Albemarle Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

Key Takeaways

  • Net sales fell 47% to $1.4 B and adjusted EBITDA dropped to $291 M in Q1 due to lower lithium pricing, partially offset by volume growth.
  • Achieved $90 M in Q1 productivity and restructuring savings, remaining on track for over $280 M full-year productivity improvements.
  • Ramped key conversion facilities, with Kemerton 1 and Meishan reaching 50% operating rates to drive near-term volume growth.
  • Strengthened financial flexibility by issuing $2.3 B in preferred stock, repaying commercial paper and ending Q1 with elevated cash for capital projects.
  • Launched recurring auctions for spodumene concentrate and lithium carbonate to improve market transparency and price discovery.
AI Generated. May Contain Errors.
Earnings Conference Call
Albemarle Q1 2024
00:00 / 00:00

There are 17 speakers on the call.

Operator

Hello, and welcome to Albemarle Corporation's Q1 2024 Earnings Call. I will now hand it over to Meredith Bandy, Vice President of Investor Relations and Sustainability.

Speaker 1

Thank you, and welcome, everyone, to Albemarle's Q1 2024 Earnings Call. Our earnings were released after the close of market yesterday, and you'll find the press release and earnings presentation posted to our website under the Investors section at albemarle.com. Joining me on the call today are Kent Masters, Chief Executive Officer and Neel Shere, Chief Financial Officer. Netha Johnson, President of Specialties and Eric Norris, President of Energy Storage are also available for Q and A. As a reminder, some of the statements made during this call, including our outlook, guidance, expected company performance and timing of expansion projects may constitute forward looking statements.

Speaker 1

Please note the cautionary language about forward looking statements contained in our press release and earnings presentation. That same language applies to this call. Also note that some of our comments today refer to non GAAP financial measures. Reconciliations can be found in our earnings materials. And now, I'll turn the call over to Kent.

Speaker 2

Thank you, Meredith. During the Q1, our team demonstrated its ability to navigate dynamic market conditions with actions that position Albemarle for profitable growth and deliver on the operational steps that we have set out to achieve this year. We recorded net sales of $1,400,000,000 and adjusted EBITDA of $291,000,000 We saw continued volumetric growth driven by Energy Storage segment, highlighting the demand growth in the segment and our ability to capture it. We also ramped new conversion facilities, executed on our productivity plans and strengthened our competitive position and financial flexibility. During the quarter, we delivered more than $90,000,000 in productivity and restructuring cost savings, consistent with our efforts to align our costs with the current market environment.

Speaker 2

We are on track to deliver more than $280,000,000 in productivity improvements in 2024, demonstrating our excellent execution. To drive lithium market transparency and discovery, we held several successful bidding events for spodumene concentrate and lithium carbonate in March April. We are encouraged by the results and level of participation to date and plan to continue these efforts. And we continue to advance our in flight growth projects that are near completion or in start up to deliver near term volume growth and cash flow. In particular, we've reached important new milestones at Kemerton 1 and Meishan.

Speaker 2

Finally, the year so far has developed as we expected, and we are reaffirming our full year 2024 outlook ranges that are based on observed lithium market price scenarios that we included for the first time last quarter. Our operational and strategic playbook positions us well to serve our customers today and for the future. With our focused execution and our continued confidence in the elements we provide, Albemarle is well positioned to drive sustainable growth and create value. I'll now hand it over to Neil to talk about our financial results during the quarter.

Speaker 3

Thanks, Kent, and good morning, everyone. Beginning on Slide 5, let's jump into our Q1 performance. In Q1 2024, we recorded net sales of $1,400,000,000 compared to $2,600,000,000 for the prior year quarter, a year over year decline of 47%, driven principally by lower pricing, partially offset by volume growth. Adjusted EBITDA was $291,000,000 significantly down from the same period last year when pricing and margins across our Energy Storage and Specialties businesses were at peak levels. Diluted EPS was negative 0 point 0 $8 Adjusted diluted EPS was 0 point and mark to market losses on public equity securities held or sold in the quarter.

Speaker 3

Our earnings decline was Our earnings decline was driven mostly by margin compression on lower pricing, especially within our Energy Storage segment. Additionally, we had some margin pressure due to timing of higher cost spodumene flowing through cost of goods sold and reduced equity earnings at the Talison joint venture. These factors were partially offset by volumetric growth, primarily lithium carbonate and hydroxide, and we also recorded spodumene sales at favorable pricing. Also, the Ketchin business recorded increased net sales and EBITDA driven primarily by higher volumes. Looking at Slide 6, we'll break down the company's Q1 adjusted EBITDA by driver.

Speaker 3

Compared to the prior year quarter, the decline in EBITDA was $1,400,000,000 related to lower lithium pricing in both energy storage and specialties, dollars 90,000,000 in cost of goods sold due to timing of higher priced spodumene inventories built in prior periods and $270,000,000 related to pretax equity income, primarily from our Talison JV. Offsetting these declines were improvements of $251,000,000 related to higher volumes as our energy storage projects continue to ramp, as well as better clean fuel technologies volumes at Ketchum and $80,000,000 of net improvements mainly due to restructuring and productivity benefits across multiple areas, including procurement, manufacturing and back office spend. This demonstrates our team's agility and focus on delivering higher volumes and productivity improvements in the current market environment. Turning to Slide 7. As we did last quarter, we are providing outlook ranges based on historically observed lithium market pricing scenarios.

