Albemarle Corp Q1 FY2023 Earnings Call

Hello, and welcome to Albemarle Corporation's Q1 2023 Earnings Call. I will now hand it over to Meredith Bandy, Vice President of Investor Relations and Sustainability. Ms. Bandy, please proceed.

Thank you, Forum, and welcome, everyone, to Albemarle's First Quarter 2023 Earnings Conference Call. Our earnings were released after the market closed yesterday, and you can find the press release and earnings presentation on our website under the Investors section at albemarle.com. Joining me on the call today are Kent Masters, Chief Executive Officer; and Scott Tozier, Chief Financial Officer. We also have Eric Norris, President of Energy Storage; Netha Johnson, President of Specialties; and Raphael Crawford, President of Ketjen available for questions. Please be reminded that some of the statements made during the call, including our outlook, guidance, company performance, and timing of expansion projects, may include forward-looking statements. Be sure to review the cautionary language about forward-looking statements found in our press release and earnings presentation, which also applies to this call. Additionally, some of our remarks today will reference non-GAAP financial measures, and a reconciliation can be found in our earnings materials. I will now turn the call over to Kent.

Thank you, Meredith. Our first quarter was excellent. With net sales more than doubling versus first quarter last year, and EBITDA up almost four times to $1.6 billion. This reflects the high market pricing for our Energy Storage business at the end of 2022. Our Specialties business also had a strong quarter, up sequentially from last quarter on higher pricing. Looking forward to the rest of this year, we are adjusting our expectations based on the current lithium market pricing, and Scott will go into that in more detail. We moved the business forward in a number of ways during the quarter, including selecting the site for our U.S. Mega-Flex lithium processing facility in Richburg, South Carolina, which is a strategic move that is even more important given the U.S. Inflation Reduction Act. We also announced the restructure of our MARBL joint venture in Australia. And we announced the separate investment by mineral resources limited into two of Albemarle's conversion assets in China. We expect those two deals to receive regulatory approval and close later this year. This week, we announced the final investment decision to build Kemerton trains III and IV in Australia, which will be 100% Albemarle owned. The fact that we are advancing the Kemerton trains and the U.S. Mega-Flex facility points to our confidence in the long-term growth and opportunities of the lithium business and in particular, our Energy Storage segment. Lithium demand in the EV market continues to grow at extraordinary rates. And with that, I'll hand over to Scott.

