Albemarle - Q2 2023

Transcript

Operator (participant)

Hello, and welcome to Albemarle Corporation's Q2 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number 1 on your telephone keypad. If you would like to withdraw your question, again, press star followed by the number 1. I will now hand it over to Meredith Bandy, Vice President of Investor Relations and Sustainability.

Meredith Bandy (VP of Investor Relations and Sustainability)

Thank you, Aisha. Welcome everyone to Albemarle's second quarter 2023 earnings conference call. Our earnings were released after the close of market yesterday. You'll find the press release and earnings presentation posted to our website under the Investors section at albemarle.com. Joining me on the call today are Kent Masters, Chief Executive Officer, and Scott Tozier, Chief Financial Officer. Netha Johnson, President of Specialties, and Eric Norris, President of Energy Storage, 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 timing of expansion projects, may constitute forward-looking statements. Please note the cautionary language about forward-looking statements contained in our press release and earnings presentation, which also applies to this call. Please also note that some of our comments today refer to non-GAAP financial measures. Reconciliations can be found in our earnings materials.

Now I'll turn the call over to Kent.

J. Kent Masters (Chairman, President, and CEO)

Thank you, Meredith. Our second quarter results continued the positive trend from last quarter, with net sales up 60% and EBITDA up 69% versus the same period last year. We have increased our energy storage outlook for 2023 based on current market prices. Of course, the long-term shift to electric vehicles is well established and growing. Automakers are planning ahead to accommodate that future growth. For example, we signed a strategic agreement with Ford to supply over 100,000 metric tons of lithium hydroxide over a five-year period starting in 2026. One of the reasons our customers choose Albemarle is our commitment to sustainability. In June, our Salar de Atacama site became the first lithium resource in the world to complete an independent audit and have its audit report published by IRMA, the Initiative for Responsible Mining Assurance.

We achieved an IRMA 50 level of performance, a third-party auditor verified that the Solar site met 70% of over 400 rigorous IRMA requirements, covering topics such as water management, human rights, greenhouse gas emissions, fair labor, and terms of work. During the quarter, Albemarle's growth and impact on the energy transition were recognized by inclusion in the Fortune 500 rankings and in the TIME100 Most Influential Companies list. We continue to invest in future capacity to meet long-term demand. The Salar Yield Improvement project reached mechanical completion on schedule, the Meishan project in China is ahead of schedule, with mechanical completion now expected in early 2024. Last month, we announced agreements to simplify and amend our joint venture with Mineral Resources.

I'll update you on these activities later in the presentation, and for now, I'll hand it over to Scott to walk you through our financial results.

Scott Tozier (Executive VP and CFO)

Thanks, Kent, hello, everyone. On slide 5, let's review our second quarter performance. Net sales were $2.4 billion, up 60% compared to last year. This nearly $1 billion increase was driven by energy storage as a result of both higher market pricing and higher volumes, which were up almost 40%. Net income attributable to Albemarle was approximately $650 million, up 60% compared to the prior year. Diluted EPS was $5.52, also up almost 60%, and adjusted diluted EPS of $7.33 was more than double last year. At the end of July, we reached agreements in principle with the Department of Justice on a matter that we initially disclosed in 2018, related to conduct in our Ketjen business occurring prior to 2018.

Our Q2 GAAP results include an approximately $219 million accrual to resolve this matter. Looking at slide 6, second quarter adjusted EBITDA was over $1 billion, an increase of nearly 70% year-over-year, driven primarily by higher pricing as well as higher volumes in Energy Storage. Our Specialties business was down year-over-year due to lower volumes and pricing related to weakness in certain end markets, such as electronics and alas- insurance claim receipts and lower energy costs. Let's look at the updated total company outlook on slide 7. We are raising our 2023 guidance for net sales and adjusted EBITDA to reflect current lithium market prices.

As has been our practice, this guidance assumes recent lithium market price indices are constant for the remainder of the year. As a result, we have increased the lower end of the range for net sales. We now expect 2023 total company net sales to be in the range of $10.4 billion-$11.5 billion. We expect third quarter net sales to be relatively flat sequentially, followed by an increase in fourth quarter net sales as we ramp energy storage volumes. We're increasing our adjusted EBITDA guidance to be in the range of $3.8 billion-$4.4 billion. This implies full year EBITDA margins in the range of 37%-38%, also up from previous guidance.

Our full year 2023 adjusted diluted EPS guidance is also increasing to a range of $25-$29.50, reflecting a year-over-year improvement of about 25% at the midpoint. We expect our net cash from operations to be in the range of $1.2 billion-$1.8 billion. This is a decrease in outlook, driven primarily by two factors. First, higher working capital related to the timing of our energy storage shipments. We now expect lithium sales volumes to be weighted towards the back half of the year, particularly in Q4, due to the timing of our growth projects and tolling volumes. This is expected to result in higher accounts receivable at year-end, which will convert to cash in early 2024.

