thanks.

Our next question comes from David Begleiter with Deutsche Bank. Your line is now open.

Thank you, Luke. Just following up on that situation, the additional Talison spodumene, will that be processed or how that be allocated going forward?

Under the Talison agreements, we have the rights to 50% of the off-take and our partner, Tianqi, has the rights to 50% of that off-take. So that won’t change in anyway going forward. David, I’m not quite sure I understand the question.

With the reduced capacity in Kemerton, will you be processing any of the Talison spodumene in the 50,000 tons of initial Kemerton capacity?

No, that’ll be used with Wodgina rock, we would expect to do that. But we certainly have flexibility to allow us in the future to – with these resources to do whatever it makes the most sense from a financial perspective.

Very good. And just on a second-half lithium EBITDA guidance, Luke, it is a big ramp up, you do have Xinyu coming in. But any other drivers for the big second-half versus first-half in terms of lithium EBITDA guidance range?

David, this is Eric. So it is, as you depicted, it’s two things. It’s the Xinyu II ramp up now that we are – have six months of experience under our belt and are ramping towards full rates, have four major customers qualified, that can really drive that plant, there’s another six plus that will probably qualify or in the process of qualifying, but we have sufficient now to fill that plant in the second-half of this year. And then the other factor is the ramp up of – similarly of La Negra II in Chile and the volumes we expect there. And, of course, the underlying factor is strong demand growth in the EV markets, which we – our demand outlook continues to be as it was three months ago for strong growth going forward.

Thank you very much.

Our next question comes from Arun Viswanathan with RBC Capital Markets. Your line is now open.

Great, thanks. Good morning. Just trying to, I guess, understand your comments, put them in context in the prepared remarks. So, obviously, there – we’re going through a little bit of a period of oversupply in carbonate and spodumene, and you’ve halted CapEx, partly as a result. So are we supposed to, I guess, interpret that some of your decisions to not bring as much tonnage to market would help kind of stabilize the market? And do you think, we would see some similar responses from your peers in the industry? Thanks.

Yes. I have no way of knowing what our peers in the industry will do. First of all, what we’re looking at is, we have always told our stakeholders that we were going to invest capital to meet our contracted customers’ demand, where we could get an attractive return on invested capital. And our stakeholders have been clear. When I talk to shareholders, the number one thing I hear is, when are you going to be free cash flow positive. It’s critical that we adjust our capital to allow us to meet our stakeholders’ demand, while at the same time driving towards a positive free cash flow. And we put a stake in the ground that we’re going to be free cash flow positive in 2021. We believe that will create more value for our stakeholders and we will have the financial flexibility if the market conditions call for it to build or buy additional conversion capacity to meet any increased needs in the market.

Okay, thanks for that. And as a follow-up, just curious on your customers’ acceptance of the long-term contracts. Are you still seeing increased contracting? You mentioned 10 years previous – on previous calls? Are you still able to extend those agreements? And if so, what’s kind of the magnitude or the level of acceptance that you’re seeing out there? Thanks.

Arun, hello, this is Eric Norris. We ended 2018 with largely all of those major contracts extended out in – somewhere in the three to five-year range, some five-plus, and that is what is we’re operating against today. And with those contracts are holding, they are all largely outside of China, those types of contracts and we continue to move forward against them.

Thanks. I’ll turn it over.

Our next question comes from Jerry Zekauskas [sic] [Jeffrey Zekauskas] with JPMorgan. Your line is now open.

Thanks very much. You said that over a five-year period, you would drop your CapEx by $1.5 billion. So what was your five-year CapEx expectation, and what is it now?

Scott, you have that number off the top of your head?

I don’t have it off the top of my head.

We’ll get back to you with that number. I don’t have it off the top of my head. What we did was we went in and looked exactly what we were taking it down. I can tell you by – we look at 2019 being right around $1 billion, 2020 been right around $1 billion, and then 2021 drop into around $500 million or so or something like that. Am I right, Scott?

Yes, the new is around $500 million, but it was up around $800 million or so or something like that.