Thanks, Kent. Hello, everyone. Let's take a look at our first quarter performance. Net sales for the first quarter reached $2.6 billion, representing a 129% increase from last year. This marks a $1.5 billion rise driven by Energy Storage, attributable to both higher market pricing and increased volumes. Net income attributable to Albemarle was $1.2 billion, a nearly 390% increase compared to the previous year. The diluted EPS stood at $10.51, also up nearly 390%, marking another record quarter for Albemarle. In terms of adjusted EBITDA for the first quarter, it was almost $1.6 billion, a year-over-year increase of approximately 270%. This $1.1 billion increase was largely due to higher net sales in Energy Storage. The Specialties business unit experienced growth from increased pricing and some reduced freight costs, although this was partly offset by lower volumes. Ketjen saw a slight decline due to volume impacts from a winter freeze in Texas earlier in the quarter. Notably, we experienced year-over-year price increases that more than offset inflation during the quarter. We are adjusting our 2023 guidance to align with current lithium market pricing. On average, lithium indices have decreased by about 50% to 60% since the start of the year. According to our established guidance methodology, we are using lithium market price indices as of mid-April and projecting these prices to hold steady for the remainder of the year. To clarify, we are not forecasting future lithium market pricing; we are simply using the current price, maintaining it flat, and applying it through our contract structure. This follows the same approach we used in our previous guidance. Consequently, we anticipate 2023 total company net sales to range from $9.8 billion to $11.5 billion, equating to a 45% increase at the midpoint compared to the previous year. We expect second quarter sales to align with Q1, followed by sequential sales growth in both the third and fourth quarters as increasing Energy Storage volumes counterbalance sequential price declines. Adjusted EBITDA is projected to range from $3.3 billion to $4 billion, indicating a year-over-year growth of 5% at the midpoint, which reflects a full-year EBITDA margin of 34% to 35% for the total company. Our full-year 2023 adjusted diluted EPS guidance is now estimated to be between $20.75 and $25.75, reflecting an 8% year-over-year improvement at the midpoint. We project net cash from operations to be in the range of $1.7 billion to $2.3 billion, while our CapEx guidance remains from $1.7 billion to $1.9 billion. Therefore, we still expect to have positive free cash flow this year. Moving on to our outlook by segment, the 2023 Energy Storage volume outlook remains unchanged, with an anticipated increase of 30% to 40% year-over-year. We now expect average realized pricing to grow by 20% to 30% for the year. Additionally, our realized prices are projected to rise year-over-year in the first half, including Q2, before declining in the second half. We anticipate volume growth in all quarters, leading to potential upsides and downsides as market prices fluctuate throughout the year. Adjusted EBITDA for energy storage is expected to range from $2.7 billion to $3.4 billion, remaining relatively flat compared to 2022. Starting in the second quarter, we expect to face pressure on EBITDA margins, primarily due to the timing of higher-priced spodumene inventories and the growing effects of the MARBL joint venture. I'll provide more details on that shortly. For Specialties, we're maintaining our guidance range for adjusted EBITDA to be up 5% to 10% compared to the previous year. We expect to see pressure in the second quarter as customers work through their current inventories. However, we expect the second half of the year to be stronger with a recovery of end market demand, particularly in consumer electronics. Ketjen's 2023 full year adjusted EBITDA is expected to be up 250% to 400% over the prior year. This increase in Outlook is due to higher volumes and better pricing. When we look at lithium market prices, we need to remember that most of our volumes are sold under long-term contracts with strategic customers. We've updated our expected 2023 sales mix to reflect the recent market pricing. And there haven't been any changes to our contract structures in Q1. We expect our Energy Storage sales to be about 10% on spot and 90% on index reference variable price contracts. These contracts are typically two to five years in duration and are designed to ensure security of supply for our customers as well as to make our sales more predictable. These strategic customers include partnerships across the value chain, including major cathode, battery, and automotive OEM customers. We are more weighted towards the market than we have been in the past. However, we will still have less volatility than a true spot business. Because of the index-reference structure of these contracts. They typically have a three-month lag, and some of them have caps and floors. As Kent said, our confidence in the long-term lithium market is reflected in our ongoing investments in resources and conversion capacity. As we look at Slide 10, you can see we continue to expect year-over-year volume growth in the range of 30% to 40% in 2023. As we bring on new conversion assets, specifically Kemerton and Qinzhou, plus some additional tolling volume. We still anticipate a 20% to 30% CAGR in Albemarle sales volumes between now and 2027, allowing us to maintain our leadership position and keep up with accelerated market demand. All told, we expect to nearly triple sales volumes to more than 300,000 tons by 2027. Long term, we continue to expect normalized Energy Storage margins in the mid to high 40% range, in line with the outlook that we gave in January. We now expect Energy Storage margins to be about 40% in 2023, primarily based on revised lithium market pricing and the impact of spodumene inventory lags. Most of the year-over-year decline in margins is related to that spodumene inventory lag. On average, it takes about six months for spodumene to go from our mines through conversion to our customers. Last year, we saw dramatic increases in pricing for lithium and spodumene. Due to that time lag on spodumene inventory, we realized higher lithium pricing faster than higher spodumene costs of goods sold. As a result, we had unusually strong margins in 2022. This year is the reverse: as prices decline, we're realizing lower lithium pricing faster than lower spodumene costs. The next item affecting margins is the accounting treatment of the MARBL joint venture. We expect to report 100% of net sales, but only our share of EBITDA resulting in a lower reported margin rate on that portion of the business. And finally, our reported EBITDA margins are impacted by tax expense at our Talison joint venture. Talison's net income is included in our EBITDA on an after-tax basis. If you adjusted Talison’s results to exclude tax, margins would be about six points higher in 2023. Turning to Slide 12, we will continue to invest with discipline, allocating our capital and free cash flows to support the highest return growth opportunities. Our primary use of capital remains organic growth projects to leverage our low-cost resources in Australia and the Americas. And Kent will speak more about these projects in a moment. Beyond organic growth, we continue to evaluate a broad range of inorganic opportunities to expand capacity to meet our customers' future needs. Our primary targets are in three areas: lithium resources, extraction and processing technology, and battery recycling. We intend to maintain our track record of a disciplined M&A approach that improves returns and preserves our financial flexibility with our investment-grade credit rating. In line with that strategy, and as previously disclosed, Albemarle submitted an indicative proposal to acquire Liontown Resources, a development stage spodumene resource in Australia. We believe this potential transaction would be consistent with our long-term growth strategy and disciplined approach to capital allocation. To date, the Liontown Board is not meaningfully engaged in progressing the transaction, we will provide updates if and when we have more information. Our balance sheet flexibility is a competitive advantage that allows us the opportunity to grow both organically and through acquisition as well as support our dividend. And with that, I'll turn it back to Kent for a market update and closing remarks.