Speaker 3

We are reaffirming our outlook considerations published last quarter. There are 2 notable updates here related to our tax rate and share count expectations. We are updating our adjusted effective tax rate guidance to reflect the range of lithium price scenarios as well as our updated expectations of geographic income mix. At the $15 lithium price scenario, we'd expect a modest tax expense benefit in our P and L. At higher pricing, we'd expect a more typical tax rate in the mid- to high-twenty percent range.

Speaker 3

We have also accounted for the adjusted change in the diluted share count to reflect our $2,300,000,000 public mandatory convertible preferred stock offering. Moving to Slide 8, where we provide some operating cash flow considerations. We had previously highlighted that our cash flow conversion would be constrained this year, and I want to provide some additional color on those drivers. As you see here, our cash flow conversion in 2024 is expected to be below historical averages for four reasons. 1st, Talison is progressing its chemical grade plant, or CGP III, expansion, resulting in lower dividends from the JV.

Speaker 3

2nd, working capital release related to lower lithium pricing is expected to be mostly offset by increased working capital investments for our new plants at Kemerton, Meishan, Salar Yield and Chinsou. 3rd, cash tax is expected to be similar to last year, primarily reflecting jurisdictional mix. For example, we will pay Australian cash taxes in mid year based on earnings estimates from the prior year period. And finally, we expect to have higher interest expenses year over year. Turning to Slide 9, I'll provide further details on trends in each segment's outlook.

Speaker 3

First, in Energy Storage, we continue to expect approximately 2 thirds of our 2024 volumes to be sold on index referenced variable price contracts. The remaining 1 third of the volume is still expected to be sold on short term purchase agreements, including our recently announced bidding events, which Kent will discuss in a moment. Year over year energy storage volume growth is trending toward the high end of our expected 10% to 20% range, driven by timing of project ramps and spodumene sales. We continue to anticipate increased year over year volumes

Speaker 4

in the second half of the year due to the ramp

Speaker 3

of our expansions. Year as lower cost spodumene offsets new facility ramp costs. However, we expect some quarterly variance in EBITDA and margin due to the timing of Talison shipments. Specifically in Q2, we expect a lift to our EBITDA margin of about 10 points from higher offtake by our partners at the Talison JV. Next, on specialties.

Speaker 3

Our outlook reflects continued softness in consumer pharmaceutical applications. Furthermore, we are seeing higher costs for logistics as we manage through regional challenges, notably at our site in Jordan. We anticipate higher sales in the second half of the year on the expectation of modest end market recovery and improved Finally, at Ketchen, we are seeing Finally, at Ketchin, we are seeing the building success of our turnaround program. We are optimistic about increased volumes driven by high of the Ketchin businesses in 2024. Turning to Slide 10 and our financial position.

Speaker 3

As you know, during the quarter, we took action to maintain a solid investment grade credit rating and further enhance Albemarle's financial flexibility as we navigate this market down cycle. In March, we closed a $2,300,000,000 public preferred stock offering to fortify our competitive position and stay ahead of dynamic market conditions. Together, with the amended credit facility we discussed in February, these actions put Albemarle in a position to invest in and finish our last mile expansion projects as well as capitalize on the secular growth trends we see in our core end markets of mobility, energy, connectivity and health. Following the offering, we repaid our outstanding commercial paper, resulting in improved leverage. We ended the quarter with a larger than normal cash balance, and the primary use of that cash will be to complete our in flight capital projects.

Speaker 3

Our balance sheet management highlights our focus on adapting to changing market conditions and controlling the things in our control. Finally, turning to Slide 11 for a reminder of our capital allocation priorities. This is a slide you've seen before and we're touching on it briefly to acknowledge that our capital allocation priorities have not changed. We'll continue to selectively invest in high return growth, but we'll be patient and disciplined. Our near term focus remains on operational execution, and you can expect that our actions will be aligned with driving cost and productivity improvements, ramping our assets to full contribution and preserving our financial flexibility.

Speaker 3

While we believe current lithium prices are unsustainable for most of the industry in the long term, we are managing to the current environment. To support our ability to reinvest and grow for the future, we are taking the prudent steps to right size our capital spending and cost structure, focusing on ramping our plants to full contribution and volume growth capture and taking steps to boost cash flow and enhance our financial flexibility. With that, I'll turn it back over to Kent to provide more details on the proactive actions Albemarle is taking in the current market to preserve long term growth and value creation.

Speaker 2

Thanks, Neil. Moving to Slide 12. We continue to believe in the EV transition and the growth in lithium demand as well as the opportunity it creates for Albemarle. Despite a downshift in demand growth in Europe and the United States, global EV sales are up 20% year to date, led by strong growth in China, which represents over 60% of the global EV market. We continue to anticipate 2.5 times lithium demand growth from 2024 to 2,030.

Speaker 2

Additionally, we see battery size growing over time, driven by technology developments and EV adoption. These factors all translate to significantly higher global lithium needs. To put all this in perspective, we expect that this industry needs more than 300,000 metric tonnes of new lithium capacity every year to satisfy this growth. This means we need more than 100 new lithium projects across resources and conversion between now and 2,030 to support this demand. Moving to Slide 13.

