Earnings Call Transcript - ALB Q1 2021

Operator, Operator

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

Meredith Bandy, Vice President, Investor Relations and Sustainability

All right. Thank you, Olivia, and welcome to Albemarle's First Quarter Earnings Conference Call. Our earnings were released after the close of the market yesterday, and you'll find our press release, presentation and non-GAAP reconciliations posted to our website under the Investors section at albemarle.com. Joining me on the call today are Kent Masters, Chief Executive Officer; Scott Tozier, Chief Financial Officer; Raphael Crawford, President, Catalysts; Netha Johnson, President, Bromine Specialties; and Eric Norris, President, Lithium, who are also available for Q&A. As a reminder, some of the statements made during this call, including our outlook, guidance, expected company performance and proposed divestitures and expansion projects, may constitute forward-looking statements within the meaning of federal securities laws. Please note the cautionary language about forward-looking statements contained in our press release and presentation; that same language applies to this call. Please also note that some of our comments today refer to financial measures that are not prepared in accordance with GAAP. A reconciliation of these measures to GAAP financial measures can be found in our earnings release and the appendix of our presentation, both of which are posted to our website. With that, I'll turn the call over to Kent.

Kent Masters, Chief Executive Officer

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

Scott Tozier, Chief Financial Officer

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

Kent Masters, Chief Executive Officer

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

Operator, Operator

And our first question coming from the line of David Deckelbaum with Cowen.

David Deckelbaum, Analyst (Cowen)

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

Kent Masters, Chief Executive Officer

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

Eric Norris, President, Lithium

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

Operator, Operator

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

Robin, Analyst (BMO, on for Joel)

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

Eric Norris, President, Lithium

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

Robin, Analyst (BMO, on for Joel)

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

Eric Norris, President, Lithium

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

Operator, Operator

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

David Begleiter, Analyst (Deutsche Bank)

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

Scott Tozier, Chief Financial Officer

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

Kent Masters, Chief Executive Officer

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

David Begleiter, Analyst (Deutsche Bank)

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

Eric Norris, President, Lithium

So we've said those will ramp up over a period of time. When we first turn them on, don't expect to get to a full ramp immediately. Think of a ramp of roughly 18 months and some of that depends on demand and customers. So over that first year per line, probably 40% to 50% of capacity in the first 12 months — that's probably the best way to think about it and some of that will depend on demand but we expect demand to be there.

Operator, Operator

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

Jeff Zekauskas, Analyst (JPMorgan)

When you bring on your new capacity in 2022 and 2023 in lithium, how might you compare the pricing structures that will be negotiated versus the current pricing structures that you have today? That is, how has the market changed and how has Albemarle changed in the way that you charge your customers, or contemplate charging your customers?

Kent Masters, Chief Executive Officer

We've been talking about the shift in our commercial strategy in lithium for some time. We intentionally delayed the conversion from strict long-term fixed-price contracts to a structure that is more indicative of the market and moves with the market. We'll have different types of customers we contract slightly differently for. We delayed the conversion a bit because the market was so low; we didn't think it was the right time to negotiate at the bottom of the market, so we held off. That strategy hasn't changed and the new volume doesn't change that. We expect to move into that dynamic over the next 12 months. Contracts we'll be negotiating will be on that new basis: a portfolio approach where customers who really want security of supply will have more fixed elements, but many contracts will have components that move with the market rather than pure spot pricing. That's what we've been discussing for the last year, and we did delay the implementation intentionally because we felt like we didn't want to negotiate at the bottom of the market.

Operator, Operator

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

Joe, Analyst (Oppenheimer, on for Colin)

Can you speak a little bit to how challenging hiring is at this point as you get ready to bring capacity on early next year?

Kent Masters, Chief Executive Officer

There are two key locations: Chile and Kemerton in Western Australia, and they each have a different dynamic. In Chile, it's not as big a challenge because we already have a significant operation there. A bigger issue in Chile at the moment is COVID, but we're able to bring people on and we've been bringing them on and training them with existing staff. Australia is different because it's a true greenfield facility, but we've been hiring and are happy with the plan. The labor market is a slightly different dynamic in the construction market than in the chemical operating market. We've been able to hire according to our plans and ramp up staff that will operate the facility according to our plan. That hasn't impacted us materially. What's been more of a challenge is in the construction labor market and getting the staff we need to complete construction. We were actually trying to accelerate it but we're not able to do that; we're essentially keeping to our original plan.

Joe, Analyst (Oppenheimer, on for Colin)

Beyond pricing, can you speak to any other elements of your long-term contracts that you're working to improve given what seems like a better negotiating position?

Kent Masters, Chief Executive Officer

There are several elements, but it's really about guaranteed supply and the profile of that supply. Pricing is a big part, and liabilities and other terms are also important. Eric, you have more to add.