Thanks, Scott. On Slide 13, the global outlook for full-year EV sales remains robust. After slowness early in the first quarter due to China's reopening from COVID, global EV sales were up 26% year-over-year through March. Based on seasonal trends, China EV sales are on track to achieve full-year growth of 30%, an increase of more than two million vehicles over 2022. Outside of China, North America had a strong start to the year with 53% year-over-year EV sales growth. Demand has been boosted by government support, the supply chain, and increased model availability. In Europe, EV sales through March are up 7% versus the prior year. A slower start due to supply bottlenecks and the phasing out of German plug-in hybrid EV incentives. Lithium spot prices in China, particularly for carbonate, have fallen primarily due to destocking of inventory in the battery supply chain. Outside of China, index prices for lithium hydroxide have remained relatively strong amid continued demand and less inventory pressure. Global lithium hydroxide prices are $15 to $20 per kilogram above Chinese carbonate spot prices, the largest spread on record. We have also started to see initial signs of tightening in the supply chain. Unlike Albemarle, non-integrated lithium converters purchase spodumene on the open market. Year-to-date spodumene pricing is down 30%, while lithium carbonate pricing is now more than 60%. As a result, some of the non-integrated producers are cutting production after their margins turn negative during the quarter. Following several months worth of destocking, customers have recently started to return to the spot market and as a result, Chinese carbonate pricing appears to have stabilized, with spot prices up about 7% over the past week. We continue to expand our global lithium resource and conversion capacity based on our confidence in the long-term outlook for lithium. On Slide 14, you can see our expanding presence in the U.S. as well as our plans for a lithium conversion and recycling facility in the European Union. We recently announced the site for our U.S. Mega-Flex processing facility in Richburg, South Carolina, strategically placed in the growing Southeast EV and battery ecosystem. We are also strengthening our resource production. In the U.S., our expansion at Silver Peak is ahead of schedule, and our studies for the Kings Mountain mines are moving forward as planned. Our project in Chile to improve the yield at our Salar de Atacama site is on schedule for mechanical completion this quarter. Recently, Chilean President Boric proposed a new national lithium policy. The government has repeatedly made it clear it would honor current concessions. Chile has always honored the rule of law, and we do not see the new policy as a threat to our current concession, which runs through 2043. In the future, the proposal, if enacted, may offer opportunities to expand our operations using new technology. We are proud of our more than 40 years of successful operations in Chile and value the good working relationships we have with the government and other leaders in the region. Elsewhere in the world, we are expanding both resources and conversion capacity. In Australia, the various trains of our Kemerton conversion facility are moving forward. For Kemerton 1, we are pleased to have reached the specified battery-grade product milestones and look forward to product qualification with our customers. Kemerton II is progressing through commissioning with first product expected in the third quarter of 2023. We have prioritized train I activity, and this had some impact on the schedule for train II. Kemerton III and IV now have final investment decisions and we are planning the construction schedules. Note that we will have 100% ownership of trains III and IV. In China, Meishan construction is progressing on budget and on schedule with mechanical completion expected in 2024. Our resource expansion in this area of the world is progressing, both at Wodgina and Greenbushes. At Greenbushes, the tailings retreatment project completed last year is improving recoveries to increase spodumene production capacity. We have talked a lot over the past year about our durable competitive advantages, including our scale as one of the world's largest lithium producers, our geographic diversity, our world-class brine and spodumene resources, and our vertical integration from resource to battery-grade lithium. The current lithium market conditions have tested these advantages and proven how durable they are and the difference they make for Albemarle. We are a company that looks to the horizon. Our sustainability commitment is an integral part of our long-term strategy and our customer value proposition, and we continuously measure our progress against sustainability goals. Our 2022 sustainability report will be issued on June 5, and we will hold a webcast on June 20 to discuss the key highlights from the report, including our initial reporting in alignment with the task force on climate-related disclosure recommendations, progress on environmental and DE&I targets, and introducing new goals around Scope 3 and air quality. In summary, we had an exceptionally strong first quarter. While lithium prices have pulled back, our team continues to focus on the themes that are within our control. We're delivering volumetric growth and executing our projects. We are confident in our strategic delivery and the future of the EV market. Bringing all these factors together, we anticipate 2023 sales to be up 45% over last year. We remain a global leader with world-class long-term assets and a diversified product portfolio that highlights broader opportunities in the mobility, energy, connectivity, and health markets. Innovation remains core to our business as we deliver advanced solutions tailored to our customers' needs. Our strategy is clear and disciplined. It enables us to accelerate profitability and to advance sustainability. And with that, I'd like to turn the call over to the operator to begin the Q&A portion.

