Ladies and gentlemen, thank you for standing by. And welcome to the Q2 2020 Albemarle Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference to your speaker today, Meredith Bandy, VP of Investor Relations and Suitability. Please go ahead, ma’am.

Hi. Thank you, Joel, and thanks everyone. And welcome to Albemarle’s second quarter 2020 earnings conference call. Our earnings were released after the close yesterday and you will find our press release, presentation and non-GAAP reconciliations posted to our website under the Investor section at www.albemarle.com. Joining me on the call today are Kent Masters, Chief Executive Officer; and Scott Tozier, Chief Financial Officer. Raphael Crawford, President, Catalysts; Netha Johnson, President, Bromine Specialties; and Eric Norris, President, Lithium, are also available for Q&A. As a reminder, some of the statements made during this conference call including our outlooks, expected company performance, expected impacts of the COVID-19 pandemic and proposed expansion plans may constitute forward-looking statements within the meaning of federal securities laws. Note that the cautionary language about forward-looking statements is contained in our press release and that same language applies to this call. Please also note that some of our comments today refer to financial measures that are not prepared in accordance with GAAP. A reconciliation of these measures to GAAP financial measures can be found in our earnings release and the appendix of our presentation, both of which are on our website. With that, I will turn it over to Kent.

Thank you, Meredith, and good morning, everybody. On today’s call, I will cover a high-level overview of the current environment, give an update on our strategy and highlight some of the actions we are taking to improve the sustainability of our business. Scott will then review second quarter financials, provide updates on our balance sheet and cost-saving initiatives, and review our outlook. I want to reaffirm that the safety and welfare of our people is our highest priority at Albemarle. Our core values always define how we operate but even more so in the difficult situations we face today. During the pandemic, we have been able to continue to operate because we care about the welfare of each other. We humbly acknowledge that this crisis is not about us but about everyone, and we show integrity by doing the right thing. Thankfully the pandemic has not materially impacted our operations to date. I deeply appreciate the courage and continued support of the frontline essential workers in our communities and our dedicated Albemarle employees, who continue to ensure safe operations at our facilities and offices worldwide. At this point in time, we have had relatively few diagnosed individuals out of more than 5,600 global employees. Using our exposure protocol we have traced the contact path for any confirmed case among employees and have isolated colleagues as needed. We are staying in close contact with impacted employees to monitor their welfare. We are grateful that previously diagnosed employees have recovered or are recovering as expected. In areas where we are seeing unfavorable trends, such as Chile and parts of the U.S., we are extending work-from-home requirements for non-essential workers and working closely with our manufacturing sites to ensure safe operations can continue. At many of our locations, non-essential employees have returned to work. We continue to be in close contact with site teams to support them in a healthy and safe return process. Our global cross-functional COVID response team continues to meet weekly to mitigate the impact on our operations and manage the impacts on customer demand. Turning to recent results. Yesterday we released second quarter financials, including net income of $86 million or $0.80 per share and adjusted EBITDA of $185 million, down 29% from the prior year. However, I am pleased to say that these results were at the high end of our previous outlook, thanks to better than expected performance in Lithium and in Bromine. Our primary capital priorities continue to be paying dividends to shareholders, preserving our investment grade credit rating, and maintaining our long-term growth profile. To that end, during the quarter we announced a dividend of $0.385 per share in line with the prior quarter and up 5% from last year. We continue to maintain adequate financial flexibility with liquidity of $1.5 billion and our previously announced cost-saving initiatives are also on track. At a high level, Albemarle’s strategy has not materially changed. We will invest in and grow our Lithium business, and we will fund Lithium growth with cash flows from our more mature businesses. Historically, we have actively managed our portfolio to generate shareholder value and will continue to do so. We will also maintain a disciplined approach to capital allocation. The difference is that the COVID-19 pandemic has pushed Lithium growth out by at least one year, while also impacting near-term cash flow from our other businesses. Our response is to broaden and accelerate our focus on operational discipline to continuously raise the bar on performance. And specifically, manufacturing excellence to drive best-in-class cost management and product quality with a relentless focus on safety, standard work, continuous improvement, and the application of lean principles across our manufacturing operations. In business excellence to deliver exceptional value and service to our customers, and to capture profitable high-value opportunities to tailor value propositions and optimize business processes and resources. And capital project excellence to effectively manage capacity to demand through the use of standard reliable designs and discipline planning and process management. We know that being profitable and doing what’s right are not at odds with each other. We expect to do both well, and our sustainability framework is our guide. In terms of our people and workplace, we continue to advance and promote inclusion and diversity across our organization. Last year, we added two highly experienced female Board members; currently, 50% of our directors represent gender and racial diversity, which broadens the range of perspectives, experiences, and insights we can leverage to benefit our organization. Recent events of discrimination and violence against black citizens in our communities remind us that we need to work much harder to fight racism. As a result, we have introduced a multi-pronged strategy to refocus our inclusion and diversity efforts from the bottom up, as well as the top down. Current activities include the addition of a dedicated senior inclusion and diversity leader, unconscious bias training for leaders, and incorporating inclusion and diversity into the onboarding process for all new employees. We are also focused on responsible natural resource management; water management is an important sustainability objective for Albemarle and to continue to grow it’s imperative that we manage water efficiently. One example of this is that our facility in Magnolia, Arkansas, one of the world’s largest Bromine and Bromine chemical sites, uses an artificial marsh as a unique water treatment facility. We are actively collaborating and engaging with our communities. Our Lithium operations at the Salar de Atacama in Chile work closely with the local communities to promote environmental stewardship and foster the community’s long-term development. We share a percentage of our revenue with local indigenous communities and more than 35% of our employees in the region are indigenous. Finally, our sustainability business model helps create long-term value for all shareholders. For example, about 50% of our Catalyst revenues are from products that reduce SOx and NOx emissions to produce cleaner transportation fuels. In 2019, the use of our Catalysts prevented the release of about 10 million tons of sulfur into the environment. In the coming weeks, we will publish an updated sustainability report to provide increased transparency and disclosure around these and other important topics as discussed at our Investor Day late last year. We are excited about the progress we have made on sustainability, but we also recognize that sustainability is by its nature a long-term journey. In 2021 and beyond, our focus will shift from setting the baseline on sustainability performance to goal setting and continuous improvement. With that as a backdrop, I will turn it over to Scott for more detail on our recent results.