Speaker 2

Albemarle is actively contributing to the progress of price discovery and efficiency in the lithium market. We have conducted 4 successful bidding events for chemical grade spodumene and battery grade carbonate. These events inform the market of real time physical trading dynamics and promote greater transparency in the evolving lithium market. While the majority of our sales will continue to be on long term agreements with our core strategic customers, bidding events give us another sales channel to expand our market access. We have partnered with Metals Hub, an industry leading source to host efficient and transparent bidding events.

Speaker 2

On the slide, you can see a few of the ways we've designed these events to promote transparency and efficiency while meeting customer needs, including 0 cost to participate, sealed bids and bidder confidentiality as well as the winning price disclosed to all bidders following the event's conclusion. Going forward, you should expect that we will have a regular cadence of these bidding events, including additional products for sale in various jurisdictions. The primary reason for holding these bidding events is to drive fair and transparent price discovery, something that is good for all market participants. Looking at Slide 14, the Albemarle Way of Excellence remains our operational standard and continues to serve us well. Within the operating model, our focus continues to be on efficiency and ensuring our costs reflect the current environment.

Speaker 2

As I mentioned earlier, we remain on track to exceed our 2024 target of $280,000,000 in productivity benefits through manufacturing, procurement and back office initiatives. Recently, we've added cash management to our tracker to enhance cash flow with particular emphasis on optimizing our cash conversion cycle. Looking beyond our cost actions, we also remain focused on the other elements of our model. This quarter, we plan to publish our sustainability report and host our 4th annual Sustainability Day featuring key highlights of our sustainable approach and updates on our environmental targets. Moving now to Slide 15.

Speaker 2

We've said that our focus this year is on getting our in flight projects to completion and full production, allowing us to drive near term volume growth and cash flow. We're making solid progress on multiple fronts. The Salar yield improvement project in Chile is ramping well and has achieved over 50% operating rates. This project allows us to increase lithium production while reducing carbon and water intensity through the application of innovative proprietary technology. It also allows us to capture the full benefits of the capacity expansion at the La Negra conversion facility.

Speaker 2

In Australia, the first two trains, Kemerton 1 and 2, are in start up, ramp and qualification phases. Kemerton 1 recently achieved a key milestone of 50% operating rates for battery grade product, and that product is currently qualified with customers. At Train 3, we are progressing through construction in a prudent way. In China, the Zhengzhou plant is ramping on schedule and is expected to achieve nameplate capacity by mid year. Meishan marked its grand opening in April and is progressing through commissioning, having achieved a 50% operating rate for battery grade material.

Speaker 2

The remaining capital spend on Meishan is relatively small and related to the ongoing startup activities. Looking at Slide 16, our in flight projects put us in a position to deliver volumetric growth of approximately 20% per year from 2022 to 2027. 1st quarter sales volumes were recorded at 40,000 tonnes LCE. We expect 2024 total volumes weighted toward the second half of the year due to demand seasonality and project ramp. We also have the flexibility to toll or sell excess spodumene to maximize economic returns depending on market conditions as we exercise that ability in the Q1 by selling some chemical grade spodumene.

Speaker 2

Moving on to Slide 17. It's important to highlight the unique advantages that Albemarle has today and how we see those advantages translating to significant margin expansion and earnings generation in the near term. It all starts with our high quality, low cost resource portfolio, including the Salar de Atacama, Greenbushes, Wodgina and Kings Mountain. Our global portfolio is arguably the best in the industry. Large scale high grade assets are also low cost assets, and the advantages they provide are not insignificant, as you can see on the left hand side of this slide.

Speaker 2

Access to world class assets is in turn one key factor to help us maintain robust energy storage margins across the cycle. For example, at the $15 per kilogram lithium price scenario, we estimate energy storage margins would normalize above 30% after adjusting for the temporal impacts from lower partner offtake at Talison and lower fixed cost absorption at our new plants. And that's before the tailwind of price upside. We estimate that every $1 per kilogram of LCE price improvement would translate to more than 200 basis points of margin expansion. We are also diversified across resource types and finished products, vertically integrated and able to source product from 3 trade agreement jurisdictions such as Australia, Chile and the United States.

Speaker 2

Turning to Slide 18. Our comments today reflect the competitive strengths that position Albemarle for success. Beyond our world class resource base, additional competitive advantages include our process chemistry knowledge and manufacturing expertise allow us to efficiently operate large scale assets and drive down operating cost. Our targeted innovations, product reliability and reputation for quality make us a trusted partner of choice for our customers, and our people and stewardship are a point of pride and competitive strength. We have a proven management team that has operated through cycles and continues to lead with a disciplined set.

Speaker 2

On Slide 19, these factors give Albemarle a strong value proposition and position us to win in the market. Our strategy and path to capitalize on the opportunities aligned with attractive trends in mobility, energy, connectivity and health is clear. We will continue to lead with discipline and to scale and innovate, accelerate profitable growth and advance sustainability to drive value for shareholders. I hope to see some of you face to face at these upcoming events listed here on slide 20. And with that, I'd like to turn the call back over to the operator to begin the Q and A portion.

Operator

We will now move to our Q and A portion. Our first question is from Aleksey Yefremov at KeyBanc Capital. Your line is open. Please go ahead.

Speaker 5

Thanks and good morning everyone. I just wanted to ask about your lithium volumes projection on Slide 16. If current prices don't change, can you get to these volumes and capacities? Was that raising more equity or debt?

