Albemarle Corporation (ALB) Q4 2018 Earnings Conference Call Transcript

Albemarle Corporation (ALB -1.53%)
Q4 2018 Earnings Conference Call
February 21, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to the Q4 2018 Albemarle Corporation earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If anyone should require assistance during the conference, please press * then 0 on your touchstone telephone. As a reminder, this conference may be recorded.

I would now like to introduce your host for today's conference, Mr. David Ryan, Vice President, Corporate Strategy and Investor Relations. Sir, please go ahead.

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

Thank you and welcome to Albemarle's fourth 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 on our website under the investors section at www.albemarle.com. Joining me on the call today are Luke Kissam, Chief Executive Officer, Scott Tozier, Chief Financial Officer, Raphael Crawford, President, Catalysts, Netha Johnson, President, President, Bromine Specialties, and Eric Norris, President, Lithium.

As a reminder, some of the statements made during this conference call, including our outlook, expected company performance, production volumes, expansion projects, and our proposed lithium hydroxide joint venture 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 and the appendix of our earnings presentation, both of which are posted on our website.

Before I turn the call over to Luke, I would like to remind you that we closed on the divestiture on our polyolefin catalysts and components business on April 3rd, 2018. This business was part of our reported results in the catalysts segment. For simplicity and comparison of our results and guidance in 2019, all adjusted results and comparisons will be stated on a pro forma basis excluding results from that divestiture. Please see our earnings presentation for more information on these excluded results.

Now, I will turn the call over to Luke.

Luke Kissam -- Chairman, President, and Chief Executive Officer

Hey, thanks, David. The fourth quarter marked our ninth consecutive quarter of year over year EBITDA growth, ending what was the most profitable year in the history of Albemarle. In 2018, net sales were up 13%, adjusted EBITDA up 17%, and adjusted EPS up 23% versus the prior year on a pro forma basis.

All of our reported segments contributing with each delivering double-digit adjusted EBTIDA growth on a percentage basis. Our EBITDA margin for the year was right at 30%, highlighting the quality of our businesses. 2018 was also another step forward in the four-prong strategy that we laid out at our 2017 investor day.

As you can see on pages five and six of our earning presentation, we continued to make progress in each of our focus areas. Lithium delivered 19% year over year adjusted EBITDA growth in 2018 and our major capital investments in Lithium remain on track to ensure that growth continues well into the future.

We addressed some debottlenecks in La Negra II during the year and were able to operate near nameplate rates by year end. In 2019, we expect to produce close to 40,000 metric tons of lithium carbonate in La Negra in spite of the significant rain event in the Salar de Atacama in January and February this year that will cost us about 3,000 metric tons of production in 2019, all of which will occur in the first half.

La Negra III and IV, which will increase lithium carbonate capacity in Chile to a total of 85,000 metric tons remains on track to begin commissioning in 2020. In Xinyu, China, we achieved mechanical completion and started commissioning activities of the 20,000-metric ton lithium hydroxide expansion, taking our total China capacity to 35,000 metric tons annually. Earlier this year, we shipped battery-grade qualification samples from Xinyu and that team has exceeded each commissioning milestone to date. While it's still early, we expect this site to meet its production goals for 2019.

In January, we began the site work related to the lithium hydroxide complex in Kemerton, Western Australia. This complex, which should be the largest lithium hydroxide complex in the world when fully built out will use spodumene concentrate from Talison as a feedstock. The first phase of the complex will be three trains of 20,000 to 25,000 metric tons capacity each with the ability to add two additional trains over time if market demands require such additional capacity. The commissioning of this site is expected to start in stages during the second half of 2021 and continuing into 2022.

Finally, the expansion of Talison, our spodumene joint venture in Greenbushes, Australia, remains on schedule to be commissioned in the second quarter of 2019. That expansion will result in a total production of about 160,000 metric tons on an LCE four-year run rate basis with Albemarle's annual share being 80,000 metric tons on an LCE basis.