Thank you, Kent, and good morning, everyone. Albemarle generated second quarter net sales of $764 million, a decrease of about 14% compared to the prior year. This reduction was primarily driven by reduced prices in Lithium as expected coming into the year and reduced volumes in Catalysts and Bromine related to the COVID-19 pandemic. GAAP net income was $86 million or $0.80 per diluted share. The non-GAAP adjustments this quarter were primarily related to restructuring costs with adjusted earnings of $0.86 per diluted share. Lower net income was primarily driven by lower net sales, partially offset by over $30 million in cost and efficiency improvements; corporate and GS&A were lower versus the prior year due to these cost savings initiatives. As Kent stated, adjusted EBITDA was $185 million, a decrease of 29% from the prior year, but at the high end of the guidance we gave in May. If you look at slide eight for a look at the EBITDA bridge by business segment, adjusted EBITDA was down $77 million over the prior year reflecting lower net sales, higher freight costs, and lower equity income, partially offset by the cost savings initiatives. Lithium adjusted EBITDA declined by $15 million versus the prior year; excluding currency, pricing was down about 14%, partially offset by cost savings initiatives. Lower pricing reflects previously agreed battery-grade contract price concessions, as well as lower market pricing. Adjusted EBITDA was also impacted by lower Callison equity income as our joint venture partner took lower volumes in the quarter. Bromine’s adjusted EBITDA was down $8 million excluding currency. The decline was primarily due to volume reductions related to demand softness, partially offset by cost savings and efficiency improvements. In Catalyst, adjusted EBITDA declined $44 million excluding currency. Volumes were down 22%, while pricing was down just 4%. Lower volumes primarily reflect FCC volume declines caused by reduced consumption of transportation fuel, high fuel inventories, and continued travel restrictions. HPC volumes were down due to normal lumpiness in order patterns, as well as some softness related to lower oil prices and reduced fuel demand. Catalyst results were also impacted by a net $12 million correction of out-of-period errors related to inventory valuation and freight accruals. These errors occurred primarily in the first quarter of 2020 following the implementation of our ERP system. Our corporate and other category adjusted EBITDA increased $15 million due to improved fine chemistry services results and corporate cost reductions. As Kent mentioned, we ended the quarter with liquidity of about $1.5 billion, including $737 million of cash, $550 million remaining under our $1 billion revolver, and $220 million on other available credit lines. Our short-term debt is comprised of commercial paper and the delayed draw term loan. We also have $441 million of senior notes due in late 2021. The investment-grade market is open to us, and we anticipate refinancing or rolling forward these debt maturities. The divestitures of FCS and PCS, which is a portion of our Catalyst business are ongoing, but progress continues to be slow due to COVID-19 pandemic related travel restrictions. The potential buyers remain interested, and both transactions are potential liquidity events as we get back to normal. Turning to slide 10 for an update on our cost savings activities, as discussed last quarter, given the current economic environment, we are executing our downturn playbook to preserve cash. We continue to expect the short-term cash management actions to save the company about $25 million to $40 million per quarter. Examples of these short-term savings include things like travel restrictions due to the COVID-19 pandemic, limited utilization of professional services and consultants, and actively managing our working capital. As previously disclosed, our two biggest capital projects, La Negra III and IV and Kemerton are being slow walked to preserve capital. We have the optionality to accelerate or stop these projects depending on market conditions. At this point, we continue to expect full-year 2020 capital spending in the range of $850 million to $950 million, unchanged from our previous outlook and down 15% from our original outlook late last year. We are also temporarily reducing some production primarily in response to near-term demand weakness. In Catalysts, we have idled one HPC production line, and the FCC production line that was idled in Q2 is now back up and running. In Lithium, we plan to idle portions of our Silver Peak and Kings Mountain production facilities in response to short-term supply-demand