Albemarle Corp
NYSE:ALB
Earnings Call Analysis
Q4-2023 Analysis
Albemarle Corp
Investors can anticipate a significant portion of energy storage volume to accrue in the latter part of 2024 due to capacity expansions and seasonal trends. Specialties segment results are predicted to follow a similar pattern, with challenges in consumer electronics and elastomers markets being partially mitigated by robust demand in oilfield services, agriculture, and pharmaceuticals.
Margins in energy storage for the first half of 2024 are anticipated to be squeezed due to processing expensive spodumene inventory and reduced sales from Talison to a joint venture partner. Despite these short-term headwinds, energy storage margins could rebound to around 30% by year-end, contingent upon stable pricing and a resumption of normal shipments from Talison JV.
The company has taken prompt measures to uphold strong investment-grade credit ratings and improve financial flexibility in a lower pricing landscape. An amendment to the revolving credit facility reflects this commitment, with unanimous bank syndicate support and updated financial reporting protocols in line with revised adjusted EBITDA definitions.
The company maintains a growth trajectory, predicting a compound annual growth rate (CAGR) of around 20% from 2022 to 2027. in 2024, focus will be on completing projects near finalization, including the commissioning of multiple lithium conversion facilities and expansions of existing operations. Long-term lithium sales volumes remain largely stable despite capital expenditure reductions.
There are plans to curtail capital expenditures by $300 million to $500 million in 2024 compared to the prior year. These savings are achieved by prioritizing nearly completed large-scale projects and reducing operational expenses, with an expectation to realize over $50 million in cost savings in 2024.
Optimizing operations has yielded $300 million in productivity benefits in 2023, surpassing the initial $170 million target. Plans are in place to capture an additional $280 million in 2024, demonstrating a strong emphasis on operational efficiency.
The corporate strategy has adapted to market conditions, prioritizing financial flexibility and selective high-return investments over mergers and acquisitions, which are expected to be minimal as the company chooses to focus on organic growth.
A lower pricing environment tempers the short-term outlook, but significant long-term demand for lithium is anticipated, driven by increasing electric vehicle (EV) penetration. A demand increment of 28% in 2024 alone is part of a forecasted 2.5x demand growth for lithium from 2024 to 2030.
The industry's need for new lithium carbonate equivalent capacity exceeds 300,000 metric tons annually. Near-term supply adjustments, including production curtailments and project delays, aim to align with demand, awaiting long-term pricing to stimulate producer investment. Current prices, which are below both operating and investment levels, particularly in Western projects, necessitate a price recovery for sustainable growth.
To support long-term demand, the company has engaged in strategic partnerships, such as a multiyear supply agreement with BMW starting in 2025, demonstrating its commitment to innovation and shareholder value. This partnership, likely focusing on battery technology, aligns with the goal of achieving significant long-term growth for the company.
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Hello, and welcome to Albermarle Corporation's Fourth Quarter 2023 Earnings Call [Operator Instructions]. I will now hand it over to Meredith Bandy, Vice President of Investor Relations and Sustainability.
Thank you, and welcome, everyone, to Albemarle's Fourth Quarter and Full Year 2023 Earnings Conference Call. Our earnings were released after the close of market yesterday, and 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 Neal Sheorey, 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 considerations, 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 that 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.
And now I'll turn the call over to Kent.
Thank you, Meredith. Starting on Slide 4. Our full year results show continued strong volumetric growth with 2023 marking the highest net sales and second-highest EPS in Albemarle's history. This highlights the focus and ability of our global team to succeed in a macro environment that remains challenging. We ended the year with net sales of $9.6 billion, up 31% compared to 2022, of which 21% was related to volume growth. Energy Storage delivered 35% volumetric growth in 2023.
For the full year 2023, Albemarle's adjusted EBITDA was $2.8 billion or $3.4 billion, excluding a lower cost or market charge recorded in the fourth quarter. Excluding this noncash charge, adjusted EBITDA was in line with our previous expectations.
In January, we announced a series of proactive measures to rephase our organic growth investments and optimize our cost structure. These disciplined actions should allow us to unlock more than $750 million of incremental cash, advanced near-term growth and preserve future opportunities.
Today, we will provide our initial thoughts on our full year 2024 earnings. To help investors model Albemarle in the current environment, we will introduce scenarios based on recently observed lithium market prices. Neal will provide more details on this in a few minutes.
We remain as confident as ever in the future of Albemarle and ongoing demand for the essential elements we provide to support modern infrastructure, including mobility, energy, connectivity and health. The secular trends of clean energy, electrification and digitalization continue to drive growth. We are uniquely positioned to capitalize on the opportunities in our end markets, in particular, lithium demand.
Over the past year, we have further strengthened Albemarle's position and are committed to navigating the near-term dynamics in a disciplined manner to both support and capitalize on these global trends. I'll now hand it over to Neal to discuss our financial results.
Thanks, Kent, and good morning, everyone. It's a pleasure to join my first earnings call with Albemarle. I've hit the ground running and in the coming weeks, I'll be on the road meeting with our shareholders and analysts. I'm looking forward to reconnecting with many of you and building new relationships with those of you I haven't yet met.
Moving to Slide 5. I'll start with a review of our fourth quarter and full year 2023 performance. In Q4, we reported net sales of $2.4 billion, down 10% compared to last year, as lower lithium market pricing was partially offset by increased volumes in energy storage and higher volumes and pricing in Ketjen.
