Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter and Full Year 2019 Albemarle Corporation Earnings Conference Call. At this time all participants' lines are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Dave Ryan, Vice President Corporate Strategy, Investor Relations. Sir, you may begin.

Thank you and welcome to Albemarle's fourth quarter and full year 2019 earnings conference call. Our earnings were released after the close of the market yesterday and you'll find our press release, earnings presentation and non-GAAP reconciliations posted on our website under the Investors section at www.albemarle.com. Joining me on the call today are Luke Kissam, Chief Executive Officer; Scott Tozier, Chief Financial Officer. We also have Raphael Crawford, President, Catalysts; Netha Johnson, President, Bromine Specialties; and Eric Norris, President, Lithium who will participate in the Q&A portion of the call. As a reminder, some of the statements made during this conference call about our outlook, expected company performance, production volumes and commitments 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 some of our comments today refer to financial measures that are not prepared in accordance with GAAP. A GAAP reconciliation can be found in our earnings 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.

Thanks, Dave. And good morning, everybody. On today's call, I will provide a recap of our 2019 strategic accomplishments and address the 2020 milestones that will be focused on to ensure we deliver on our vision. Scott will give you an update on the financials, our cost savings program and our full year 2020 guidance. Despite a challenging back half of 2019, we grew fourth quarter and full year revenues adjusted EBITDA and adjusted earnings per share year over year. That reflects our ability to address a dynamic market and to deliver solid results across our businesses. In addition, we achieved and adjusted EBITDA for the cooperation margin of 29%. 2019 was another strong step toward our long-term vision. As you can see, on slide six of our earnings presentation, we made significant process on a number of strategic milestones. Importantly, we made significant improvements in our safety program. Lithium reduced its injury rate by 50% from 2018. Catalyst achieved its lowest recordable injury rate in four years. And Bromine surpassed two years with no lost time injuries. Our OSHA injury rate in 2019 puts us in the top quartile of our peers. 2019 marked our 25th consecutive year of dividend increases. And we are now included in the select group of companies that comprise the S&P 500 dividend aristocrats index. We demonstrated our commitment to return cash to shareholders through increasing annualized dividend from $0.10 in 1994 to $1.47 in 2019. That's a 22% CAGR and we will continue that commitment well into the future. In 2019, we also conducted a materiality assessment to identify sustainability topics that support the execution of our strategy and ensure Albemarle maintains a strong financial position in a responsible manner for decades to come. As you can see from page eight of the…

Thanks, Luke. And good morning everyone. Albemarle generated unadjusted US GAAP net income of $90 million during the fourth quarter, bringing full year 2019 net income to $533 million, compared to $694 million in 2018. Increased charges for the MARBL acquisition during 2019 were a factor. However, 2018 benefited from $170 million gain on the sale of the polyolefins and components business, creating a difficult comparison. Full year 2019 adjusted earnings were $6.04 per diluted share an increase of $0.63 or 12% over the prior year on a 2018 pro forma basis. Our businesses delivered about $0.58 per share of that growth. 2019 also benefited from a favorable tax rate and from our 2018 share repurchase program. The gains were partially offset by currency impacts, higher depreciation in Lithium and increased corporate expense. Net cash from operations was $719 million in 2019, an increase of just over 30% versus the prior year, driven by the strength of the businesses, a reduction in Lithium working capital and improved working capital across the rest of the company. Capital expenditures in total ended 2019 at $852 million after approximately $90 million in expenditures shifted into 2020 based on invoice timing. As Luke mentioned, all our major growth projects remain on track, and we will continue to update you on their progress throughout the year. In November 2019, we closed the note offerings on the equivalent of about $1.6 billion which we used to pay the MARBL joint venture cash payment and restructured the short end of our maturity curve. As a result of the bond offerings, we are able to reduce our annual average interest costs by 70 basis points to 2.7% and get our investment grade ratings reaffirmed by all three agencies. We closed 2019 with a net debt to EBITDA right…

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.