Second, this outlook assumes that the DOJ payment of approximately $219 million is made by year-end. Our CapEx guidance has increased to $1.9 billion-$2.1 billion. This increase reflects the revised agreements with Mineral Resources. Following these revisions, Albemarle will maintain 100% ownership of the Kemerton, Qinzhou, and Meishan lithium processing plants. Apart from this change, capital spending is in line with previous forecasts. Turning to the next slide for more detail on our outlook by segment. We're increasing our full year 2023 energy storage net sales guidance to be in the range of $7.9 billion-$8.8 billion. Energy storage volume growth is expected to be at the higher end of the previous range of 30%-40% year-over-year, thanks to increased tolling and successful project execution.

We also project average realized pricing increases to be at the higher end of the previous range of 20%-30% year-over-year, assuming recent lithium market prices continue through the rest of 2023. Adjusted EBITDA for energy storage is expected to increase in the range of $3.5 billion-$3.9 billion. This 15%-30% increase is due to higher net sales, which we expect to more than offset the timing impacts of higher-priced spodumene inventories. In specialties, we continue to see pressure in our end markets. Weakness in consumer and industrial electronics and elastomers is only partially offset by strong demand in other markets, like pharmaceuticals, agriculture, and oil field services. Similar to other specialty chemicals companies, we are reducing our outlook for the full year 2023.

Net sales are now expected in the range of $1.5 billion-$1.6 billion, and adjusted EBITDA is anticipated to be between $385 million and $440 million. Q2 is expected to be the weakest quarter of the year. We took advantage of the recent market slowdown to pull forward planned maintenance and reduce inventory to maximize efficiency and free cash flow in the second half of 2023. Ketjen's 2023 full year adjusted EBITDA is expected to be up 325%-425% over the prior year. This increase in outlook is due primarily to insurance recoveries, which are not expected to recur, as well as ongoing recovery in refining prices and improved processing costs. As a reminder, most of our energy storage volumes are sold under long-term contracts with strategic customers.

On slide 9, we've updated our expected 2023 net sales mix to reflect recent lithium market prices. Due to the recent rebound in lithium pricing, our full year 2023 net sales mix is now expected to be 80% index-referenced variable price contracts and 20% spot. There's been no other change to our contract philosophy or structure of these contracts. Our strategy to deliver long-term growth remains on track. Turning to slide 10, we continue to expect year-over-year energy storage volume growth in the range of 30%-40% in 2023. We anticipate coming in at the higher end of that range, primarily driven by the La Negra III/IV expansion, the acquisition of the Qinzhou conversion asset, plus additional tolling.

With additional conversion assets coming online in 2024, we still anticipate a 20%-30% CAGR in Albemarle sales volumes between now and 2027. We remain on track to nearly triple sales volumes to more than 300,000 tons. Our revised energy storage outlook implies EBITDA margins of around 45% for 2023, up from the prior outlook based on higher market prices. As a reminder, year-over-year margins are expected to normalize from the very high level seen in late 2022 and early 2023, primarily related to spodumene inventory lags at our Talison joint venture. On average, it takes at least six months for spodumene to go from our mines through conversion to our customers. Last year, we saw dramatic increases in prices for lithium and spodumene.

Due to the time lag on spodumene inventory, we realized higher lithium pricing faster than higher spodumene cost of goods sold. This year is the reverse. As prices decline, we are realizing lower lithium prices faster than lower spodumene costs, and we expect a majority of this, of this impact is going to occur in the third quarter. The next item affecting margins is the accounting treatment of the MARBL joint venture. Under the amended agreements with Mineral Resources, we expect to continue to market and toll Wodgina product during 2023. As a result, we will recognize 100% of the net sales from MARBL, but only our share of EBITDA. The result is about a 5% lower reported margin for 2023. Finally, our reported EBITDA margins are impacted by tax expense at Talison. Talison net income is included in our EBITDA on an after-tax basis.

If you adjusted Talison results to exclude tax, margins would be about 6%. Turning to slide 12, we will continue to invest with discipline, allocating our capital and cash flows to support our highest return growth opportunities. Our primary use of capital remains organic growth projects to leverage our low-cost resources in Australia and the Americas. Beyond organic growth, we also consider a broad range of M&A opportunities, primarily across three areas: lithium resources, process technology for our core business and for new advanced materials, and battery recycling. As previously disclosed in March, Albemarle submitted an indicative proposal to acquire Liontown Resources, a pre-production spodumene resource in Australia. To date, the Liontown board has not meaningfully engaged in progressing the transaction.

Another example of our strategy is the acquisition of the Western Lithium subsidiary of Lithium Power International that we completed in July in a cash transaction of just over $20 million. This purchase provides Albemarle with prospective exploration tenements near our Greenbushes Spodumene Mine, regarded as one of the world's best hard rock lithium mines. This week, we announced an investment in Patriot Battery Metals. This investment provides a 4.9% interest in a prospective spodumene deposit located in northern Quebec. We intend to maintain our track record of a disciplined M&A process to accelerate higher return growth while preserving financial flexibility and maintaining our investment-grade credit rating. Our balance sheet flexibility is a competitive advantage that allows us to grow both organically and through acquisition, as well as support our dividend.