Speaker 6

Yes. So we well, we forecast for the year looking out for the year, so 10% to 20%. And we'd say we'd probably be at the upper end of that. And those the volumes that we show are based on the capital program that the long term volumes we show are based on the capital program that we have in place and the projects that we're executing currently and no need for additional capital for that.

Speaker 5

Thanks. And just as a follow-up, I mean, you gave us scenarios for your EBITDA based on pricing. And I was hoping to get a similar idea for your medium term CapEx. If say prices stay where they are today, would you be able to sustain your current level of CapEx in 2025 or does CapEx need to come down to balance your cash needs?

Speaker 6

Yes. So if prices stayed where they were today, you'd see us ramping CapEx down. It take us a little bit of time. So it's not we have a run rate that we think is kind of a minimum CapEx level of about to maintain assets about $1,000,000,000 a year. We wouldn't get there in 2025, but kind of a run rate in line with that toward the end of 2025, we could if we felt prices were going to stay where they are today.

Operator

Our next question is from Arun Viswanathan at RBC Capital. Your line is open. Please go ahead.

Speaker 7

I guess I just want to get your thoughts on maybe fundamentals that you're observing in the lithium markets these days, it sounds like there was some disruption in some spodumene production. There was some, I think, curtailments in China related to disposal of waste. Altogether, that has taken some production off the market and potentially stabilize the price environment. Could you maybe highlight some of those issues for us and maybe describe the inventory side as well, what you're observing in both downstream cathode manufacturers and upstream lithium producers? Thanks.

Speaker 6

So, let me start I'll start with that. Eric can give you a little bit more detail on inventory. But, I mean, you described the situation reasonably well. We've seen, as we expected, some production come offline, lepidolite in China and some higher cost spodumene resources. And we've seen price respond to that marginally, I would say 15% or so change in price as a result of that.

Speaker 6

But that's what we thought the market would do. We don't really see it running dramatically up and we still expect to see other resources coming off if prices stay where they are. So it's going to balance as the market kind of figures out exactly what prices is doing and how production responds to that. So I think you'll see new projects that are planned, coming off and struggling to get capital if we stay at prices like they are. So I think we're in a balancing mode at the moment.

Speaker 6

And we do expect to see additional resources come out. Eric, you want to talk about inventories? Sure. First, I'll just hit the other factors important is demand. China stands as a market and start 1st of all, the majority of demand in the

Speaker 8

world, over 60% of the demand. And stand in stark contrast to the U. S. Or Europe with very strong growth you may have seen reported even in April growth that was quite significant for various automotive producers, BYD being up 49%. So there's very strong growth in China, coming off a very low inventory levels.

Speaker 8

And that's a favorable indicator for price in light of the pressure on producers at these price levels that Kent described. And the inventory more specifically, what we're seeing is inventory is pretty much at very low levels, ending in March, relatively speaking. So less than 2 weeks from a lithium producer standpoint and about a week for downstream cathode companies. That's in China. It's a little higher for battery producers or excuse me for battery inventories.

Speaker 8

But again at levels that are very low compared to the average we saw in 2023. So that's a that coupled with this demand signal we're getting from China, we see as a positive signal for price going forward and obviously we'll have to we don't know for sure, but we'll watch that carefully and should that happen, that'll benefit our earnings going forward.

Speaker 7

Thanks for that. And I know there's going to be a lot of other questions. So maybe I'll ask one on specialties. Do you see any risk maybe to given where geographically where some of your resources are in Jordan? I know there's been some activity there obviously.

Speaker 7

So maybe you can just give us your thoughts on is that part of what's leading you to the lower end of guidance for specialties or what else would you cite, I guess, other than

Speaker 6

Yes, I think it's a fair assumption. There's always risk in the Middle East. But in terms of our operational, we've seen limited operational impacts year to date. But the logistics is where the challenge is. And we are incurring additional costs to secure those logistics out of that part of the world.

Speaker 6

So that's what's impacting our business. But, that's different than what it was last year. So yeah, that's definitely a risk in the second half as we move into that for specialties.

Operator

Our next question is from David Deckelbaum at TD Cowen. Your line is open. Please go ahead.

Speaker 5

Thanks for taking my questions, everyone. I wanted to just follow-up on the outlook if prices were to stay the same. You've obviously seen the impact of lower near term production at Greenbushes. And then obviously you have CGP 3, which is still or under construction and ramping. We've heard from Wajina with the 3rd train kind of being deferred a bit.

Speaker 5

Do you anticipate any more, I guess, corrective actions or responses under some of the JV spodumene facilities that you're involved with if prices were to remain where they are today?

Speaker 6

So, the resources that we operate, I mean, we have made adjustments just to the market condition, but I don't think we make further ones. These are world class resources in the lowest cost position. So we still operate and make money at the pricing level there. These were investments that were kind of happening in the near term and we had opportunities to adjust the execution profile as we have around conversion assets as well and our partners agreed to that. So we've made some adjustments.

Speaker 6

But long term, we still expect to exploit these resources because they're some of the best in the world.

Speaker 5

Appreciate that. And I'm curious on the second question, just I think you've highlighted some EBITDA margin recovery in the second quarter, with increased partner off take at Talison and some variability there throughout the year. As we think about your EBITDA margins in 2024 versus 2025, is there a ballpark range that you would estimate that commissioning new facilities has as sort of a drag on EBITDA margins this year versus next year?