Yes. So it’s about $300 million to $400 million drop, so in that one year alone. So we’ll get that number for you. I’m sorry, I don’t have it off the top of my head, Jeff.

Okay. Okay. And then just to my follow-up. Originally, once your Wave 2 capacity was done, I think, it would have had something like 350,000 or 340,000 tons of LCE. And what you’re now going to do is you’re not going to build 125,000 tons of LCE. So basically, what you’ve done is, you’ve curtailed your longer-term capacity to the mid-decade by about 35%, 35% or 36%. So that must correspond to with diminished expectation for either lithium growth rates overall, or lithium profitability overall. Can you give us a sense…

Yes.

…of why your curtailments are so large and how you got there?

Yes, Jeff, certainly can. First of all, we will still have the capability out in the years to either buy or build additional capacity, if that’s met. I don’t – you should not view this anyway as seen that we don’t believe demand is still going to be where it is. We’re still bullish on demand. We’re at, I think, 1 million metric tons in that range by 2025 and we still see that based on all the data that we have coming in. So it’s not demand. From an actual dollar perspective, I think, it’s too soon to say whether there’s going to be a reduction in EBITDA or not, when the supply and demand is got to have an impact, you – one would think over time on price. What this will do at a 1 million metric tons is, it will reduce our market share, unless we build more over time. So while it is not ondemand, understand how you do the math on the EBITDA in earnings. But I’m not ready to concede that point yet. If you’ll – we’re just going to need to let see how this plays out. But I want to be clear, we’re going to meet the commitments that we have to our customers. We’re going to be free cash flow positive in 2021. As we go out through the years and our EBITDA and our volumes do grow, you’ll continue to see us generate significant free cash flow and will have the balance sheet and the flexibility to invest either in buying or building additional conversion capacity if it means it makes sense to our stakeholders. And that’s probably once we say go, if we’re building it, is probably 24 to 36 months.

Okay, great. Thanks so much, Luke.

Thanks for the questions.

Our next question comes from PJ Juvekar with Citi. Your line is now open.

Yes. Hi, good morning. Luke, now that you’ve delayed a big chunk of your hydroxide capacity. You are going to be more exposed to spodumene concentrate from both Wodgina and from Talison for longer period of time. Why is that a better economic decision when you know that there’s going to be excess rock capacity in the market?

Well, you assume I’m selling it and I’m not saying today, we’re going to sell it. So we’re not going to be more exposed to spodumene rock. We’re not going to sell it, if there’s not a market for.

Okay. So you’re saying you won’t operate the mines if there is no demand for it.

I’m saying at we will discuss – after the deal closes, we will discuss with MRL what the best approach is to take on the spodumene rock from that mine.

Okay. And then most of your cancelled capacity is in Australia. Is Australia not competitive, either because of higher labor, or building cost or whatever, or is it because demand is lower and you’re just matching it to demand, it has nothing to do with Australia?

It doesn’t have anything to do with Australia. Although I will say and it’s clear, if you’re going to build an asset in China versus you’re going to build an asset in Australia, you’ve got a much higher capital intensity in Australia, be the same thing if you build something in the U.S., you’ve got a higher capital intensity than you do in China. But what we’re delaying is simply what we had on the drawing board, and we’re taking that capacity out and you ought not read anything more than that into it.

Okay. Thank you.

Our next question comes from Robert Koort with Goldman Sachs. Your line is now open.

Thank you. Good morning. Maybe a question for Eric. I’m trying to reconcile Albemarle’s unique supply capability. I think you guys have talked in the past about customers maybe narrowing or tightening their specifications and your ability to supply there given legacy supply arrangements, qualifications and whatnot. And, Luke, you’re suggesting maybe you could seed some share. So are the Tier 2 and Tier 3 converters beginning to be able to meet those specifications, or are they narrowing the distance to and performance capabilities that you have? And then secondly, are we seeing those goalposts narrowing by the customer base? Are there specs getting tighter or tougher requiring more out of their suppliers that are lithium suppliers?