imbalances and excess inventory builds in the battery-grade channel. We remain committed to the long-term operation of these facilities and currently plan to restart them in early 2021. And finally, our accelerated 2020 sustainable cost savings initiative is on track to achieve cost reductions of $50 million to $70 million this year until we reach run rate savings of at least $100 million by the end of 2021. These cost savings projects were already identified and underway when COVID-19 hit. For example, our Lithium team has identified $11 million of annual savings related to operational excellence and supply chain optimization. We are leveraging lean principles at our plants to optimize efficiency. Bromine and Catalyst both have projects aimed at reducing annual direct material costs by almost $7 million in total. We are examining all upcoming contracts for additional cost savings. Depending on market dynamics that may mean qualifying new suppliers and diversifying supply or consolidating spend with fewer suppliers in exchange for better pricing. And at Corporate, our global IT group is streamlining the number of software applications that they support to reduce costs and increase productivity, resulting in a savings of about $4 million per year. Let’s turn to our outlook for the third quarter on page 11. Based on current order book and cost reduction actions, we expect Q3 2020 adjusted EBITDA in the range of $140 million to $190 million. Lithium’s Q3 2020 EBITDA is expected to be down about 10% to 20% sequentially. We continue to see the impact of contract price concessions agreed upon in late 2019, as well as lower market prices. Q3 results are also expected to be impacted by continued low OEM automotive production, higher inventory in the battery chain, and reduced demand in the glass and ceramics markets. Bromine Q3 EBITDA is expected to be roughly flat sequentially, as we continue to see COVID-19 pandemic-related impacts, which began in late Q2. Stabilization in some markets like construction offsets continued weakness in other areas including flame retardants and drilling fluids. Finally, Catalyst Q3 EBITDA is expected to remain down about 50% to 60% from the prior year. FCC demand is expected to partially recover in the second half as travel resumes and global gasoline inventories continue to deplete. Conversely, the HPC business is expected to be negatively impacted in the second half as refiners defer spending and push turnarounds into 2021 and 2022. Looking beyond Q3 2020 continues to be challenging with limited visibility for most of our businesses. We are staying in close contact with customers and suppliers, and reviewing various economic forecasts as we continue to navigate through this uncertain environment. Albemarle benefits from strong business positions across a wide range of end-user markets. About a quarter of our revenues are from transportation fuels; these revenues are largely tied to miles driven or fuel consumption. U.S. miles driven dropped off sharply in March with stay-at-home orders around the country and has rebounded since but remains well below our normal summer season. EIA forecast suggests that U.S. miles driven won’t return to 2019 levels until late next year. Electric vehicle sales are a key driver for our Energy Storage business. We look at a variety of auto production and sales forecasts including IHS markets forecast. IHS expects 2020 electric vehicle production of 3 million units, down significantly from the pre-COVID forecast, but up about 20% from 2019. Expected 2021 EV production of 5.2 million units is also down from previous forecasts, but represents a significant rebound from current EV production levels. Of course, ultimately, what matters is consumer behavior and automotive sales, and to that end, we are also encouraged by recent green incentives we have seen around the world, which are supportive of EV demand. Many of our end-markets such as electronics, chemical synthesis, and construction are driven by broader consumer sentiment and global GDP. Consumer sentiment is rebounding in all regions but remains below pre-COVID levels. In 2020 GDP forecasts have stabilized but represent a fairly significant year-over-year decline. These forecasts and leading indicators help gauge the outlook for end-use markets, but a variety of factors including order lags, inventory changes, and regulatory changes could cause our own results to differ from the underlying market conditions. And of course, secondary waves of infection could also cause setbacks in demand. Nevertheless, we are cautiously optimistic that many of our end-use markets are at least stabilizing if not starting to recover.

