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Albemarle Corp  (NYSE:ALB)
Q3 2018 Earnings Conference Call
Nov. 08, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome everyone to the Q3 2018 Albemarle Corporation Earnings Conference Call hosted by Dave Ryan. My name is Chris and I'm the operator for this call. During the presentation your lines will remain on listen-only. (Operator Instructions) I would like to advise all parties that this conference is (Technical Difficulty)

David Ryan -- Vice President, Corporate Strategy and Investor Relations

Thank you and welcome to the Albemarle's Third Quarter 2018 Earnings Conference Call. Our earnings were released after the close of the market yesterday and you'll find our press release, earnings presentation and non-GAAP reconciliations posted to our website under the Investor section at www.albemarle.com.

Joining me on the call today are Luke Kissam, Chairman and Chief Executive Officer; Scott Tozier, Chief Financial Officer; Raphael Crawford, President, Catalysts; Netha Johnson, President, Bromine Specialties; and Eric Norris, President, Lithium.

As a reminder some of the statements made during the conference call about our outlook, expected company performance, production volumes and commitments as well as lithium demand 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, 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 in the Appendix of our earnings presentation, both of which are posted on our website.

Now I will turn the call over to Luke.

Luke Kissam -- Chairman, President & Chief Executive Officer

Thanks Dave, and good morning everyone. We apologize for the little snap to at the very beginning, apparently you could hear us but we couldn't hear the operator. So we apologize and hope we got that fixed.

Turning to the third quarter. In the third quarter our revenue grew $50 million or 7% and adjusted EBITDA grew by $36 million or 18% compared to the third quarter of 2017, excluding divested businesses. This marks our eighth consecutive quarter of double-digit adjusted EBITDA growth.

During the third quarter Bromine Specialties and Catalysts both reported pro forma adjusted EBITDA growth over last year. In Lithium, third quarter pricing increased year-on-year as expected. However, unexpected outages at three of our manufacturing sites during the quarter caused volume shortfalls which resulted in our not being able to meet the sales commitments in the quarter. These issues were one-time in nature and have been addressed. All of our Lithium facilities are now running at forecasted production rates.

In addition, our Lithium capital projects remain on track. We completed the tie-ins at La Negra II and expect to operate that unit at full rates in 2019. La Negra III and IV which is a 40,000 met ton carbonate expansion is progressing as planned toward commissioning during 2020. Earlier this year we commissioned an expansion of our evaporation system in the Salar de Atacama enlarging our evaporation pond capacity by 60%. Additional ponds of more than 450 acres are on schedule for completion in early 2019. This expanded pond system will provide sufficient feedstock for all of our carbonate production facilities in Chile.

In China we have completed all pre-commissioning activities at Xinyu II, and are now transitioning that unit over to operations. We have begun start-up activities and will be in this space over the next few months. We expect significant hydroxide volumes from this unit in 2019.

With respect to the Kemerton, lithium hydroxide facility we are on track to obtain all necessary approvals to begin earthwork at the site in December.

Now I'll turn the call over to Scott.

Scott Tozier -- Executive Vice President & Chief Financial Officer

Thanks, Luke, and good morning everyone. For the third quarter we reported net income of $130 million or $1.20 per diluted share. Adjusted earnings per share were $1.31, an increase of about $0.31 per share compared to third quarter 2017 or 31% growth, excluding divested businesses and other one-time items. Our businesses and lower corporate expenses delivered about $0.31 per share of growth with strong performance in Bromine Specialties and Catalysts. Our share repurchase program contributed about $0.04 during the quarter. Those gains were partially offset by a net cost increase in other areas primarily due to a higher effective tax rate and unfavorable ForEx change compared to the third quarter of 2017.

Let me talk about each of the businesses. Lithium reported third quarter net sales of $271 million and adjusted EBITDA of $114 million, each up about 1% year-over-year. Adjusted EBITDA margin was 42%. Average prices were up 6% versus the third quarter of 2017 with battery grade salts providing most of that improvement. The gains were mostly offset by the volume impact from the unexpected plant outages.

Hydroxide volumes and costs were unfavorable due to a one-week shutdown in Kings Mountain, as a result of Hurricane Florence in North Carolina. The Xinyu facility was down about two weeks as a result of an unannounced environmental inspection by local officials. We have agreed on a remediation schedule with the government and Xinyu I is back running at full rates. As Luke mentioned the commissioning of Xinyu II is progressing as planned. Volume was also unfavorably impacted by environmental upgrades required at the facilities of some of our tollers.

Carbonate volumes and costs were impacted by a week of downtime in La Negra, Chile, caused by two separate events. The first was a multi-day outage in power supply due to a grid blackout in Chile. And the second, was a failure in our soda ash delivery system, which resulted in downtime for repair. The planned electrical tie-ins that we spoke of last quarter have been completed and La Negra II is back online and operating at forecasted rates.

Had we and our tollers been able to operate throughout the quarter, we estimate we would have had an additional shipments of approximately 3,000 metric tons that would have equated to approximately $35 million in revenue, about $14 million to $15 million in EBITDA and $0.11 to $0.12 per share earnings during the third quarter.

Bromine Specialties reported third quarter net sales of $233 million and adjusted EBITDA of $79 million, up 9% and 23% respectively year-on-year. Adjusted EBITDA margins were strong at 34% benefiting from a favorable mix and high plant utilizations. Prices were up globally across most products, but volume gains were modest. The increased profits were partially offset by higher raw material costs, primarily from oil derivatives.