With that, I'll turn it back over to Kent for a market update and closing remarks.

J. Kent Masters (Chairman, President, and CEO)

Thanks, Scott. One of the reasons we can report strong financial results is our disciplined operating model. We call it the Albemarle Way of Excellence. Our 4 operating pillars are high-performance culture, competitive capabilities, operational discipline, and a sustainable approach. These aren't just words, they are principles that guide our decision-making. Today, I'll highlight operational discipline, which includes business, manufacturing, and capital project excellence. Through initiatives and operational discipline, we've targeted $250 million in productivity benefits over this year and the next, and we are on track to exceed that goal. Our goal in manufacturing excellence is to drive best-in-class discipline and operating efficiency with a target of $150 million of savings over the next 2 years. Across our businesses, we've realized value in our manufacturing operations through yield improvement and better utilization of raw materials and energy.

Through Project AI, which we call Albemarle Intelligence, we're leveraging machine learning to optimize our manufacturing processes. Our global procurement team is strategically sourcing to pull purchasing and capture raw materials and logistics efficiency enhancements in real time. With continuous improvement, we are targeting $100 million of productivity benefits this year. Another execution principle under operational discipline is capital projects excellence. Our focus on capital project execution is paying off, with 4 global projects progressing on time and on budget, including the Salar Yield Improvement project, Meishan, Richburg, and Kings Mountain. As we continue to develop projects around the world, our objective is to build the structure, capabilities, discipline, and design approach that enable faster capacity growth at lower capital intensity. Turning to slide 14 for an update on more of our capital projects.

In Chile, I'm pleased to report that our Salar Yield Improvement project recently achieved mechanical completion on time and has transitioned into commissioning. In Australia, Kemerton 1 continues to produce battery-grade products subject to customer qualification. While there have been challenges, particularly in light of the very tight labor market in Western Australia, we are proud of our Australian team as they commission that plant and deliver products to our customers. We are applying what we've learned to the construction of Kemerton 2, and Kemerton 3 and 4 projects have recently gated into execution. In China, Qinzhou is ramping up on budget and on schedule to nameplate capacity, and the construction of Meishan is progressing on budget and ahead of schedule, with mechanical completion now expected in early 2020.

As mentioned earlier in the call, we have agreed to amend the terms of the transaction signed earlier this year with Mineral Resources. Under the amended agreements, we will acquire 100% ownership of Kemerton and retain 100% ownership of Meishan and Qinzhou lithium conversion assets. Other key aspects of the February 2023 agreement remain in effect, including a 50/50 ownership of the Wodgina mine and an April 2022 economic effective date. The transfer of 10% interest in Wodgina is exchanged for 25% interest in Kemerton. Upon closing, we expect to pay Mineral Resources $380 million-$400 million. About half is related to the purchase of the remaining 15% ownership stake in Kemerton, and about half relates to economic effective date settlements and other transaction costs.

This transaction is anticipated to close later this year after we receive Australian regulatory approvals. On slide 15, EV sales over the last quarter indicate 2023 global electric vehicle sales are on track for 40% growth. After a slower start to the year, EV sales have picked up, with global sales up 41% and China up 45% year-over-year through June. China has regained growth momentum, with June representing the largest monthly EV sales since last December. In Europe, easing supply chain issues have lifted sales by about 20% year to date. Despite mixed macroeconomic conditions, the outlook for global full-year EV demand remains resilient, driven by the introduction of new models, new incentives, and the expansion of charging infrastructure. Since May, we have seen a rebound in lithium market pricing, driven by downstream restocking and strong EV and battery production.

Customers are returning to the spot market after destocking to unsustainably low levels of inventory against the backdrop of growing demand, with lithium inventories decreasing in the supply chain over the last few months. Global lithium supply-demand remains relatively balanced, driven by increased EV demand, as well as challenges in bringing on new projects. As we continue to expand our lithium capacity, our scale, global footprint, and vertical integration positions Albemarle to sustainably meet growing customer demand. While we're pleased that the lithium market remains strong, we continue to focus on managing the things that are within our control for long-term value creation. We're delivering growth in both sales and earnings. We anticipate 2023 sales to be up 40%-55% over last year, with healthy margins.

While the EV market is clearly the star at the moment, we are a global leader in world-class long-term assets and a diversified product portfolio with broad opportunities in the mobility, energy, connectivity, and health markets. Our focus on sustainability is not only aligned to our values, it also aligns with our customers' values and creates an advantage for us in the marketplace. Our strategy is clear, our markets are growing, and our discipline in both how we operate and how we allocate capital gives us an edge across economic cycles. With that, I'd like to turn the call back over to the operator to begin the Q&A portion.

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, press star, then 1 on your telephone keypad. Also, bear in mind this Q&A session is limited to 1 question per person and 1 follow-up. Your first question comes from the line of Josh Spector from UBS. Your line is open.

Joshua Spector (Director of Equity Research)

Good morning, everybody. It's Chris Perrella on for Josh. Could you work through the timing and the cost impact of the spodumene sales on the third quarter and fourth quarter? Thank you.