As Kent mentioned, we recorded 2 charges in Q4 that impacted results. The first was a lower of cost or market charge of $604 million, and the second was a tax valuation allowance in China of $223 million. These charges were fundamentally related to the fact that in the second half of 2023, lithium market prices fell over a relatively short period of time. In the case of the LCM charge, market prices reached a level such that our cost of inventory, especially spodumene, which we purchased at a market price from our Talison JV was above the market price of the final lithium salts, which resulted in us writing down the value of our inventory in accordance with GAAP.
Similarly, in the case of the tax valuation allowance, the rapid decline in market prices led us to recognizing losses in China as we process the higher cost spodumene in inventory. In China, we are only allowed a 5-year carryforward period to utilize these losses. In accordance with GAAP, we recognized the valuation allowance against the losses. The company's full year results, excluding those charges, met our previously announced expectations. Net sales of $9.6 billion were up 31%, primarily driven by volume growth. Adjusted diluted EPS, excluding both charges was $22.25 roughly flat year-over-year.
Looking at Slide 6. Fourth quarter adjusted EBITDA was $289 million, excluding the lower of cost or market charge. This primarily reflects a decrease in energy storage adjusted EBITDA driven by lower lithium market pricing, which more than offset higher volumes. In Specialties, adjusted EBITDA declined $64 million, primarily due to lower sales volumes and pricing, reflecting ongoing demand weakness in key end markets. Ketjen adjusted EBITDA increased $34 million as higher sales and higher pricing more than offset increased raws material cost. Turning to Slide 7. Before I transition to forward-looking information, I want to take a moment to review our adjusted EBITDA definition and share an update that we plan to make. Effective with Q1 2024, we are updating our definition of adjusted EBITDA to include Albemarle's share of the pretax earnings of our Talison joint venture. There are a few important reasons for this change. First, the updated definition better reflects our vertical integration with Talison's Greenbushes mine, one of the world's largest, highest grade and lowest cost lithium resources. Second, it smooths the impact of price variations in inventory timing that obscure the underlying profitability of our full chain integration. And finally, this definition is consistent with the amendment to our revolving credit facility, which I'll discuss later on the call.
As a reference point, on this slide, we've given you both the energy storage and Albemarle's full year 2023 adjusted EBITDA under the previous and updated adjusted EBITDA definitions. We will report under the updated definition in 2024. Therefore, all of our comments and numbers regarding 2024 modeling considerations are based on this new definition.
Turning to Slide 8. To help investors model Albemarle's earnings under different price scenarios, we have provided ranges of outcomes for our energy storage business based on 3 lithium market price scenarios that were observed in the back half of 2023. First, year-end 2023 market pricing of about $15 per kilogram of lithium carbonate equivalent or LCE. Second, Q4 2023 average market pricing, which was about $20 per kilogram of LCE. And third, second half 2023 average market pricing, which was about $25 per kilogram of LCE.
Within each scenario, the ranges are based on our expectation to increase energy storage volumes by 10% to 20% in 2024 compared to 2023. All 3 scenarios assume flat market pricing flowing through energy storage's current book of business. These scenarios demonstrate the resilience of our energy storage business.
As you would expect, given our strong resource positions around the world, we can maintain solid margins even with lower year-over-year lithium pricing, which are further bolstered by our organic volumetric growth and the normalization of temporary inventory timing impacts.
Moving to Slide 9. Here, we provided modeling considerations for Specialties, Ketjen and Corporate. We expect Specialties 2024 net sales of $1.3 billion to $1.5 billion and adjusted EBITDA of $270 million to $330 million. Ketjen 2024 net sales are expected to be $1 billion to $1.2 billion with adjusted EBITDA of $130 million to $150 million. The Corporate outlook reflects our planned decrease in capital expenditures, which we expect to total $1.6 billion to $1.8 billion in 2024, down from $2.1 billion in 2023.
Corporate costs in 2024 are expected to be between $120 million and $150 million. Corporate costs in 2023 included interest income that is not expected to recur. And therefore, excluding this factor, corporate costs are relatively flat year-over-year.
Adding it all together on Slide 10. We provided here the full roll-up of Albemarle under each of the energy storage price scenarios.
Turning to Slide 11. I'll provide some further detail on the trends that underpin each segment's outlook. In energy storage, approximately 2/3 of 2024 estimated volumes are expected to be sold on index referenced variable priced contracts. The remaining approximately 1/3 of volume is expected to be sold on short-term purchase agreements. This is a modest change from our past mix and reflects our positioning in this lower price environment. We could potentially add additional long-term contracts, but we will only entertain that if the pricing in other terms reflect long-term industry fundamentals.
Energy storage volume is expected to be weighted toward the second half of 2024 as our own capacity expansions ramp and as we experience normal seasonality. Specialties results are also expected to be back-half weighted. The Specialties outlook reflects continued softness and opaque demand conditions in consumer electronics and elastomers end markets, partially offset by strong demand in oilfield services, agriculture and pharmaceuticals. We continue to actively monitor the situation in the Middle East and in particular, the Red Sea. And are working with our partners to facilitate safe, efficient and cost-effective transport of our products to customers.
To date, operations continue largely as normal though we are experiencing some shipping delays and tighter availability of processing materials. In Ketjen, we are optimistic about increased volumes driven by high refinery utilization as well as higher pricing, primarily in clean fuel technology products. Ketjen made good progress against its improvement plans in 2023, and we are expecting another year of improvement in both net sales and adjusted EBITDA.