Thank you. [Operator Instructions] And our first question comes from Bob Koort from Goldman Sachs. Your line is open.

Thanks very much. Luke, I wanted to ask about the contracting approach. I guess you characterized there is a onetime concession in 2020. Can you talk about maybe why you took that avenue as opposed to maybe just repricing every year? And then secondly, I think you talked about range, which would seem to suggest again a trend towards hydroxide but maybe there's been some more news about LFP and some other cathode types gaining some momentum. Can you just talk about how you see that developing over the next couple of years? Thanks.

Yeah, I'll take the first one. And I'll turn it over to Eric to talk a little bit about the hydroxide versus carbonate. And I'm assuming you're talking about the LFP, I'm thinking about a long range plan here, the LFP that Tesla announced with [indiscernible]. So I think the idea on the contract is that there's a situation that is occurring today that we want to address. But we believe that that dynamic will change over the next three to four years. That means a long-term contract. So it doesn't make any sense for us to reset that contract for five or six years when we think we've got a short term disconnect here between supply and demand. So we thought it was in our best interest to address the concerns that the customers had today, yet keep the overall structure of those contracts where they are. Now, that's not to say long term we might not see modifications of our plan of the contracts. But this is why you have a long-term contract. You set those prices. We've got a short-term issue. We address it short term. And then it goes back to the way the contract was and we have to renegotiate in 2021. We'll do the same thing again. So that's why Bob, we took that approach as opposed to just set -- it doesn't do us any good to set the price when the market's low. I mean, that doesn't make any sense at all. So we were trying to preserve the integrity of those agreements while adjusting to the marketplace for the short time for that short window that we see that there's an issue. With that. I'll turn it over to Eric to talk a little bit about your question on the LFP.

So hey, Bob, it's Eric here. With regard to LFP or lithium iron phosphate and cathode. As you may know, the China market has used that as a workhorse for a variety of applications for some years now. And that supply chain is well developed in China. As you I think, also know we've talked about the development of high nickel chemistries, which would shift from carbonate which is used in iron phosphate predominantly to hydroxide for high nickel, that tends to be a range driven technology get high energy density to provide higher driving ranges. And that's a phenomenon that appears to be most prominent outside of China, with large established global automotive OEMs, and also Tesla. What Tesla's announced recently is the adoption it appears from the press releases of working with iron phosphate to provide a compromise of reduced range for a lower cost. That market we view being a China market today. We still believe in the US and in Europe, and for that matter, other developed countries like Japan that range is an important consideration for the adoption rates we're seeing. But the reason we've talked about the value we have as a player, both carbonate and hydroxide is that we can play in both opportunities. I think the Chinese subsidy changes or the reduction of subsidy changes as maybe strengthen the movement to LFP because it helps. It's not giving an incentive to move to higher range. And I think the characteristics of a Chinese consumer support, potentially a lower range, lower cost vehicle, and that's the market that I think Tesla sees.

Yes, this is Luke. Just one other thing. If you go back and look to our Investor Day presentation we did in December, we were still talking about carbonate production doubling between now and 2025, going from about 195, to about 410# and hydroxide going from 70 to 525. So, we believe carbonate is going to continue to grow. We think there's going to be a higher growth in hydroxide, but we do have the flexibility to go either way. There seems to be some scraping on the phones, I'm not quite sure what that is, but operator can you check on that please? And we'll go to the next question.

Thank you. Our next question comes from PJ Juvekar from Citi. Your line is open. Please check if your line is on mute.

The one-year price concessions you talked about is mid-teens. What happens after that? We go back to the old price [technical difficulty] from current levels? Just in terms of timing these negotiations happened before the coronavirus hit or was it after coronavirus?

So, it's a one-year amendment. So in 2021, it go back to the original agreements and if we have to negotiate from there in some instances we will. But you go back to the original agreement. The discussions took place before and during the coronavirus.