Thanks, Scott. As we all know, economic conditions remain very challenging. Albemarle is an industry leader in all three of our core businesses. We believe in the long-term growth prospects of these businesses, but our immediate challenge is to manage through this crisis. In the meantime, we will focus on controlling what we can control. That means first and foremost, working hard to keep our people safe. It also means building operational discipline to improve cost and efficiency to deliver exceptional value and service and to optimize our capital spending. We remain confident in our strategy and we will modify execution of that strategy to further position Albemarle for success.

All right. Before we open the lines for Q&A, I’d like to remind everyone to please limit questions to one question and one follow-up to ensure that as many participants as possible have a chance to ask a question and feel free to get back in the queue for additional follow-ups if time allows. And with that, Operator, please proceed with the Q&A.

Thank you. Our first question comes from David Begleiter with Deutsche Bank. Your line is now open.

Hi. This is David Huang here for Dave. I guess, first, you have just given the timing lag and probably some lower fixed cost absorption. Can Lithium EBITDA be up sequentially in Q4?

It’s really going to depend. This is Scott. It’s really going to depend on what the volume environment looks like in Q4. The team’s done a great job on cost reduction. I am not expecting any incremental sequential cost reduction going into the fourth quarter at this point in time unless demand starts to decline further. But at the end of the day, depending on fourth quarter growth is going to depend on what the volume looks like coming out of our customers.

Okay. And then, I guess, if you have any early view on how your Lithium prices could trend in 2021?

Yeah. So, yeah, this is Kent. Yeah. So that’s the magic question and it’s going to depend on volume, right, as volume comes back and the market gets tighter. But we know there’s inventory and the supply chain and it’s going to take a little bit of additional volume to work that off before prices move. So that’s the inflection that we are looking forward. But it’s too early for us to call that.

Okay. Thank you.

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

Hi. This is Robin on for Joel. Thanks for taking my questions. If you describe the magnitude of the current LC inventory dynamic and if you could break it down both regionally and by end product versus feedstock if possible? Thank you.

Hi, Robin. This is Eric Norris. I will do my best to answer your question. However, I can't provide the detailed information you are looking for. During the second quarter, inventories continued to build in the channel because automotive services were shut down. Our demand in the industrial sector has weakened, and when automotive producers reopened, we did so at lower rates. This led to inventory levels that are over five months above normal for refined Lithium products, primarily in the battery channel. While there may be some inventories in industrial, that is being worked off, so the focus is really on the battery channel. Most of the battery industry is located in Asia, so inventory is concentrated there, though some is also held by suppliers. We have mentioned efforts to reduce our inventory by idling facilities, and we believe some competitors might also be dealing with excess inventories. It's difficult to pinpoint where those might be, possibly in the Asia region or at their production sites. We are closely monitoring the situation as we look towards recovery to see if the peak can begin to decrease as demand improves. The key question, as Scott noted, is our current visibility into that demand improvement.

Great. Thanks for that. And just one quick follow-up, so can you just quantify the magnitude of the reduced production, is it about 2,000 tons or?

The production we are discussing is expected to decline from the beginning of September through the end of the year, depending on market conditions. This represents approximately four months of output from a plant that is primarily supplied by our King’s Mountain facility, which produces hydroxide, while the carbonate that feeds it comes from Silver Peak. In terms of annualized output, we are looking at around 4,000 to 5,000 tons of hydroxide, and production could be down for four months within that timeframe.

Great. Thank you.

Thank you. Our next question comes from Mike Sison with Wells Fargo. Your line is now open.

Good morning. It was a solid quarter. You previously presented a slide regarding the potential demand for lithium through 2025, with a base case of 1 million tons. Could you elaborate on your thoughts about the long-term potential? Has there been any significant change, or is it relatively the same? Additionally, how do you foresee this evolving over the next couple of years?

I’ll begin by stating that we believe the demand profile has been pushed out by about a year. We do not think long-term demand has been affected, but the curve has changed and is likely steeper, starting about a year later. We are monitoring forecasts and the global EV penetration to determine if this profile changes, but for now, we expect the curve to remain consistent over the next four to five years. The volume remains the same, but the curve is a bit steeper to reach that volume.

There’s not much to add to that comment, but if you look at slide 12, you can see the steepness of that curve. We mentioned that the demand we anticipated for 2020 before the crisis has shifted to the following year. Initially, we expected it to be 4.1 million electric vehicles, and that has not materialized. Currently, IHS is forecasting something closer to 3 million vehicles. However, looking ahead to the next year, IHS estimates that demand has moved to 5.2 million vehicles, which is obviously higher than 4.1 million. This indicates that the curve is getting steeper. We believe that the additional stimulus measures, alongside existing OEM measures and carbon dioxide reductions, along with new consumer incentives in Europe, are contributing to this steepness and supporting our projections. We are preparing detailed modeling extending beyond 2025, with expectations around 1 million tons for the industry driven by electric vehicles.

Got it. And then Eric as a quick follow-up, the price concessions, how does that get negotiated, if I recall that was sort of our fourth quarter event, right? So can you sort of walk through kind of the semantics of what will happened with those price concessions as you head into 2021?