Moving to Slide 12. We continue to deliver volumetric growth with line of sight to a growth CAGR of about 20% from 2022 to 2027. Our expected 2024 volume growth reflects projects that are at or near completion in which we have prioritized as we reduced capital spending in other areas. This includes commissioning and start-up of the Meishan lithium conversion facility, completion of commissioning activities at the Kemerton lithium conversion facility and ongoing expansions at Silver Peak, La Negra and Qinzhou.
Our long-term expected lithium sales volumes are mostly unchanged as we continue to utilize flexible tolling arrangements to bridge to full capacity at our conversion expansions, as well as pace supply to current market conditions.
Turning to Slide 13. This is an update to a slide we provided last quarter, which explains how energy storage margins are impacted by JV accounting and the inherent timing lag that occurs from the mine through our conversion processes. The inventory lag we saw beginning in the second half of 2023 is expected to be reduced for 2 reasons. First, the lower of cost or market charge recorded in Q4 2023 resets inventory costs closer to current market pricing. And second, the Talison JV partners recently agreed to change the spodumene pricing to N-1 or a 1-month lag versus the prior use of a 3-month lag. That said, these changes will not completely offset the inventory lag, particularly in a period where prices have significantly changed. And therefore, we expect our first half 2024 margins in energy storage to be impacted by the lag as we process higher cost spodumene inventory and by expected reduced sales from Talison to our JV partner.
Importantly, when we look beyond these temporal impacts, we estimate that energy storage could exit the year at a margin of approximately 30%, assuming constant current market pricing and a return to normal shipments from the Talison JV.
Turning to Slide 14 and our financial position. As our rapid action in recent months has shown, we are committed to maintaining a solid investment-grade credit ratings and enhancing our financial flexibility as we navigate the lower price environment. With our earnings release yesterday, we announced that we have completed an amendment to our revolving credit facility to ensure ongoing financial flexibility. The amendment uses the revised adjusted EBITDA definition, consistent with the definition that we will use for financial reporting going forward.
I'm happy to share that we had unanimous support from our bank syndicate for the amendment. This action, along with all the steps we are proactively taking as a company to modify our cost and capital spending demonstrates our focus on maintaining financial flexibility, adapting with changing market conditions and exercising our investing discipline. With that, I'll turn it back over to Kent to provide more details on our actions to preserve growth, reduce costs and optimize cash flow.
Thanks, Neal. And now turning to Slide 15. In markets as dynamic as ours, growth companies must be able to pivot and pace with disciplined decision-making and focused execution. This is especially true for Albemarle as a trusted leader in the markets we serve.
At Albemarle, disciplined growth means carefully prioritizing CapEx time lines when pricing moves higher and rephasing when the market shifts. As we look to 2024 and the current market dynamics, we've identified certain strategic investments and projects across the enterprise that do not need to grow as fast in the short term. In short, the returns for new projects are not there at these prices, which we believe are well below reinvestment levels. As a result, we are reducing our CapEx in 2024 by $300 million to $500 million versus 2023 by refocusing our energy on the large, high-return projects that are significantly progressed near completion or in startup.
Additionally, we are aligning our OpEx to a slower pace of investment. We are taking action to reduce costs by nearly $100 million and we expect to realize more than $50 million of these savings in 2024. Our actions include reducing headcount and lowering spending on contracted services.
We also continue to evaluate and execute the sale of non-core investments. For example, we recently monetized our Liontown Holdings given our decision to withdraw our nonbinding offer. At the same time, we're pursuing additional cash management actions, including optimizing our working capital. This includes initiatives focused on shortening the time from the mine to the customer in our supply chain. These measures together are expected to unlock more than $750 million of cash flow in the near term. This disciplined approach to managing the current market downturn reflects the actions that we must take to preserve our financial flexibility and repace our investments. The actions we are taking today will position Albemarle to emerge stronger to the benefit of our shareholders, partners, employees and the communities in which we operate.
Moving to Slide 16. The specific rephasing decisions within our 2024 CapEx plan include continuing critical health, safety, environmental and site maintenance projects, commissioning the Meishan lithium conversion facility, which reached mechanical completion at the end of 2023, completing commissioning activities for Trains 1 and 2 at the Kemerton lithium conversion facility and prioritizing construction on Train 3 of the Kemerton expansion project and prioritizing permitting activities at the Kings Mountain spodumene resource.
We continue to have significant optionality for long-term organic growth. At the same time, if pricing remains below reinvestment economics, we will be disciplined and hold capital at or below current levels for the foreseeable future.
Moving to Slide 17. The Albemarle way of excellence remains the standard by which we operate and continues to serve us well in 2024. Here, we provide more details on operational discipline, a key pillar of our operating model, especially given the current environment. In 2023, we realized productivity benefits of more than $300 million well ahead of the initial target of $170 million, and we've identified plans that target another $280 million in productivity benefits this year.
In manufacturing, we continue to implement initiatives on overall equipment effectiveness, including improvements to recovery and utilization with expected benefits of $80 million. In procurement, we are targeting benefits of $150 million by pooling corporate spend and continuing our strategic sourcing to recognize lower raw material pricing.
And finally, after restructuring certain back-office functions and with 3 prioritized projects, we expect to realize $50 million of productivity improvements. Slide 18 demonstrates the adjustments we've made to our capital allocation priorities as we navigate the dynamics of our key end markets. Our 4 capital allocation areas remain the same with the shifts in how we prioritize. As Neal highlighted earlier, maintaining our financial flexibility in this environment is a central area of focus. We'll continue to selectively invest in high-return growth, but we'll be patient and disciplined. We expect minimal M&A in this environment as we primarily focus on organically accelerating growth at attractive returns. As we have mentioned before, we'll continue to actively assess our own portfolio to identify opportunities to create value.
