Albemarle Corporation (ALB) Q1 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2021 Albemarle Corporation Earnings Conference Call [Operator Instructions]. I would now like to hand the conference over to your speaker host, Meredith Bandy, Vice President of Investor Relations and Sustainability. Please go ahead.

All right. Thank you, Olivia, and welcome to Albemarle's First Quarter Earnings Conference Call. Our earnings were released after the close of the market yesterday, and you'll find our press release, presentation and non-GAAP reconciliations posted to our Web site under the Investors section at albemarle.com. Joining me on the call today are Kent Masters, Chief Executive Officer; Scott Tozier, Chief Financial Officer; Raphael Crawford, President, Catalysts; Netha Johnson, President, Bromine Specialties; and Eric Norris, President, Lithium, are also available for Q&A. As a reminder, some of the statements made during this call, including our outlook, guidance, expected company performance and proposed divestitures and expansion projects, 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 and presentation 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 reconciliation of these measures to GAAP financial measures can be found in our earnings release and the appendix of our presentation, both of which are posted to our Web site. And with that, I'll turn the call over to Kent.

Okay. Thanks, Meredith. Good morning, and thanks to you all for joining us today. On today's call, I will highlight our recent accomplishments and discuss our strategy as it relates to accelerating growth and creating a more sustainable business. Scott will give us more detail on our results, outlook and capital allocation. This was another strong quarter for Albemarle with solid financial results. We generated net income of $96 million and adjusted EBITDA of $230 million, up 17% from last year. We benefited in part from several lithium customers that accelerated orders under long term agreements as well as favorable volume and customer mix in our bromine business. We continue to see strong market demand for lithium, especially from EVs. First quarter EV sales were up 135% versus last year, led by China. European and North American sales were also up significantly. All that said, remember that we are sold out in bromine and lithium. Therefore, we are maintaining our previously reported company guidance for the full year. Scott will provide additional detail on this in just a few minutes. We are advancing our growth plans with the progress being made at our Wave II lithium projects. These two projects, La Negra III, IV and Kemerton I, II, are expected to add volume beginning next year. As you are probably aware, during the first quarter, we successfully completed $1.5 billion equity offering and then subsequently reduced our debt. This enabled us to achieve two strategic goals. First, we are now well positioned to execute on our high return Wave III growth projects for lithium and bromine. And second, we have maintained our investment grade credit rating, which was recently upgraded to a BBB rating by S&P Global. I'm also proud to say that we have signed the UN Global Compact, joining the efforts of corporations and stakeholders worldwide to advance sustainability. On Slide 5, I want to update you on those two projects at La Negra and Kemerton, our two ongoing projects to increase lithium production from our world class resources. These conversion facilities are in the final stages of construction, and when complete, are expected to double our nameplate capacity to 175,000 metric tons per year. This added capacity will provide much needed volumes to support our customers' growth ambitions and will enhance our ability to drive further earnings expansion. Construction is on track for completion later this year. We are watching the Western Australia labor situation closely, but currently, we do not expect any impact to our schedule. Once complete, we move into final commissioning and customer qualification, which typically takes about six months. We expect to begin producing commercial volume from both projects in 2022. These two sites will complete our Wave II lithium projects and enable our team to focus on the execution of Wave III, which represents further 150,000 metric tons of conversion capacity. We expect to make investment decisions on the first projects from Wave III as early as the middle of this year. This includes a greenfield site in China and potentially the acquisition of a Chinese conversion plant. I would like to mention that the Chilean Nuclear Energy Commission, or CCEN, has confirmed that our resource and reserves report is in full compliance following the additional data we provided in January. We are committed to complying with our regulatory obligations around the world, and we are pleased to reach a satisfactory and collaborative resolution with CCEN. Finally, in bromine, we are accelerating our growth projects and expect to see the benefit of these projects beginning in 2022. I'll now turn the call over to Scott to review the first quarter results.