It’s a bit early to determine the future outcome. However, I can say we are approaching this year similarly to how we did last year, facing declining market prices. We are trying to strategize for the year ahead, which led to the concessions in our long-term agreements in 2021. If you look back at 2021, the current market price is significantly lower than it was last year, which is a downside. On the positive side, there is an anticipated steep growth curve for next year, as indicated by some of the projections from Korean battery producers regarding their expected demand in the latter half of the year. While I cannot predict the exact pricing outcome for 2021, as Kent mentioned, that remains a key question. Our long-term agreements have been beneficial, and we are utilizing them in our negotiations to achieve a solution that respects our commitments to our customers. We expect to have more details later this year or early next year.

Great. Thank you.

Thank you. Our next question comes from Jim Sheehan with Truist Securities. Your line is open.

Good morning. Thanks for taking my question. So could you talk about what downside and upside are from your segment guidance, so it looks like your full-year EBITDA, sorry, your full company third quarter EBITDA guidance varies significantly from the segments. I am just trying to figure out either whether you have downsides and upsides baked in or is this coming from corporate and all other?

Yeah. Jim, this is Scott. So if you look at the segments, for Lithium we are expecting a range of being down sequentially by around 10% to 20%. So that kind of bounds what’s happened there. Most of that’s going to be volume related overall for Lithium. For Bromine, it’s relatively tight right now. They have got pretty good visibility into their order book at least through the end of August and so flat sequentially they could be down a little bit or up a little bit, but flat sequentially. And then Catalyst is expected to be down between 50% and 60% on a year-over-year basis, really on the back of hydro processing orders and the timing of those, as well as the recovery of FCC on the back of increased fuel demand globally and so that kind of balance the range. Corporate is pretty well bound in with the cost reductions that we have out there and the small business fine-tuning services is doing well in the U.S., so.

Thank you. And as it pertains to capital allocation, you have listed M&A in your slide on capital allocation. Maybe to talk about the pipeline what type of acquisitions you might be considering, what size and what region in the world or is that process really slowed down the same way that your asset sale process is?

We continue to seek opportunities, but they will be small additions rather than significant changes. It's fair to say that this process has slowed down, but we are still looking for opportunities in the down market, particularly around Lithium conversion assets that we find attractive.

Thank you.

Thank you. And next question comes from Vincent Andrews with Morgan Stanley. Your line is now open.

Hi. Thank you for giving us time. This is Daniel Kutz on for Vincent. I just had a quick question in terms of the technical grade, how much is that like in the demand down this year versus battery grade demand and how fast do you expect technical to come back and kind of what are the sign posts that we should be watching to track that?

It’s a smaller market for us. The technical grade market, based on various industrial indicators, reflects the ongoing recession. I’ve seen external statistics indicating that the glass and ceramics industry contracted by 25% in the second quarter, which aligns with the current global economic conditions. This segment represents less than 20% of our overall sales and is very mixed; there are other areas performing better than glass and ceramics. Currently, we have not observed any signs of recovery in that segment as we move into the third quarter, and we anticipate similar conditions in the fourth quarter. The situation is quite unclear, which is why we are hesitant to provide detailed guidance for Q4.

Understood. Thank you. And then in terms of idling facilities, what is the cost of temporarily idling these and how quickly can they both be taken down and brought back up? And I guess, just part of that, what is kind of the lowest utilization rate that they can run at before it becomes unit cost derivatives?

So I will take the cost of idling. It’s relatively small. So these are smaller plants with a relatively small workforce. So really in total less than $10 million is actually idling the plant itself. And Eric, if you want to just talk about utilization and recovery?

We informed the workforce yesterday about our plans, and we anticipate being completely idled or safely down by September 1st. This provides some context regarding the downtime, and there will be a corresponding period for ramping back up once we observe demand signals. The second part of your question was about utilization. Although this segment is relatively small within our overall operations, it remains crucial for our ability to meet demand in 2021 if the recovery unfolds as we expect. On a utilization basis, it's not significant. However, I want to highlight an important point related to your question: given the current market weakness, while we are upholding our contracts, opportunities outside of those agreements, including in China and industrial markets, are limited due to the contraction in the marketplace. Therefore, this product would typically be directed towards inventory. Consequently, there is no EBITDA impact on our guidance related to what would have been linked to this. It simply reflects a decrease in inventory. During this downtime, we will continue making investments to prepare these assets for full production when recovery occurs, which we anticipate will happen in 2021.

Very helpful. Thank you.