Moving to Slide 19. While the pricing environment has softened for the moment, we should not lose sight of the fact that we continue to see significant long-term growth in demand for limited supply. This updated forecast is about 10% below our previous forecast from early last year, and it now reflects recent OEM announcements, more moderate battery size growth and inventory destocking. At the same time, global EV penetration is expected to grow significantly, resulting in anticipated 2.5x lithium demand growth from 2024 to 2030. In 2024 alone, we expect demand growth of 28%. To put it another way, we expect that this industry needs more than 300,000 metric tons of new LCE capacity every year.
In our view, incentivizing producers to meet this demand requires long-term pricing at or above investment economics and certainly above current market pricing. At today's prices, the economics for new greenfield projects, particularly in the West, are not supported. We expect near-term supply to be relatively balanced with demand, and you see that adjustment starting to happen with recently announced production curtailments and project delays, including our own.
As a leader, Albemarle remains well positioned to capitalize on the long-term growth trends we see in front of us, but we'll be disciplined in how we capture our share of it.
Slide 20 shows our durable competitive advantages and how Albermarle can win as we navigate near-term conditions. We are vertically integrated with a globally diversified portfolio of world-class low-cost resources and industrial scale conversion assets. Albemarle has leading process chemistry that allows us to build and operate large-scale assets safely and efficiently. As a leader in the markets we serve, we are a partner of choice to strategic customers and stakeholders that seek to drive innovation and growth. For example, we recently signed a multiyear supply agreement with BMW, which takes effect in 2025. That agreement will also allow both companies the opportunity to partner on technology for safer and more energy dense lithium-ion batteries.
And last, but certainly not least, we are committed to operating sustainably with industry-leading ESG performance and partnering with customers and suppliers to benefit the entire supply chain. As Albemarle adapts to the market dynamics, both present and future, we are confident in our ability to deliver on our strategy and drive value for shareholders. With that, we'd like to turn the call back over to the operator to begin Q&A.
[Operator Instructions] Your first question comes from the line of Stephen Richardson from Evercore ISI.
Just wondering to get a clarification on Slide 12, which is always very helpful in terms of sales volumes. Could you comment on what were your fourth quarter sales volumes? And what do you expect Q1 to be?
Neal, do you want to take that?
Sure. So if I heard your question right, you were looking for volume growth that we had in the fourth quarter as well as volume growth that we expect in the first quarter. So we haven't -- with regards to 2024, we haven't given the specific volume growth numbers across the specific quarters in 2024. As we mentioned, we expect 10% to 20% growth in the year in 2024. And really the growth trajectory in the year will be dependent on how quickly we can ramp our existing assets that are in startup at the moment.
Maybe just a follow-up, specifically on assets. The 10-K, which looks you just filed suggests just looking at those numbers that the Atacama was flat year-over-year. Is -- could you just give us an update on the Salar expansion and what the status is in Chile right now in terms of incremental volumes?
Yes. So I can start. Eric can fill in a little bit. So at the Salar, we were operating at capacity. We've done expansions at La Negra. We need brine to feed that. So that expansion is complete, but we need brine from the Salar to feed that. And then we were commissioning the Salar Yield project. That's the project that will provide the additional brine. But once we do that, it has to work its way through the brine system and then we can -- that will end up feeding La Negra project. And I think that's probably, Eric, a 6-month lag roughly from a Salar perspective.
Yes. I mean for virgin brine that we pump, it's I think the rule of thumb has been more like 18 months, but for the Salar Yield, it's 6 months. We commissioned that in the middle of last year. That's enabling Steve, the growth that we will see in that 10% to 20% range. A big chunk of that is coming out from carbonate from Chile from the La Negra plant enabled by Salar Yield.
Your next question comes from the line of Colin Rusch from Oppenheimer.
Can you talk a little bit about what you're looking for as triggers for either Salar or reaccelerating some of the CapEx investments for the balance of the year?
Yes. So I mean, to be blunt, I think that's going to be about pricing levels that we see and the trends that we see. So we see demand there. The volume growth in the industry is there. And we start seeing some projects come out, operating projects as well as projects on the books like the ones that we described. So for us to kind of reaccelerate, if you will, we'll need to get a better view of what pricing is and the long-term view of that as well. So we think what the prices today are unsustainable, they're below operating cash levels of some assets that are currently operating, and they're definitely below reinvestment levels. And as we said, particularly in the West, there's not a particular price that kicks up necessarily a range of projects off. It's all individual depending on the resource, where it's located, what the cost position is of that and the conversion asset where that's located.
So there's not 1 number that we will look at, but we'll look at it project by project. But it's not going to -- if spot prices hit a number that's not going to necessarily turn us into -- back into investment mode. We need to have a view that, that's a long-term number that would -- that we can rely on through the life of that asset.
You've talked about inventory levels for the industry in the past. And I wanted to get an updated view on what you think is a normalized inventory level for the channel to keep things healthy and moving and what you're seeing right now in terms of inventories on hand through the channel.
Colin, it's Eric. We've spent a lot of time looking at inventory and there's been a drawdown effect that's been on and off throughout all of last year and into this year. At the top of that -- of the supply chain upstream, looking at lithium salts and even the next level cathode production, we feel that inventory is normalized. The drawdown we're seeing now harder to predict and understand because it's less visible to us. Is that the battery cell, battery module and EV level? There are a lot of reports out there that vary on that. It's not a highly quantitative or a highly known number. But we think there's probably a couple of months excess as we exited last year that will be drawn down this year that's going to affect apparent demand.