Speaker 9

Yeah. Hi, David. This is Neil. Yeah, absolutely. That's actually one of the reasons why we put that slide in the deck that showed that our range found that.

Speaker 9

I think that's Slide 17. So the way that we think about it, it's about a 500 basis point drag, this year, from the ramp up of these new plants. Now, you won't get all 500 basis points back in 2025 because obviously we will still be working through the ramp of these facilities. But certainly you can expect over the next couple of years as these facilities come up to full rate that you should start to see that margin expansion from those plants running full.

Operator

Our next question is from Steve Byrne at Bank of America. Your line is open. Please go ahead.

Speaker 4

Hi. I have Rock Hoffman on for Steve Byrne. Out of the $280,000,000 productivity benefits goal that you guys set for 2024, given that you're already, I guess, above pace of $90,000,000 in Q1, is this faster pace apparent in results and guidance?

Speaker 6

So I think we're using the $280,000,000 as we forecast that out. It's still early in the year. We're probably a little ahead of schedule, but not ready to call it and build into our forecast that will beat that. But we'll be we're optimistic. We're comfortable with the program and the target is a pretty big target for us across the organization and we feel pretty good we're on a run rate that we can meet that or maybe beat it, but we've not built that into our forecast.

Speaker 9

Yeah and this is Neil. To the point of can you see it in the financials, maybe just one example I'll give you is if you look at our SG and A line. So just remember that on the face of the income statement, our SG and A line includes about $35,000,000 of one time charges that was related to our restructuring activities that we announced in the Q1. When you back that out and then look at our SG and A line versus the Q4 versus where we ended 2023, you will see about a $20,000,000 to $25,000,000 decline in our SG and A cost. So that gives you an idea that we are starting to see productivity and restructuring savings that we already announced.

Speaker 4

That's helpful. And just to follow-up, in terms of your longer term volume growth chart here, why doesn't the potential tolling volume go down over time? Wouldn't you generate higher margins at your own conversion plants?

Speaker 8

Actually, your question, just to make sure I'm clear on it, this is Eric speaking, was why would we see tolling volume go down over time? Why would we see tolling volume go down? I'm sorry. Yes, I think, fair enough. You would on that it's all a factor of ramp of plants, right?

Speaker 8

What it comes down to, we have a plant in China, Meishan, that's ramping at a faster speed than the plant in Australia and that has to do with operating experience. But if you look on this over a long term basis, ultimately we will our intention is to be fully integrated and to take all the available resources and convert them with company built assets as opposed to tolling assets. Increasingly those, we would target those to be outside of the U. S. We have a considerable base as you know today in China.

Speaker 8

But again, depending upon the speed with that, tolling always remains a flywheel, an option for us to go to hang on the speed of ramps to go to another alternative. But you're right, I mean, in time, that's why there's a plus minus on it, it should come down.

Speaker 6

The timing for the most part is a bridging strategy for us, sorry.

Operator

Our next question is from Andres Costanos at Berenberg. Your line is open. Please go ahead.

Speaker 10

Hello. I wanted to understand better why are you running sputumene options now? And to have a sense on what is the percentage of volume that goes in these options?

Speaker 11

Are in

Speaker 10

deals with dollars somewhat impacted by this?

Speaker 6

Yes. So, I'm not sure I got the last part of the question. Let me start on the front and you catch that in the follow-up if I don't answer your question. So we're doing the auctions both on spodumene and on salts to help transparency in the marketplace, price discovery to really understand make the market a little clearer, a little more transparent. We get good information for it.

Speaker 6

And then we've decided to include spodumene as part of that, just more transparency in the market, more knowledge that we get around that. And it's an opportunity for us to participate in a different part of the value chain. So it's not a change in our strategy of being an integrated producer. We will sell most of our product through these long term agreements on a salt basis as we have historically. So that strategy didn't change, but it's just it's an adjustment to take to try and get more transparency in the marketplace and then to sell spodumene a different value, a different product, a different value in the marketplace.

Speaker 6

So, if there are dislocations, we can take advantage of that.

Speaker 11

Right. So I take it's

Speaker 10

a small percentage of the total volumes that essentially the deals with the dollars are still in place and they take the majority of the excess spodumene. My second question would be on the level of cost of inventory that you have at the moment for spodumene, for the one you take on board from what you know. Can you comment on that more or less where you see versus the index? Thank you.

Speaker 9

So I think the question was the cost of our spodumene inventory versus the index. So, as we showed in our Q1 results, we are still working off a little bit of spodumene that went into inventory in prior periods that is at a little bit higher cost than where it is today and we documented how much of that was in our Q1 results in our EBITDA bridge. You can expect that there'll be a little bit more of that spodumene that we'll have to work off, but for the most part, you will start to see a spodumene cost rolling through our COGS that is consistent with what is in the market, as we get towards the middle of the year and in the back half of the year. And that's built into the outlook scenarios that we've been publishing.

Operator

Our next question is from John Roberts at Mizuho Securities. Your line is open. Please go ahead.

Speaker 12

Thank you. Last quarter, Slide 13 on Greenbush has discussed the lag and the lower cost of market issue. It projected spodumene inventory costs for the March quarter of about $4,000 a ton. Does that play out the way you projected last quarter?