Catalysts third quarter net sales were $251 million up 15% compared to the third quarter of 2017, excluding divested businesses. Adjusted EBITDA was $63 million up 25% with adjusted EBITDA margins of 25%. Year-over-year growth was driven by increased volume in pricing and refinery Catalysts and about $2 million of insurance collections. It is important to remember that third quarter of 2017 had an unfavorable impact from Hurricane Harvey in Houston of about $9 million. The gains were partially offset by increased raw material prices in fluid catalytic cracking Catalyst and curatives.

Moving on to the balance sheet and income statement items. We completed our 2018 -- our May 2018 accelerated share repurchase program and in August initiated a second $250 million ASR program, which is expected to be concluded by the end of this year. Through the first nine months of 2018, we've retired approximately 4.7 million shares. Our average share count for all of 2018 is expected to be about 110 million shares. Our average share count for the second half is expected to be about 108 million.

Through the end of the third quarter our net cash from operations was $377 million and adjusted free cash flow was $38 million. For the full year we continue to anticipate breakeven to negative adjusted free cash flow. Capital spending year-to-date through September was $472 million. As previously mentioned our Lithium projects continue to ramp up as scheduled. Higher forecasted sales of Catalysts and Lithium for the fourth quarter resulted in increased inventory with a corresponding increase in total working capital compared to the second quarter of 2018.

Based on current sales and production mix by country, so far in 2018 and our expectations for the fourth quarter, we currently expect our full-year 2018 effective tax rate to range between 22% and 23%, excluding special items, non-operating pension and OPEB items. Our full-year adjusted EBITDA, EPS, diluted EPS and free cash flow guidance remain unchanged.

Bromine Specialties is a bit stronger and on a path to deliver low double-digit adjusted EBITDA growth. Catalysts is expected to increase high single-digit growth on a pro forma basis and Lithium is a bit weaker with the third quarter outages, but still expected to grow in the low 20% range.

With that, I'll turn the call back over to Luke.

Luke Kissam -- Chairman, President & Chief Executive Officer

Thanks Scott. I want to spend a minute providing more detail on our long-term Lithium supply agreements with major cathode and battery producers. Pages 12 and 13 in our earnings presentation, which was posted online last evening, provides a snapshot of where we stand as of today on secured volumes for the calendar years 2021 and 2025. And the volumes that are still the subject of active discussions with third-parties.

In summary, we are right on schedule for 2021 commitments and well ahead of schedule on 2025 volume commitments. As you can see for 2021 we are already at our goal of having 80% or so of our volume secured and are in negotiations for volumes well in excess of our targeted Wave I nameplate production capacities of 85,000 metric tons of carbonate and 80,000 metric tons of hydroxide. These charts also show the acceleration on our customers demand for the battery grade, lithium hydroxide over that period.

For lithium hydroxide more than 60,000 metric tons are secured for 2021. Approximately 60,000 metric tons of committed minimum volumes are contracted for 2025, with an additional 20,000 or so metric tons contracted as right of first refusal or option volumes. In addition, for 2025, we're in negotiations for another 80,000 metric tons to 90,000 metric tons of hydroxide volume.

For lithium carbonate, more than 70,000 metric tons is secured for 2021 through our supply agreements and our internal needs which speeds production of our specialty products and hydroxide at Kings Mountain. As we look out to 2025, we have carbonate volumes under supply agreements and for our forecasted internal needs of around 40,000 metric tons with another 60,000 metric tons to 80,000 metric tons, the subject of ongoing negotiations.

Given the demand from existing customers and from cathode and battery producers, who are not customers today, we are very confident that the 2025 committed volume will increase significantly over the next few quarters. It is important to note that the average sales price for the committed minimum volumes of carbonate and hydroxide volume under the supply agreements in 2021 and 2025 are equal to or greater than the average 2018 sales price with opportunities for price increases.

Given this outlook demand, as shown on page 15 of our earnings presentation, we are adjusting our capital project planning accordingly. While the 40,000 metric ton carbonate expansion at La Negra, is still on track to allow us to begin commissioning in 2020, we have stopped all engineering work on any further carbonate expansions in Chile at this time. We are going to put it on the shelf and continue to monitor our customers' needs and the needs for the market.

We previously disclosed that Kemerton would have an initial capacity of 40,000 metric tons with an ability to expand to 100,000 metric tons over time. We now expect to accelerate a portion of that additional capacity to add another production line at Kemerton, which would increase the initial nameplate capacity to at least 60,000 metric tons of hydroxide. The commissioning of the Kemerton site is expected to start in stages during the course of 2021. We do not expect any meaningful change in our CapEx spending over this period as a result of this change.

As we have previously indicated, we will build out capacity to match the needs of our customers and these announced modifications are consistent with that strategy. And there have been questions raised in the press about our authorizations in Chile, so let me try to clarify the matter. As you can see on page 16 of our earnings presentations, we have the operating permit for pumping brine from the Chile Environmental Superintendent, the production quota from CORFO, and the sales quota from CCHEN to allow for the production and sale of at least 80,000 metric tons LCEs annually through 2043.

In addition, as we have previously disclosed we are in the engineering and development phase of a project that we believe will increase the overall Lithium yield from our operations in the Salar. If successful, and we have seen no doubt to indicate that it won't be, the project would allow us to produce more Lithium from the same amount of brine that we pump today or allow us to produce the same amount of Lithium from less brine. In either case, it would be a more efficient and more sustainable process.