Thanks, Kent. I'll begin on Slide 6, and I'm happy to report on a strong start to the year. For the first quarter, we generated net sales of $829 million, a 12% increase from last year. This was driven by increased volumes across our three core businesses, as well as a favorable customer mix within our bromine unit. GAAP net income was $96 million. Adjusted EPS of $1.10 excludes the cost of early debt repayment that we incurred when we delevered in March following our equity raise. Our sales growth enabled us to generate adjusted EBITDA of $230 million, up 17% from last year, giving us an early start to meeting our guidance for the full year. Now turning to Slide 7 for a look at adjusted EBITDA by business. Adjusted EBITDA in total was up $34 million over last year, thanks to stronger lithium and bromine results and a foreign exchange tailwind. Lithium's adjusted EBITDA increased $30 million versus the prior year as some customers accelerated orders for battery grade carbonate and hydroxide into the first quarter. To meet this demand, we drew down lower cost inventories resulting in Q1 margin expansion. Average realized pricing was down 10% as expected due to lower carbonate and technical grade pricing. However, increased volumes more than offset the lower price. Market demand remains very strong but our plants are sold out, which limits our ability to increase volumes in 2021. Bromine's adjusted EBITDA grew by about $8 million compared to the first quarter of 2020, an increase of 9%. The strong quarter was due primarily to higher sales volumes across the product portfolio. Pricing was also higher, in large part related to a favorable customer mix. The US Gulf Coast winter storm reduced production and increased cost by about $6 million in the quarter. And just like lithium, we drew down inventory in Q1 and our bromine plants are sold out for the year, making it difficult to offset the production losses from the storm. We expect to see the impact from lost production in the Q2 and Q3 time frame. Catalysts adjusted EBITDA declined $23 million, primarily due to the US Gulf Coast winter storm, which impacted production in Bayport and Pasadena, Texas. These sites incurred increased electric and natural gas costs, production downtime and repair expenses that totaled $26 million. Our Q1 catalyst results from last year included $12 million of income that was later corrected as an out of period adjustment, which further complicates the year-over-year comparison for this quarter. Without this and the storm impact, our Catalyst EBITDA would have been up 31%. Our corporate and other category adjusted EBITDA increased by $4 million, primarily due to lower corporate costs. Slide 8 highlights the company's financial strength. With the proceeds from our $1.5 billion equity offering in February, we repaid debt. By deleveraging in the short term instead of holding the proceeds as cash, we were able to reduce interest expense and create the debt capacity that will allow us to accelerate our growth for the lithium and bromine businesses, funding investments as they are approved. You can see how we are executing on our commitment to grow our dividend and maintain our investment grade credit rating. We increased our dividend for the 27th consecutive year, which speaks to our ongoing success and a track record of shareholder returns, which we are proud to maintain. On Slide 9, we provide a look at our guidance for the year. I would like to note that our company guidance for the year includes a full year of Fine Chemistry Services results. In February, we entered into an agreement to sell the FCS business for proceeds of approximately $570 million. The transaction is expected to close in the second quarter of 2021. We've also given a breakout of second half guidance for FCS for modeling purposes. As we've discussed, our lithium and bromine businesses outperformed expectations for the quarter, primarily driven by accelerated customer orders and a favorable customer mix. We do not expect to see the same upside over the next three quarters, mostly because our lithium and bromine businesses are effectively sold out and we don't have excess inventory to meet increased demand. Timing of orders can shift from quarter-to-quarter but the outlook for full year volumes is mostly unchanged, except for modest increases in lithium. We continue to monitor the chip shortage at automotive manufacturers for impacts to lithium and bromine. And so far, we've not seen an impact. This may be due to our position in the supply chain. In May, IHS revised their forecast for 2021 EV production down 3% from prior forecasts related to microchip shortages and supply chain issues. EV production is still though expected to be up 70% year-over-year. We are maintaining our company guidance for the full year and continue to expect net sales to be in the $3.2 billion to $3.3 billion range, which is slightly higher than last year. The demand we saw during the first quarter and sold out volumes speak to the importance of investing in our lithium and bromine businesses to add to our future earnings potential. Our 2021 guidance for adjusted EBITDA remains between $810 million and $860 million. We continue to expect CapEx to be around $850 million to $950 million for the year as we complete our Wave II lithium projects and begin focusing our efforts on Wave III. Net cash from operations are also tracking on plan. As the year progresses, we expect higher inventories as we start to commission the two new lithium plants and higher cash taxes. Expectations for adjusted diluted EPS of $3.25 to $3.65 are on track, reflecting higher taxes, depreciation and increased share count and lower interest expense. While our total company guidance has not changed, the outlook for our lithium and catalyst businesses has, as shown on Slide 10. Our outlook for the lithium business has improved due to higher lithium volumes driven by plant productivity improvements, and we have added some tolling of lithium carbonate. We expect lithium prices to improve sequentially through the remainder of the year due to tightening market conditions. Overall, average realized pricing for the year will be flat compared to last year. We continue to expect higher costs in 2021 related to project startups, but this will be partially offset by efficiency improvements. In total, lithium EBITDA is now expected to be up high single digits on a percentage basis. The outlook for our catalyst business is lower than we had originally planned, offsetting the upside we expect from lithium. On a year-over-year basis, total catalyst results were projected to be down about 30% to 40%. This is primarily due to the impact of the US Gulf Coast winter storm and delays in customer FCC units. Our outlook for the bromine business has not changed. While we had a very strong first quarter, we do not expect the favorable customer mix to continue in future quarters and we will not be able to make up the lost production in the first quarter. In addition, raw material costs are moving higher. We continue to expect results to be modestly higher than last year due to continued economic recovery and improvements in certain end markets, including electronics and building and construction, along with ongoing cost savings and improved pricing. Finally, as to our quarterly progression for the full company, we expect Q2 to have modest growth in EBITDA and the second half to have a modest decline. We continue to expect that 2022 results will benefit from accelerated growth plans in bromine, recovery in catalysts and the initial lithium sales from La Negra III, IV and Kemerton I and II. And with that, I'll hand it back to Kent.