Speaker 9

John, so this is Neil. So I would have to check your numbers. One of the big adjustments we made in the Q4 was that LCM, which really collapsed the gap that we previously had that sort of 6 month lag that we had in the spodumene cost and how it rolls through cost of goods sold. Now, even after taking the LCM, we did still prices did still come down as we started the Q1. So we did still have a little bit of higher priced spodumene that rolled through our P and L.

Speaker 9

But I think the numbers you're referring to maybe before we took the LCM adjustment, and we collapsed a lot of that gap with that adjustment.

Speaker 11

Yes. All

Speaker 12

right. And then have your thoughts on the role of Ketchum in the portfolio changed at all since the last call?

Speaker 6

I would no, I would say, look, we're we've said it's not a core business for us. So, we would look to divest that at some point. But and we went through a process, which I think we talked quite a bit about, didn't get the value we wanted. So we're doing a turnaround. That program is going pretty well, but we would still anticipate doing a transaction on that business when the timing is right.

Operator

Our next question is from John Roberts sorry, Christopher Parkinson at Wolfe Research. Please go ahead.

Speaker 13

Great. Thanks. This is Harris Stein on for Chris. So I'm not sure if I'm reading too much into this. You left the EBITDA sensitivities unchanged, but also volumes seem like they're trending towards the high end of the guide.

Speaker 13

Is it wrong to think that EBITDA would trend to the higher end of those ranges as well, all else equal?

Speaker 9

Yeah. Actually, it's a fair assumption. Basically, the way that we constructed those EBITDA ranges, the reason they're ranges is driven by that volume consideration that we have, the 10% to 20%. So I think all things being equal, that's a fair assumption to make.

Speaker 13

Then for my follow-up, there are a lot of moving pieces in the cash flow guide. I guess when I look at the reasoning for the lower conversion rate this year, it doesn't seem like those things are necessarily going away after this year, Like you'll always be ramping projects. So, how are you thinking about the operating cash conversion going forward?

Speaker 9

Well, actually, I have a little different viewpoint on that. I do think that our cash conversion should be improving in 2020 5 for a few reasons. Number 1, as I mentioned or as we mentioned in the prepared remarks, our cash taxes are very similar this year to what we had last year and that's primarily because of Australia and we're paying taxes based on income from last year. If you assume that, pricing is sort of flat for the rest of the year, I think you should assume that our cash taxes will be lower next year, all things being equal. The other part is, is that our facilities are so far, as you heard in Kent's remarks, ramping, quite well.

Speaker 9

And so we would expect that those will start to contribute as we get into the back end of this year and into 2025. And as Kent mentioned, right now for where we are, the ramp that you see in our volume growth is just based on the projects that we are finishing up right now and are ramping right now. So we won't be ramping plants forever. That will most certainly come to

Speaker 8

an end and those plants will begin contributing in the back half of this year and into 2025. So I do anticipate our cash conversion to get better. And just a little finer point on Neil's point, I mean, we are those the new plants that are ramping will become as

Speaker 6

we grow, our business grows, they become a smaller part of the portfolio. So, we'll still be building new plant and ramping over time, but they become a smaller percentage of the portfolio. And then at the moment, we have a lot of plants ramping in that particular phase. Didn't necessarily plan it that way, but that's how it's worked out. We've got, I think, 4 plants actually ramping now at the same time and that's not the plan.

Speaker 6

Going forward, it won't be that many. And if they were, it would be a smaller part of the portfolio just because we've grown.

Operator

Our next question is from Kevin McCarthy at Vertical Research Partners. Your line is open. Please go ahead.

Speaker 14

Hi. This is Matt Hetler on for Kevin McCarthy. Regarding the spodumene and carbonate auctions that you just touched on, what is the customer feedback been like? And how has the auction participation rates trended?

Speaker 8

Yes, this is Matt. This is Eric. We've had very good participation. We're very early in our process and so we're very we have a qualification process to make sure we're inviting people to these auctions that meet certain standards, but that's growing over time. The participation rate we received and the corresponding conversion of those invited versus those who put in a bid has been strong.

Speaker 8

The interest has been therefore good and the outcome has been well received what we think by the market, particularly from our price reporting agency. We found that these through the normal surveying process, the results of these bids have found their way into the price reporting agencies. Of course, they determine how they use that in their index calculations, but it's our anticipation that they're landing there as well. And then as we turn to our sort of contracted customer base, they appreciate that what we're doing is better understanding and what is a pretty immature market, how to seg what the drivers are as Kent was referring to different types of prices, whether that's inside a country, outside a country or an IRA compliant, a non IRA compliant product or a spodumene versus a battery grade carbonate. It's giving us better intelligence, better segment, understand what's happening in the market and allowing the same for our customers in the contract side ultimately because that would be reflected in the indices they

Speaker 14

reference. Thanks. And then as a follow-up, I believe in the prepared remarks you mentioned expanding the auctions to other geographies and products. What other geographies are you looking at? And in the future might you include hydroxide in the auctions?

Speaker 8

Yes. So I touched on a little bit when I talked about IRA compliance, but just as reference almost or actually all 4 auctions that we've done to date have all been inside of China with available inventory on the ground there. We'll be looking for product outside of China shipped on a CIF basis for example. We'll be looking at that certainly for our Australia product. We'll be looking at it for product styrene compliance ship to the U.