In conclusion, we believe we have positioned the company for another year of exceptional growth supported by our long-term strategic initiatives. Our 2019 planning process is well under way and while it's too early to provide specific guidance, we believe 2019 will deliver another strong year of growth. We remain committed to, and confident in our strategy, and in our ability to execute that strategy in a way that should drive significant shareholder value well into the foreseeable future.

David Ryan -- Vice President, Corporate Strategy and Investor Relations

Chris, we are now ready to open the lines for Q&A. But before doing so, I would like to remind everyone, to please limit questions to two per person to ensure that all participants have a chance to ask questions. Then feel free to jump back in the queue for follow-up, if time allows. Please proceed.

Questions and Answers:

Operator

Thank you. Your question-and-answer session will now begin. (Operator Instructions) And the first question is coming from the line of Kevin McCarthy. Please go ahead, your line is open now.

Matthew DeYoe -- Vertical Research Partners -- Analyst

Good morning. It's actually Matt DeYoe on for Kevin. So I'm interested in the outages of Xinyu and the Chinese environmental inspections. And we've clearly heard about the fallout of tougher restrictions in China across a lot of other chemical chains but less so in lithium. And I'm just thinking out loud here, but if you're fallen victim to the forced (ph) outages you might stand a reason that converters are operating off over concentrated ore than green bushes, maybe even having a more difficult time. So, with that in mind is there something specific to this is in you? Or is this a one-off thing? Do you expect it to be an ongoing industry issue? And how much is the remediation going to cost out more?

Luke Kissam -- Chairman, President & Chief Executive Officer

Yes. This is Luke. From a remediation standpoint of the cost it'll be minimal and you won't see it in our numbers and you won't see it in our capital. It would be around in there first of all. Second of all, I can't comment on what might have happened as it relates to other tollers. We do know some of our tollers were also unable to produce, so I don't think it was just targeted at Xinyu, but I do view it from our standpoint as a one-time thing one-time event. We reached agreement on everything that needs to be done with the authorities and are well under way of getting that taken care of. So, we viewed it as a one-time event and it would be just pure speculation for us to say anything about what happen in the future of the third-parties.

Matthew DeYoe -- Vertical Research Partners -- Analyst

All right. And then regarding the longer term contracts. So, based on disclosure you have some price commitments for the committed minimum volume agreements. What about those agreements under the right of first refusal or evergreen contracts? How should we think about the pricing terms there? Thank you.

Luke Kissam -- Chairman, President & Chief Executive Officer

Well the pricing terms would be consistent. If you look, we have the ability to supply if we do, but we are not required to supply. So we are going to sell at a price that's commensurate with what we think the market should deserve or we won't sell it.

Matthew DeYoe -- Vertical Research Partners -- Analyst

So is that based on market prices at the time of those sales? Or is that kind of more in line with the price agreed to in the committed minimum volume contracts?

Luke Kissam -- Chairman, President & Chief Executive Officer

It's more in line with the price committed in those minimum volume projects because that's what we put in to look at what the capital return should be for those projects. And we are going to be disciplined in our approach that we take for pricing, so that's what it is set for.

Matthew DeYoe -- Vertical Research Partners -- Analyst

Perfect. Thank you.

Operator

The next question is coming from the line of Ian Bennett. Please go ahead. Your line is open now.

Ian Bennett -- Bank of America Merrill Lynch -- Analyst

Thank you. Good morning. Thanks for providing that slide 16. I think it's really helpful to the investment community. And I was wondering if you could elaborate a little bit on the areas of conflict with each of these agencies. I think there's been some discussion of various water pumping rights as well as some of the technology with the expansion, and helping us to think about that.

Luke Kissam -- Chairman, President & Chief Executive Officer

Yeah. There's no conflict at all with the EPA. We've got a permit. We are operating within our permit. There's been -- with CORFO, it's been very public of what that confusion is. It's a matter of what price needs to be offered to any third-party who would build a cathode facility in Chile. There's a dispute. They've said they're going to arbitrate -- they want to arbitrate that dispute but to-date no arbitration has yet been filed. So we believe very strongly in our position. We think it's clear. It's a public document in Chile, so I'd invite you to look at that document and read the language. We think it's quite clear and we are very confident in our position.

With respect to CCHEN, there is nothing a issue relative to the 2017 authorization. That is not an issue. And it is not an issue or ability to be able to sell the 80,000 met tons or so annually. What we did is in March of 2018, CORFO signed an amendment to the agreement with us that essentially said, if we elect to build Chile V and VI, they would extend our production quota from around 80,000 met tons a year to around 140,000 met tons a year.

But at the same time we applied for CCHEN to ensure that the ability to sell was also reflective of what we could produce. We can -- we, to build V and VI, we have to have yield improvement from Lithium out of the Salar or we won't have enough brine coming out of the ground to be able to do that. So all that they've done is come back and said, we are not willing to approve that additional sale today, until we understand where you are in the yield improvement process. So from our perspective there is nothing at issue that restricts in any way our ability to sell at least 80,000 met tons which is our Wave I nameplate through 2043.

And it's not even an issue for anything unless we elect to build V and VI, and we've just told you today that we will put that on the shelf to understand what happens with the marketplace and what our customers need. So hope that clarifies. I'm sorry it's so confusing, but that's how the regulatory system works down there and hopefully this helps you out.

Ian Bennett -- Bank of America Merrill Lynch -- Analyst

That's very helpful. And as a follow-up and perhaps related, it appears to me from the outside that there is increasing conflict within Chile who has this great national resource in Lithium and some members of the government want to have that resource create more battery manufacturing which ultimately will be a much larger industry than just Lithium production, whereas, the existing players in the industry, yourself and SQM are companies that are operating to create shareholder return.