Hi, it’s Eric. So I would say that this is all about EV growth, right, for our strategy. First of all, that may be obvious, but an important point, because where we see that going is largely a high nickel base, increasingly, and where we see that needing therefore is hydroxide – lithium hydroxide. When you talk about the types of quality specifications they are tightening, and you talk about the ability – the supply pace to meet them, it’s a handful or less of companies that can do that. So I wouldn’t – I would say that that is – today, that is not the non-integrated producers. It is the integrated major producers in the marketplace. And so our strategy is one simply around creating flexibility that you’re hearing on this conference call for growth, while continuing to meet needs, not any statement around what we see competitively in this high-growth market, or their continued need for more specialized or high-quality products.

Yes, Bob, this is Luke. As a leader in the lithium business, we feel like we need to put a stake in the ground. And that’s what we’re doing. We’re pivoting our strategy to address the major concern we hear from our shareholders, which is, when are you going to be free cash flow positive. We’re going to be free cash flow positive in 2021, and we’re still going to be able to meet the commitments we have to our customers. And we will also have the flexibility in the future using the world’s best resources to build or buy additional conversion capacity. So don’t hear me – please don’t hear me say that I’m willing to cede share or I’m happy with a lower EBITDA, or I’m not looking for earnings growth. I don’t hear any of that. What you ought to hear is, we’re going to be very responsible in how we are managing our cash to drive shareholder value and meet our customers’ demand.

If I could follow-up, Luke, that seems to be an ongoing anxiety in the market about spot prices and relevance to your portfolio. I think, you guys have obviously demonstrated consistently your pricing is not in anyway correlated to that spot market. But I’m curious as you think about renewing contracts, I assume some roll in, some roll off, and you’re writing a new contract today. Does that still have a price uplift from where it may have been written the expiring contracts, or how do you sort of characterize the contract pricing dynamic as you look forward from here?

Yes. I’m going to let Eric talk about that. But I think, you’ve got to separate it between what you’re seeing today in carbonate and what you’re seeing today in a dry side from a battery grade standpoint, okay? So Eric?

Yes. So it is – is it different by the two? Yes. I mean, first of all, in our mix of business, as I said in the previous question, we are not seeing a lot of or we don’t have a lot of contracts expiring within the next – this year or next year. We have a large number, a large volume committed on the hydroxide side of that, that is where we see the growth, certainly for EVs. But it’s also where we see considerable tightness from a supply standpoint, both today and into the future. And so while there might be excess in carbonate, carbonate is also a product that is not the preferred product line going forward for EVs. And as a result, you will see pricing pressure there. And any contract that renews, you’ll see more there on carbonate than you would on hydroxide. And so that – that’s really the dynamic we’re facing right now.

I mean, Bob, that’s – the question is, as these contracts enter, we’ve got to look to see if steady price, a set price on that minimum volume, the way it makes sense, or do we go to a band of pricing? How are we going to do this in this evolving market? And that’s something that there is a significant amount of focus on, not only internally with Albemarle, but our discussion with our major customers, the major battery suppliers, and some automotive OEMs, because you’re – what we’re seeing today is that buying decision is moving further to the right of that supply chain. And we are engaged in those discussions at the right levels and we’re going to hopefully reach an arrangement that makes sense for us and for our stakeholders and allows our customers to also meet their demands that they have to the OEM. That’s our goal.

Great. Thanks for the help.

Our next question comes from Aleksey Yefremov with Numora. Your line is now open.

Good morning. This is Matt Skowronski on for Aleksey. Given the price volatility that you’ve seen so far this year, are your lithium contracts being executed as expected, or were there any change in terms of mid-year?