So that's why our demand forecast is a difference if you look at -- I can't remember which slide it is, the lithium supply side towards the back of the deck between lithium demand growth and EV growth, and that is that drawdown effect happening at the battery and EV level.
Your next question comes from the line of Steve Byrne from Bank of America.
Maybe just continuing on that discussion. Where is it that you see the glut of inventory that is driving spot prices down? Is it spodumene inventories at converters that is really where the, I think, a lot of material is?
Steve, I'll repeat what I said before. It is not upstream. We're not seeing large inventory levels. We're actually seeing projects -- spodumene projects go into care and maintenance. There are several in Canada -- or excuse me, in Australia, there's 1 in Canada and some others that are questionable that we're watching closely. And so it's not there. It's not the conversion level. We track that as well, as well as the direct consumer for us, which is the cathode companies. We have very high visibility to that. That was at 1 point fairly high a year ago that has since come down.
Inventory that we're seeing is further downstream, as I was saying earlier, it's in the battery and EV level of supply chain. And that is affecting apparent demand to the lithium industry, albeit EVs are growing quite healthily, above 30% we see for the year going forward.
And what do you -- what would you say is driving the spot price of hydroxide to be meaningfully lower than carbonate in China? And does it make sense for you to cut your operating rates to tighten that market up and drive an inflection?
Well, look, I'll answer the price question. Maybe, Kent would like to comment on the broader supply question. On the price question, I think what you're seeing in China is particularly -- now let's remember, China is almost 3 quarters -- 2/3 or 3/4 of lithium supply is consumed in China. So it's very much a market where things are set, and the trend there has been strongly towards -- in the past year towards carbonate for LFP production. That is -- that trend is the opposite in other parts of the world that are developing like Europe and North America, although we are seeing LFP interest.
So those 2 products are starting to balance out, looking to be closer to 50-50 in their mix, although we have to watch it. It will move with time as technology and scale economies develop. But that is causing that near-term if you will, putting things upside down because historically, hydroxide has been higher than carbonates in the near term, we're seeing that flip. We would expect that to revert over time as the industry grows. Do you want to comment on supply more broadly, Kent?
Yes. I don't -- I mean I don't know if I have anything much to add to that. I mean I think we supply hydroxide and carbonate. We tend to supply carbonate from Chile. So we're -- that's capacity is growing, as we just talked about a little bit earlier. So we'll supply that into the LFP market. And then -- so we're trying to be balanced between hydroxide and carbonate and catch those growing trends. It's a little bit more skewed toward carbonate at the moment, and -- but we think hydroxide catches up to that. And then your question about should we lower rates to kind of bring that back in the balance. So we're still ramping up, and we still see growth in the market, 20% a year. We're 10% to 20% for us this year and the market is a little bit stronger than that. So think that demand catches up without us having to adjust operating rates. We're still trying to commission plants and catch up to that.
Your next question comes from the line of Josh Spector from UBS.
So I had a couple of questions around your pricing scenarios. So -- when you talk about $15 a kilogram on the Asia markets, what's implied in that scenario in terms of Albemarle realized pricing and really getting towards kind of the impact of floors if that's meaningful or not or if anything's changed in that regards?
Yes, Josh, it's a bit of a complicated picture because as you may know, there are varied price indices out there. There are some for China and then there's some for outside China. Those inside China tend to be 10% to 15% lower, just because of the structural differences, VAT and some other aspects that drive that. But in any event, as you look at an average price across the 2, we're going to be higher than the index generally for a couple of reasons, particularly as prices go low, 1 is floors. So it's -- our price is a little more sticky, even though it is linked to the index. And then the other is our mix. We tend to be more biased outside China than in. That being said, where the price goes is that will be the trend that our ASP, or average selling price, follows.
Your EBITDA kind of ranges for 15 versus 20 versus 25, it's the same change in EBITDA between each range. If there were floors in the high teens, low 20s, wouldn't the increment from 15 to 20 be a bigger step-up than 20 to 25. I guess what would I be missing in that math?
Josh, we might need to look at the math you're doing because actually the transitions between those different scenarios are a little bit different. And actually, if you do some averaging math in those scenarios, you'll see how we have a little bit different jump between the 3 different scenarios.
Okay. I'll follow up on that offline.
Our next question comes from the line of Jeff Zekauskas from JPMorgan.
I have a question on your Specialties forecast. So for next year, at the midpoint, you assume EBITDA is about the same and revenues were about flat -- and last year, in the first quarter, I think your specialties EBITDA was something like $162 million and maybe you finished the year at something close to 30%. How can you get to flat EBITDA as a base case?
Jeff, this is Netha. I think if you look at the way we're projecting the way pricing plays out throughout the year, you're right. First quarter will be a little bit challenging on a year-over-year comparison standpoint, but we still saw the numbers you saw, which was about a 6% growth in Q1 last year. But the decline from that was really, really steep driven by pricing. But if you play that out on an annual basis for us, we think we can get back to where we were last year with maybe some upside or downside based on the ranges we provided with the pricing we expect to see going forward. And as Neal stated, that really is about a second half ramp in market volume and market pricing that we see coming and it's really driven by how we look at the forward indicators with semiconductors, which for us is a good proxy for electronics already up 25% in the first quarter alone. .
Okay. And then for my follow-up, can you talk about what your either cash flow expectations are this year or free cash flow expectations for '24?