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

Great. Thanks. Good morning. I guess I just wanted to get your perspective on Lithium markets. I understand that your overall view is maybe even pushed out a year. But has there been any change in, I guess, how you are looking at supply demand, I mean, I appreciate that the automakers may not be coming back at full, but are they potentially coming back with greater focus on EVs and if so would that be a positive tailwind for you. So that’s my question on Lithium and then I have one more question on Catalysts, if you could maybe just characterize how you are thinking about that business on the surface. It looks like there could be some structural impairment that could last for quite a while. I guess is that a fair characterization. So, yeah, maybe you can just give your medium-term thoughts on both businesses? Thanks.

I will comment on that, and Eric can add if I miss anything about Lithium. As previously mentioned, we believe the long-term dynamics of the EV market remain unchanged, and we are confident in the demand for Lithium that will support that market. One notable change is the increase in incentives related to electric vehicles, particularly in Europe, which is likely to influence the market differently than before. Previously, we lacked depth in the market, but with the current demand and these incentives, we are seeing a stronger return. However, we are still uncertain about how this demand curve will ultimately shape up. Regardless of the incentives, consumers still need to purchase cars, which is a fundamental uncertainty, and many who are forecasting that also do not have clear answers. Eric, do you have anything to add?

No, nothing to add other than you all have to be aware that the impacts from the second quarter are not really affecting us until the third quarter. Regarding the recovery, as I mentioned, the Korean manufacturers are reporting a significant increase in their sales. This increase is likely related to the situation in Europe, and there is a corresponding delay, especially with excess channel inventories that need to be addressed before it affects us. That's why we are generally optimistic for the long term, but over the next six months, it's very difficult to predict.

Yeah. And then on your Catalysts question kind of the same approach. I will do a high level, Raphael, can fill in. But so oil prices are down and then the miles driven are pretty dramatic change and you could see on that slide, I think, it was slide 12, how dramatic that was miles driven and that’s changed that. We don’t really see it changing the fundamentals of that business long-term, but it is going to take some time for that to come back. Before people go back to work and commute and maybe they don’t commute as much as they did after this or maybe less miles driven, maybe more vacation by driving rather than flying. But then again, that’s air travel. So we think that’s been pushed out for some period of time, but peak oil probably it doesn’t change. We knew that was coming in some period of time, has that been pulled forward a little bit, we don’t know that. Most of the forecast say maybe a year, maybe not. So I don’t think it fundamentally changes the business that we have; clean fuels continue to be important, our business is based on innovation around clean fuels, so we don’t think it fundamentally changes it or structurally changes it. But it might change the dynamics of where our markets are geographically and which of our customers do better or do worse during this.

This is Raphael, Arun. To expand on that perspective, this is a crucial time for our business to act in order to lessen the effects of COVID-19, which has significantly impacted our customers and their suppliers. However, as Kent mentioned, there is a positive outlook for refining catalysts when appropriately positioned. Our strategy focuses on aligning our business to capitalize on trends in emerging markets where fuel consumption is set to increase beyond the global peak in gasoline, as well as the rising chemical applications from refineries where we already have strengths that need to be advanced. Despite the challenges presented by COVID-19, it serves as a strong motivator for us to remain committed to our strategy and to accelerate efforts to engage in more resilient areas as we move forward.

Thanks.

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

Hi. Good mornings. Raphael, maybe kind of continuing on the Catalyst discussion, can you talk about the FCC pricing outlook. I believe you saw a pricing in your Catalyst business overall decline by 4%, not sure if that’s pricing or mix, but are you seeing resilient FCC pricing and are you see any trading down as you look at your overall mix and Catalysts.

Thank you for the question, Mike. When we examine the situation, there has been some downward movement in pricing, but this does not apply to our value-oriented products, which make up most of our portfolio. In the FCC industry, there are contracted businesses, non-contracted businesses, and trials. Trials allow competitors to test performance in a refinery during a certain period within a contract, and trial pricing is typically lower. If we have trials in our mix, especially with new or existing refineries, the pricing during those trials will be lower than what we generally see. However, for our core business of performance products, pricing has remained stable. Looking at previous quarters and future negotiations for contracts where we are proving value or increased value, we have been able to achieve price increases. Therefore, the interaction between trial pricing and contract pricing, along with the value we create, significantly influences the overall pricing dynamics.

All right. Thanks for that. And then on Lithium, I was wondering if you can give a little more color on where you are seeing the greatest concern in terms of inventories in the Lithium channel and in the battery channel. Is it with finished Catalyst material and the battery makers, is it hydroxide, is it carbonate, it’s probably mean maybe some more detail there?

Hey, Mike. It’s Eric here. I would say that we have taken action with our plants regarding both hydroxide and carbonate. This involves our customers, whether they are cathode customers or battery accounts, and we believe this also includes suppliers in the channel. We understand there might be some excess inventories from a cathode perspective. The industry experienced a significant slowdown during the second quarter, with some plants halting operations for about a month or more due to OEM closures. This situation affects various points within the battery channel. At this moment, that's about the most information I can provide. Regarding spodumene, there is still excess spodumene in China, including some that is below grade, meaning below 6%. There is also the DSO variety, which is raw rock that hasn't been processed. Additionally, some purchasers bought spodumene rock at high prices, making it economically challenging in the current situation. However, the exact amount of excess spodumene is difficult to determine.