J. Kent Masters (Chairman, President, and CEO)

Hey, Chris, thanks for this. This is Scott. We expect the, the impact of the spodumene cost to be most acute in the third quarter. We'll see a similar a headwind in the fourth quarter that's very similar to what we saw in the second quarter. Again, it'll be mostly in the third quarter, and then it'll start to abate in the fourth quarter.

Operator (participant)

Your next question comes from the line of Patrick Cunningham from Citi. Your line is open.

Patrick Cunningham (Senior Equity Research Associate)

Hi, good morning. Can you elaborate a little bit on the strategic rationale for the investments in early-stage hard rock assets in Australia and Canada? Should we expect these regions to be the focus of resource M&A going forward, or is there anything on the table maybe in South America or the U.S.?

J. Kent Masters (Chairman, President, and CEO)

I think, I mean, we've been talking about pivoting toward resources from an M&A strategy for a while, and then also going a little early stage, so we get in on these opportunities earlier when they're not as expensive. Now there's more risk in that, so we're taking smaller stakes to get in our foot in the door, so to speak. Then we. It allows us to get information and analyze the opportunity as it develops, and then we'll have an opportunity later whether we participate in a bigger way or not. I don't- it's not- look, look, the opportunities are where the, where the resource is, and we look at those, we try and. We'll look at the jurisdictions and where it's the most favorable for us to do business.

And really, that's wherever the resource is. North America, Canada, Western Australia, are mining jurisdictions that we're very familiar with. We're used to it, geopolitical, very stable. They're used to mining operations, so Canada a little bit more than North America, than the U.S. and North America, but those are favorable. We'll look everywhere for where the resources are, including South America. I mean, everywhere there's resources, we look, but we, we balance those geopolitical stability. Are they used to mining, permitting, all of those issues when we make decisions.

Operator (participant)

Your next question comes from the line of Christopher Parkinson. From Mizuho Securities, your line is open.

Christopher Parkinson (Managing Director and Senior Equity Research Analyst)

Yep. How are you? This is Harris Fiene on for Chris. now that you've basically bought MinRes out of your downstream assets, you have the MegaFlex facility to be thinking about down the line. how do you feel about your current resource footprint? And maybe it'd be helpful if you could do a quick walkthrough of how you're thinking about additions to your portfolio. Thanks.

J. Kent Masters (Chairman, President, and CEO)

Look, we've a few years, a couple of years ago, we were talking about acquisition of conversion facilities. We did that at Qinzhou, and we've been building those out organically, and we've, we've been talking about pivoting toward resources as we, we feel like we've, we're starting to utilize our resource with the conversion facilities that we have. We need to identify additional resources toward the end of the decade. We're pretty much good to about the end of the decade or so, and we need additional resources beyond that. The lead time given to identify, qualify, and then bring a resource on, we need that kind of time. We feel pretty balanced now. I mean, look at it, the difference between now that we bought MinRes out, we've got full control of those assets.

Operationally, it's simpler, it's better, but it wasn't a huge move between we were probably a little short on conversion, now we're a little long, but that gives us opportunities to, if we find a resource we can bring on quickly, we can process spodumene for our customers. We have some customers that have secured spodumene. We can process that and participate with them in that way. I don't think it was a major shift, and it's not a shift in our long-term strategy. We're still looking for those resources. We're good pretty much on resource and conversion with the current build program we have close to the end of the decade, but after that, we need more resources.

Operator (participant)

Your next question comes from the line of Colin Rush from Oppenheimer. Your line is open.

Colin Rush (Managing Director and Senior Analyst)

Guys, I have a two-part question. One, can you speak to how you're handling volumes that are going to fairly large OEMs in the US and Europe that are a little bit slower on their EV ramps, where those volumes are ending up? The second question is around the viability of pressure leaching process. how you guys see that as a potential way to simplify supply chain logistics, as you move into areas that have a little bit more intense environmental considerations from, from a compliance perspective?

J. Kent Masters (Chairman, President, and CEO)

Yeah. Okay, Colin, can you just clarify the second comment? I didn't really pick up the technology you referenced.

Colin Rush (Managing Director and Senior Analyst)

The potential for pressure leaching processes rather than basically eliminating the asset from the process, process.

J. Kent Masters (Chairman, President, and CEO)

okay. Autoclave.

You want to take the OEM question?

Eric Norris (President of Lithium)

Sure, Colin. This is, this is Eric. With regard to OEM volumes, just a first comment I would make is that the vast majority of OEM contracted volumes today are future-based. They're from mid-decade onwards. More of the supply chain for their lithium needs is secured today through battery producers. We've seen through the middle of the year, very strong demand, over 40% demand growth in registered EV sales through, through June. Early data from China in July looks promising as well. We're not, we're not seeing any pressure. We've certainly seen headlines that, that certain EV models in the US potentially may be slower, I, I would caution you that that's a, a small part of the market.

The rest of the market and, and the demand we're seeing is quite strong. That's the second question. I don't know if you wanted to address that, Kent?