The delay in expansion in Chile V and VI, is this related and how do you think about deploying capital moving forward in that region? You said it's on hold, but does this -- is your view of how to deploy capital in the most shareholder friendly manner over the next decade or so changing as a result of the political situation in Chile? Thank you.

Luke Kissam -- Chairman, President & Chief Executive Officer

Yeah. I think it's astray to say that. What's changing is we're seeing a significant acceleration in demand of lithium hydroxide. And so we need to address that, and we need to be focused on what we are going to do. We've always said that we are going to invest capital to meet the needs of our customers. And if you look at the charts that we put in there, you see what we're talking about about the hydroxide demand and what we're talking about the carbonate demand, it's clear we need to focus on lithium hydroxide, have the focus there and that's why we're doing it.

Operator

The next question is coming from the line of David Begleiter. Please go ahead. Your line is open now.

David Huang -- Deutsche Bank -- Analyst

Hi. This is David Huang here for David. I guess first on your Q3 Lithium pricing, can you discuss what happened there since that 6% looks a bit lighter than expected. And do you still expect high single-digit for the year?

Eric Norris -- President, Lithium

This is Eric. I'm having a hard time understanding. Could you repeat the question please? It's regarding pricing I understand that. I could not hear you over the phone line.

David Huang -- Deutsche Bank -- Analyst

Yeah. So on your Q3 pricing that 6% looks a bit lighter than expected. Do you still -- what will happen there in Q3? And do you expect high single-digit for pricing for the year?

Eric Norris -- President, Lithium

It's actually right on our expectation. We had forecasted at the beginning of the year, high single-digit increase overall for the year. And given the year-on-year comparison in that -- during 2017 prices will gradually increasing through that year. We've seen double-digit comparison in the first half of the year dropping to less than the average for the year to the mid-single-digit for an average of high single-digit price increase year-on-year. So it's on our expectation.

David Huang -- Deutsche Bank -- Analyst

Okay. And second, just on your Q4 guidance. What gives you the confidence in the EBITDA ramp in Q4? And what needs to happen for you to be in the upper end of your guidance range?

Scott Tozier -- Executive Vice President & Chief Financial Officer

So, this is Scott. I mean overall we've got two big movers in terms of the fourth quarter. So, of course, Lithium is on a big volume ramp. That's been expected throughout the year. Of course, with the third quarter outages we have a pause there. We are fully back online. The cat projects that we have coming online are coming online to schedule. So barring some other unexpected or blacks one type of an event where I think we are well on track for Lithium.

The other one is Catalyst. Similar to 2017, the Catalyst business has another large fourth quarter. Much of that being driven by the volume in the CFT or Clean Fuels Technology hydroprocessing Catalysts business. We have pretty good line of sight to those projects right now, and again barring any other change in our customers with the downtime that they take to put this Catalyst in, we feel confident in that Catalyst fourth quarter as well. So, those are those -- those are the big major drivers for the fourth quarter growth and again we feel good about where we are right now.

David Huang -- Deutsche Bank -- Analyst

Okay. Thanks.

Operator

The next question is coming from the line of Arun Viswanathan. Please go ahead. Your line is open now.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Hey guys good morning. I just wanted to ask kind of a little bit more of a macro question. I mean there's been a lot of noise on China and other OEM builds over the last little while. Have you guys noticed anything different in the environment in China from a demand standpoint? And I guess just looking out into the next year, would any change in OEM builds or anything like that affect any of your progress? Thanks.

Eric Norris -- President, Lithium

Hi, Arun this is Eric. So, the short answer is we haven't seen any (Technical Difficulty) that might be some softening in demand that hasn't been and we've seen both in China and throughout Asia where the bulk of our customer base is for the energy storage market. It continues strong demand with as Luke referenced earlier, a bias as we go forward toward hydroxide versus carbonate.

From a specific or more production standpoint, we have 1.3 electric -- 1.3 billion electric vehicles thus far this year, which given a pace of growth we expect to actually -- excuse me, million which we expect to increase further into Q4. So I think we aren't seeing anything negative from a macro standpoint from EV growth or demand for product.

Luke Kissam -- Chairman, President & Chief Executive Officer

And Arun I would just add, I think if you look at total automotive production in China there is a softening overall. However, it is concentrated in the internal combustion engines not in electric vehicles as Eric's talked about. So we don't see it in our business.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Okay. That's helpful. And I also wanted to ask a question on the contracts. Appreciate the detail. You also made a comment that the 2021 and 2025 commitments are above '18 averages. Could you just describe the mechanisms you guys have to I guess increase prices if the market is trending that way? Or also defend against lower pricing if in fact that happens with increased production? Thanks.

Eric Norris -- President, Lithium

Arun, so we did in different material or different what we described before, right? There is a range of contracts. It's hard to speak to it being completely uniform. But in general they all have a provision by which there is a floor price and that -- there is an opportunity and depends on the contract in terms of its frequency or timing for Albemarle to invite and ask for an increase in the price at a point in time. And at that point in time the party -- counterparty, the customer has an opportunity to -- if they are and so desire to stop that volume, but there is a floor that is put in there for us that gives us security that Luke has discussed for return on investment. And that floor is today as we strike this new contract is no less than '18 price, right. So that's the confidence that we have in the contracts we have going through or by going forward.