Each of our other businesses maximize their returns in 2018. Bromine and catalysts delivered double-digit percent year on year adjusted EBITDA growth on a pro forma basis and provided the cash flow needed to fund the capital expansions in lithium. The tetrabromide expansion which came on line at JBC mid-year in 2018 provides low cost production flexibility between our JBC and magnolia sites. This expansion will also enable us to manage bromine allocation and derivative production more efficiently and profitably.

Additionally, on January 1, we successfully implemented the first of four deployments of a new global ERP platform. This platform will be fully implemented by year-end and will give us the tools to be much more efficient and effective in our end to end business processes. We continued to assess our portfolio of business in other resource opportunities.

In April, we closed on the sale of our polyolefin catalysts and components business to W.R. Grace. In December, we exercised an $18 million option to acquire 100% ownership of a lithium brine resource in Antofalla, Argentina. We believe this asset has the potential to be the largest lithium resource in Argentina. We also completed a drilling program at our hard rock site in Kings Mountain, North Carolina to allow us to more fully characterize that opportunity. Both of these assets will be kept available for development in the future based upon market demand.

Also in December, we signed a definitive agreement to form a lithium hydroxide joint venture with minimal resources limited. We made the necessary regulatory filings and pending those approvals expect to close the transaction in the second half of 2019. This transaction will combine the mining and operational expertise of MRL with our lithium hydroxide production and marketing expertise.

Albemarle with have exclusive marketing rights for all spodumene and lithium hydroxide produced by the joint venture. This will allow Albemarle to continue to support our customers' growth under our long-term agreements with increased volumes and provides for an effective channel to market for this capacity addition.

Finally, in 2008, we stayed committed to our disciplined capital allocation strategy. We increased our dividend to $145 million, repurchased $500 million worth of stock, invested $700 million in CapEx, primarily in pursuit of our lithium growth plan and still completed the year with a net debt to EBTIDA ratio of 1.2 times.

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

Scott Tozier -- Executive Vice President and Chief Financial Officer

Thanks, Luke. Thank you, everyone for joining the call this morning. As Luke said, 2018 was the most profitable year in the history of Albemarle, with each business delivering growth in both volume and price for the year. We generated unadjusted US GAAP net income of $130 million during the fourth quarter, bringing full-year 2018 net income to $694 million. This is up from $55 million in 2017. Net income during 2018 benefited from the growth of our businesses and the gain on the sale of the polyolefins and components business.

2017 was negatively impacted by the transition tax charge related to US tax reform. We generated net sales growth of 11% and adjusted diluted earnings per share of $1.53 for the fourth quarter, an increase of $0.27 per share or 21%, compared to fourth quarter 2017 excluding divested businesses. All three of our recordable segments performed well, providing about $0.25 of that growth.

Full year 2018 pro forma adjusted earnings were $5.43 per diluted share, an increase of $1.03 or 23% over the prior year. Our businesses delivered about $0.96 per share and our share repurchase program contributed about 14%. Net cash from operations nearly doubled to $546 million in 2018. The increase was driven by higher earnings and lower cash taxes compared to 2017, when we made the tax payment on the sale of Chemetall.

Operating working capital continued to be a use of cash in 2018, primarily due to increased inventory of spodumene in the lithium segment in preparation for the start-up of the Xinyu II expansion in China.

Capital expenditures in total ended 2018 at $700 million, up from $318 million in 2017. Spending on our lithium growth projects continued on a successful ramp rate with total capital expenditures reaching $228 million during the fourth quarter, right on track with expected levels in 2019.

Now, let me move on to the business performance. Lithium ended the full year with sales of $1.23 billion and adjusted EBITDA of $531 million, an increase of 21% and 19%, respectively, compared to 2017, and an adjusted EBITDA margin of 43%. Volume growth for the full year 2018 was 10% and prices improved by 9%, driven by the increasing demand of our contracted customers for battery-grade materials.

Fourth quarter volume was strong with 14% growth compared to prior year and 25% growth sequentially. Average lithium pricing for the fourth quarter was 4% higher for the fourth quarter of 2017 and flat sequentially.

In bromine specialties, full year sales of $918 million and adjusted EBITDA of $288 million were up by 7% and 11% respectively, compared to 2017. Full year adjusted EBITDA margin was 31%. The market for flame retardants remained healthy and the demand for clear completion fluids picked up slightly in the second half. Overall, pricing continued to be supported by constrained production of elemental bromine in China.