Yes. I'm sorry, Jeff. So this is Neal, Jeff. So yes, we have obviously several things that are in motion right now with regards to our cash flow. And I just want to put a finer point on what we're working on. With regards to operating cash flow, obviously, we've already mentioned that we are working hard on aligning our own OpEx to the current pricing in the market. We're also working on several operational things from a working capital perspective. You should expect in a deflationary environment that we should continue to release cash from working capital. And additionally, we're looking for other levers that we can pull to further reduce inventory in our network. For example, investors are well aware that we have a long time between the mine and the customer in our natural supply chain. So we're looking for ways that we can reduce that and harvest cash from there.
And then, of course, from a free cash flow standpoint, we're reducing CapEx, as Kent mentioned earlier. In addition to that, we also have, what I call, nonoperational cash flow items that we're working on. This is things such as looking at what we can do with our working capital balances and generating financing from that. Now all of that said, I realize that some people may want a rule of thumb of how to think about this. So if you think about things from a cash conversion standpoint, and obviously, it will depend on what your lithium scenario is, but a cash conversion, if you look over the last 3 or 4 years, this company has averaged a conversion of about 50%, plus or minus 10%. So that's one example that you can use to think about how to model operating cash flow.
Your next question comes from the line of Vincent Andrews from Morgan Stanley.
Maybe just following up on that, just looking at the balance sheet at the year-end. Your receivables are up year-over-year. Your inventory is up year-over-year, your payables are about flat, and that's in a -- obviously, lithium price ended the year much lower at the end of '23 than it did in the '22. So what's the bridge on that, that caused that working capital to build despite the lower prices?
Yes, Vincent. So it's a few things. I think one of the important ones with regard to inventory is remember that we have several assets that are in start-up. So there has been a natural build in inventory through 2023, and you will continue to see that to some extent in 2024 as we build that inventory and work through the commissioning and startup of these new facilities that we have around the world. Remember, too, that there's a timing aspect to this as well. And so you have the timing of shipments and how that flows through our working capital. And so when you look at it, at an end-of-year punctual period, you won't necessarily see the impact of the timing of those shipments. And so when we take a snapshot at the end of the year, it might not accurately reflect sort of the lag that we have in our supply chain.
But just to link your question, Vincent, also to what Jeff just asked, as you think about whatever your lithium price scenario is and as you think about working capital, cash release in 2024, depending on the scenario that you pick, if you use the scenarios we put in our deck, we're looking at a sales decline of somewhere between $2 billion to $4 billion depending on the scenario. And historically, we use a rule of thumb here at the company that working capital is around 25% of sales. So you should expect in 2024 that we can release cash to the tune of $500 million to $1 billion, depending, of course, on how those scenarios evolve in 2024.
That's very helpful. And Kent, can I just ask you to refresh us on what return on invested capital you're looking for when you put CapEx to work in the energy storage business? And I don't know if you want to define it differently by geography, but just sort of what those rough hurdle rates are and if they've evolved at all over the last few years given the price movement?
Yes. So we -- I mean, we've kind of have a benchmark that we use where as we say at trough pricing, we want to get our cost of capital and double that at kind of the mid-cycle pricing. So yes, now, those numbers have moved around on us, but that's kind of our -- still our aim, but we do projects is when we look at it at what we believe is trough pricing that would generate a cost of capital and then kind of twice that at mid-cycle pricing -- average pricing.
Your next question comes from the line of David Begleiter from Deutsche Bank.
And Neal, welcome aboard. Kent and Eric, energy storage EBITDA guidance, if you were to mark-to-market that guidance to current prices, assuming no change in prices for the rest of the year, how much lower would your EBITDA guidance be for energy storage?
David, look, I think we've provided the numbers here for people to interpolate as they would like to, between these different lithium price scenarios. And so you can do your interpolation based on what you think the market price is at the moment. The only caution that I would give you as you think about a lower price scenario, which I think is where your question is getting at is -- and you can see this in our scenarios, as you get to these levels, it's not unreasonable to think you're bumping into some of the floors that we have in our contracts, and those are at varying price levels, but you will see that in the math of our scenario. So I wouldn't necessarily take that interpolation one-for-one. if you're going down further than the scenarios we've given.
Understood. And Eric, just on lepidolite production in China, how much do you think has been shut-in? How much do you expect to be shut-in? Why has it been -- why has that not been more shut-in up till now for lepidolite production in China?
Well, thanks for the question, David. A couple of things I'd say. It's -- when we look at shut-in capacity, our capacity that's exited the market in general, and a big chunk of it is lepidolite, but some of it is also nonintegrated spodumene and some of it is spodumene itself that's come offline or about to come offline because it's very high cost. It's above current spodumene costs even or prices rather -- or the cost is above current spodumene prices. But that is about 200,000 tons in total that has come off. Lepidolite is probably close to maybe 1/3 to half of that somewhere in that range.
The nonintegrated lepidolite production has come off. Some of the integrated lepidolite production that is a weaker grade is well below -- price is well below the cash cost of that. It's very hard for us to -- we know that. We know what the economics are. We can't necessarily understand why some of it's there. It's still operating because otherwise, it should be -- our math tells us that it should be coming offline. So we can't quite understand what's going on there, but there's still quite a bit -- there's still some capacity in the market that's -- well, like I said, at current prices, cost is well above those prices.
Your next question comes from the line of Joe Jackson from BMO Capital Markets.