Right. And just one quick question on Bromine. You mentioned that, you're seeing some -- there could be some pricing impact in second half, because of increased supply. Can you just sort of elaborate on that?

Yes, I'm going to let Netha handle that, please.

If you look at the import data of people who are importing bromine into China, you can see from the data very clearly that there's more supply going in to China than what we have last year. So, we expect that trend to continue and we'll see that supply increase into that market, which will put some pressure on pricing.

Thank you.

Thank you. Our next question comes from John Roberts from UBS. Your line is open.

Thank you and Luke, I know you have at least one more quarterly call coming but good luck with your treatments and thank you for your service. And could I ask, do you have any covenant issues if you don't get the divestments off? Okay.

Scott, now will be okay. We're monitoring that carefully, but given our outlook and given even lower risk or higher risk type of scenario with coronavirus, will be okay.

Okay. And then there's been a lot of news recently about stationary storage. Are we reaching an inflection point where that could actually start to become material?

John, this is Eric. So, I would reference the Investor Day presentation, when we talked about the demand that's there. It's still a small part of the demand picture. It's growing rapidly. That said, I see the same news you see about being continued push towards these sorts of installations. So, we're watching it closely. But we still don't view that as being quite the mover for our strategy and driving the capacity growth that we see and the volume contracts we have with our customers. It doesn't look -- it's still EVs that really drives that equation for us.

Thank you.

Thank you. Our next question comes from Joel Jackson from BMO Capital Markets. Your line is open.

Hi. Good morning. So for my two questions first one thank you for the update on how coronavirus may be impacting your business. When you set your guidance here for 2020, what did you assume were the impacts from coronavirus in the first half year, second half year? I understand all the uncertainties are especially around OEMs and auto sales in China. Thanks.

Yeah. So I think Joel, that's the big point is that it is really difficult to know exactly how this is going to play out. Every day there's a new data point out there in terms of, is it getting worse, is it getting better? China's trying to get back to work and how long that's going to take. So it's difficult to know. I think as you look at our first half, there's certainly a component of coronavirus that's built into that. So particularly in the first quarter with the expectation of EBITDA overall being down between 20% and 25%, part of that's coronavirus, part of that's inventory adjustments happening within the Lithium business. So, as we get out further in the year, we'll just have to continue to adjust and keep you updated.

But suffice it to say that what we're looking at coronavirus is it is a delay. It is causing the first half to be weaker. We were already talking about a weaker first half to begin with. It's making it weaker. But we're not projecting now for it to have an impact on the full year.

Okay. So just my second question was first can be a follow up. So then it sounds like what you're saying is impacting first month of the year and it sounds like you're expecting then to all come back to in the second half of the year. And then my second question would be, inventory situation right now for feed stock and for the chemicals. How's it looking right now, both for Albemarle and for the industry? And what are you seeing in terms of closures or curtailments for some of the spodumene players, some of the conversion plants in China? Thanks.

Well, you are talking specifically about Lithium or across our portfolio?

I'm talking about for both Albemarle and Lithium industry for both feedstock, spodumene also for the technical things.

So to date we have not seen an input on the raw materials for us. We've been able to secure the raw materials that we need to run in the first quarter. As we referenced on our calls, we've had lower run rates in China than we had anticipated for our Lithium. But it hadn't been an issue to date of getting raw materials in our other businesses. We have seen some in -- if you listen to the calls and I know you have, you seen a number of chemical industries, companies talking about the ability to get raw materials. But we're pretty well okay for that from a raw material standpoint right now. We don't see that as an issue from where we are in the timeframes they're talking about on the coronavirus. I do think one of the issues that we don't know about is, as -- if you look at the automotive OEM, some of them are not running today, but some of the batteries are running today, both inside and outside of China. So what remains to be seen is for the full year are the automotive OEMs going to run fast enough to soak up the inventory levels in that Lithium that we would expect over the year or is there going to be a ripple effect later in the year which would put our full year kind of some downward pressure on that. We've got contracted volumes, so we don't expect it to be a significant risk. But that's one of the things that we're going to really keep our eyes on is what is a real impact, not only on our products but on our supply chains, and particularly in Bromine and in Lithium as these end product OEMs either ramp up or ramp down during the course of the year. That's the biggest unknown issue that we'll face. And we're not -- we don't sell to the -- we're not a tier one supplier. We're further back in the chain. So that causes a ripple effect to be even more.

