ALBEMARLE CORP quarterly report, Q3 FY2023

Albemarle Corporation — Q3 2023 Form 10-Q Summary

Business context and reporting period

Albemarle is a global specialty chemicals producer serving energy storage, petroleum refining, consumer electronics, construction, automotive, pharmaceuticals, agriculture and other markets. Its reportable segments are Energy Storage, Specialties and Ketjen. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, with comparisons to the corresponding 2022 periods.

Key financial metrics

Metric	Q3 2023	Q3 2022	9M 2023	9M 2022
Net sales	$2.311 billion	$2.092 billion	$7.261 billion	$4.699 billion
Gross profit / margin	$54.9 million / 2.4%	$1.044 billion / 49.9%	$1.890 billion / 26.0%	$2.073 billion / 44.1%
Operating profit (loss)	$(140.0) million	$891.0 million	$1.102 billion	$1.637 billion
Net income attributable to Albemarle	$302.5 million	$897.2 million	$2.191 billion	$1.557 billion
Diluted EPS	$2.57	$7.61	$18.60	$13.23
Adjusted EBITDA	$453.3 million	$1.190 billion	$3.081 billion	$2.232 billion
Operating cash flow	Not separately provided	Not separately provided	$1.424 billion	$955.6 million

Q3 sales increased 10%, but net income attributable to Albemarle declined 66% and adjusted EBITDA declined 62%. The quarter was pressured by higher-cost spodumene, lower lithium pricing, unfavorable pricing and mix, higher utility and material costs, and stronger U.S. dollar effects. Nine-month earnings benefited from strong lithium pricing and volume earlier in the year and higher equity income from the Talison joint venture.

Segment Q3 sales: Energy Storage $1.697 billion, up 20%; Specialties $352.7 million, down 20%; Ketjen $260.7 million, up 11%.
Segment Q3 adjusted EBITDA: Energy Storage $407.5 million, down 62%; Specialties $46.3 million, down 65%; Ketjen $15.2 million, up 227%.
Segment nine-month adjusted EBITDA: Energy Storage $2.746 billion, up 48%; Specialties $268.7 million, down 38%; Ketjen $72.6 million, up 132%.
Equity income from unconsolidated investments increased to $470.3 million in Q3 and $1.418 billion for nine months, primarily reflecting stronger Talison results.

Cash flow, liquidity and debt

Cash provided by operating activities was $1.424 billion for the first nine months, versus $955.6 million in 2022. Higher dividends received from unconsolidated investments and increased Energy Storage earnings were partly offset by working-capital investment.
Capital expenditures were $1.465 billion for the first nine months. Management expects 2023 capital expenditures of approximately $1.9 billion to $2.1 billion, primarily for Energy Storage expansion and capacity projects.
Cash and cash equivalents were $1.602 billion at September 30, 2023, up from $1.499 billion at December 31, 2022. Approximately $1.59 billion was held by foreign subsidiaries and intended primarily for non-U.S. uses.
Total debt was $3.658 billion, including $156.5 million of commercial paper and a $300 million interest-free loan. Long-term debt, excluding current maturities, was $3.496 billion.
No borrowings were outstanding under the $1.5 billion revolving credit facility. Management reported approximately $1.3 billion of availability under the commercial paper program and credit agreement, plus $186.1 million under other lines of credit, subject to applicable covenants.
Management stated that the company was in compliance with its debt covenants and expects available cash, operating cash flow and financing capacity to fund operations, debt service, capital expenditures, dividends and other planned needs.

Material changes versus the prior comparable period

Q3 profitability deteriorated sharply despite higher sales: gross margin fell to 2.4% from 49.9%, and operating income moved to a $140.0 million loss from $891.0 million of profit.
Energy Storage sales increased on higher volume from La Negra III/IV, Qinzhou and tolling arrangements, but segment adjusted EBITDA fell because of lower pricing and higher input costs.
Specialties weakened because of lower demand in consumer and industrial electronics and elastomers. Ketjen improved on higher pricing, volume and lower utility and material costs.
Nine-month SG&A increased 93% to $725.2 million, including a $218.5 million accrual for the resolution of historical Foreign Corrupt Practices Act matters.
Working capital increased materially, with inventory rising to $3.404 billion from $2.076 billion, primarily due to higher-cost lithium spodumene and growth in Energy Storage sales.
The quarterly dividend was increased to $0.40 per share from $0.395 per share.

Guidance, outlook, commentary and unusual items

Management expects 2023 Energy Storage revenue to increase year over year, while earnings are expected to be flat or lower because of higher variable costs. Further declines in lithium pricing could negatively affect results and outlook.
Specialties revenue and profitability are expected to be lower in 2023. Ketjen results are expected to increase year over year on higher pricing, improving volumes and stabilized raw-material and energy costs.
Lithium index pricing declined significantly during 2023. The company has increased exposure to index-referenced and variable-priced contracts, making results more sensitive to market pricing.
On October 18, 2023, Albemarle completed the MARBL restructuring with Mineral Resources Limited. Albemarle acquired the remaining 40% of Kemerton, will own 50% of Wodgina, and expects to pay MRL approximately $380 million to $400 million in cash. The company expects to record a gain in Q4 2023.
Kemerton Train I was operating subject to customer qualification and Train II had reached mechanical completion and commissioning. The Meishan, China conversion plant remained under construction and was expected to be completed in 2024.
The company expects a $1.3 billion lithium processing facility in South Carolina, with construction expected to begin in late 2024, and continues work on Kings Mountain, North Carolina projects supported by U.S. government awards.
The DOJ and SEC matters related to historical conduct were resolved in September 2023. Albemarle paid $218.5 million in October 2023; no future financial obligations are expected, although ongoing compliance reporting is required.
A public equity investment with a September 30 fair value of $180.5 million declined approximately 45% after quarter-end and could produce a Q4 mark-to-market loss if the decline persisted.

Principal risks and contingencies

Volatility in lithium prices, including downside exposure from index-linked contracts.
Higher raw-material, energy, transportation and construction costs, supply-chain disruptions and potential production shortfalls.
Demand weakness in electronics, elastomers and other specialty chemical markets.
Foreign currency volatility, interest-rate changes, geopolitical events, regulatory changes, cyber incidents, environmental liabilities and chemical-manufacturing hazards.
Environmental remediation liabilities of $37.8 million were recorded, with management estimating a reasonable possibility of up to approximately $16 million of additional costs before tax.
Off-balance-sheet bank guarantees and letters of credit totaled approximately $191.2 million.
Uncertain tax positions, including interest and penalties, totaled $215.4 million, partly offset by $79.7 million of related tax assets; timing of potential cash payments was not estimable.

Important facts for investors to verify

Whether lithium prices and index-linked contract pricing stabilize or decline further, and the resulting impact on Energy Storage margins.
The pace and cost of Kemerton, Meishan, Kings Mountain and South Carolina capacity expansions, including customer qualification and commissioning milestones.
Whether planned 2023 capital expenditures of $1.9 billion to $2.1 billion can be funded while maintaining liquidity and investment-grade credit metrics.
The cash conversion of elevated inventories and working capital, particularly as lithium pricing changes.
The final accounting and cash impact of the MARBL restructuring, including the expected Q4 gain and $380 million to $400 million payment to MRL.
The extent of any Q4 mark-to-market loss on the public equity investment that declined approximately 45% after quarter-end.
Talison joint-venture earnings, dividend receipts and related-party spodumene purchases, which were significant contributors to reported results and cash flow.