So – hi, Matt, Eric Norris, again. So we see a mix of things, right? The vast majority of our businesses is battery grade. The vast majority of that is located outside of China. And that’s where our contracts sweet spot has been for years and where it continues to be where we renewed a lot of our contracts last year for the duration of a number of years going forward. So those – all those contracts are performing as expected. We have some technical grade products that are sold under more shorter-term non-traditional or not traditional for these battery grade contracts. They are seeing pressure and Scott referenced that we will see some of that in the second-half of this year. The volume that we have in China that, which is strategic to maintain a position within that supply chain, is also not a traditional sort of contract. It’s been shorter-term, some expired this year. And in some cases we’re able to reach a price agreement with some, and others we weren’t willing to go, where they felt they wanted them to go. And so we walked away from some contracts that we’ve kept a foothold in China. So it really would be China, which is less than 10% of our volume and tech grade, which is another depending on how you count it 10% to 20% of our volume. That’s where there might be some pressure, but in the vast majority of our business, and certainly, our battery grade portion of the market is growing. Those contracts are performing.

Thank you. That’s helpful. And then what are your early kind of views on demand for lithium in China in July and August so far? Has there been any change or deterioration from June levels?

Again, it’s Eric here. It’s a question that I ask my team and I think it’s really way too early to know. You asked in the spirit of, I think, the fact that the new subsidies went into effect as of July 1. Very often there’s a run up before any subsidy change of buying behavior. And so we don’t know what it’s going to mean going into July or August, where I could speculate one way or the other. The market for EVs remains robust, but subsidies do distort behavior. And so it’s possible that the July or August could be weak – weaker than they otherwise would be without the subsidy. On balance, though, we see a strong year for China going forward from a demand standpoint.

Thank you.

Our next question comes from Steven Byrne with Bank of America. Your line is now open.

Hi, good morning. This is actually Luke Washer on for Steve. So given your decision to reduce hydroxide capacity, could you provide some more detail on what you’re seeing on the demand side that’s changing your tone? Are you seeing a slowdown in optimism perhaps for the timing and shift to 811 and the NCA technology?

Hi, Luke, Eric, again. So as Luke said, first of all, there’s nothing that’s changing in the next two to three years, right? The capacity that we have opted to not pursue is in that three to five-year timeframe. And that same three to five-year timeframe will have certainly the resources and the cash, should the market warranted to go after that, that opportunity. So it’s putting the stake in the ground, as Luke referred to. In terms of now your question of demand. Demand is unchanged from what we thought three months ago from what we thought six months ago. It remains strong and it – and probably stronger than – for hydroxide than we would have expected maybe six months ago. So there continues to be that edging towards hydroxide that is supported by NCA chemistries and 811 chemistries. But I’ll reiterate what I said three months ago, we never expected 811 to be a big player in EVs in the next couple of years. There are technology and processing challenges yet for that technology to be safely used in a large-scale format in a battery for an EV. It is being used experimentally in some – in China in some consumer goods products. It is being blended with a six to two to sort of, if you will, supplement the energy within that battery at a small level. But it is not – there are today, really no – we don’t see any 811 full EV batteries for some time yet. NCA continues to grow, is driven by a few automotive producers, in particular. And so that continues on. But again, going back to the original point, nothing has really changed in our demand view in the next couple of years or for that matter five years out.

Thanks. That’s helpful. And then on the La Negra III and IV, you expected to add 40,000 metric tons of carbonate to the market and now you’re delaying that project a bit. What do you believe the effective capacity of those increases will be now?

Yes. I think we always intended to bring that capacity on. As 2021 is when we would have mechanical completion in the first quarter, we have to have four to six months worth of qualification. So I wouldn’t expect much in in 2021. We always talk about bringing these units on third, third, third. So we’re confident we can still bring that on and we could probably have this Salar yield online and have the brine ready for – by 2023 when we need that last third of that project there. So I would look at it as 15,000, 15,000, 10,000 something like that something in that range.

Great. Thank you.

Our next question comes from Joel Jackson with BMO Capital Markets. Your line is now open.

Hi, good morning.

Hey.

Hey. You clearly said that being free cash flow positive in 2021 is a key thing for you when considering the changes in the JV with Min Res. And I understand the optionality, I guess, spodumene for you here. So maybe you could talk a little bit about the rationale about deciding just give over $1 billion of consideration for spodumene resource, where maybe in the future, you could go and get that resource later when you need it?