J. Kent Masters (Chairman, President, and CEO)

I think, look, we, we have a lot of effort on R&D development, particularly around process chemistry and extraction around that. I think the autoclave processes is one of the ones we're investigating, and I think the industry is looking at, but it's, it's down the road. We're focused on not only kind of near term, what we're operating today, 'cause we think there are significant productivity gains that we get out of our existing facilities as we develop more sophisticated processes around that in the years to come. The new plants we're bringing up today, we see as big productivity opportunities, going forward for the next, well, 10 years, probably, and probably on that as we get better and better at the process chemistry. It's still early technology.

It's been operating for quite some time, but at scale, it's still early technology. Then new technologies around that with different leaching agents and different techniques like pressure with an autoclave is something that we're looking at. It's not something that's gonna be in scale production in the next year or 2.

Colin Rush (Managing Director and Senior Analyst)

Perfect. Thanks so much, guys.

Operator (participant)

Your next question is from the line of David Deckelbaum from TD Cowen. Your line is open.

David Deckelbaum (Managing Director)

Hey, Kent and Scott. Thanks for the time this morning. I, I wanted to just ask, post the Mineral Resources restructuring and the MARBL JV, you're obviously allocating more capital to conversion assets that you were building out in theory, together in the future. That, that puts the burden more on CapEx this year and, and presumably at some point next year. Does that in any way change how you're thinking about the trajectory of your growth investments as you, as you manage the balance sheet over the next couple of years?

J. Kent Masters (Chairman, President, and CEO)

I don't, I mean, it doesn't. I mean, look, we're spending a little more capital than we had originally anticipated, but it, it, it's not-- it doesn't change it dramatically. We do have to watch the balance sheet carefully and be disciplined as we invest. We, we need to make sure that we're, we're balanced as we go forward, but we don't give up opportunities. You see us looking for those resources and investing in those and the, and the opportunities that, that are, that are public and the ones we've just closed. It's a combination of getting resources that are near term to the market and then investing for the long term as well. We, look, we're trying to be very disciplined about this.

We watch our balance sheet, we're, we're very serious about that, but we, we don't wanna miss opportunities as, as they come up.

Scott Tozier (Executive VP and CFO)

David, I'd just add, I mean, this is a huge competitive advantage for Albemarle. Like, if you look across the competitive set, the, the, there, there just is not a big balance sheet out there at many of our competitors that just gives us the flexibility to, to handle the ups and downs in the market, but then the opportunities that Kent talked about.

David Deckelbaum (Managing Director)

Thanks, Scott. Maybe just a little bit more granular on tolling volume. Can you give a sense of magnitude of tolling volumes expected in the back half of the year versus the beginning of the year? Was there a point, I suppose, in the first quarter, where you might have been withholding tolled volumes just based on market conditions at the time?

Eric Norris (President of Lithium)

This is, this is Eric speaking. Our tolling volumes overall for this year will be about 2x what we did last year. It is, and it is largely for two reasons: one, because it takes a while to qualify and find the right tollers and partners as we grow that volume, so there's a lag in that. That pushes it into the second half of the year, as well as spodumene availability is also back-end loaded in the second year. Then finally, you referenced a market phenomenon. We were in a weak market in January, February, where you, you're quite right, we were not aggressively going after incremental volumes because of the, the, the, the state of the market. As we sit here today, the market is quite strong.

We've seen this growth I referenced in the earlier comment around, over 40% growth, in, in EV sales. We see strong demand for product in, in all regions, and as it pertains to tolling in China, it will be back-end loaded, both because the demand is there, but also because we have the available supply and relationships in place.

J. Kent Masters (Chairman, President, and CEO)

there's a balance here between. I mean, we're building large conversion assets and ramping those up. We're expanding mines and resources, bringing those on, some with different techniques around that. Tolling is a way that we can balance some of that, and we've been able to leverage that effectively.

Eric Norris (President of Lithium)

I might also add that, to your earlier question that another individual asked around the some of the additional conversion capacity coming on the MinRes deal, that's, that's now volume that we can self-produce as opposed to toll as well. While, if you look at the next 18 months, we are probably still long resource versus conversion. Adding more conversion in the near term means we can, we can do less tolling, and bring it in self-produce. That's really how we look at our tolling business. There's, there's always some amount we do. It will vary as we bring on assets, and it allows us to continue to have a large and growing footprint in the market.

It's a part of why we are gonna be at the higher end of our 30%-40% growth range in volume year-over-year. Our strategy is to self-produce, and we certainly have the, the ability, more so than, than the other producers we talked about, to build that capacity both inside and outside of China to meet that demand growth.

Operator (participant)

Your next question comes from the line of Matthew DeYoe from Bank of America. Your line is open.

Matthew DeYoe (Senior Equity Research Analyst)

Morning. Thank you. It seems like your inventory keeps building, quarter-over-quarter here, and I assume maybe some of that's gonna get fed into Kemerton. It seems to provide like a pretty significant amount of tonnage, is sitting on the books. What else is going on here? Or how should we think about the way that turns to cash, if it does?