Our first question comes from Colin Rusch with Oppenheimer. Colin, your line is now open.

Can you talk a little bit about what you're seeing in terms of order size in the spot market? And how that inventory is clearing at this point? Are you seeing any real meaningful change here in the last, call it, 3 or 4 weeks?

Good morning, Colin, this is Eric. I didn't catch the first part of your question. Did you ask about order size and inventory clearing?

Yes, yes. Yes, this activity in the spot market just...

Yes, I think what really happened, as Kent mentioned earlier, was significant destocking in China, which impacted the spot market. Our contract customers around the globe are still purchasing at their agreed volumes. We've observed nearly 30% growth in EV sales in the first quarter across the industry, with over 50% growth in the U.S. and a bit weaker performance in Europe. Overall, the markets are performing largely as we expected for a strong year with what we anticipate will be a tight supply. However, in the first quarter, due to destocking, we noticed that the spot market was nearly nonexistent at times, with minimal activity as inventories were reduced. Stocks were drawn down to levels at the cathode and battery levels in China, with some cases falling below a week’s worth, which is clearly not sustainable for long-term operations. Recently, we have started to see spot buyers return, which we believe is partially driving the price increase in China. We anticipate no changes to our projected EV sales growth for the year, estimating around 30% growth in China and closer to 40% for the overall market. Regarding the size of spot orders, it's too early for me to provide specifics, but they are beginning as cathode producers start to restock and get ready for a more stable operation for the remainder of the year.

That's very helpful. Regarding the refining sector, with new entrants joining the space, are you observing any significant developments in the technology aspect? Specifically, how are companies achieving the quality specifications in this area? I'm asking this in light of the new chemistries that are emerging and getting ready for production.

Yes, we don’t have clear visibility on that. We haven't noticed any changes in the specifications, and it seems that the qualification process for some of the newer facilities is taking longer, which might contribute to the delays we are experiencing. However, we still can’t determine if the issues are related to qualification or production.

No. In terms of the competitive landscape, I would tell you in terms of the expectations of customers of us, it is a moving ball. The expectations go up on quality, particularly in the higher energy density chemistries, which tend to be the nickel chemistries. We recently completed upgrades in some of our workhorse plants like Xinyu to drive even higher quality standards to remain a leader in that area and in that regard. So it is something that it is a barrier for any new entrant to be able to achieve and to get to for sure.

Thanks so much, guys.

Our next question comes from the line of David Begleiter with Deutsche Bank. David, your line is now open.

This is David calling for Dave. Can you discuss where the lower spodumene costs are coming from in Q1 and how much they contributed to margins in that quarter? Also, is the higher cost of spodumene from the or from Greenbushes?

Yes. The lower cost spodumene is coming from both Kemerton and Qinzhou, as well as Greenbushes. The reason it is lower cost is due to the timing lag and the rapid increase followed by the decrease in spodumene prices. It is not the operating cost of the mines that is causing this issue. In Q1, the benefit was likely in the range of 15 to 20 percentage points. However, we will see that reverse as we progress through the year, which will exert pressure on the margin rate for the business.

Okay. And what was the final cost for Kemerton and I guess what will Kemerton III & IV cost?

We haven't disclosed the total amount yet, but it's likely in the range of $1.5 billion to $1.7 billion for Kemerton I and II. Kemerton III and IV will be in a similar range, partly due to the establishment of an employment village to address labor issues.

Our next question comes from the line of David Deckelbaum with Cowen. David, your line is now open.