I'm [indiscernible] Joel Jackson. So I want to ask a question about some of your sales guidance for energy storage. If I take your guide $15,000 a ton, 10% to 20% more volume than 150,000 tons you did at energy stores last year. That would imply sales just a bit below $3 billion, maybe $2.9 billion for energy storage for this year regarding to, I think, $3.3 billion or something like that. What is the $400 million or $500 million difference in sales? Is that an accounting thing, spodumene? Can you explain that, please?
No, it is not an accounting thing. I'm wondering what volumes you're using because the ranges that here in our scenarios are based on the range of volumes that we've put here on the slide, Slide 8 in our deck. And so we've adjusted the ranges based on that. So there's definitely no accounting noise in that revenue number.
Additionally, I should say this too, maybe this explains it. Just remember that for energy storage in total, there are other products that are in energy storage that don't necessarily move one-for-one with lithium market price. So maybe that's another piece of what is in your math as well.
Okay. Fair enough. I just wanted to also ask you about the U.S. strategy. So as this industry was really looking at regional supply chains, and you really were going to go after Kings Mountain and U.S. Mega-Flex, you put those plans on hold that you're still doing the permitting, of course, at Kings Mountain, as we know it takes a while sometimes to get mines permit in the States. Is this how important is this U.S. strategy is going to be? Is this something maybe that will have to assess in the DOE or DoD with some of the different funding options, help revive some of this? I guess, it seems like it's a bit of a damper here on some of the objectives of political in the industry.
Yes. No, I think there's a big impact on that. On building the -- we say in the West, so called Europe and North America, but focus is -- and we were a bit more focused on North America. We have access to a great resource at Kings Mountain. But where prices are today, the economics aren't there for those projects. So we continue to progress, as you said, the permitting -- the kind of real long lead time items that are not real capital intensive in anticipation of prices coming back to where we'd be able to do those investments or some support or another way that we maybe could do those. But they've been pushed out. I mean at Richburg, we have -- it's not a canceled project, it's been delayed. So we're still doing some of the long lead time permitting there, but no construction and we stopped engineering work on it.
And Kings Mountain, we're progressing with the permitting because past the long lead time. We hope to work out a solution, but it requires better pricing in order to execute on those projects. And those are -- those are kind of 2 of the best opportunities to start the supply chain. We need a lot more support, not just -- we can't do it ourselves. But that would be the first project we would bring to market in North America, and probably as others as well, particularly around resources.
Your next question comes from the line of Mike Sison from Wells Fargo.
Could you just remind us, given your new CapEx plans, what capacity you'll end within 2024? And then could you give us an update on how you think that will unfold in '25, '26, to '27? So where do you think you'll be in capacity to offer the market over the next several years?
So depending on where we -- Mike, it's Eric, depending on where we land in that range of 10% to 20%, you're talking something could be close to -- it's going to get close to 200,000 tons, 190,000, 200,000 tons at the top end. And that is being driven, just to be specific by more production out of Chile, which we discussed earlier, and that's realizing some of the efficiencies of the Salar Yield Project and debottlenecking capacity downstream for La Negra to drive that growth. It's also being driven by increased spodumene production out of Australia and the ramp of Kemerton, Qinzhou as well. Where Meishan is more of a 25 item for the time being, but that plan is ramping nicely for that period of time. That then brings me to how you think about the future.
Kemerton 1 and 2 will continue to ramp as you go into '25. Meishan will start to ramp in '25 and '26. The interesting thing about our near-term volume picture, we're going to be looking at that sort of 20% plus volume growth for some years to come based upon the investments we have made already. The things that we have idled or paused from an investment standpoint that Kent earlier referenced are -- were longer term further out, sort of really second half of a decade in terms of what they were going to deliver. So the impact of slowing those down should prices stay low and we not return into investing in those projects will be felt in the latter part of the decade, which is I'll also remind you at the point in time when we see industry supply already getting tight relative to demand.
So there's some real challenges because we don't see demand slowing down. We certainly see weakness in certain parts of the smallest market, which is North America. But on the whole, we see a very strong growth and a challenging environment for supply to be able to meet it in the long term. But we have good growth, I would say, in the coming years, for sure, and multiple several years ahead of us.
Yes. And some of that is just the lead time in getting these investments on the books and then executing against it. It's a number of years to get this out there. So the projects we're pulling back on, as Eric said, impact the back half of the decade.
Got it. And just a quick follow-up and just because I figured you guys would be better off knowing what the potential is for lithium prices. I know you don't want to get into a specific forecast, but -- what do you think needs to happen to get pricing back to greenfield economics?
Well, I mean prices stay where they are, you're going to see production come off and projects come off the books and that will eventually bring prices up. The imbalance will happen. And then I'm hoping we're in a cycle where lower highs and higher lows starts to prevail, but -- and that was what we were anticipating in this cycle. This is still higher than the last low, so maybe it's just not quite as mature as we had anticipated. But we need to get into lower highs and higher lows so that there is some consistency in the industry and people can see through to an investment case for new projects.
Yes. It's not an understatement to say, Mike, that if prices stay where they are, which is well below marginal cash costs. And as we said, we thought it would be less volatile is that you're going to see -- we believe you're going to see enough projects ultimately come off at that inflection point where we start to get structurally short on supply moves forward from the latter part of the decade into the middle part of the decade. So that not only -- what that says is excessively low prices only aggravate excessively high prices potentially down the road. That's the challenge. We -- and certainly, our customers love to see a much more moderated cycle.
And as the market does recover, we'll look to try to find ways to reduce that volatility in our mix. But certainly, we'd hope that for the industry more broadly as well.