Luke Kissam -- Chairman, President & Chief Executive Officer

Yeah, if you look at from a pricing standpoint my position is, if you look at '21 and 2025 what you see on that page is the bare case.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Okay. Thanks. And then just lastly, maybe you can just describe the input cost side. Would you expect any raw material pressure next year, I guess principally in Lithium but anywhere else if there's for the material?

Luke Kissam -- Chairman, President & Chief Executive Officer

Scott?

Scott Tozier -- Executive Vice President & Chief Financial Officer

Yeah. I don't think we'll see -- I mean, other than labor cost which I'll exclude. But if you look at raw materials, I think we are fine in lithium. The other businesses Bromine is going to be driven primarily by oil derivatives. So it depends on what happens with oil. If oil prices continue to move up we are going to see pressure there, and we'll need to work on the market appropriately.

In Catalysts, it tends to focus more on the metals and so commodity based metals, so if you think about nickel, molybdenum and those kind of products. So again I think it will depend on what's happening. We have seen kind of a mixed story in 2018, both on the oil prices and commodity metal prices. So, hard to predict right now in the market that we are playing in. We -- our business and the chemical industry overall did not drive those prices. Obviously it's other macro market drivers that push it. We just need to react to it. So we know how to do that. We'll react appropriately and make sure we protect our margins.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Great. Thanks.

Operator

The next question is coming from the line of Josh Spector. Please go ahead. Your line is open now.

Josh Spector -- UBS. -- Analyst

Yeah. Hey guys. Just a question around Bromine. It continues to outperform pretty good quarter with maybe record-high margins. Just wondering how long do you think that continues? And maybe what are the one or two biggest factors that drives that?

Eric Norris -- President, Lithium

We expect the Bromine market to continue to grow slightly, projecting volumes in our flame retardants to 1% to 2% growth. And at least what drives that basically is the shortage of Bromine in China and that's a big significant driver to our growth.

Josh Spector -- UBS. -- Analyst

Okay, great. And just -- I mean in terms of prices you seem to be handily offsetting higher raw materials. Do you see that continuing? Or is that primarily China tightness that you think might abate when you go into next quarter or maybe like next year?

Eric Norris -- President, Lithium

We'll see that continuing into the rest of this year. We've got great pricing discipline. We do expect some volume to come on next year that may affect pricing, but we'll continue to maintain our pricing discipline and just as necessary as market conditions allow.

Josh Spector -- UBS. -- Analyst

Okay great. And then just one more on Lithium pricing sequentially. I guess are you able to qualitatively say the quarter-on-quarter for battery grade products, was pricing flat, up, down? Any kind of guidance around how things moved quarter-to-quarter?

Eric Norris -- President, Lithium

So this is Eric, Josh. So from quarter-to-quarter pricing was relatively flat, (inaudible) up and pretended by customer it was -- there is no downward pressure, it was probably upward. Once factor in mix, you look at the role of your product was more flattish overall quarter-to-quarter.

Luke Kissam -- Chairman, President & Chief Executive Officer

And I think when we're talking about mix, here we're talking about customer mix.

Eric Norris -- President, Lithium

Yes.

Luke Kissam -- Chairman, President & Chief Executive Officer

Talking about customer mix.

Josh Spector -- UBS. -- Analyst

Okay. All right. Thanks guys.

Operator

The next question is coming from the line of Robert Koort. Please go ahead. Your line is open now.

Dylan Campbell -- Goldman Sachs -- Analyst

Hey, good morning guys. This is Dylan Campbell on for Bob. A quick question on the environmental inspections in China, it sounds from what you've discussed it is more of a marketwide impact. And I know you mentioned it's really only a temporary impact for Albemarle specifically. But can you talk if kind of your general conversations around the market if you're hearing any ramblings of -- in a more prolonged outages where operations weren't out as much to those inspections. And whether that could result in longer term outages across the Chinese market?

Luke Kissam -- Chairman, President & Chief Executive Officer

Yeah. I don't see that -- that would be pure speculation on our part. So we're assuming is, everybody's going to be back up and running just like we are.

Dylan Campbell -- Goldman Sachs -- Analyst

Okay. That's helpful. And then I noticed that R&D expenses declined a little over 20% year-over-year. Do you have any color in terms of what drove that decline?

Scott Tozier -- Executive Vice President & Chief Financial Officer

No, I think it's really just a mix of our portfolio and where we are standing at this point. So I don't think that I would draw any conclusions from it. Some of it is going to be foreign exchange. But at the end of the day it's just a mix of our projects and portfolio across the company.

Dylan Campbell -- Goldman Sachs -- Analyst

All right. Thank you.

Operator

The next question is coming from Sebastian Bray. Please go ahead. Your line is open now.

Sebastian Bray -- Berenberg gossler & co -- Analyst

Good morning and thank you for taking my questions. I would have two please. The first is that on the volume development. Now that the Chile V, Chile VI projects has been put on hold, what certainty can you provide that you are going to reach 2023 and you don't simply run out of volumes? I think there was reference made earlier to what is favorable at Kemerton, but could you give any insight on to how you would expand your volumes in Lithium post 2023? That's my first question.

My second one is on IMO self legislation coming in 2020. Has the Catalysts division already started to see the uplift from this? Or is it simply the fact that refinery CapEx is picking up worldwide that is driving the growth? And would you expect this to continue for the next two or so years? Thank you.