Thanks, Scott. As I mentioned earlier, in April, we signed the UN Global Compact, a voluntary leadership platform for the development, implementation and disclosure of responsible business practices. In addition to supporting the UNGC principles, we are aligning our sustainability framework to the UN Sustainable Development Goals, the largest corporate sustainability initiative in the world. Over the past year, we've increased ESG disclosure, published updated sustainability policies and made public commitments to advance sustainability. Sustainability is, by its nature, a long term commitment. But I'm pleased to report that we are beginning to see the benefits of our efforts. For example, Albemarle was recently recognized and added to the S&P 500 ESG Index. You can expect more details on these and other sustainability related initiatives in our 2020 Annual Sustainability Report due to be issued in June. Now on Slide 12, I'd like to reiterate our corporate strategy. We have started 2021 with a strong quarter and continue to make progress on our four strategic pillars. We are completing our Wave II projects and plan for those to deliver commercial volumes and generate sales in 2022. We are making plans to execute on our Wave III lithium projects as well as expand our bromine resources to align with growing customer demand. And we are laser focused on operational discipline to drive maximum productivity across our businesses. We continue to expect around $75 million of productivity improvements this year and we will continuously work to improve efficiencies within our operations. With a revitalized balance sheet, we are well positioned to invest in high return growth, maintain our investment grade credit rating and support our dividend. Finally, sustainability remains a top priority and key component of our value proposition to our customers, and we are dedicated to exploring opportunities such as the UN Sustainable Development Goals to help us implement these efforts. With that, I'd like to open the call for questions, and we'll hand over to Olivia.

[Operator Instructions] And our first question coming from the line of David Deckelbaum with Cowen.

I wanted to follow up on your questions around potentially looking at acquiring a Chinese hydroxide conversion facility. Can you just expand upon that a bit and just help us understand what sort of metrics are you using to weigh acquisition right now? We've seen a lot of your peers looking to expand conversion capacity in the Western Hemisphere. How should we think about the scale of this and what sort of things you'd be looking for before making an acquisition like that?

So I'll make a few comments, and then Eric can give you some detail if I don't get there. But we've looked at China very much, we're very familiar with the operators there, and we've been kind of looking at these opportunities for some time. We've made acquisitions in the past so we feel pretty comfortable with this, with the assets that are on the ground and what we would need to do to move them to our standards. So we did that at Xinyu. We bought an asset and we've expanded, and we consider that to be very successful. So we like the model. We're comfortable. We've got people on the ground in China. So we're able to do good due diligence. We’d be able to staff a new facility with -- partially from people from our existing plants. So we feel very comfortable with the strategy. And then I think it seemed like part of your question was about people looking at different geographies. And we're looking at different geographies as well, but we still see growth in Asia as being a big part of the growth coming forward. And ultimately, we'll be moving in other locations around the world. But we still see growth in Asia, which is why we're looking at this as a strategy.