Speaker 8

S. And across our product range including hydroxide.

Operator

Our next question is from Ben Isaacson at Scotia Capital Inc. Your line is open. Please go ahead.

Speaker 15

Good morning. This is Apurva on for Ben. So we're heading into what has historically been a peak buying season in China. Just off of the earlier comments on demand, are you starting to see this restocking materialize?

Speaker 8

Yes, this is Eric. As I pointed out, we've seen inventories at a fairly low level, ending in March and I do think a part of the demand is the restock in anticipation of the mid year and into later year seasonality of EVs. It's one reason why it's very hard to look at Q1 sales of EVs and correlate that to real on the ground demand because the EVs that are being sold in the Q1 this year were lithium for that was sold late last year, middle of the late of last year. And we are seeing, I think it's a part of the demand that I referred to earlier. It's not only fundamental demand for what our increased EV sales that are coming in that we see in April and we expect in May June, but also it's a result of some restocking because some of the levels of which inventory gone to just weren't sustainable for these operations to run without taking considerable risk of not being able to meet demand.

Speaker 15

Great. Thank you. And as my follow-up, looking back with your 10 ks, you actually published an updated technical report on green bushes. With that report, we saw something of a step down in both grades and recoveries and concurrently costs have moved upward. Given those technical specs, where do you see the next phase of resource growth coming from 4th green bushes?

Speaker 8

Well, that's you're correct. You're referencing a report that we published on our SEC guidelines, which are have a different standard. It's not uncommon in mining for different standards around the world and different standards are more strict and how they should be exercised and that produced some of the results you're describing. This is still even in that report on a relative basis, the best spodumene resource reported in the world. And our aims are to continue as we've described to we are now executing with our joint venture partners as CGP III expansion.

Speaker 8

There is the possibility long term, although we have not announced this formally or committed to it for further expansion of CGP-four and continued operation of that grade of that operation at its current grade reported for quite some years, decades to come. So our intention is to maximize that resource given its low cost potential.

Operator

Our next question is from Michael Cisson at Wells Fargo Securities. Your line is open. Please go ahead.

Speaker 11

Hey, good morning. Good start to the year. You have a slide on sort of minimum capital and I think the line looks like $1,000,000,000 So if Viking kind of stays here, is that where CapEx will go in 2025? And what would that mean to your capacity potential in longer term if that has to be the case?

Speaker 6

Yes. So, I think we commented on that earlier. So, we can so, we would look at the $1,000,000,000 that's kind of maintenance capital for us around the to maintain our assets and continue to operate there. And we could if we prices stay where they are, we could get to that kind of on a run rate by the end of 'twenty five. So, 'twenty six number, so to speak, 25 would be a little bit higher, but we get to the run rate by 25.

Speaker 6

That would impact our long term growth, if we went to that level. So, the current planning that we have, the projects we're executing at the moment get us kind of a 20% growth rate through 27% or so. And if we were to cut back to those levels, we'd impact that materially beyond that.

Speaker 11

And as a follow-up, your EBITDA margin for energy storage, it's pretty good. And I know you think we need you need higher pricing for the industry. So, I mean, what price do you think lithium needs to be at to support the growth that is expected for the end of the decade? And maybe any thoughts on where you think others around the world who are where their margins are? Because yours are again from pretty good, not as good as they used to be, but I think they're still a pretty good margin.

Speaker 6

Right. So, I'm not going to comment on other people's margins. But if we stay where we are, we can operate at about at a 30% -ish type margin rate once we get the noise out of the P and L that kind of the transition from the big prices and some of the spodumene costs. So on a run rate, we could get to around 30% and still grow our business for us. I think that's the good margins that you're talking about.

Speaker 6

We've had stronger margins than that and they would be stronger if prices move up. The issue with price is really about returns on new investment projects more than it is about our existing business P and L and the margins that we can deliver. So prices need to be to move up in order to develop new projects to get the growth the industry needs to support the EV transition. I'm not going to comment on because it's different by every project and every geography as to what price you need. You need to believe that for 10 or 15 years in order to get a return on the project when you go through FID.

Speaker 6

So, I can't say a number and if I had one, I probably wouldn't say it. But if they are different by geography, by region, by technology, what the resource looks like. So it's quite different. There's no way to pick one particular number.

Operator

Our next question is from Joshua Spector at UBS. Your line is open. Please go ahead.

Speaker 4

Hi, good morning, everyone. It's Chris Perrella on for Josh. I just wanted to follow-up on, I think Neil, the 2Q energy storage EBITDA margin that you guided to. Given the puts and takes, you have the higher cost spodumene inventory, which is maybe a $50,000,000 drag in the 2nd quarter, but you also have the one off from Talison. So how does that bridge together to get to your 2Q margin?

Speaker 4

And then does it step down with the absence of the Talison one off in the second half of the year?

Speaker 9

Yes. So, I think if I let's talk about the Q2 first. So, basically the way to think about this, I think your numbers are probably all in the right kind of range. If you do the math based on the Q1 and what we said in the prepared remarks that we expect about 10 point bump in Energy Storage's EBITDA margin in the second quarter. You probably will get into the range of about $100,000,000 bump to EBITDA Q2 versus Q1 and that's really just driven primarily by the expectation that all partners are taking their allotment off of Talison plus we have that additional 200,000 tons that is getting off taken in the second quarter as well.