What do you think of the inventories for spodumene carbon and hydroxide right now in the industry? Thanks.

Hey, Joel its Eric. Overall, we would say that we're about six month's inventory across the supply chain. And so as you look at that, it's probably closer to four months for refined lithium. And the additional couple months is excess spodumene. The excess spodumene that's in inventory now, a great deal of it is not economic at current prices. Meaning it's not at 6%. It's not of the grade to be able to cost effectively be converted at current spot prices. So, it's -- that is what we'll watch very carefully this year, right? We expect demand growth of 50,000 tons, so, it's going to be an overhang for the year. Supply growth as you referenced in your question has already been curtailed. We see very little supply growth year over year. It's going to be stocks and the drawdown of those stocks would be important to the stabilization. And we'll look for that over the next 12 months and give you updates as to what that we think that means for pricing later in the year as we approach 2021.

Thank you very much.

Thank you. Our next question comes from David Begleiter from Deutsche Bank. Your line is open.

Thank you. Good morning. Luke, you mentioned that one customer had not agreed to the, I guess, down 15% in Lithium. How large is that customer and what's the expectation for those negotiations?

So Dave, you know the answer to that question. I'm not going to get into a conversation about a specific customer. Our expectation obviously is we're going to meet and find a resolution that meets that customer needs and meets our expectations. And if not our position is we've got a validly enforceable contract.

Understood. And on the non-tech, non-battery grade, technical grade lithium, what's your expectations for pricing in 2020 versus 2019?

For technical grade lithium?

Correct.

Yes. So, if you look at both carbonate and as I said on the call the technical grade carbonate will be down more than that mid-teens average that we talked about, as I said in our prepared remarks. It is down more than that.

I actually meant the non-battery grade lithium?

Oh, my apologies. I'll turn it over to Eric.

Yes. I think Luke said it, but let me summarize it. So, as Luke said, on the battery grade side, carbonate is probably down a little more than hydroxide. And on the technical grade side, all technical grade products are down bit more than battery. And so in Specialties mixed, very mixed. It's not as price sensitive an area although there are the input lithium -- there is input lithium materials in that business and it does have a mild effect on price. That would be the least affected.

Thank you.

Thank you. Our next question comes from Jim Sheehan from SunTrust Robinson Humphrey. Your line is open.

Thank you. In Catalyst, your outlook for flattish earnings in 2020. Can you describe what impact IMO 2020 regulation is having? And what is the underlying growth you're seeing in that business, excluding the IMO 2020 and also, what is your outlook for FCC pricing in 2020?

Hey, Jim. This is Raphael. So to give you a view I mean as Scott and Luke have indicated, we're expecting a fairly strong year on FCC Catalyst, and a slightly weaker year on HPC Catalyst. The reason for that, as explained in Investor Day is that HPC Catalyst is about change outs, and the change outs happened to be smaller in 2020 for distillates than they were in 2019. And that's an area of strength for our business. Overall, the industry will see IMO 2020 as a tailwind. For our business of higher diesel production to blend to be able to meet the sulfur specs is favorable. It might not be as favorable as it is for others because our business is weighted more towards distillate than it is towards resid. And resid is the areas that will benefit the most from IMO 2020. Again, it will be positive perhaps not as positive it could be for others. But we have a very strong business in distillates and in specialty Catalysts for hydro processing and the trends in the industry are favorable overall for the long term in that business. As you -- it's a little bit too early on FCC pricing. We did have positive pricing in 2019. It's too early to say in 2020. Crack spreads are a little narrower than they have been. So that that could have an impact. But our business is about value creation for our customers. We continue to do that and where we can get value pricing for that value creation we will.