And then just perhaps on my follow-up, you talked about just pricing this quarter, obviously, driven by increased volumes of greater mix of carbonate and industrial grade. As we think about growth coming online from Wave II, when do you think we should think -- as we think about pricing with contract rolling, at what point do we see battery grade making up a greater component of the overall mix? Is that really like a late 2023 dynamic just given sort of delays around qualification, or how should we think about that as you guys increase capacity into the market?

So I think that means a big piece is already battery-grade material and both carbonate and hydroxide. But I'll let Eric get into the details, maybe around timing as they layer in.

So the volume -- just to build on what Kent said, 60% of our business today is energy storage, and that's split between carbonate and hydroxide relatively evenly as we sit here today. With the expansions coming on, we have -- it will still be split because we have a large expansion in Kemerton on hydroxide and similarly one in La Negra on carbonate. So that's where our growth is. As we bring that capacity on, that's where the volume will go. So that 60% of sales will grow larger on a volume basis. Now in terms of pricing, that's an evolution that we're going through now in our contracts. We've had, as you may know, concessions we made to fixed price contracts we've done in the past. And while that's given us security of supply to run our plants and strong margins at the bottom of the cycle, we're now evolving those pricing mechanisms to give us more exposure to the market as it recovers. And that will benefit this volume as well, bring on volume under new terms that will allow us to benefit from a rising market.

Our next question coming from the line of Joe Jackson with BMO Capital Markets.

This is Robin on for Joel. You talked about being limited on lithium inventories to meet your own demand. How much offline conversion in spodumene capacity do you see reramping in the industry this year to meet total industry demand? And how quickly do you see industry inventories rebuilding, or maybe you can talk about overall tightness and what that could mean for pricing?

I think the short answer to your question is while mines are restarting, there are still some that went into the bankruptcy phase in Australia that still haven't come back. It takes some time, particularly in Western Australia right now given the labor crisis and the rising iron ore prices, to mobilize both equipment and labor personnel to restart a plant. So what we foresee going forward, given the strong demand that's starting to develop -- has been under development in China and is now ramping around the world, that it's going to remain short in China. That spodumene is going to be a constraint. That is why you're seeing carbonate prices rise so quickly in China, where there is a high demand, in particular, for carbonate for some of the recovering industries in China post pandemic, but also because of the growth of LFP chemistry, specifically in China. And inventories are a bare minimum in the Chinese market and have come back to normal levels worldwide, which is why we were in a position during the first quarter to otherwise thought like as in prior quarters would not be a strong quarter, it was quite the opposite. We had to pull volumes forward into that to drive the growth that you saw. We're limited in what we can do, but we'll benefit greatly when we bring on that new capacity and be well positioned into 2022.

And just a quick follow up. So I assume the rationale to reinstate tolling is to meet that market tightness. So is that strategy temporary then? Maybe you can discuss the amount of volume from tolling and what the margin impact from that is? Because I think the previous long term target for lithium margins was closer to 40%. Obviously, things are trending sub 35 right now. Maybe you can just elaborate on those points.

Tolling has always been a bridging strategy for us, and it's only ever done in carbonate because we feel that there's adequate carbonate capacity out there that can meet the standards for that product, and hydroxide is something we view as different and more proprietary. The bridging strategy, in this case, is to get us revamped in relationships with Chinese customers that we've supplied in the past, such that when we bring on La Negra III and IV next year, we have a ready customer base to take that on. So I would think of it as ad hoc or bridging. It's not a sustained strategy. It is something -- I can't get into the details of volumes per se. But it is to, as you point out, not as lucrative, not as high a margin of business for us because we're paying somebody to convert for us. So it moves us to the right on the cost curve, whereas we're normally on the left side, you're moving more towards the right, so that impacts margins. But it does provide incremental EBITDA, and it does set us up for a successful ramp next year.

And our next question coming from the line of David Begleiter with Deutsche Bank.

First, in Lithium, what was the benefit of the acceleration of customer orders into Q1 on EBITDA?

David, I'm going to have -- let me just take a quick look. But I think it's meaningful in terms of the volume. So it's probably in the $30 million range, something like that.

Another way of seeing that, David, is that you may have had -- I don't know your model, but you may have had to get to guidance. You may have had a much stronger second half than first half. And because of the robust demand, whatever we make, we're selling. There's not very little going to inventory. So the quarters are going to be a lot more even or similar this year than they were last year for the Lithium business.