Yes. That’s a great question. They will run in an auction and it was going to get sold. If you go back to the very beginning of it, MRL was running a process. We were engaged in a process. It was a top tier asset. If you take Talison out of the equation, you take out Greenbushes, that is the best rock resource in the world. The – when you look at Wodgina, the size of that resource, the purity of that resource, and the skill that MRL brings to the table from a mining standpoint, and I believe from a capital execution standpoint, that can help us, it just made for a perfect fit. Ultimately, you’re going to need that volume. And we thought it was best that we had it, we saw it as a good asset. And now when we’ve restructured it, we have 60% of that joint venture. So that gives us some rise that we didn’t have in the past. So all in all, quality asset, we’re going to use that rock for Kemerton. We will also partner with MRL on our next installment of capital, which will further reduce our capital outlay and still allow us to meet our customer demand. So quality resource, quality people, ability to reduce our capital outlay and still have 100,000 met tons worth of lithium hydroxide coming on board, it all made sense to us from a return standpoint.

Thank you for that. A little more on the yield improvement program deferral. Is that just matching some of the conversations you’ve talked about earlier today? Is there anything else going on with the government on getting proper quota increase or maybe…

No, not – this is [Multiple Speakers]

…technology?

Yes. No, this is nothing involved with the government. Our quota system is fine. There have been no changes in any of the regulatory issues, no changes with any of our contracts. This is purely a decision where we saw an opportunity to delay the implementation of capital to allow us to get free cash flow positive more quickly than we were. So we decided that we were going to take the step to do that. Because when we calculate it, we believe we can still meet all the commitments we made to the carbonate customers that we have under contract. So it’s all about free cash flow has nothing to do with anyway. Our relations with the government in Chile are fine.

Thanks.

Our next question comes from Colin Rusch with Oppenheimer. Your line is now open.

Thanks so much. Can you tell us what you’re looking for from your customers or from the demand environment to think about reanimating these products? And then can you just update us in terms of your targeted return on capital? Are you looking at evolving that, or are looking for higher returns, as you see this market evolve and see the strategic moves play out a little bit more in advance?

We – for a return on invested capital, we still see for two times our weighted average cost of capital for return. That’s what that’s – and that’s always been the case and we continue to see that as our case. As what we’re looking for, for our customers at, if people are going to sell carbonate at the cash costs of that marginal producer, it doesn’t make sense for us to add new capacity and we won’t. We can because of our position in Chile, because of our cost position in Chile, we can still make very good margins at that level. But we don’t see the need to put new capacity in the ground. So it all comes down to what’s the pricing going to be, how’s that pricing going to be, how the contracts coming with the customers, what or how are those going to evolve over time, and those are all decisions that need to be made in the context of a company that needs to make a commitment to our stakeholders on free cash flow, which we’re doing.

Okay, great. And then just with the kind of changing trajectory here and the operating expenses, are you – is the organization right-size at this point, do you need to make any adjustments there?

Yes. I think as we look at – as we look out into 2020 and you start looking across our portfolio, we’ve been operating – bromine has grown almost double digits for three or four years in a row, that’s not happened before. And we can see some weakness in automotive, we can see some weakness in construction, as we talked about, we’ve been able to reallocate that bromine molecule to date at very successfully. So those continue to grow, but I don’t know how much longer that it’s practical to expect that business to grow at that. So we are undertaking in the second-half of the year of view of our overall cost in a way to try to reduce our overall cost and gain efficiencies going forward. And we’ll share more of that with you at our December Investor Day presentation.

Thanks so much, guys.

Our next question comes from Mike Harrison with Seaport Global Securities. Your line is now open.

Hi, good morning.

Hey.

Luke, as you commented several times about this build versus buy decision that you could have looking out a few years when it comes to conversion capacity. Does this reflect the view that you think there’s going to be excess conversion capacity available when you might need it?