Good morning, Ken, Eric and Scott. Thanks for taking my question today. I wanted to just ask about long-term planning, particularly for you, Scott, how you think about the move to be spending, I guess, about $4.2 billion in '27 versus $1.8 million this year? You point out obviously that your guidance always just illustrates pricing if you held conditions sort of flat today. You talked about this year spending within cash flow. I guess that these conditions obviously persist that you would be outspending cash flow if you followed that CapEx plan. How do we think about that planning cycle while you maintain sort of a long-term structurally bullish view on the market? You're expanding your conversion quite a bit to get to those CapEx numbers? I guess how do we think about that CapEx trajectory every year? And should we expect it to be governed by sort of the beginning of the year outlook for organic cash flows?

Yes. When we outlined our investment strategy, we assessed the market and will make adjustments as needed. The plans we presented in January are our intentions. If our perception of the market changes significantly, we will adapt accordingly. For short-term fluctuations, if our outlook is accurate, we will continue to invest. However, if our long-term perspective on pricing shifts, we will modify our investment approach.

Yes. And I would just add, Kent, that given our volumetric growth at these kinds of pricing levels, we'll continue to be generating significant cash flow to be able to fund that kind of CapEx growth. So the Albemarle story is not really about the price; it's about the volumetric growth and the cash generation that's coming from this is significant.

I appreciate that. Kent, in your prepared remarks, you talked about the minimal impact for now of the Chilean governmental moves, particularly given your contracts expiring in 2043. You also, I guess, highlighted looking at things like extraction technologies, processing technologies. I guess, did the move change any of your long-term strategy in the country and might have accelerated some of the investments? Or, I guess, exploration around direct lithium extraction and applications in Chile?

Yes, we were taken aback by the announcement from Chile. We anticipated some movement in that direction and gained new insights. Our plans regarding direct lithium extraction and discussions with the government about its use in the Salar remain aligned with our previous approach. We are actively working to advance this initiative, and while we will pursue it in various locations, there is a specific opportunity in the Salar as well. Our concession is valid until 2043, and the government has reassured us on that front. However, expanding our efforts and obtaining additional concessions will likely require new technology and collaboration with the government. We see this as a chance for growth beyond our existing concession.

Appreciate the answers, guys.

Our next question comes from the line of Josh Spector with UBS. Josh, your line is now open.

Hi, thanks for taking my question. I was wondering if you could talk about your thoughts around the EBITDA margin cadence in Energy Solutions through the year. I assume 2Q is probably going to see the biggest compression. But can you get back to that mid- to upper 40% range in fourth quarter? Or can you even get there with where spodumene prices are today once that does roll through?

Yes. So Josh, with where spodumene prices are and the projection that we've made using the mid-April prices, we'll be below that kind of mid-40% range in the second quarter all the way through the fourth quarter. So it's really, again, the pressures coming from that price being lower, as well as that spodumene price drop or cost drop that is putting the pressure on the margins. If you were to stabilize that, I think you'd end up being more at the long-term expectations of that mid-40s to low 50% range. So really, this just as a reminder and repeat it again, this margin pressure is really just driven by the velocity and the change in the spodumene price flowing through our P&L.

Okay. And just to make sure I'm clear, just in your pricing assumption, I mean, are you assuming that your contracts step down with the lag in the next couple of quarters along with that? Or are you assuming your current contract mix extends?

We are taking our current contract mix as of mid-April and applying the market indices referenced in those contracts. This allows us to generate our revenue expectations. When looking at it sequentially, we anticipate price reductions each quarter. However, for the first half of the year, we expect price increases on a year-over-year basis. In the second half of the year, we will see year-over-year price decreases, which reflects the structure of the contracts and the lags embedded in them. Additionally, some contracts have caps and floors that we need to consider.

Okay. Thanks, Scott.

Our next question comes from the line of Mike Sison with Wells Fargo. Mike, your line is now open.

Hey, good morning, guys. Nice start to the year. In terms of inventory destocking, I understand there's been some in the industry, but your volumes were up in the first quarter. So are you not seeing destocking from customers? And is that a risk as you get into the second, third and fourth quarter?

Hi, good morning, Mike. So this is Eric. The way I would qualify that is, again, that the destocking has happened specifically in one country, it's China. Now it happens to be the largest country in the market where almost all the spot volume activity is; that's 10% of our mix, as we described on an annualized basis. All of our contracts are everywhere else around the world, including even some long-term contracts that are sourced into China, are all operating according to the projected plan prior to beginning of the year, prior to any destocking that happened in China, meaning the EV growth story is intact everywhere, all that's happening in China is destocking, which is specifically there. And everywhere else, volume continues to flow. We're not seeing destocking as a widespread phenomenon, just something in China and specific to the spot market.