Scott Tozier (Executive VP and CFO)

Yeah. It's a good question. We continue to see our inventory balances grow. It's really being driven by two things: volume, as we've been ramping, capacity, tolling, as we talked about, as Eric talked about. The second thing to, to keep it in mind is that spodumene prices are going up, in that cycle. That's a, that's an impact on our inventory balance. If you actually look at it on a days basis, so days of inventory, it's very consistent. It's, it, it's really just driven by the volumetric growth and those pricing impacts ultimately. It's really not a over We're not over in- indexed on inventory. We're not under, kind of, right in line with what we're expect to be.

Matthew DeYoe (Senior Equity Research Analyst)

Okay. your partner at MARBL made some comments on the earnings call around questions for trade relationships between China and Australia and where it makes sense to have conversion assets or not. I mean, do you think that they're wrong? I guess, does it make sense to look to secure hard rock in a country that maybe has better trade relationships with Australia over time, as you think about, the sustainability of feedstock to your China conversion network?

J. Kent Masters (Chairman, President, and CEO)

I'm not sure what, exactly what Mineral Resources said on their call, but I, we, we have different views of the geopolitical risk between Australia and China. They're an Australian company or a U.S. company, and we, we. The lithium business is a significant business in China, and we've got significant footprint there, and our customers all operate there for the most part. Then we've been very, we've been public about our pivot to the West. We, we, we plan to serve the Chinese market, but also pivot and invest West, so we can localize the supply chain in the West as for both. We'll continue to look for resource where we can find it. Australia is a, I mean, it's a stable economy. There's. The geopolitical risk is minimal, and it's a mining district.

They understand mining, they understand tailings, it's just, it's a good location to operate in from a mining standpoint, so we won't be shying away from that, from that standpoint. We'd love to diversify our resource base, geographically more, but, lithium is, is tight, and where you find the good resources is where you end up going, and then you end up having to manage the geopolitical aspects of that.

Scott Tozier (Executive VP and CFO)

Kent, just to reiterate, just clarify that, that our resource base is, base is in Australia, Western Australia, North America, now with Kings Mountain, certainly Silver Peak. We have this investment now in Patriot and then South America, largely Chile, obviously. Our resources, those would be the areas that we continue to focus on as being the favorable jurisdiction with sort of low cost, first quartile, cost position resources.

J. Kent Masters (Chairman, President, and CEO)

that's right.

What we do in China is conversion, and there's a great, there's a large market for, for demand and demand in China and certainly a growing one in, as we pivot west.

that's, I think that is the most diverse resource network within the industry, and we would like to continue to build that.

Operator (participant)

Your next question comes from the line of Arun Viswanathan from RBC Capital Markets. Your line is open.

Arun Viswanathan (Senior Equity Analyst)

Great, thanks. Just had a question, I guess, on the guidance construct and the pricing. obviously, when you moved to more index-based contracts, last year, definitely was a positive from a cash flow and balance sheet statement point of view. And, Scott, you just kind of reiterated some of those benefits and competitive advantages. But, obviously, we've also experienced quite a bit of volatility on the lithium price front. So I know it's not necessarily, easy to forecast prices there, but that is a little bit more part of the Albemarle operating model now at this point, just the lithium spot price environment. So, I mean, is that an accurate statement?

how do you feel about providing guidance now, with this volatility that we've experienced? I guess, my, my concern would be, prices again, go back down to that $25,000-$30,000 per ton level. would you be required to kind of lower your guidance at that point? How do you just think about philosophically about the guidance construct at this point? Thanks.

J. Kent Masters (Chairman, President, and CEO)

I mean, there's a couple of things in there. One, so we have pivoted to be more index-based. I mean, we still have typically long-term contracts, but they're referenced to a market index, so we're gonna move with the market. With that move, we've decided to do our guidance by not forecasting lithium prices, but by basically take whatever the market is today, and we forecast it for the balance of the year. That's the methodology that we're gonna use for the foreseeable future, the near term. I mean, ultimately, our goal is that we get to where we can forecast lithium price, and we feel confident in that. We don't feel confident in that today, so it feels prudent to

We, we tried to give you the tools to adjust based on your view of that, that market, and that, that's kind of how we do guidance at the moment. Ultimately, we would like to be able to forecast and feel good about that, but that's not in the near term.

I think the other thing just to remember.

Okay.

is given our, our, our low-cost resources, our low-cost operations, it allows us to, to earn throughout the cycle. We're gonna have reasonable margins throughout the cycle, no matter where that, that price goes. I think that, that gives us more confidence in being able to take this guidance approach as well.

Arun Viswanathan (Senior Equity Analyst)

Great. Just, you made the investment in Patriot. There was, obviously some other moves that you've, approached on the M&A side. What else should we expect there? continued partnerships, how do you feel about the integration level backwards into resource at this point? Are there any larger investments that you're still thinking about or contemplating? Thanks.