And Eric, just on La Negra and Kemerton following the commissioning qualification processes, how should we think about volume ramp up for these two new assets?

So we've said those will ramp up over a period of time. So we first turn it on, nothing to getting us to expect to get to a full ramp of say, 18 months and some of that depends on demand and customers. So over that first year per line, probably 40% or 50% of capacity in the first 12 months, that's probably the best way to think about it and some of that will depend on demand but we think -- we expect demand to be there.

Our next question is coming from the line of Jeff Zekauskas with JPMorgan.

When you bring on your new capacity in 2022, '23 in lithium, how might you compare the pricing structures that will be negotiated versus the current pricing structures that you have today? That is, how has the market changed and how has Albemarle changed in the way that you charge your customers, or contemplate charging your customers?

So we've been talking about kind of the shift in our commercial strategy in lithium for some time. We kind of intentionally delayed the conversion from kind of a strict long term fixed price contract. So one that is more indicative of the market, that moves more with the market, and that we'd have different types of customers we contract slightly different ways. We delayed the conversion of that a little bit because the market was so far down. We didn't think it was the right time to negotiate at the bottom of the market, so we held off on that. So that strategy hasn't changed and the new volume doesn't change that. So I think we're moving into that dynamic as we go through the next 12 months, or the contracts we'll be negotiating will be on that new basis. So portfolio of customers with kind of customers who really want security of supply will be more of a fixed price, but it will still move with the markets and then contract with other people that look more like market prices, not spot prices contracted, but prices that move with the market. And that's what we've been talking about for the, I would say, almost the last year. And we did delay the implementation intentionally because we felt like we didn't want to negotiate at the bottom of the market.

Our next question coming from the line of Colin Rusch with Oppenheimer.

It's Joe on for Colin. Can you speak a little bit to how challenging hiring is at this point as you get ready to bring capacity on early next year?

So I mean there were two locations. So Chile and Kemerton, so Western Australia, and a different dynamic because we've got a significant operation in Chile already. So it's not such a challenge in that location, abigger issue in Chile at the moment is COVID. But we're able to bring people on there and we've been bringing them on, training them with existing staff. And Australia is a little different because it's a true greenfield facility, but we've been hiring. We’re happy with the plan. We’ve been doing well. In the labor market, it's a little different dynamic in the construction market than it is in the chemical operating market. So we've been able to hire according to our plans and ramp up staff that would operate the facility according to our plan. So that hasn't impacted us. What's been more of a challenge is in the construction labor market and getting the staff that we need to complete construction. And we were actually trying to accelerate it but we're not able to do that, we're just kind of treading water with our original plan.

And then switching gears a little bit. Beyond pricing, can you speak to any other elements of your long term contracts that you're working to improve given what seems like a better negotiating position?

Well, I mean I guess it's several elements, but it's really about the guaranteed supply, the profile of that supply. Pricing is a big part of that and liabilities. Eric, you have…

I would say that the big -- the evolution of the dialog, where we feel we have a lot of value to offer now is on location of supply as well as the localization. And we've referenced in our expansion strategies down the road how we can play to that. And for many of our customers that's a down the road consideration because the vast majority of the business today is still Asia based. And then the other is sustainability. Sustainability has been key. As OEMs become more involved and have thought through their value proposition, which is based on lower CO2 and other sustainable factors, they want suppliers who are differentiated in that regard. And what we are doing, what Kent described in the call has real value. We talk in these calls very much about what it means to shareholders of being part of the S&P 500 ESG Index. For me, it's about driving a value proposition with our customers and getting paid for it. So that's become a big part of our proposition as well.

Our next question coming from the line of Vincent Andrews with Morgan Stanley.

This is Angel on for Vincent. Just curious on your Wave III, what are the key gating factors that you kind of see for both capacity and lithium and bromine before you actually announce FID?

You said the key?

The key gating factors or what are the primary, I guess, checkpoints or things that you want to see before you actually make the FID decision?

So I mean we're looking at projects, identifying them, designing in the plans for that. So I guess it's anything you would expect to see in a normal investment program. So we're making sure that we've got designs, the process chemistry that we like. We've aligned up -- we have the resources that's not an issue but a lot of it's about location, about permitting, workforce. I mean all the that you would see that we would line up. But we're relatively advanced at looking at that. And then obviously, when you get to that decision point, the returns are a big deal.