Catalysts reported strong fourth quarter net sales of $305 million and adjusted EBITDA of $79 million, excluding divested businesses, full year catalyst sales of about $1.1 billion increased by 11% compared to 2017. Adjusted EBITDA was $273 million, also up 11% from 2017. Growth was driven by our refining catalyst products due to favorable mix in hydro-processing catalysts and growth in volume and pricing in fluid catalytic cracking or FCC catalysts as a result of strong demand for transportation fuels.

Turning to the future, since we last updated you on our lithium demand forecast in the first quarter of 2018, the momentum around electric vehicles has continued to accelerate. Although global automotive sales slowed by over 8% during the fourth quarter of 2018, sales of electric vehicles rose by 98% over that same time period.

Globally, the number of available plug-in hybrids in battery electric models announced by automotive manufacturers for 2021 has grown by almost 40% since mid-2017. The increase in new models announced for the US is even more dramatic.

In mid-2017, auto manufacturers announced that almost 40 new models were expected to be available over the next three years. Now, that number is over 60 and all the new additions are pure battery electric. Likewise, for the European market, the announced new models targeted for availability in the next three years has grown from a little over 40 to around 80, almost double.

Then there's China. Annual sales of new energy vehicles in China doubled during 2018. While China has not yet released their specific subsidy plan for 2019, all indications suggest that the policy will continue to incentivize the shift to vehicles with longer-range, larger batteries, a good trend for lithium.

We're also beginning to see an upward trend in large-scale batteries for utilities, buildings, and power installations. To support the auto manufacturers, the battery supply chain has responded by increasing capacity targets in just one year from 270 to about 400-gigawatt hours by 2021. The target for 2023 is now more than 800 gigawatt hours growing to roughly 1.5 billion by 2028.

These trends have had a marked impact on our demand outlook, which is based on inputs from multiple sources, including automotive OEM announcements, industry forecasts, research reports, and discussions with our customers.

As you can see on page 14 of our earnings presentation, each time we have updated our outlook, the demand curve has shifted higher and steepened. In our current view, the LCE demand is expected to be around 475,000 metric tons by 2021, growing to around 1 million in 2025. From a 2018 base of about 270,000 metric tons, this represents a 21% CAGR primarily driven by EV battery demand.

In 2019, we expect new supply, brought on by the major integrated producers will be about sufficient to meet market demand growth of roughly 21%. The market could see non-integrated converters in China bring on capacity in excess of that. These converters would need access to spodumene concentrate sources out of Australia for feedstock.

This capacity will largely be carbonate, will take time to scale up, and likely will not be of EV-grade quality, but may result in a carbonate over supply in the short-term. Given our long-term contact strategy and our customer base of top-tier producers, we do not expect this situation to impact our volume or price.

As we discussed in November, we are already at our goal of having about 80% of our 2021 nameplate volume secured under long-term agreements with floor pricing for both lithium carbonate and lithium hydroxide. We remain ahead of schedule on 2025 lithium hydroxide and the volume under negotiation continues to increase.

This market demand and the status of our long-term agreements gives us confidence in our capital investment plans as we look to meet customer demands in lithium. In total, you can expect capital spending of $800 million to $900 million in 2019 with over 75% of that dedicated to lithium growth. We would expect capital to remain in that range or slightly higher in 2020 and 2021, assuming with close on the JV with mineral resources.

We are confident that our businesses will continue to perform at a level that funds the cash needed for this growth plan. Net cash from operations is expected to range between $700 million and $800 million in 2019 exceeding the pro forma of $535 million of 2018. Free cash flow is expected to remain about the same as 2018.

As a final note, on page 19 of our earnings deck, we provided some additional data points that may be helpful for modeling purposes. Now, I'll turn the call back over to Luke.

Luke Kissam -- Chairman, President, and Chief Executive Officer

Thanks, Scott. By now, you've probably heard some mixed messages on other earnings calls about the economic uncertainty for 2019. The fact of the matter is the EV supply chain has not lived through a general automotive slowdown so there's no past experience on which to rely. It's also a fact that bromine is the Albemarle business that historically has felt the impact from an economic slowdown the earliest and the most intensely.