All right. Thanks very much.

Thank you. Our next question comes from Matthew DeYoe with Bank of America. Your line is now open.

Hi. I wanted to hit a little bit on the Catalyst trial pricing issue. I mean, why are your trial price is lower, are refineries just kind of trialing lower quality products, is the way to temporarily lower costs. Do you see risk of these getting adopted because refineries don’t need better utilization rates right now that your higher FCC would deliver?

Hello, Matthew. This is Raphael. Some of the situation relates to the general downturn in the market, as all Catalyst producers are looking for new volume opportunities, with trials being the most straightforward way to achieve that. As a result, there is increased activity and interest in trials. In this competitive environment, companies, including Albemarle, are often willing to lower prices from the norm while still maintaining a positive margin in order to participate in trials and demonstrate their value compared to existing suppliers. However, trials also establish benchmarks for future pricing. Most refineries recognize that Catalyst pricing is closely linked to the value delivered, and if a product generates lasting value, it's possible to adjust the price to reflect the performance over time. Albemarle has excelled in this regard, particularly in markets related to max chemicals and bottoms cracking, which play to our strengths within FCC, allowing us to show value and adjust prices accordingly over time.

Okay. And then if I would have just circle back on the excess spodumene comment, I know there was a fair amount that’s you mentioned below 6% and there is DSO. But how much excess spodumene out there that is above 6% and like a seasonable product? I think that was sized before at about three months to six months of excess inventory, is that still the case? Has any of that been worked down at all?

I need to revisit that topic. The situation is quite unclear, to the point where inventory counts can vary based on who you ask. Unfortunately, I can't provide a definitive answer. However, I can tell you that the 6% spodumene produced for integrated companies like Albemarle and competitors such as Tianqi and others like Kemerton likely doesn't have much excess inventory. We assume these competitors are following Albemarle’s lead in reducing inventories, as evidenced by the significant drop in our equity income from Talison, largely attributed to Tianqi and their challenges. The 6% quality spodumene is decreasing, but most of the remaining quantities are below or barely at 6%, which is where the excess is more pronounced, as that product is less profitable in the current market conditions.

Okay. I appreciate the added detail. I know it’s definitely unclear. So thank you.

Thank you. Our next question comes from Bob Koort with Goldman Sachs. Your line is now open.

Thank you. Good morning. A couple of Lithium questions. Have you guys think about reconciling what seems to be some odd financial math when, I guess, in China we are seeing battery-grade material under $6,000 you have got spodumene market prices under $400. And I think, Eric, you are talking about inventories might be bloated everywhere. So can your competitors in China make money? Is there the risk that they try to liquidate those inventories more aggressively in a weak period? Do you see a bifurcated market as China different than Japan and Korea? Can you just give us a little color there?

Well, hey Bob. It’s Eric here. Regarding the first part of your question, I would say that nothing has changed in the cost curves we've previously discussed. You can refer back to the Investor Day to see where we estimated that marginal cash costs are in the range of $6 to $7. That remains unchanged. Essentially, at the current spot prices in the China market, the entire right-hand side of the cost curve is not profitable. They are unable to generate revenue from selling products. I can't explain this situation except by noting that the market has undergone a compression we mentioned, due to the COVID crisis in the second quarter, which is starting to normalize as we head into the second half of the year. Lower-cost producers, particularly in the carbonate sector, are dominating the market since China is primarily a carbonate market. Brine-based carbonate has a significantly lower cost structure, allowing them to sell at prices much lower than those of rock-based producers in the area. I think that's what's happening and it highlights the stress within the system. Will Chinese producers begin to liquidate inventory? I think that might be a possibility in a desperate attempt, but currently, most of that rock is stationary until market values improve. You had a second part of your question, Bob, that was about...

Just wondering...

There is a difference between China and other regions. It's mainly a carbonate market, with a higher proportion of high nickel chemistry produced outside of China. Some of it may be produced in China, but the majority of the demand exists outside of China. Additionally, there are structural differences, including VAT disparities between China and other regions. However, I don't believe anything has fundamentally changed except for the demand crisis, which has placed significant pressure on the system.