And then switching, I guess, to bromine a little bit. You talked about the favorable mix, customer, I guess, not repeating going forward. One, I guess, could you give us a little bit more color on that and why it won't repeat. And then as we think about kind of the second half or kind of 2Q and beyond, should we expect higher pricing in bromine to kind of offset both the shorter supply because of lost production and because of Uri and also the raw materials headwind that you mentioned?

I would start, and maybe Netha can add some additional color. But in the first quarter, the bromine market overall was relatively short. So it gave us some nice opportunities in the spot market to take advantage of that and get some upside. We're not expecting that kind of condition to continue through the rest of the year. But maybe, Netha, you have more specifics?

Just as Scott described, we had a chance to go sell some volume out of inventory to our noncontracted customers that increased demand based on market recovery, that's a unique opportunity and at very good pricing. We don't expect that to continue through the second half of the year. But just like other industrial businesses, as you look forward to the second part of your question, freight and raw materials are going up and they'll do the same for us and that will impact our business in Q2 and beyond for the rest of the year.

Our next question coming from the line of Matthew DeYoe with Bank of America.

Can we talk a little bit about the puts and takes on Lithium EBITDA as we move sequentially through the year? I kind of understand the transition from 1Q to 2Q. But it seems like you're guiding for price to improve sequentially as we move [here] but also costs are up. So perhaps like how much cost do you expect to incur with these new plant start ups and when would that roll off?

So in the second half, it’s up something in the range of $10 million to $15 million of incremental costs from those plants. It all depends on the timing of what those come in. But that's the kind of range that we're looking at ultimately. So as you look at the puts and takes, obviously, there's a limit in terms of our ability to supply additional volume. We're getting some out of tolling. Of course, that comes at a lower margin ultimately for us. So that's a bit of a drag from a margin perspective as well.

And then on catalysts, you made a comment that you don't expect to get back to pre COVID levels before late 2022, 2023. So can you just walk through your assumptions there? Is that just all miles driven or is there something else that's happening?

Ultimately, it's coming from our customers and what our customers are telling them. But maybe, Raphael, you can provide some additional color as to the specific parts of the market that are slower than others.

So I think there's a few different pieces that come into play. I mean one of them is miles driven is a big driver of recovery in refining utilization. I think we're already starting to see an improvement in refining utilization, and you'll see that throughout the year and into next year, that's going to have -- will have a big effect on FCC usage at the refineries and our business, about 60% of our business is FCC, so we'll see that recovery. On the CFT or HPC business, that business is timed with turnarounds at refineries. A lot of that's been pushed out until 2022, and that's when we'll start to see an uptick in that business. The portfolio we have in our business is very much geared towards high performance. When refiners are running near capacity, that's really when the value of our products kicks in because we help them maximize on yield, maximize on the throughput through their assets. So as it recovers, we'll start to see that leverage effect in the return of our business.

And so just right now, you're seeing mix just mixing down across some of the catalyst because people don't need their utilization through the refiners…

Yes, I think that's a fair statement. We see a mix impact and a volume impact, but we expect both of those to reverse as the world recovers.

Our next question coming from the line of Arun Viswanathan with RBC Capital Markets.

I'm just curious what you're seeing, I guess, in China. There's been obviously some robust recovery in lithium markets in there as well as in Europe. Do you expect that to kind of continue into next year? Is there an environment or scenario where you see prices kind of getting back to say the $12,000 to $14,000 per ton range? Maybe you can just comment on what your outlook for pricing is for hydroxide.

It's hard to comment too much on price. I mean those are the -- that's the magic question. But the market is clearly moving in that direction. And you're seeing the demand growth, so the demand growth we expect to continue. I mean, what we're seeing is it's extraordinary, but it may not be 135%, but it's going to be 70%, 80% for the year around EV levels, and lithium is going to follow that. So demand growth is going to be there. And pricing has moved very quickly in China because that's mostly a spot market, so it would move quicker. That hasn't translated into the contract market fully yet. So it has started to, we think, and we see that moving in that direction over time. It's hard to predict what's going to happen out into the future, but we see prices moving up. And that what's happening in the spot market will translate into the contract prices and that will be a positive for Albemarle.

And just as a quick follow-up then. A couple of years ago, you were discussing contracts with term lengths of maybe seven, 10 years at times. Have you seen your customers kind of come back to you now with requests to kind of elongate their contracts or -- yes, maybe you can just comment on the customer environment from a contracting perspective.