J. Kent Masters (Chairman, President, and CEO)

I think if the question about integrating into the resource, I mean, that's fundamental to our strategy, to be integrated from resource and conversion all the way to the customers. We can guarantee the quality and the production because of the quality of the resource, and then we actually do we do the conversion. As requirements become more sophisticated and the lithium products become more sophisticated, we expect to be on the leading edge of that. That's fundamental to our strategy. I mean, from a resource standpoint, as we said, we think we're pretty good until the end of the decade, but given the time it takes to develop resources, we need to be identifying and bringing and owning additional resources.

We're working on that now, and you see us, I mean, that's some of the activity that you see from us out there, and that we'll continue to do that.

Operator (participant)

Your next question is from the line of Kevin McCarthy from Vertical Research Partners. Your line is open.

Kevin McCarthy (Partner)

Yes, good morning. A two-part question on, on MARBL, if I may. Scott, would you comment on how margins might change as you execute on the second version of the restructuring of that joint venture? In other words, does the 5% drag that you reference on slide 11 go away completely or partially? Then, in that same press release 2 weeks ago, you also indicated an acceleration of the Meishan project, and I'm wondering why that's the case. Is it for lack of a better term, related to an experience curve where you now, have greater capability to bring on conversion capacity more quickly than was the case in the past? Thank you.

J. Kent Masters (Chairman, President, and CEO)

You'll do the margin. I'll cover capital.

Scott Tozier (Executive VP and CFO)

I'll take the MARBL question and the impact on, on margin. As part of the restructuring of that joint venture, we've agreed for a period of time to continue to toll volumes out of the Wodgina mine on behalf of MinRes. So for a period of time, I believe it goes through the middle of next year, we'll continue to have that margin headwind. Once that period is over, we'll end up, improving our margin rate ultimately. Won't change the dollars because the EBITDA dollars will be the same, but the margin rate will certainly improve by that 5, that 5 percentage points.

J. Kent Masters (Chairman, President, and CEO)

On the Meishan being early, look, it's a good old-fashioned, good old-fashioned project execution. We're getting, we're getting better at it. it is also there's a capability in China is significant to execute these large projects. We don't have the labor issues there that we had in Australia. There's a, a number of things. Part of it is our capability is getting significantly better. We're learning every time we do a project. Part of it's about just the capability in China. The biggest piece, one of the bigger pieces is that we have labor availability there that we, that we didn't have in Australia.

Kevin McCarthy (Partner)

I see. As a brief follow-up, if I may, how, how is that experience at Meishan similar or different to, what you would envision for Kemerton 3, 4, in terms of capital cost and speed of execution?

J. Kent Masters (Chairman, President, and CEO)

Well, I think, I mean, for Well, let's, not just 3, 4, but let's say all the projects that we're working on, I think we're building a significant capability. It is, it's materially different now than it was 3 or 4 years ago, and we think we can execute projects around the world on budget and on schedule. That said, those schedules and those budgets will be different depending on where you're executing. Europe will be different than Western Australia. North America is a little, is different, and China is different. I, I wouldn't use Meishan capital numbers and apply those around the world. That's not how it works. We've executed a very good project. We're still executing. It's not complete yet, but we're, we're getting there.

At Meishan, we think it's gonna be a great project, and, we're, we feel like the capability we built is world-class, in this industry in particular. You can't take Meishan schedules and capital numbers and apply them in Western Australia or North America or Europe.

Operator (participant)

Your next question comes from the line of Mike Sison from Wells Fargo. Your line is open.

Michael Sison (Managing Director)

Hey, good morning. Just curious on energy storage. When I think about 2024, which I understand is so far away, but if you think about volume growth next year, you should still be in that 20%-25%. How do I sort of calibrate?

where EBITDA could be from these levels? Meaning, does EBITDA just go up with volume growth next year? Then, and then how do you sort of change or give us sort of a variable for pricing as we think about 2024 for energy storage?

Scott Tozier (Executive VP and CFO)

Mike, that's a little far out. It's certainly, given the way that we're giving guidance, it's gonna be a volume story next year. Of course, pricing is gonna be a question mark that we would, we would have, and it's all based on the contract structures. We're not anticipating to have any big changes in the contract structures. As that pricing moves, we'd, we'd expect to see that trailing kind of 3, 3-month lag to, to what those indices are. I think, scale becomes an important part of the story as well, so that'll help on our fixed costs. You'll see a little bit of improvement there. The operating margins will improve based on productivity. Kent talked about what we're seeing with our, the Albemarle Way of Excellence and how that's translating into results.

We expect that to, to play a role, in the, in all of our businesses ultimately. I don't know, Eric, you have something maybe to add?

Eric Norris (President of Lithium)

I was just gonna say, as, as it pertains to price, it's As, as Kent said, we don't have the confidence to know exactly ourselves what price is gonna do. We do know this: We believe that the market will continue to be quite tight next year as well. There'll be significant demand growth in the market, and indeed, there will be more supply growth as well, but it, those two will be fairly, fairly matched, right? It'll be a fairly tight market. That much we, we foresee. How that plays out from a price standpoint, to be determined.

Michael Sison (Managing Director)

Got it. Just a quick follow-up. As you add capacity through 2027 or you scale up these projects, do your fixed costs, I think you sort of mentioned, do they go down as we get to the end of the decade?