And Eric, you mentioned that your LTAs have largely held, I think, in the last couple of quarters, you have talked about you want to sell to your customers in the manner that they want to buy in terms of contract dynamics. But what’s your expectation for the desire for those LTAs as you start to get to the exponential part of that demand curve? Because it would seem the cathode folks are looking at this volatility and pricing and obviously resets on pricing, but then you have got some pretty dangerous implications for them if the industry curtails its expansion activity, where there may be a scarcity value sometime down the road. So I guess what I am asking is the game plan, do you think you will have a lot more LTAs at fixed prices two years and three years from now or a lot fewer because your customers are maybe moving away from that? Can you give me your sense of how this market develops from a very weak price period to a potentially very tight market in a few years?

I don’t think the security of supply and notion of that has changed. But we do see our contracts starting to evolve from there. Do you want to comment, Kent?

Yeah. And I would say that security and how our customers look out a year or two and looking for guaranteed supply out in that timeframe is part of that dynamic. But we are seeing it as a portfolio with a percentage and they will be those long-term contracts, but with slightly different terms across the portfolio, some with guaranteed promises of supply a couple of years out and some without that and some more spot based and others more contracted with a formula that may indicate spot but not move with spot.

Yeah. What's happening now is that you've identified an interesting aspect of short-termism. It can save you some money because spot prices are quite low. However, as you've pointed out, capacity is being removed from the market. Currently, the economics for expansion are lacking for nearly every producer except for those with the lowest costs, leading to a scarcity that will eventually cause a shift. We believe that the supply chain, especially those heavily invested in it, particularly automotive producers, are increasingly recognizing this issue and will continue to focus on it. This is why there's always value in ensuring a secure supply. Additionally, we always aim for a balanced portfolio. We want to include some price-based agreements because they hold value when the market rises, which positively impacts our EBITDA. While we don't want the majority of our business in this area, we will maintain a portion there.

Great. Thanks for the insight.

Thank you. Our next question comes from Matthew Skowronski with UBS. Your line is now open.

Good morning. Thank you for taking my question. Can you give us an update on when we should expect to see sales from La Negra III and IV and if you have changed your view at all about the timing of the ramp of additional capacity given the demand disruption you have seen this year?

We mentioned last quarter that we have slowed down the execution of our two major projects, La Negra III and IV, as well as at Kemerton. This status remains the same. The slowdown is mainly due to demand being pushed out at gap, which we decided to do to conserve cash. This also aligns with our perspective on supply and demand. While we have our forecast and understanding, it feels somewhat uncertain. In response to your question, we anticipate that volume from La Negra III and IV will start coming online late next year, followed by a qualification period.

Thank you.

Thank you. And our next question comes from Chris Kapsch with Loop Capital Markets. Your line is now open.

Good morning. I have a question for Eric and a nuanced follow-up on some of the topics you've discussed. Regarding your comments about excess inventory in the battery supply chain, I understand that hydroxide has a limited shelf life due to its hydroscopic nature, while carbonates do not present such an issue. I'm curious whether your insights on inventories suggest that this situation is more significant for carbonate grades compared to hydroxide grades. You briefly touched on excess inventories at the cathode level, but considering that many new EV models, especially in Europe, are using higher energy density cathodes that rely on hydroxide, is there a noticeable difference in these dynamics?

So you are right. Chris, this is Eric. There is a definite shelf life for hydroxide, which is a smaller market. When we look at our customer base, the number of customers that primarily use hydroxide and maintain high inventory levels is a more manageable group. This is also the reason behind the idlings we announced to our employees yesterday, which is primarily driven by hydroxide. Carbonate is a larger market, and the shelf life issues are not the same. Therefore, we manage them differently since carbonate has much more inventory available. There are more producers and buyers involved. While the management strategies differ, the challenges remain heightened for both.

Okay. My follow-up relates to your long-term agreements. There’s an acquisition where near-term oversupply is an issue, likely worsened by the COVID pandemic. However, we are anticipating a steep increase in EV adoption in the coming years. I'm curious about the discussions regarding carbonate in comparison to the long-term sourcing of hydroxide. Can you share any insights on whether some customers are seeking relief from previously agreed pricing floors? Is there still concern about the long-term sourcing of hydroxide, and is that concern more prominent in discussions about hydroxide compared to carbonate? Thank you.

I believe that the growth curve projected by IHS is significant, and our customers are experiencing similar trends, which are largely influenced by Europe. There is a substantial opportunity for hydroxide there, and customers seem to express increased concern about needing significantly more hydroxide in the upcoming year. They are counting on Albemarle to bring Kemerton online to meet this demand. However, the timing of these developments is uncertain. The steepness of the growth curve feels justified based on current observations, but it ultimately depends on consumer spending. We are monitoring the situation closely throughout the supply chain.

Fair enough. Thanks guys.

Thank you. This concludes the question-and-answer session. I would now like to turn the call back over to Meredith Bandy for closing remarks.

Hi. Thank you all for your questions and participation in today’s call. As always, we appreciate your interest in Albemarle and this concludes our call.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.