Luke Kissam -- Chairman, President & Chief Executive Officer

Let me take the first one and then turn I'll turn it over to Rapahel to talk about IMO. First of all post '23 what we said if we're putting the Chile went on the shelf right now which is not proceeding right now with Chile V and VI. That could change. We have always said, Sebastian, that we are going to build out according to demand of our customers. And right now we've got a bigger need in lithium hydroxide as we look out past 2021. So that growth is going to come from our ability to build out lithium hydroxide facilities, and likely the ability to expand Kemerton to 100,000 metric tons over the next five to seven years, which would take care of hydroxide.

In carbonate, we still have the ability to do Chile. We're just taking a pause on that and see where it comes and let's see how that market develops. We may find out that we need even more hydroxide. Or in a couple of years we may find we need lithium sulfur or we maybe more of lithium metal. So what we've got to be able to do is be very responsive to the needs of the market both today and in the future and the only way we can do that is by looking at what our customers are willing to commit to in the future and ensure that we have the capacity in place or the relationships in place to be able to meet that demand. And that's what we're trying to do, because we've got to get return on these assets as well.

And if we can't get the people willing to step-up to the plate to sign those longer longer-term contracts and we don't have them, we are not going to build it for speculative demand. We are going to build it for what we know our customers are willing to supply to us. That's what we've said and we're going to maintain our discipline in that regard. With that, Raphael, you want to address the IMO please?

Raphael Crawford -- President, Catalysts

Yes sir. So Sebastian, this is Raphael Crawford. To our perspective on IMO, 2020 is a net tailwind for our business. The magnitude of that -- we're still working through that with customers who have several different strategies for getting to the lower sulfur specifications for bunker fuel. Certainly we have a broad portfolio of hydro treating Catalysts that can serve various needs of refiners depending on what their particular crude slate is, what their operations are and their market strategy. So we feel like our value selling approach with those customers, with our portfolio and the strong team of technical people we have, will be able to use our products to help them meet those sulfur specifications.

Additionally, we were watching carefully and looking for ways for we -- how we can participate in FCC Catalysts as it relates to this trend as well. It maybe the case that over time refiners are looking for higher diesel output out of FCC units, in order to help them meet the increased diesel demand that would come from such specifications. But at a high level Sebastian, the overall trend IMO 2020 as well as sulfur specs around the world is favorable for hydro processing Catalysts going forward.

Sebastian Bray -- Berenberg gossler & co -- Analyst

Okay. Thank you. Could I just quickly ask on the potential Kemerton expansion? Do you have Tianqi's agreement that you will accelerate the expansion already? Do you have the access to the raw material?

Luke Kissam -- Chairman, President & Chief Executive Officer

Yeah. They've been previously announced what we are going to do with Talison. And if Talison goes through with those expansions which we fully expect they do, we'll have sufficient rock to meet almost all of that 135,000 metric tons that we would have in China and in Kemerton. And if not we can get it on the open market. We'll be able to buy rock on the open markets. So I'm -- I'm less worried about that.

We've always said we'd like to have a little bit more conversion capacity for hard rock, than we actually had hard rock to feed it which would give us some benefit there to flex up. So that's all consistent with the strategy we talked about before and very confident in our ability, not only from Talison, but if we have to supplement a little bit from outside parties we'd be able to do that. So we've got all the agreements we need and everybody is aligned on what we need to do to be able to supply our customers.

Sebastian Bray -- Berenberg gossler & co -- Analyst

All right. Thank you very much.

Operator

And our next is coming from the line of Colin Rush from Oppenheimer. Please go ahead. Your line is open now.

Colin Rush -- Oppenheimer -- Analyst

Thanks, so much guys. I just want to follow-up on that last question. There's obviously awful lot of R&D going on in the battery industry right now coupled with a lot of automotive configurations. Can you talk about the rate of change in terms of the needs of your customers? And what you are seeing come back to you especially as you may these longer term commitments on capacity?

Eric Norris -- President, Lithium

Yeah. So, Colin this is Eric. First to address what the customers are telling us. I mean we -- as Luke just reiterate to what Luke said earlier. We are seeing decidedly stronger push and as they've shared our long-term outlook for us from a consumption standpoint toward hydroxide. And that is symptomatic of going toward higher nickel chemistries and end-to-end. So that means moving closer to the 622 source of chemistries. There's been some speculation in the market that 811 is around the corner. I think if there's still some technical challenges to get there, and so we still see that not necessarily being within the next couple of years that being a few years or more off versus today.

At a more technical level, there continued to be efforts to think through how to get more incremental capacity at the battery cell, by looking at pre-lithiation technologies or novel anode configurations which would involve some potentially some lithium metal doping. And this is a sort of incremental trend. It's not going to move the needle in 2018 or 2019 volume for us, but it is representative of the technology trend you're talking about. And in a period of five to 10 years could result in more significant demand on the metal side. We just have to watch that very carefully.

Luke Kissam -- Chairman, President & Chief Executive Officer

So, Colin if I could just add on that at what he is saying. That's another reason why our long-term strategy is that we are going to have these long-term agreements. Because we need to understand where the demand is either from a carbonate, from a hydroxide, from a metal or from what's next from our customers in time so that we can invest in and expand capacity, move capacity, whatever the right thing is to be able to address the needs of our customers in the market. And the customers the big customers understand that. And they're on board without a pledge (ph). So we feel good about it.

Colin Rush -- Oppenheimer -- Analyst

Okay. And then these volumes that are under negotiation, can you give us a sense of the magnitude of demand for those volumes? Or I mean is it kind of one-to-one sort of ratio are you looking at 3x, 4x, 5x the actual available capacity that you are in discussions on?