To date, we have seen no evidence of a slowdown in the order pattern from our customers across our business, but we do have some customers in bromine who indicate they are watching the second half carefully. With that in mind, let me try to frame up our business outlook for 2019.

In lithium, 2019 is a volume story. Our 2019 production is almost fully committed under our long-term contracts. There was a significant rain event in the Atacama in January and February. The resulting dilution in the pond system will likely cost us about 3,000 metric tons of production during the first half of the year, but we're still expecting volume growth of over 20,000 metric tons from 2018 with 10,000 to 15,000 coming from internal production and the rest from tolling.

We would expect to see flat to inflationary pricing trends with any variant from that coming as a result of customer mix. We expect lithium-adjusted EBITDA to increase by a little more than 20% year over year. Quarterly adjusted EBTIDA will increase through the year as we recover from the rain event in Chile and qualify lithium hydroxide from Xinyu II with customers and ramp production in sales. Adjusted EBITDA margin should exceed 40% but could be below 2018 levels, largely due to increased tolling volumes to support customer demand and start-up costs related to Xinyu II.

For bromine, we expect 2019 performance to be about flat compared to 2018. Demand for flame retardants and other bromine derivatives is expected to remain stable despite some caution coming out of the construction, automotive, and electronics markets for the second half.

We expect catalysts to be about flat year over year with adjusted EBITDA in the second half somewhat stronger than in the first. Refinery solutions is expected to provide mid-single-digit percentage adjusted EBITDA growth, excluding the one-time settlement of about $9 million received during 2018.

FCC catalysts are expected to continue to benefit from strong demand, high utilization rates, and an improved product mix, with increased sales of our Max Propylene product line. We also expect a similar trend in clean fuels technologies during 2019, particularly in distillates and FCC pre-treat units. The growth in refinery solutions is expected to be largely offset by a decline in PCS during 2019 due to pricing pressures and the loss of a large customer contract, which contributed about $11 million in EBITDA in 2018.

When we add all of this together, we expect pro forma net sales growth in the range of 9% to 15%. Adjusted EBITDA should range from just over $1 billion up to $1.14 billion. We expect overall corporate adjusted EBITDA margins of around 30%. This would result in adjusted diluted earnings per share of between $6.10 and $6.50, a pro forma growth rate of $0.12 to $0.20 over 2018.

With the new lithium capacity weighted to the back half of the year, the rain event in the Salar, and the catalyst shipments weighted to the second half, we currently expect the cadence of earnings to ramp through the year with growth in the second half stronger than the first. We expect the first quarter of 2019 to be about equal to the first quarter 2018. As always, normal fluctuations in our business could have an impact on quarterly results.

As we close, we have a clear and simple strategy and we are well-positioned for growth in the short, medium, and long-term. We've outlined our growth plan well into the next decade driven by capacity expansions in lithium and steady profits and cash flow from our other businesses. Now, it's all a matter of execution. I believe that we have the people, the tools, and the financial flexibility to be able to execute successfully and deliver stakeholder returns now and well into the future.

I have never been more excited about the potential I see in our employees and our businesses and the opportunities I see for our stakeholders.

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

Operator, we are now ready to open the lines for Q&A. 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. Feel free to get back into the queue for follow-ups if time allows. Please proceed.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press the * followed by the number 1 key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. Our first question comes from John Roberts from UBS. Your line is open.

John Roberts -- UBS -- Analyst

Thank you. On the Mineral Resources JV, is it just financing and legal work that needs to be completed for the closing later this year? Are there any sticking points left to be done there? Related to that, could you remind us again -- does stage two capital spending come sequential to stage one or is it likely that they'll overlap?

Luke Kissam -- Chairman, President, and Chief Executive Officer

This is Luke. We've got two regulatory filings that we had made, one in Australia and one in China. We expect to get those approvals, but that's always a condition of a closing, John. So, that's an open item. I would expect that phase two, it would be sequential, it would come after the phase one.