Eric Norris, President, Lithium

The big evolution in the dialogue where we feel we have a lot of value to offer now is on the location of supply and localization. We've referenced in our expansion strategies how we can play to that, and for many of our customers that's an important consideration because the vast majority of business today is still Asia-based. Another key element is sustainability. As OEMs become more involved and have thought through their value proposition — which is based on lower CO2 and other sustainable factors — they want suppliers who are differentiated in that regard. What we are doing has real value here. For me, it's about driving a value proposition with our customers and getting paid for it. So sustainability has become a big part of our proposition as well.

Operator, Operator

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

Angel, Analyst (Morgan Stanley, on for Vincent)

On Wave III, what are the key gating factors that you see for both capacity in lithium and bromine before you actually announce an FID?

Kent Masters, Chief Executive Officer

We're looking at projects, identifying them and designing the plans. The gating factors are what you'd expect in a normal investment program: completing designs, confirming process chemistry, aligning resources — the resource base is not an issue — location, permitting and workforce. We're relatively advanced in that work. And obviously, when you get to that decision point, the returns are a big factor.

Angel, Analyst (Morgan Stanley, on for Vincent)

Regarding bromine, you talked about the favorable customer mix not repeating. Could you give a little more color on that and why it won't repeat? And as we think about 2Q and beyond, should we expect higher pricing in bromine to offset both the shorter supply because of lost production from the winter storm and also the raw materials headwind that you mentioned?

Scott Tozier, Chief Financial Officer

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

Netha Johnson, President, Bromine Specialties

Just as Scott described, we had a chance to sell some volume out of inventory to our noncontracted customers that increased demand based on market recovery, and that was a unique opportunity at very good pricing. We don't expect that to continue through the second half of the year. But like other industrial businesses, freight and raw material costs are going up and that will impact our business in Q2 and beyond for the rest of the year.

Operator, Operator

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

Matthew DeYoe, Analyst (Bank of America)

Can we talk a little bit about the puts and takes on Lithium EBITDA as we move sequentially through the year? I understand the transition from Q1 to Q2, but it seems like you're guiding for price to improve sequentially as we move forward but also costs are up. How much cost do you expect to incur with these new plant startups and when would that roll off?

Scott Tozier, Chief Financial Officer

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

Matthew DeYoe, Analyst (Bank of America)

On catalysts, you made a comment that you don't expect to get back to pre-COVID levels before late 2022 or 2023. Can you walk through your assumptions there? Is that driven mostly by miles driven or other factors?

Scott Tozier, Chief Financial Officer

Ultimately, it's coming from our customers and what our customers are telling us. I'll let Raphael provide some additional color as to the specific parts of the market that are slower than others.

Raphael Crawford, President, Catalysts

There are a few pieces that come into play. Miles driven is a big driver of recovery in refining utilization. We're already starting to see an improvement in refining utilization, and you'll see that throughout the year and into next year, which will affect FCC usage at the refineries — about 60% of our business is FCC — so we'll see that recovery. On the hydroprocessing and FCC turnaround business, that business is tied to turnarounds at refineries, and a lot of those have been pushed out until 2022, and that's when we'll start to see an uptick in that business. Our portfolio is geared toward high performance. When refiners are running near capacity, that's when the value of our products kicks in because we help them maximize yield and throughput through their assets. As it recovers, we'll start to see that leverage effect in the return of our business. Right now, we see both a mix impact and a volume impact, but we expect both of those to reverse as the world recovers.

Operator, Operator

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

Arun Viswanathan, Analyst (RBC Capital Markets)

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

Kent Masters, Chief Executive Officer

It's hard to comment too much on specific price ranges — that's the magic question. But the market is clearly moving in that direction. We're seeing demand growth that we expect to continue. What we're seeing is extraordinary; it may not be 135% for the full year, but we expect strong growth — 70% to 80% for the year around EV levels — and lithium will follow that. Pricing has moved very quickly in China because that's mostly a spot market, so it moves quicker. That hasn't fully translated into the contract market yet. It has started to, and we see it moving in that direction over time. It's hard to predict what's going to happen further out, but we see prices moving up, and the spot market movement should translate into contract prices, which will be positive for Albemarle.

Arun Viswanathan, Analyst (RBC Capital Markets)

A couple of years ago you discussed contracts with terms of seven to ten years at times. Have you seen customers come back with requests to elongate contracts? Can you comment on the contracting environment?

Kent Masters, Chief Executive Officer

Our philosophy hasn't really changed; we've evolved the nature of contracts but kept the same philosophy. Customers are coming around to that thinking a bit, and OEMs are getting more involved and have a longer-term view. I don't see many pushing to ten-year terms; three- or five-year terms, perhaps seven on the longest end, are the kinds of contracts we're discussing. No one is really pushing us further than that.