Luke Kissam -- Chairman, President & Chief Executive Officer

Well if you look on page 12 and 13 of our earnings deck presentation that we laid out yesterday, we tried to give a view of what that was both from a carbonate standpoint as well as a hydroxide standpoint in both 2021 and 2025. The other thing, I'd add is on 2021, we put nameplate of the units on there by collective production capacities. That -- because that is what's public. It's not realistic to believe in any of these size that we'll be operating at nameplate from a product -- actual production capacity in 2021. We are going to ramp up over time. And as we've seen with La Negra II, as we've seen with the other things coming, you're not going to start it up on day one and be able to operate at nameplate capacity. So that's not an indication. It has the volume we are going to produce in that year, but we want to be consistent with what we told The Street previously to give you a benchmark.

So as I sit and look at it, we have much more opportunity than today we believe we will have the production capacity. So I feel excellent. Looking even out in 2025 which is seven years away to be able to confidently say, we're going to be well above our goal of 80% subject to minimum volume contracts.

Colin Rush -- Oppenheimer -- Analyst

I'll take it offline then. Thanks.

Luke Kissam -- Chairman, President & Chief Executive Officer

Yes.

Operator

The next question is coming from Joel Jackson. Please go ahead. Your line is open.

Robin Fiedler -- BMO Capital Markets -- Analyst

Hi this is Robin on for Joel. Thanks for taking my questions. First off, you mentioned that you saw approximately $35 million in lost revenue on the 3,000 tons of lower sales volumes from the various production issues. So does that mean your average price realizations are around $12,000 a ton? And following that what are your initial expectations for lithium price realizations in 2019?

Luke Kissam -- Chairman, President & Chief Executive Officer

Well, so, I mean you can do math as easy as I can. If you take the numbers that Scott read you can get to an average number but that's a combination of carbonate, hydroxide, technical grade, it's a combination of customer. So I just don't think there's not one price. You're not selling the commodity that's trading on some exchange. It's different, but that's how the math works.

Eric Norris -- President, Lithium

Yes. So, this is Eric. It's clearly a mix of different products that are in there. As you know we don't disclose, because it does vary widely by product. We don't get into details disclosing price because there is no one price there.

Robin Fiedler -- BMO Capital Markets -- Analyst

Okay. And just on your initial expectations for price realization?

Eric Norris -- President, Lithium

Oh I'm sorry, you had a second question, on 2019? Yes, it's too early to get into 2019. We believe, what we have said before, is that increases would be more of an inflationary type basis as we go forward into the future years. That seems representative of what we are going to expect based upon contracts but it's, but we haven't given you a revised outlook for 2019 yet. We'll do that in a number of months and get more precise at that time.

Luke Kissam -- Chairman, President & Chief Executive Officer

What we've always said is 2019 will be more about volume and it will be about price. And if you look at what we're bringing online with La Negra II being wide open, starting up Xinyu II operations, certainly I would expect we'll see significant volume growth year-over-year. And I think that whenever we get around doing that number it's going to be more about volume growth than it is pricing. But as we've said pricing, I don't expect any downturn in pricing. I expect a slight tailwind in pricing but you'd also see significant tailwind on volume.

Robin Fiedler -- BMO Capital Markets -- Analyst

Okay. And if I can just sneak in one more. Have you discovered anything in your initial feasibility work that might suggest that the pond yield increased technology wasn't going to deliver as expected? Or what is it that CCHEN doesn't understand with the respect you're improving process based on the approval? Thanks.

Luke Kissam -- Chairman, President & Chief Executive Officer

It's, CCHEN doesn't have to do anything, first of all. So we are asking them to do something. They are not required to do and all they want to see is some proof that it's going to work before they give it to us. That's it. It is not a big deal, OK? It's not a big deal. If we only need it, if we build V and VI. So in due time, all the data that we are working on when we get approval for that yield improvement project will sit down with CCHEN and if we build V and VI, I'm confident we'll have the ability to sell it.

Eric Norris -- President, Lithium

And I think it's also important to note, because, I just want to make sure this is clear. In our spending, our capital spending guidance they are spending for that yield technology. That continues onwards. As Luke said in his prepared remarks the way you can think about that is providing buffer in the event that ultimately we do proceed with V, VI or choose to proceed that or whether that is used to further enrich the quality of brine we have to feed when that grows I to IV. So it is on our spending going forward, but V, VI is on hold.

Robin Fiedler -- BMO Capital Markets -- Analyst

That's helpful. Thanks.

Operator

The next question is coming from Aleksey Yefremov from Nomura Instinet. Please go ahead. Your line is open now.

Matthew Skowronski -- Nomura Instinet -- Analyst

This is Matt Skowronski on for Aleksey. Just touching on a question earlier. You are on track last quarter for 10 KT year-over-year volume growth. I assume less 3 kilotons this quarter because of the outages. That would make it 7 kilotons or am I missing some inventory?

Luke Kissam -- Chairman, President & Chief Executive Officer

What you're doing is you're missing some of the tailwinds. Some of that 3 kilotons we talked about was related to tolling. We are little -- we're going to be south of 10,000 metric tons from our actual production and both part of that is not all of the 3 kilotons, because some of that 3 kilotons was tolling.

Matthew Skowronski -- Nomura Instinet -- Analyst

Understood. And then in Catalysts you mentioned that HPC has been good so far this year and that visibility is pretty clear through the fourth quarter. What are you seeing into the 2019? Can we expect another tailwind from HPC demand? Or is your visibility not that great?