Scott Tozier (Executive VP and CFO)

Well, fixed costs on a unit basis will go down. Obviously, fixed costs will go up as you're adding plants in, on an absolute basis. On a, on a unit basis, meaning per ton, yes, they'll go down.

Operator (participant)

Your next question is from the line of Ben Isaacson from Scotiabank. Your line is open.

Ben Isaacson (Equity Research Analyst)

Thank you very much, and good morning. Just on terms of the seasonality of EV sales, since we typically see a bit of weakness in Q1, someone suggested that that could lead to kind of seasonal pullbacks in the lithium price. I just wanted to get your thoughts on that. Then just as a follow-up, can you give some specifics on the Salar Yield Improvement? What is the volume lift, and what is the shape or the timing of that? Thank you.

Eric Norris (President of Lithium)

Ben, this is Eric. On seasonality, indeed, you, whether it's ICE vehicles or electric vehicles, there's a, there's a crescendo in the year. The demand is stronger in the second half seasonally than in the first. I would be careful to say that we had weakness in the first part of the year. We had a weak January, particularly in China, the market did, that's really China and the timing of the new year. What happened with price and why we talked about price coming down and the inventory correction was inventory correction, was not demand growth. Demand growth has remained strong, it's strengthened as the year has gone on.

U.S. up over 50%, China up 45% through the middle part of the year. The only, the only market that hasn't been as strong, up in the 20s % range, is Europe. I think that has a lot to do with some of the macro and other headwinds that we all know about in Europe. If as we look across the year, we still see a 40% growth in the marketplace. there are certainly lots of macro headwinds we can talk about. Despite these, we still see that secular shift supported by incentives in China. Grid storage has also been a big growth in, in China recently as well, and continued growth outside of China for EVs.

I, yeah, I guess I'd say on the demand front, be careful to assume that we had a weak first quarter. It was, it was not bad off when it ended. Pretty strong, actually. The next question I think to use was Ben, what was your second question, please? Can you repeat it?

Ben Isaacson (Equity Research Analyst)

Solar Yield.

Eric Norris (President of Lithium)

Oh, Solar Yield.

Ben Isaacson (Equity Research Analyst)

Thank you.

Eric Norris (President of Lithium)

We've reached mechanical completion, and we now, we're in the process of commissioning that. That is a an efficiency, so we are able to recover more lithium for every gallon of brine that we pump. It has to work its way through the solar system. There's a 18-month lead time before that, those products start hitting the sales register, so to speak. We still use the pond system to concentrate that, and I don't think, I'm not sure the uplift. What would you estimate that at when we get there? The uplift, well, look, I mean, it's

Solar Yield is gonna allow us to get to nameplate capacity over the next couple of years at La Negra, which is 85,000 tons. Once we start loading brine from the Solar Yield project into the ponds, we're able to slightly more concentrate. We're able to shortcut it. It's about closer to six months, so within six months, so starting next year, we'll start to see the benefit of that uplift.

Operator (participant)

Our last question will be coming from the line of David Begleiter from Deutsche Bank. Your line is open.

David Begleiter (Managing Director, Equity Research Analyst)

Thank you. Thank you, good morning. First on the energy storage full-year guidance increase, can you just bridge us from the roughly $3 billion of prior guidance midpoint to now the $3.7 billion of, of current guidance?

J. Kent Masters (Chairman, President, and CEO)

David, it's, it's really all price. I mean, we got a little bit of extra volume, but it's all just driven by the price indices, where, where they're sitting right now. Obviously, they've recovered off the lows that happened in the, in April, and, and have improved. We've as we've mentioned on the, in the prepared remarks, we've held them flat in our guidance, as of the end of, as of the end of June.

David Begleiter (Managing Director, Equity Research Analyst)

Interest in Arkansas lithium production, potentially. What are your current thoughts as to accessing your, your assets down that region?

J. Kent Masters (Chairman, President, and CEO)

I mean, we have plans to exploit that. We have, we have access to the lithium at, in the Smackover at Magnolia. Basically everything we pump for bromine today, we would, kind of the easy answer is that we process that for lithium. It requires different technology, DLE-based, absorption-based, which we have been working on. We have proprietary technology around that. We're building pilot plants at the moment, and we'll be able, and we plan to execute projects around that. We wanna, we wanna run pilot plant. It is a new technology, and we, we're, we're gonna make sure that we do it right, but we have access to the brines. We've got the infrastructure at Magnolia. We're well positioned to take advantage of that.

David Begleiter (Managing Director, Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. That's all the time we have for questions. I will now pass it back to Kent Masters for closing remarks.

J. Kent Masters (Chairman, President, and CEO)

Okay. Thank you, Aisha, and thank you all for joining us today. We are confident in the market opportunity and our discipline strategy to achieve both short-term and long-term results. We are a global leader in minerals that are critical to a mobile, connected, healthy, and sustainable future. We continue to work to be the partner of choice for our customers and investment of choice for both the present and the future. Thank you for joining us.

Operator (participant)

This concludes today's conference call. Thank you for your participation. You may now disconnect.