Yes. I think there’s excess conversion capacity available to date and there’s more coming online. So I think that it’s going to provide perhaps an opportunity for people that are interested in conversion assets. So as an integrated player with the best resources in the world, we believe that that could be an opportunity for us. And we are always mindful of making sure we’re getting the best return on the dollars we invest in that regard.

And then, wanted to actually ask you a question about Catalysts. Can you just maybe give a little bit of color on the changes in customer mix that you mentioned and the startup delays, maybe what’s causing them and how those play out in the second-half?

Hey, Mike, this is Raphael. So in the second quarter, the mix in the second quarter was different, namely, we had a very strong second quarter in hydroprocessing catalyst in 2018, that is a refill, rebid – rebed business. So sometimes, those projects or those refills shift from one quarter to the next. And it just so happened that last year, we were very strong in hydroprocessing. With regard to FCC, as Scott had mentioned in his commentary, there are some delays in some projects that we have won, it is not a matter of if, but when. So we have – in 2019 – coming into 2019, we shed some low-priced, low-margin business to make room for those orders. Some of those have now been delayed. So that gives us a little bit of a gap in 2019. But we fully expect that we will have that business in 2020 and beyond. So fundamentally, FCC catalyst and catalyst overall in the refining space is very strong for Albemarle.

All right. Thanks very much.

Our next question comes from Chrish Kapsch with Loop Capital Markets. Your line is now open.

Yes, good morning. Thanks. Question probably for Eric, maybe, Luke. In your formal comments, you’d pointed to expectation that you’d see tighter supply demand in the industry in 2020. Just wondering if that’s just based on sort of top down math, are you seeing anything specifically from a bottoms up standpoint, either customer order patterns, inventory levels, anything that, any acceleration in demand that is pointing to that? If you could just characterize that, that would be appreciated?

Hey, Chris, sure. It’s Eric here. So a couple of factors. One, demand is, as we said on prior questions, is continues to be strong, and we see it based on electric vehicle launches, commitments from EV producers to battery producers, we see that demand will continue to step up again in 2020 to a greater degree. We’ll give more specific guidance, but it’s consistent with our demand model that we articulated of 50,000 to 60,000 tons of this year and 1 million by 2025. So it’s a natural step up there. So that’s on the demand side. On the supply side, we are seeing a couple of projects on the resource side be delayed, take longer to come to market and/or under current economics, we believe may – maybe challenge to operate. And then finally, inventory, which has been a big factor in the marketplace this year, we believe, hard to quantify, a lot of it is in China. Within China, that’s largely been depleted, we think, from the supply chain, on the carbonate hydroxide side and what’s being in hands, it’s not outside of China. There continues to be some excess rock in inventory outside of China and Australia – in Australia and it continues to be some excess salt in some of the battery producers’ hands outside of China. So maybe the balance of this year that would be drawn down. And when you put that formula together, we see a pretty tight 2020.

Thanks for that color. And then my follow-up is really to the expansion curtailments. And really, the question is that strategic pivot, juxtaposed against a couple of your slides you’ve used in prior investor presentations regarding your lithium hydroxide and lithium carbonate that you have under contract over the 2021 and 2025 period? The question is, like it looks like this decision doesn’t influence those metrics on 2020 intended production, but this is really all about not having visibility on longer-term commitments from customers out to 2025. So could you just – is that one way to think about – maybe characterize the decision against those slides? Thank you.

Yes. So we made commitments to people out through 2025 in some instances. And in all these scenarios, we’re able to meet those commitments with capacity that we’ve announced and that we have under construction today. And we know what the price is on those and we’re able to calculate the return based on what that capital is going to be. But we’ll be able to meet everything that is under contract today. What we’re doing now, again, is driving to a free cash flow positive in 2021, with the ability to flex up, if necessary, to build or buy additional capacity, if the market demands it and if we have customers that are prepared to enter into contracts with us for those volumes that we will be producing. But we I don’t think it makes a whole lot of sense for us to build a lot of capacity, if we’re not going to have contracts that we can place against those, or and it doesn’t have to be the exact same contracts we have today. We just need to know within the range what that returns going to be and we can make a intelligent economic decision about what that’ll be. So if you see our long-term agreements change a little bit, all these agreements are a little bit different. What we’re looking for is – not a guarantee, but a surety of a return based upon the capital we put in the ground. But we’re going to meet our commitments to our customers, we have enough. But this is a pivot to make sure that we’re also focusing on free cash flow for our stakeholders, not just a potential for customers to come.