Raphael Crawford -- President, Catalysts

At this point of the year this is Rapahel, Matt. At this point of the year we have some of visibility to what's going to happen in HPC. A lot of the HPC business or all of it is related to change outs of Catalysts can be a lumpy business. But we certainly -- we expect the year in 2019 to be somewhat consistent with what it looks like with 2018. There is no known changes to our outlook for HPC demand.

Overall there is certainly are macroeconomic tailwinds as it relates to software specifications. Just like in FCC, there's tailwinds as it relates to olefins output. So overall the fundamentals of Catalysts are good. And I wouldn't expect big differences next year in HPC versus this year in terms of overall performance.

Matthew Skowronski -- Nomura Instinet -- Analyst

Understood. Thank you.

Operator

The next question is coming from Mike Sison from KeyBanc. Please go ahead. Your line is open now.

Michael Sison -- KeyBanc Capital Markets -- Analyst

Hey guys. Nice quarter. Luke any changes in your outlook for EV adoption? Over the years the EV adoption rates have increased. Just thought I'd get an update on what you are seeing from your folks in terms of the trend there?

Luke Kissam -- Chairman, President & Chief Executive Officer

We have not -- we've not publicly updated our demand model. I will say that there have been some other models that are coming around that would push that up a little bit. The demand that we are seeing from our customers is certainly consistent with that demand model that we put out there. So still feeling more confident in that model that we put out, but not any real significant change that I will talk about today.

Michael Sison -- KeyBanc Capital Markets -- Analyst

Great. And then in terms of the lithium outages in the third quarter, it doesn't seem like you are alone there. A lot of industries have unplanned outages. So is this something that you should think about as kind of a routine, every year, every -- some facilities will go down? And then how do you think your customers will react if that -- to that? I mean obviously your long-term contracts make -- are more important to them. But just your general thoughts on that?

Eric Norris -- President, Lithium

So, Mike this is Eric. I think it's just -- I think the way you need to look at this standards are going up, so that's why you see people getting caught with these sort of unexpected outages. In our case we have under way for some since we don't need to add that -- a plan to address them. A good number of the improvements that we aim to make, to make it more a sustainable operation going forward are connected to the bringout in Xinyu II so that sitewide sort of infrastructure is going on.

As Luke said, the authorities clearly understand what we're up to and how we are going to address that. They are very anxious to see Lithium production increase, and this is a country that as you know really wants to see as much domestic lithium production as possible. So I think it is a one-time sort of change in expectations. And in our case it's associated with our longer path of interesting things that will be more complete or complete we vis-a-vis the remediation plan we have in the government, by the time it continues to fully online.

Michael Sison -- KeyBanc Capital Markets -- Analyst

Great. Thank you.

Operator

The next question is coming from Mike Harrison from Seaport Global Securities. Please go ahead. Your line is open now.

Mike Harrison -- Seaport Global Securities. -- Analyst

Hi. Good morning. Just on the Lithium business and the shortfall that you had in terms of volume and revenue there. You mentioned what the EBITDA impact would have been there but just looking at the margin number, I think it was surprising that your margin performance was still pretty solid, pretty similar to where you were in the prior year. Can you help us understand why the operational issues didn't have more of an impact on your bottom line?

Scott Tozier -- Executive Vice President & Chief Financial Officer

No, I think, I mean at the end of the day we had some cost improvements that we're starting to see in the third quarter that were not affected by the turn -- the outages. So again some of it comes down to mix of product as well. So as Luke said, we had some portion of that outage was tolling. As we said previously tolling is a quite a low margin, versus our internally produced volume as well. So that has a bit of an averaging impact on us as well. So we feel good where that margin came in for the quarter.

Mike Harrison -- Seaport Global Securities. -- Analyst

All right. And then I want to make sure I understand -- sorry one more quick one. Just on the yield increase project in the increased Lithium recovery. I want to make sure I understand that your quota is a lifetime quantity of Lithium. It's not an annual quantity. So you can actually exceed that 80,000 metric ton number if you wanted to, which just means you're going through the quota faster?

Luke Kissam -- Chairman, President & Chief Executive Officer

That's exactly right.

Mike Harrison -- Seaport Global Securities. -- Analyst

All right. Thanks very much.

David Ryan -- Vice President, Corporate Strategy and Investor Relations

Okay. We would like to thank everyone for your participation in today's conference. We appreciate your time. This concludes Albemarle's third quarter earnings call. Thank you.

Operator

Thank you everyone. That concludes our conference call for today. You may now disconnect. Thank you for joining and have a lovely day. Good-bye.

Duration: 61 minutes

Call participants:

David Ryan -- Vice President, Corporate Strategy and Investor Relations

Luke Kissam -- Chairman, President & Chief Executive Officer

Scott Tozier -- Executive Vice President & Chief Financial Officer

Matthew DeYoe -- Vertical Research Partners -- Analyst

Ian Bennett -- Bank of America Merrill Lynch -- Analyst

David Huang -- Deutsche Bank -- Analyst

Eric Norris -- President, Lithium

Arun Viswanathan -- RBC Capital Markets -- Analyst

Josh Spector -- UBS. -- Analyst

Dylan Campbell -- Goldman Sachs -- Analyst

Sebastian Bray -- Berenberg gossler & co -- Analyst

Raphael Crawford -- President, Catalysts

Colin Rush -- Oppenheimer -- Analyst

Robin Fiedler -- BMO Capital Markets -- Analyst

Matthew Skowronski -- Nomura Instinet -- Analyst

Michael Sison -- KeyBanc Capital Markets -- Analyst

Mike Harrison -- Seaport Global Securities. -- Analyst

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