Thank you. And under $50 million in cost savings for 2020. Could you just discuss how the savings will be realized by segment?

Yes, Jim, this is Scott. So as you look at this kind of a split out, roughly you're going to get about two thirds of that savings in Lithium business; about 10% in Catalyst and Bromine; and the remainder is going to be in the corporate functions is how it will play out in 2020.

Thank you very much.

Thank you. Our next question comes from Jeff Zekauskas from JP Morgan. Your line is open.

Thank you very much. You said that you thought that global lithium demand would grow about 50,000 tons in 2020. How fast do you think it grew in 2019? And wouldn't 50,000 tons imply about a million incremental electric vehicles for 2020 or how big is the component tied to electric vehicles? And how do you calculate it?

Hey, Jeff. This is Eric. Yes, the growth of 50,000 tons was a similar growth rate last year. The issue last year was we had a lot of excess supply and a lot of excess inventory. So a lot of our customers didn't buy. They didn't actually buy a lot of -- a lot of people in the market didn't buy that volume. They actually drew down their inventories instead. But their real consumption was in that same order of magnitude. For us looking forward then yeah it does imply a growth and a significant growth in electric vehicles. Our view on 2019 was that it was -- production was about 2.6 million electric vehicles. And we're looking for that number to be close to -- go up to 3.5 million to 4 million. So it's over a million electric vehicles in growth. Most of that's going to be driven out of the European producers, automotive producers.

Okay. And then in your financials, your equity income in the Lithium business drops sequentially from maybe roughly $30 million to $15 million. What's going on in Talison such that the equity income is dropping so sharply? And how do you see that for 2020?

Yeah, Jeff. I think you're referring to the fourth quarter. And the equity income for Talison and in the Lithium business is largely driven by the volume that's been taken by both Tianqi or Albemarle out of that that joint venture. And so we did see reduced shipments primarily going to Tianqi in the fourth quarter. Expecting that will be roughly flat as we go into -- roughly flat to slightly down as we go into 2020 overall.

So that’s flat to down from the fourth quarter or year-over-year versus the previous year?

Year-over-year.

Okay, good. Thank you so much.

Thank you. Our next question comes from Mike Harrison from Seaport Global Securities. Your line is open.

Hi, good morning. Moving on Slide 7 the Assess box there. Can you give us an update on the opportunities that you're seeing to acquire Lithium conversion assets, as opposed to building additional conversion capacity? Maybe how you're thinking about that buy versus build strategy today versus how you might have been looking at it a few quarters ago?

Yeah, it's the matter of pricing. I think the reduced price that we've seen of carbonate in the marketplace and the inability to get some of the spodumene rock as the raw material supply has brought some prices down to a level that it appears to us you could have a lower capital base. And if you build your own then you would be in the market a lot sooner. So for us, it all comes down to is there a price at which when you look at our all in cost of acquiring, modifying where necessary to meet HSE standpoints and converting from either carbonate hydroxide or what have you? What's that return on capital? How we lay that out versus what's the return on capital and timing for building? It's a mathematical equation for us. And you got to negotiate it and be able to close it as well. So that that's how we're looking at it. And there are opportunities out there because of our tolling relationships we're familiar with many. So we are in active evaluations.

All right. And then in terms of Lithium customer mix, you mentioned that that was a negative in the fourth quarter. Can you talk about how that plays out during 2020. Is that something -- is mixed something that maybe improves as we get later in the year? Maybe we get some additional hydroxides demand growth.