Got it. Thank you.

Our next question comes from Dimitri Silverstein with Buckingham Research. Your line is now open.

[Multiple Speakers] How are you doing? Please go ahead.

Hello, can you hear now? All right.

Yes, we can hear you now, buddy.

Okay, great. Thanks. Thanks for taking my call. Quickly on the – you mentioned higher upfront payments that your vendors are requiring for the expanded capacity that you are undertaking. And that was one of the reasons that your CapEx is staying where it is. I’m just trying to understand sort of why? I mean, are they less – I mean, are they concerned about the rapid lithium expansion across the world by many players? I just want to make sure that you guys sort of serious about the – these longer-term orders?

No, Dimitri, this is Luke. It’s just a matter of the Australian market is heating up for construction. So you’re seeing a lot of activity in mine. You’re seeing a lot of activity in Australia, and they got a book of business that they – there is now, they’re kind of – they got a good market. I mean, they got a good seller’s market. And what they’re doing is, if you want to get in line for the time that we want to get in line in the shops, we had to pay more upfront to get that preferred space in line, so we could get it to the market when we said we would in that timeframe. So that’s all it is. And the cost didn’t – the overall cost didn’t change, it’s a matter of we have to pay a little bit more upfront sooner than we originally thought we would. That’s all it is. It’s just a market heat-up. It’s got nothing to do with Albemarle. It’s not – got nothing to do with lithium. In particular, it’s the construction market in Australia.

Gotcha. Okay, that’s helpful, Luke. And then just as my follow up question on volume growth that you saw in the second quarter in lithium. I think, you talked about 3% volume growth. I mean, it doesn’t sort of jive well with the market that’s growing 60% or whatever the EV megawatt market – battery market is growing at. Was this constrained in your capacity that prevented you from delivering a better volume number, or is there something else going on, and that’s going to go away in the second-half and you’re going to get to the growth that is more reflective of what the EV market is growing at?

Hey, Dimitri, this is Eric. So we’re selling everything we can make, right? We are ramping up Xinyu II that has natural limitations just on the ramp experience curve, and it has limitations on customer qualification. But I can tell you that both for that plant and for Chile, which was impacted in the first quarter by a rain event, everything we can make we can sell. Where we were limited in the first-half of the year on sales growth was opportunistic sales, that would be enabled by tolling of the spodumene capacity we have. That – those opportunistic sales are off contract by nature, given that they’re opportunistic. A lot of them given us half of the market in China is in China, all of them are in carbonate. And with the excess carbonate market with prices where they are in that $8 to $9 marginal cash cost range, we just – it doesn’t make sense economically for you to do that. So we pull back on that, we maximize the growth we can get from our internal assets. And what happens in the second-half of the year is, we get the full benefit of qualification at Xinyu II running to full ramp rates on Xinyu II, which is nameplate on that facility 20,000 tons. And the same on La Negra, both – the benefit of both units running at full tilt, as well as seasonally better brine. We have now opportunity to really recover from the headwinds we had from rains in the first quarter. And those are the factors that drive the comparison first to second-half.

Gotcha. So there was a little bit of capacity constraint that that’s going to resolve itself in the second-half of the year. That’s what I wanted to make sure. Okay, thank you.

At this time, I’m showing no further questions. I’d like to turn the call back over to Mr. Dave Ryan for any closing remarks.

We just wanted to thank, everyone, for your questions and participation in today’s conference. As always, we appreciate your interest. And this concludes Albemarle’s second quarter earnings call. Thank you.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.