Let me start, Eric can add some detail to that. But I would say, I mean, our philosophy hasn't really changed. We've adjusted a bit on the kind of the nature. I would say we've evolved in our contracting structure, but it's really still the same philosophy. And I think our customers are kind of coming around to that way of thinking a bit. And I think it's changing because some of it's with OEMs now. Several years ago, we were talking to cathode makers, then battery makers and now it's OEMs and still talking across all three of those areas, but the OEMs are getting more involved, and they have a longer-term view. So I don't know about 10 year contracts, but three year, five year, maybe seven on the longest term. But those are the kind of -- that's the nature of the contracts that we're discussing. I don't know anyone's pushing us further than that.

Our next question coming from the line of Aleksey Yefremov with KeyBanc.

This is Paul on for Aleksey. Could you update us on any lithium recycling initiatives currently so far?

Recycling is a key platform for us going forward from a growth standpoint, both because our customers who, as Kent just indicated, are increasingly OEMs value that as part of their partnership with us and because a good amount of the knowhow we have from processing lithium is going to be replicable in the streams that will come from a recycled process. We've got investments we've made and start ups are looking at making through some relationships we have. We've got technology initiatives underway with some business development activities underway to partner. We have one joint development agreement, which we’re currently doing with the customer. All these are all confidential at this stage, so I can't divulge names. But it's a pretty comprehensive effort and a critical one for our growth going forward. We view this as a future resource that we would like to play prominently in.

Our next question coming from the line of John Roberts from UBS.

This is Matt Skowronski on for John. Going off of Jeff's question earlier, you mentioned that you're restructuring some of your lithium contracts. And I believe on the last call, you mentioned the majority of these contracts will eventually have some sort of variable based pricing tied to an index. When do you expect the majority of your contracts be based on this variable price mechanism and how frequently does a typical contract allow for price adjustments?

You're right, our legacy contracts had, as Kent described in the past, a fixed price mechanism. And during the crisis of the past year plus we gave some relief on that, that relief clause expires during the course of this year. Some in the middle of this year, all by the end of the year. For our legacy contracts that's the time frame we'll be looking to move to the new structure that we'd earlier described and that will give us that upside to have price rise with the market more freely than it would have under the fixed price constructs. And it's the basis for any new contracts we've struck. We've struck several new contracts, both with battery and automotive OEM producers in the past three, six months and they are in that same construct. Now it's important to note, it's not one structure. We have some customers who actually value more consistency. And obviously, that's a higher price point from a fixed price standpoint, so we can get our returns over the cycle. And there are certain commitments we'll make to go along with them on volume. On the other hand, those who are more fixated on price we'll have a component of our mix there. We will be a little more -- just more discretion about how long we go on some of those contracts. And so there's going to be a mix there is kind of a mix that we see, but the underlying message is exposure to a rising market.

Our next question coming from the line of Ben Kallo with Baird.

Just on bromine, I know it's on the top of du jour, but the chip shortage that we see, everyone sees out there, can you talk about how your visibility is on that, or what you could gain if there is semiconductor new builds and if that [benefits] you? And then just on the lithium side, Scott, back when the worry was around not enough batteries being produced and from our EV coverage, I think that's a worry too. But what you guys see on that side as far as new capacity being built and how you guys are modeling that yourselves and the visibility on that?

So let me start with the second part first with the battery. I mean, we're focused on making sure we get the lithium that goes with the market. And we model that from the vehicle backwards to the battery and then to the cathodes, and there's a lot of plans and capacity being added. I don't know that we -- we're not going to put an opinion out there about capacity for batteries. We're very focused on making sure that we've got -- our part of the lithium market that we're building out -- what all of our growth plans are about. Those investments and executing on those investments, so we've got lithium to provide that market. So I don't think we should comment about the capacity in the battery market, but we see a lot of projects and a lot of capability in executing those projects. Maybe Netha could talk a little bit about the chip shortage and how that impacts bromine from a, I guess, that would be across all the electronics space.

Ben, we see the electronics market is really strong. But as Scott mentioned, we're not seeing the chip shortage impact us. A strong semiconductor chip electronics market is definitely good for us. But with us being sold out, we have very limited additional capacity to leverage that in the rest of the year. So we do have contracted volumes in those markets. Those volumes are being ordered as we expect. And so we don't really see that as an issue right now. Now things could always change but from where we sit in the supply chain, we're not seeing an impact right now with the chip shortage.