Got it. And then, so when you think about the volume growth as you head into the second half of the year, it doesn't sound like there's a lot of risk to that on your end, right? Customers want that product, and it's within your contract. So what is the risk for volume in your second half, if any?

What we've discussed regarding destocking is primarily a temporary situation in China and not reflective of underlying demand trends. Although demand in China was somewhat sluggish at the beginning of the year, it rebounded quickly by the end of March. Europe also began the year weak, which we attribute to the expiration of incentives in Germany. In contrast, the U.S. had a strong start to the year. This aligns with our initial outlook and our current perspective that we anticipate a 40% year-on-year growth in demand, with our customers requiring the supply. Overall, we maintain that the market remains tight for the rest of the year. Despite current pricing dynamics, the fundamentals of supply and demand are quite favorable.

Yes, Mike, I would just add to that, as you look at our projection, I mean, it's really an operational risk because we're ramping new plants, right? So it's really just our ability to ramp those plants, and we think we have it dialed in, but things can go wrong. So I think that's really the risk and also potential opportunity, because if things go better, then we'll have more volume.

Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Arun, your line is now open.

Hey, thanks for taking my question. Appreciating that it's a very volatile market that's constantly evolving. Could you just kind of review some of the drivers that you think are influential on price lithium spot prices? And maybe just give some perspective on the market? The declines that we saw were very swift and would indicate destocking and very high inventory levels, especially in China. I know that there's been some other factors like discounting on ICE vehicles over there, but maybe you can just provide your own perspective on what you're seeing?

Yes. So it's difficult to say what's really happening in the spot market; kind of the fundamentals we rely on are the supply and demand balance. We spent a lot of time working on that, making sure that we understand that. We think we understand that, and it kind of works where it's a tight market for a pretty long period of time. And the previous question, we're probably more concerned this year about volume and being able to produce the volume as opposed to the demand that's there for the product. In the spot market, I mean, in China and the movement that we've seen, a lot of that is about destocking and that volume running down and shifting to different areas in the supply chain between the battery makers, the cathode makers, and then the raw lithium salt providers like ourselves and converters that sit in the market as well. So it's moved around within that space. And then there's been a lot of destocking in that. That's really driven the pricing. But in the spot market, as we've said before, it's about 10% of our portfolio, has a big impact on the broader portfolio because we indexed our prices to those with a lag, but it does have a bigger impact on our portfolio than just the 10% that we represent. Eric, do you have additional color?

I believe the automotive market is evolving. There are now more models and manufacturers, leading to increased competition for market share. This is a shift happening within our customer base, reflecting the industry's response to the demand for these vehicles. Our focus remains on executing effectively to meet our customers' expectations. As Kent mentioned, the market for spot material is largely confined to China. Currently, we're observing some developments in China, and when considering inventory reductions, it's a temporary situation influenced by strong demand. Soon, many in the supply chain will need to begin restocking to keep up with growth as well.

As new resources come on, right, and new technology comes to play, those could very well move out that cost curve as well as lower-quality resources come to market with different technologies that could lower the cost curve.

We discussed converters in China that have been shutting down because the economics no longer add up between lithium and spodumene prices. However, I'm not aware of anyone postponing a new project due to the current market prices, although that might be happening.

Our next question comes from the line of Vincent Andrews with Morgan Stanley. Vincent, your line is now open.

Thank you. Good morning. Scott, I'm wondering if you can just help us on the inventory on your balance sheet. Just looking at the end of the year, it was a little south of $2.1 billion. And then at the end of the quarter, it's almost $3.2 billion. So what were the mechanics of that increase? I'm sure some of it is price, but how much of it is volume? And then I think you made an accounting change at Q3 in terms of how you deal with the unrealized profits from your JVs, and I think those now reduced inventory. So if you could just help us bridge the increase from 12/31 to 3/31 that would be great?

Yes, a significant portion of that increase is due to price. As the price has risen, it has understandably affected our overall value. Additionally, we are seeing an increase in volume as we ramp up operations at both Greenbushes and Wodgina, which will contribute to further increases. You are correct that we made an accounting change regarding how we recognize profits in inventory; this is now reflected in our inventory line instead of our investment line, which lessens the impact. These are the key factors at play.

Okay. My other follow-up is about your spodumene cost. It's clear what you're assuming regarding lithium prices based on your comments. However, regarding the spodumene cost included in your guidance, are those the mid-April costs, or do you have a more updated projection factored into the guidance?