Speaker 9

And so, that's basically what serves as the basis for the 10 percentage point bump. In terms of then going forward, it is sort of a one time bump up and then what you should expect in the 3rd and the 4th quarter is that we'll come back down to again pretty healthy margins. It won't be as healthy as the Q2, but you can expect that we will as our plants continue to ramp up and we continue to absorb fixed cost that will continue to get some margin expansion versus the Q1 for sure in the 3rd and

Speaker 8

the 4th quarters as we exit the year.

Speaker 4

That's perfect. Thank you for explaining that. And then a quick follow-up. Sequentially into the second quarter, do you expect volumes to be up? I'm trying to bridge the seasonality to get to the 190 KT for you for the full year.

Speaker 9

Yeah. So, we will, have volume at least sequentially what you're asking about is, yes, we will have some higher volumes as we get in Q2 versus Q1. Remember that the peak for energy storage demand is usually in the Q3, so we're building to that peak. So it won't be the highest quarter of the year, but yes, I would expect that you'll see a little bit higher volume in Q2 versus Q1.

Operator

Our next question is from Colin Rusch at Oppenheimer. Your line is open. Please go ahead.

Speaker 11

Thanks so much guys. Given

Speaker 16

the dynamics around geopolitical positioning on manufacturing for batteries and some of the evolution that the tariffs that we're seeing on the solar side and other areas. Can you talk a little bit about the importance of refining and your thought process around that importance in North America as you enter into the balance of this year and next year?

Speaker 6

Yes. So, okay, interesting question. So, the politics is playing into the market significantly and we've got the integrated strategy. So, we've got a good resource position and it's spread around the world. So we have nice diversity around that.

Speaker 6

And we've built conversions. So we have conversion in Chile, in the U. S. Lower scale at the moment, and Australia and China. So, we're spread around the world and we've got nice diversity around that and it allows us to kind of plan for some of these aspects.

Speaker 6

So, our goal would be to have larger scale conversion in North America to satisfy the North American market. And we are but we've paused on that a little bit just on some of the issues that you've described, price being a big one, how geopolitics plays into it. And we're going to use that pause to figure out exactly what we do around that.

Speaker 16

Okay, great. And then in terms of some of the evolving cathode chemistries, obviously, we're seeing some activity around doped LFP. And I'm assuming that the precursor materials are evolving a little bit. Can you talk a little bit about some of the specific adjustments that you're making around some of the refining processes to meet those cathode needs in a more tangible way as you go through the balance of

Operator

this year and into next year?

Speaker 6

Yes. I'll start on that. Eric can fill in the gaps. I think, I mean, the biggest thing for us at the moment is and with the primary products around hydroxide and carbonate is balancing that. So, as LFP has become more prevalent, it's got stronger demand on carbonate.

Speaker 6

And we've been a stronger, a larger percentage of our portfolio is carbonate. Historically, we've been building out hydroxide and then balancing those 2 is understanding where those chemistries go and then long term it's going to be about solid state and then how you shift from so much being more about carbonated hydroxide to about lithium metal. That's a longer term scenario. The carbonate hydroxide is playing out in the assets we're building now.

Speaker 8

Yes. So Colin, just a little shred more color around that. I would say that we still see a market that is for hydroxide, high nickel is favored outside of China versus in, with carbonate and supporting LFP being a very big part of the China market. The innovations that have been coming out of, largely out of China and LFP chemistries for higher energy density and efficiencies, as well as the cost profile of that cathode are obviously very increasingly now interesting to the West. And so we expect that certainly our Chile position is a position of power in which we can supply into that opportunity.

Speaker 8

We'll watch that carefully as Kent talks about had talked about earlier about pausing the investment here in the U. S. For North America to figure out in this uncertain market direction and develop our own strategy there. One of those one of the components of that has to be an assessment of LFP in the U. S.

Speaker 8

And that will be part of that equation as well.

Operator

Our final question is from Patrick Cunningham at Citi. Your line is open. Please go ahead.

Speaker 5

In the past, you've talked about the marginal cost of production being $20 a kilo and maybe new projects pushing that curve up over time. Do you still believe that to be the case given we've seen relatively tepid supply response at current prices?

Speaker 6

Yes. It changes over time with volumes in the industry, but as most new projects come on are going to be higher on the cost curve and moving that up. So, we still think that, look, within $1 or 2, the accuracy of that, but I think we still believe that fundamentally is about the target of marginal cost today.

Speaker 5

Got it. And then just a quick follow-up. Did price floors play a meaningful impact with price levels in the low teens for a good part of the quarter?

Speaker 8

I'm sorry, your question was the price for impact on our realized price for the quarter or was that the question?

Speaker 11

Yes, it was meaningful.

Speaker 5

Yes, yes. What's our meaningful impact?

Speaker 8

Let's put it this way. We don't disclose a lot of our price scores and they tend to range because often based on age of contract. At current prices, some of those floors, some are being tested, floors have held. And so, we certainly are seeing the floors come into play for some of our business.

Operator

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

Speaker 6

Okay. Thank you and thank you all for joining us today. We continue to innovate, adapt and lead the world in transforming essential resources into the critical ingredients for modern living with people and planet in mind. We're focused on continuing to be the partner of choice for our customers and investment of choice for both the present and the future. Thank you for joining us.

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