John Roberts -- UBS -- Analyst

Is there any near-term anecdotal guidance you can give us on the China EV market? You're quite bullish here over the next couple years in your slide, but things have been pretty choppy on the overall automotive market in China in recent months. I don't know if the EV market is going through any short-term transition period here.

Eric Norris -- President, Lithium

Hey, John. This is Eric. We continue to see, and we saw this last year as well, the Chinese government creating incentives for longer range, higher energy-density batteries. That's what we expect, as Scott referenced, to happen in the next set of subsidy changes for this year. You're right, the Chinese automotive market has been choppy. The global market has been choppy. It's been down, as Scott has pointed out. But on the other hand, EVs continue to grow and the incentives that the government is putting in place we believe will continue to drive the kind of range that will drive a lot of lithium consumption.

If you look at the demand chart we have in our presentations, you'll see a BEV battery has four times the amount of lithium in it that a PHE battery would have. That incentive to longer range is beneficial to us and to the industry.

Operator

Thank you. Our next question comes from Robert Koort from Goldman Sachs. Your line is open.

Robert Koort -- Goldman Sachs -- Analyst

Thanks. Good morning. Scott, I think maybe you or Luke talked about the conversion capacity that may expand in China but maybe not challenge your business because they have challenges qualifying. I wonder if you could help differentiate what you produce out of Xinyu and why you're able to get that qualified and maybe some of these peripheral parties have a harder time.

Luke Kissam -- Chairman, President, and Chief Executive Officer

Well, first of all, we're starting with a better feedstock because we're taking the Talison rock, which is the best concentrate in the world and we've got it dialed in. We also have the process engineers from around the globe that have a history with operating within the lithium business. So, we have an advantage there, but it starts with the feedstock and it rolls into the know-how of how we've developed the design as well as the improvements we've made since we purchased Xinyu.

Robert Koort -- Goldman Sachs -- Analyst

Luke, if the Wodgina deal closes and they start producing spodumene later this year, what are you going to do with your share of that spodumene? Where will that be placed? Will it be converted by you or by tollers or sold into the merchant markets?

Luke Kissam -- Chairman, President, and Chief Executive Officer

We've got a marketing plan that we're working with right now. Some of it obviously will toll. We will work to place that volume with strategic converters in the marketplace. One thing I just want to be clear is you talked about the share of Talison, the share of MRL. We have marketing rights to 100% of that. We will market all of the spodumene, not just a portion of it.

Operator

Thank you. Our next question comes from Lawrence Alexander from Jefferies. Your line is open.

Lawrence Alexander -- Jefferies -- Analyst

Good morning. Could you clarify two issues -- one is can you talk a little bit about what the impact of mix was on the lithium business in Q4 and what you expect in Q1 just so we can get a sense for how much it's swinging results? Secondly, when you mention you expect pricing to be flat, just to be clear, that is reported realized prices, not just the prices embedded in the contracts?

Eric Norris -- President, Lithium

So, Lawrence, this is Eric. I'll answer the first question. I'm going to need some clarification on the second. As far as mix, in Q4, as you may recall, Q3, we had troubles from an operating standpoint for different reasons in both China, which is largely all hydroxide for us, and in Chile, which is carbonate. The reason for the results we saw, the strong results we saw in Q4 versus Q3 and a sequential volume increase at 25% has everything to do with those plants running very well.

The China plants ran very well, consistently through each of the three months, and the La Negra or Chilean operations ran well during that time. The only thing that happened in Chile that might be slightly different is we were ramping up La Negra II in that period of time. We did get very close to capacity design rates there. So, we had a successful start-up, but there was a slight disruption there. It was a fairly balanced mix as the bottom line.

As you look forward into this year, as Luke mentioned, we're challenging the first quarter on carbonate because of the rain event. We will not see necessarily a mix shift to hydroxide because hydroxide, that ramp up of Xinyu II is a staircase, if you will. It gradually steps up through the year with its weakest portions from a volume contribution standpoint to growth in the first half of the year.

The other thing we're going to see is a lot more tolling. That's going to benefit largely carbonate. You might see a shift toward carbonate and that would have in the earlier parts maybe a depressive effect on mix in the first half of the year. So, it's a complicated story, but those are the factors.