No. The same methodology is based on that mid-April cost. So we are not taking a position on what that will do.

Our next question comes from the line of Christopher Parkinson with Mizuho. Christopher, your line is now open.

This is Harris Fein on for Chris. So there's been an effort over the past few years to increase the variable portion of your lithium tons. All of your expansion plans are still going forward. It seems in tracking in line with expectations, and you're still generating a lot of cash. But I guess in light of what's going on in the market, can you speak to how comfortable you are with having this level of volatility in your results?

Yes. So there was quite an effort from us to move toward index-based pricing as pricing was moving, whereas historically we've had more fixed price or at least agreed prices for a period of time. And it does create a little volatility in our results as the price moves, but it's a volatile market and it's probably going to move around like that for a period of time. So it could we, at some point, want to change that structure. But you never say never. It could be the case at some point. But given where the market is now, I think being indexed to the market, we like that. We think it's right for us and our customers. No one is really out of the market, either one, and that's kind of how we're going to operate now. It creates volatility in our results, and we just have to live with that in the near term.

I believe our performance shows that our low-cost resources and operations provide us an advantage. This allows us to manage volatility more effectively than many of our competitors due to our cost structure and scale.

And my second question is I would think that spodumene is the more commoditized product versus the downstream lithium salts. So I guess, why do you think that spodumene prices are holding in better more stable on a relative basis versus the downstream chemicals?

Yes, that's a speculative point, but there is a longer delay in how it influences our profit and loss statement and the industry overall. We depend on market conditions where prices are determined. This situation is not particularly significant for us because we are fully integrated from spodumene to lithium salt. The main effects are related to timing and the tax implications from the joint venture, which cause the observed volatility. I believe the lag exists due to the time it takes for prices to adjust and for materials to move through the supply chain.

Kent, I'd also add that fundamentally, this is an inventory drawdown in a period of time that won't last, we believe long, and we're seeing and we think it's fact transpired and it's behind us, and we see strong demand. I think the spodumene market is reacting to the strong demand and the need for the supply. So there is a time lag, but there's also just the supply/demand fundamentals are, again, very strong for growth going forward. So I think we can speculate, but some of that is at play as well.

There are no more questions?

Everyone, it appears the operator was disconnected, and we are in the process of reconnecting. Please hold on for a moment. The next question will come from Joel Jackson at BMO. Your line seems to be open, but we might need to wait for the operator.

Meredith, can you hear me?

Yes, we can hear you. Go ahead, Joel. Thanks.

I have a couple of questions to clarify something. When you mention that the mid-April market pricing is what you're using for the rest of the year, are you referring to spot index prices in the market at that time, or are you talking about where the prices were in mid-April? Alternatively, are you referencing the realized price that was reflected in your book in mid-April, considering any lags? Also, what specific price level in mid-April are you referring to?

Yes. So Joel, we're using the indices that are referenced in our contracts. So it's not just taking like the China spot or just 1 index where you're actually taking the actual indices that are referenced in our contracts as of mid-April, holding that flat and then calculating through the contract structures and the lags and caps and floors and all that kind of stuff to generate what that forecast is. And if you look at that as of mid-April to today, it's basically the same. So it hasn't really moved much in that time difference.

Great. But that is the unlagged mid-April market indices price?

That's correct. That's correct.

There will be differences in China compared to outside of China, but as you know, they are very significant.

Another question is about the negative conversion margins we've seen for several months. When you purchase spodumene, such as from Talison at market prices, the conversion aspect results in a negative margin. While I understand that overall you are still profitable, how do you view the negative aspect of that business? How does it affect your operations? Looking ahead, what do you anticipate the balance of profitability will be between conversion margins and spodumene production margins?

We don't look at it that way. We're in the lithium business, and we're fundamental from the resource through to the salts that we sell to the customers, and we think of that as one business. And if the margin moves from one part of the business to the other, they're both ours, it's not that relevant to us.

The next question is coming from John Roberts with Credit Suisse. You may proceed.

Thank you. On your contracts that have caps and floors, do you expect to hit the floor on any contracts in 2023?

I don't think we've disclosed that. We haven't discussed specific contracts, and I don't believe we want to.

Okay. And then second question. I know it's small, but can you remind us of the main limitations of sodium-ion batteries and why the range won't improve over time for them?