Your next question comes from the line of John Roberts from Mizuho.
Does that lower end of the 2024 volume growth of 10% include a sequentially flat March quarter or sequentially down March quarter in volume?
So sequentially from the fourth quarter, is that what your question year-over-year, just to clarify this question?
You start the year out without any growth sequentially?
Yes. I mean I think there's going to be a difference between production and sales. I think if you look at what happens seasonally with EVs, -- it is -- each year is a rapid rise to December and then a drop seasonally in January. So from a production standpoint, we'll be sequentially up. From a demand standpoint, seasonal demand plays a role for the whole industry, including us.
Okay. And then on Slide 19 that has the industry EV growth and the lithium growth -- so battery sizes are getting smaller here in the near term, but it looks like it flips and the assumption here is that full EV start -- before the end of the decade, full electric start outgrowing hybrids again?
Yes. Well, and it's hard to generalize that, John. I mean, I think you have to go by region. So what I'd tell you is in China, there was a nice growth in plug-in hybrids last year. By our reckoning and our estimates, the estimates we had at the beginning of the year where we didn't anticipate that, that plug-in hybrid growth came at the expense of internal combustion engines, not at the expense of battery electric vehicles in China, which is the largest market, it's 6% of the market.
In Europe, in the past year, you've seen the opposite trend. Battery electric vehicles have been growing faster than plug-in hybrids. The U.S., which is the smallest market is in a pivot point now, which I don't -- we'll have to see which direction it goes. So a lot of discussion about how certain automotive producers are struggling with demand and costs to play. And so I think they're looking at plug-in hybrids as an alternative. But it is on the margin, it's the smallest market. So I think it has the least effect on lithium demand. By and large, going back to your original question, battery size grows, may grow at varying rates year-on-year-on-year, but it grows over time as we go forward.
And our final question comes from the line of Kevin McCarthy from Vertical Research Partners.
Would you comment on the expected quarterly cadence or phasing of your adjusted EBITDA in energy storage in your $15 per kilogram scenario? I thought I heard a comment in the prepared remarks that you would expect to be at a 30% margin by the end of the year? So perhaps you can kind of walk through that margin escalation expectation?
Yes. A couple of things to -- Kevin, this is Neal. Just a couple of things to think about as you think about the quarterly ramp. First of all, as we mentioned in our prepared remarks, in energy storage, we expect most of the volume growth or at least 2/3 of the volume growth to occur in the back half of the year as our plants ramp up. So remember that we are still ramping these facilities through the first half of the year, and then you'll start to see that volume kick in as we get into the back half of the year. That's point number one.
Point number 2 is that as we move through particularly the first quarter, we are still working off some spodumene inventory that is higher priced. And so as we mentioned again in the prepared remarks, you should expect that, that will weigh on our margins in the first quarter. That is just by nature of the inventory lag that everyone is very familiar with as we process that spodumene. Why -- margins then start to improve as we go through the year and we exit the year at this sort of stronger 30% margin that I mentioned in the prepared remarks, is because as things normalize and you have a spodumene cost running through our P&L, that's more indicative of the lithium salt prices, you start to see come through the margin strength of our energy storage business even in this lower price environment, which you would expect when you're sitting on some of the best resource in the world. And so I would -- my counsel here is to think about margins rising as you go through the year in one part because of volume, but also in another part as we work through this inventory lag and then get to the back half of the year.
That makes sense. And as a follow-up, if I zoom out the lens and look at your segment margins during the last cyclical trough for lithium, they were around 34% or 35% under the old definition of adjusted EBITDA. And so my question would be if prices persist at the $15 per kilogram scenario, what do you think the new trough margins could be moving forward into, let's say, 25 plus? Is that mid-30% level still representative or indicative or do you think they would be materially higher or lower than that?
Kevin, I'll jump in here. I mean, I think it's -- let me tell you the variables. The answer is it's going to be fairly similar, we believe, because what are the factors? One, we are -- again, once spodumene prices are indicative lithium prices. They haven't been most of all last year and into earlier part of this year just because of the accounting we talked about the lag, we've talked about within Talison. Once they are -- you're dealing with a margin -- that's one benefit that gets us back to where we were before. When you talk about the last cyclical trough, prices were even -- well, they're about where they were lower than where they are now, and we're earning a 34% EBITDA margin. But the difference then is spodumene with a smaller percentage of our sales mix. It's a much larger percentage now. It is a slightly higher cost than Chile and brine. That's one thing to note at these prices.
The other is, is that we didn't have nearly as many plants in the commissioning stage. And these are plans that take a couple of years to ramp. They have a fixed cost associated with them. That's a drag when you're ramping those plants. The upside benefit of that is without any further capital investment, we're going to continue to grow for the next couple of years, as I said to Mike earlier, the downside is it's a drag that brings your margins down. So that's -- these are the factors that would lead at these prices, which are, as I said, is trough above the prior trough amid sort of 30% EBITDA margin.
That's all the time we have for questions. I will now pass it back to Kent Masters for closing remarks.
Thank you, and thank you all for joining us today. Albemarle is the global leader in transforming essential resources into the critical ingredient for modern living with people and planet in mind. Our strategy and path to capitalize on the opportunities of electrification over the coming years is clear, and we will continue to operate with a disciplined operating model to scale and innovate, deliver profitable growth, and advanced sustainability.
We continue to work to be the partner of choice for our customers and the investment of choice for both the present and the future. Thank you for joining us.
This concludes today's conference call. Thank you for your participation. You may now disconnect.