Eric Norris, President, Lithium

Our legacy contracts had fixed-price mechanisms, and during the crisis we gave some relief on those. That relief expires during the course of this year — some in the middle of the year, all by the end of the year. For our legacy contracts, that's the timeframe we'll be looking to move to the new structures I described earlier, which will give us upside to have price rise with the market more freely than under fixed-price constructs. This is the basis for any new contracts we've struck. We've struck several new contracts with battery and automotive OEMs in the past three to six months and they are in that same construct. It's important to note it's not one structure. Some customers value consistency and will accept a higher fixed price for stability and volume commitments; others want market exposure. We'll have a mix. The underlying message is we'll have exposure to a rising market.

Operator, Operator

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

Paul, Analyst (KeyBanc, on for Aleksey)

Could you update us on any lithium recycling initiatives currently underway so far?

Eric Norris, President, Lithium

Recycling is a key platform for us going forward from a growth standpoint, both because our customers — including OEMs — value that as part of their partnership with us, and because a good amount of the know-how we have from processing lithium is replicable in the streams that will come from recycled processes. We've made investments and have startups and partnerships we're exploring. We have technology initiatives underway and business development activities to partner. We have one joint development agreement currently underway with a customer. These are confidential at this stage so I can't divulge names, but it's a comprehensive effort and a critical one for our growth going forward. We view recycling as a future resource in which we'd like to play a prominent role.

Operator, Operator

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

Matt Skowronski, Analyst (UBS, on for John Roberts)

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

Eric Norris, President, Lithium

You're right: our legacy contracts had fixed-price mechanisms. The relief clauses we provided expire during the course of this year — some in the middle of the year, all by the end of the year. For our legacy contracts, that's the timeframe we'll be looking to move to the new structure. That will give us the upside from a rising market more freely than under fixed-price constructs. For new contracts, we've been using the new construct. There are customers who prefer consistency and will accept a higher fixed price for volume certainty; others prefer market exposure. We'll have a mix, but the overall trend is more exposure to a rising market.

Operator, Operator

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

Ben Kallo, Analyst (Baird)

On bromine, with the chip shortage that everyone sees, can you talk about your visibility on that and what you could gain if there are semiconductor new builds? And then on the lithium side, Scott, back when the worry was around not enough batteries being produced, what do you see on that side as far as new capacity being built and how are you modeling that yourselves and visibility on that?

Scott Tozier, Chief Financial Officer

On the battery side, we're focused on making sure we have the lithium to match market demand. We model from the vehicle level backward to the battery and then to cathodes. There are a lot of plans and capacity being added in the industry, but we won't put an opinion out about overall battery capacity. We're focused on executing our growth investments so we have the lithium to meet market needs.

Netha Johnson, President, Bromine Specialties

Ben, we see the electronics market is really strong, and a strong semiconductor market is definitely good for us. But we are not seeing the chip shortage impact us right now. With us being sold out, we have very limited additional capacity to leverage that for the rest of the year. We have contracted volumes in those markets and those volumes are being ordered as we expect. So from where we sit in the supply chain, we're not seeing an impact right now. Things could change, but at the moment it's not an issue for us.

Kent Masters, Chief Executive Officer

Part of the potential advantage from semiconductor growth is greater demand for electronics where we play — whether in automotive or in Internet of Things applications. That would benefit us, but only if the industry can keep up. So it's an advantage if the underlying demand translates into additional production.

Operator, Operator

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

Chris Kapsch, Analyst (Loop Capital)

My question relates to lithium business visibility. The industry is still China-centric; in materials, China has sometimes double-ordered or built excess inventories during periods of rising commodity prices, and on the flip side destocking can exacerbate downward pricing. Granted lithium chemicals for batteries are not as commodity-oriented as iron ore, but could you comment on the ability of the industry to build back inventories or safety stocks, and how your visibility is changing along with procurement strategies migrating to involve battery and OEMs? How do you see this evolving?

Kent Masters, Chief Executive Officer

From our perspective, we're fighting to keep up with demand and I don't think companies are building big inventories in the supply chain. We're not building inventories; in Q1 we actually sold down inventories to satisfy demand. I don't think the industry is building buffer stocks right now; demand is strong and the industry is tight.

Eric Norris, President, Lithium

The industry is tight worldwide as a consequence of how weak it got last year. A lot of capacity left the market or projects slowed down, so it will take time to catch up while demand accelerates. We don't see a letup in that situation for the near term, which is why we see price rising going forward for the foreseeable future. China remains important to the industry; a delay anywhere downstream in batteries is likely to occur outside China. Asia continues to be an important point, which suits where we're bringing on capacity. We're optimistic about placing the capacity we'll bring on next year.

Kent Masters, Chief Executive Officer

One difference from other commodity industries is that we are integrated across resource and conversion, and our resources are not primarily in China. Conversion capacity and customer demand are concentrated in China today, but our resources are diverse and we're building conversion capacity in Chile and Western Australia as well. We focus on diversification from a resource standpoint and conversion footprint, even though it can be more expensive; we think it's important.

Operator, Operator

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

Kent Masters, Chief Executive Officer

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

Operator, Operator

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