John, it's Eric. Its sodium-ion batteries are just less energy-dense and heavier on weight for this comparable energy density. So while it may fulfill maybe a city, low-range vehicle, and that could help ease some of the ability of the industry to meet electric vehicle demand given the shortness of lithium we see in our forecast, it cannot replace it in whole in any significant way. However, it could be a viable technology in grid storage. So it just has inherent limitations given the energy density and weight to energy benefits.

Thank you, Mr. Roberts. The next question is from Chris Kapsch with Loop Capital. You may proceed.

A couple of follow-ups. One is on the pricing discussion. Just trying to get a little bit more granular because it sounds like you have good visibility on volumes. And then the variability is going to come from the pricing assumptions. But you alluded to the sort of the bifurcation in hydroxide and carbonate prices. Can you get more explicit in sharing with us like where the assumption baked into your guidance is on each of those chemistries? Is it that $15 to $20 delta that you're currently baking in your revised guidance?

Yes. I think as we assess the market in mid-April, we are using the current spot markets to guide our expectations for the remainder of the year for the different chemistries. The performance of the carbonate business will be influenced by carbonate pricing, while the hydroxide business will be guided by hydroxide pricing. We are keeping these prices flat at the levels observed in mid-April based on the indices we discussed for our various contracts.

Okay. And just to be clear, you have different indexes for both carbonate and hydroxide inside China and outside China?

That's right. Yes, we've got indices for the different products. You also have different countries, different regions, and some customers actually blend some of the indices. So it's a mix.

Makes sense. Got it. And then a follow-up just on the market intelligence about the non-integrated converters shuttering in China. Just curious too, we had heard that. That's definitely the case with lepidolite. Just wondering if your commentary where you're talking about sort of more conventional SC6 feedstock users or for lepidolite or just across the board in terms of non-integrated converters being uneconomic as where recent spot carbonate prices have been?

Well, generally speaking, Chris, what we view lepidolite producers is tending to be more integrated producers from mineral resources of lepidolite all the way through conversion. Our comments on what we're seeing and who we'd be tolling with are obviously those who consume spodumene and who have to buy spodumene in the market to run their business. That's where our comments were focused on.

Our last question is from Ben Kallo with Baird. You may proceed.

Thank you very much for filling me in. If you could give us some help on marginal cost of the industry and you guys point about being integrated, not how you look at the margin in mining versus conversion. But how do we think about the marginal cost of the overall industry? And any way you can frame that for us? Because I think that's the biggest question when what everyone is looking at price is like how low can it go? And if you're the cost leader, then you set that price theoretically? And then I have a follow-up.

Yes. Eric can probably provide more details on this. We believe it's important to consider the difference between integrated producers and non-integrated producers, as the latter likely determine the marginal cost. The spodumene price is relatively transparent, and the conversion process helps generate margins. The marginal producers' costs can vary depending on the current spodumene price, and this can be observed and evaluated.

Yes, Ben, that is when the battery-grade carbonate spot price in China dropped from the 30s into the 20s, which highlighted the challenges faced by producers. We noticed an increase in activity within China aimed at preventing further declines. Market sentiment indicated that this was a difficult time for many producers. This supports our long-held view that prices need to be at least in the 20s for the industry to remain viable, if not higher.

And then you see as new resources come on and new technology comes to play, those could very well move out that cost curve as well as lower quality resources come to market with different technologies, that cost curve kind of grows.

Thank you. It seems we are already noticing a differentiation in pricing coming from China compared to other regions. Additionally, regarding the U.S., I understand there isn't a significant volume originating from there. In your discussions, how varied is the pricing across different regions, particularly for spodumene or carbonate? What differences exist in pricing based on the region?

Yes, China is a significant part of the market and has historically influenced pricing. As other regions expand and we begin to ship more volume there, I expect this will evolve. The market may begin to differentiate globally, but currently, it still functions as a single market, although signs of separation are appearing.

And it's particularly true then for carbonate, 70%, 80% of the world's carbonate is consumed in China. And so if China is destocking, that's going to have a disproportionate impact on carbonate in China.

Yes, there's no real consumption around that at the moment. But the speculation around it has started. But there's not a lot of volume shift that's changed since that law came into effect.

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

Okay. Thank you, and thank you all for joining us today. So it's clear we're a growth company that continues to provide added value to our markets. As a global leader in minerals that are critical to mobile, connected, healthy and sustainable future, we remain the partner of choice with customers and key stakeholders. Thank you.

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