Well, hey, Michael, it's Eric, I would say it's, we have -- 2019 had a lot of moving parts to it. In 2020 we're going to have an equal amount of growth in production out of La Negra and out of Xinyu for hydroxide. And at the same time, a big reduction in toll volumes we sell into the marketplace. As Luke said, Scott said, we contract out 9% of our business. We endeavor each year to try to keep the mix fairly constant. We don't have swings from period-to-period. The simple fact of the matter is, is that we tend to produce a lot more carbonate at the end of the year than beginning. So there's sometimes some product mix factors. And some customer mix factors. I don't know if it will probably be similar throughout the year. But again, we try to manage it, so it doesn't cause these swings as best we can. But I think it'll be fairly similar.

Thanks very much.

Thank you. Our next question comes from Colin Rusch from Oppenheimer. Your line is open.

Thanks so much, guys. Can you talk about what's going on with your customers in terms of potential consolidation and how you think about that, not just in 2020, but as you move into 2021, 2022, with some of the production schedules that you're getting from the OEMs?

If you're looking at, you're talking I'm assuming about Lithium and the battery producers. What we said is that we've seen the decisions moving from the cathode producers to the battery producers and then some instance all the way to the OEM. So we've seen that as those big battery producers making the purchasing decisions and the volume decisions. And then allocating some of that volume from in-house production and then some of it to be directed towards certain of the cathode producer. So we are seeing that, that will in effect consolidate the decision makers about these purchasing decisions and who you’re contracting with down to a lower number. I think long term as you look across the spectrum, you're going to see a consolidation even further of battery producers. You're going to have -- the Koreans and Chinese and the Japanese are going to consolidate into the bigger producers. That's the typical of what you seen in other industries and I do not think this is going to be any different.

Okay. And then, we're seeing OEMs with various challenges in terms of getting into production and ramping up production on EVs it's a different manufacturing process. Can you talk a little bit about the CapEx plans in your ability to modulate the spend this year and early next year as you see those schedules adjust, because obviously there's a fair amount of variability there?

Yes. So I think on carbonate, if you look at carbonate, we've got La Negra III and IV. That's going to come online by the first quarter of 2021 and will be commissioned. Most of that spending is already done. So it's kind of hard to do anything there on La Negra. I'm sorry on further at La Negra, we have the ability, we have the plans where if necessary, we could expand that. But it would be kind of the 2 to 3-year process at La Negra for a carbonate plant. If you are looking at hydroxide, from a Kemerton standpoint. We believe, we're on track for the second half of 2021. For start-up, it will be difficult to rattle that back much, because of the cost we've got in there. And anything else we build is going to be a lower capital intensity. So that's why we're looking a build versus buy in an area like China. You can probably get it done in China from start to finish in about 2 years. We have teams in our engineering working right now on taking the plans and the designs that we have and building a lower capital intensity and a lower operating costs, looking at what our opportunities are there. So the next asset that we build from a hydroxide conversion standpoint. We will build more efficiently, more cost effectively and operate it with lower cost than the ones we have today. We got to continually drive that down. In addition to that, I know there you can take -- as you know you take carbonate and convert it to lithium hydroxide. We also have teams looking at what is the most cost-effective way. If the market goes that way, what is the most cost-effective way? Would we build that in close to our carbonate facilities? Will we convert that -- convert the carbonate somewhere else? What is the best way to do that? And the idea of modularizing that is a concept that we're looking at. But we need to be prepared to pull the trigger on that if and when the market calls for that. Again, that would take you probably, if you're building it in China is probably 50% of the capital and probably a year of the timing to get it built, to get it permitted and get it up and running.

Excellent. Thanks, guys.

Thank you. And that does conclude our question-and-answer session for today's conference. And I would now like to turn the call back over to Dave Ryan for any closing remarks.

Just like to thank everybody for their participation today and for your questions. And as always, we appreciate your interest. This concludes Albemarle's fourth quarter earnings call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program you may all disconnect. Everyone have a wonderful day.