And I think it's a little bit -- Ben, part of your question was just about an advantage we might see coming forward. I think that's really just going to be about demand of those electronics. So they need more chips, those underlying applications where we play, whether it's in automotive or just call it, the Internet of Things, so proliferation of chips and that's an advantage for us, but they have to be able to keep up with it for it to be an advantage for us.

And if I could sneak one more in. What about just the overall flexibility of the three businesses? And I know you guys have done a lot, but just overall, 80% of the questions are about lithium here. So how do you think about the portfolio altogether?

So we've got three core businesses and it's a portfolio. So catalyst is struggling a little bit, their market is not as strong because the miles driven and the issues we saw from COVID there. Bromine held up very well during the pandemic. And then really, EVs and then part of that, the lithium market was accelerated through COVID because really the European response to the COVID was really about clean energy and electric vehicles. So I think the portfolio effect is working for us. I mean we'd love for all three businesses to be striking on all cylinders but that's part of the portfolio. We think they're key businesses. They all fit into the sustainability angle that we're pushing. There's a sustainability piece for all three of those businesses, and that's kind of what ties them all together, and we like that portfolio. And it's working because when one business is down, the other two are doing quite well and that will probably cycle.

Our next question coming from the line of Chris Kapsch with Loop Capital.

So my question relates to lithium business in the industry and focused on your visibility more specifically. So the industry at this point is still pretty China centric and in the materials space, China has been notoriously sort of double ordered or build excess inventories during periods of rising commodity prices. And on the flip side, as this industry has witnessed the pain can be pretty acute when prices are coming in with destocking in the supply chain exacerbating the downward pricing pressures. Granted this lithium chemicals for the battery application are not as commodity oriented as say copper or iron ore or something. But I'm just wondering if you could comment on the ability right now for the industry to build back inventories or safety stocks, or buffer stocks? And maybe also speaking to your visibility, how is this changing along with the procurement strategies, which are migrating maybe away from cathode producers simply to cathode plus battery and in some cases, OEs? So just if you could speak to visibility on that, what the dynamic is currently and how you see that evolving.

So I mean, I guess, a bit about China. I'm not sure we have a ton more visibility, but there's not -- I mean we're fighting to keep up with demand. I think the industry is doing the same. So I don't think they're building -- anybody's building inventory in the supply chain, and that probably goes from batteries, the cathodes to materials as well. I mean from our perspective, we're not building inventories. We actually sold down inventories to take advantage, or to satisfy demand in the first quarter. And I don't know, Eric, if you have any more visibility around that?

No, I mean the industry is tight, up and down not just in China but around the world, and a consequence in some regards of just how bad it got last year from a value standpoint. There's a lot of capacity went out of the market, a lot of projects slowed down. So it's going to take a while to catch up and yet demand is accelerating. So we don't see a let up in the situation, which is one reason why we won't give a specific number. We see price rising going forward for the foreseeable future. China is still very important to the industry. If there's a delay anywhere in building out capacity downstream for batteries, it's outside of China. So Asia continues to be an important point going forward, which certainly in the near term suits where we're bringing on capacity. So we're very optimistic about being able to place that capacity we bring on next year.

And I would just say one thing that's a little different than some of the other industries that kind of mining industries, iron ore, ferrous materials. I mean we are integrated into the resource and into the conversion as well. And that's not all China, the resources are really not in China, a lot of the conversion capacity and the customer demand today is in China. And we spent a lot of effort making sure we have a diverse resource base from a resource standpoint and also from a conversion specific. So we're not too heavy in China. It's why you see us building in Western Australia, and we're doing conversion capacity in Chile as well. So we focus on that diversification from a resource standpoint and a conversion basis as well. And in some cases, it's more expensive for us to do that but we think it's important.

And I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Kent Masters for closing remarks.

Okay. Thank you, Olivia. And again, thank you all for joining us today. All the efforts and opportunities we discussed today require execution, and we have the capabilities, the resources and most importantly, the people to execute on our strategy. We expect to achieve accelerated growth with lower capital intensity, which should enable us to achieve higher returns. We will continue to work on our sustainability throughout the value chain, not only within Albemarle's operations but by continuing to support our customers. Thank you, and we look forward to speaking to you on our next call.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.