Your second question, could you repeat it please?

Lawrence Alexander -- Jefferies -- Analyst

What I was trying to get out there is there was a comment in your prepared remarks about how pricing lithium will be flat to up as mix effects. I wanted to clarify that that comment pertains to your reported lithium pricing that you'll report on the quarterly calls, not just a comment about the pricing embedded in the part of the business that is contracted with the EV market across the entire business including the industrial grade.

Scott Tozier -- Executive Vice President and Chief Financial Officer

Hey, Lawrence, this is Scott. The pricing guidance we gave is across the lithium segment and it's not just related to our contracted business, nor is it just related to our battery-grade business. It is intended to be across the business.

Operator

Thank you. Our next question comes from Arun Viswanathan from RBC Capital Markets. Your line is open.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Good morning. I just wanted to ask a question about the long-term outlook. It seems like you've provided a range that's maybe in the 850 million to 1.25 million tons of lithium demand in 2025 and 610 million of that would be coming from EV side. You also provided supply of your own capacity meaning 325 to 350. Would you be in a position to comment on what you're seeing from an industry capacity standpoint? Would it be balanced in that 850 to 1.25 million range? Furthermore, do you see around 600 as far as battery-grade lithium or would it be less than that? Thanks.

Luke Kissam -- Chairman, President, and Chief Executive Officer

That's a lot of questions. What I'd say is this. If you look around and look at the announcements that have been issued over the last month or so, as we've always said, it's harder to bring this capacity online. It's one thing to issue a press release, it's another thing to go out and raise a little money. It's more difficult to do it.

I think what you're going to see is you'll continue to see in the long-run the big players, the Albemarles, the SQMs, those are the ones that are going to have to expand to bring this capacity online with the know-how of how to do it in the timeframe they can do it with the volume that's going to meet the big customers out there to meet that demand.

As you look out long-term, the market tightens up is our belief. We believe there will be enough to meet demand, but it's going to be tight. In some instances like we talked about in 2019, there's going to be a little bit of overhang of spodumene rock and carbonate could be long in some applications in 2019. That's going to burn off. What you're going to see is the markets are going to continue to tighten up. I did some research on new technologies that come into the marketplace.

If you look at every new technology and go back and look what the demand forecast was, every year when they came out of a new demand, it always got higher and the curve got steeper. I think that's what we're going to see. I think we've got realistic but orb overly conservative demand outlook out there. I think we're going to be in the long-run fairly tight.

That's why it's so important for us to have resources on the balance sheet that we control that we can execute additional capital to bring it to the market if we see the demand out there. if we don't, we just got resources for the future.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Just a quick follow-up on the spodumene issue -- prices are down a fair amount year on year. I just wanted to get your thoughts on maybe what's driving that and your view and your overall portfolio, why that wouldn't be impacted by lower prices in spodumene, if at all. Thanks.

Eric Norris -- President, Lithium

This is Eric. It's a pretty simple answer. It's supply. As we all know, there's new supply of spodumene coming into the market. I point out though that that is a very unproven quality. So, I think some of that supply will work better than others in meeting the demands inside China, but the more presence and more supply coming on has had the effect of creating somewhat lower prices.

Luke Kissam -- Chairman, President, and Chief Executive Officer

What I point to on that is the strategy of the long-term agreements really comes into play when you have a situation like we have today. We're very confident in what our pricing model is going to be in 2019. We're very confident in the demand, very confident in being able to replace the volume that we can produce in 2019 with customers under long-term agreements at set prices.

Operator

Our next question comes from Ian Bennett from Bank of America Merrill Lynch. Your line is open.

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

Thank you. Your guidance calls at the midpoint for sales to be up around $400 million but EBITDA is only up close to $100 million, which is a little bit less than what I would have thought. Can you outline some of the increasing costs that are occurring this year? As we look forward in time, given we know your volumes and price and lithium, should EBITDA margins and lithium be increasing or stable? Just some context there will be helpful.

Scott Tozier -- Executive Vice President and Chief Financial Officer

This is Scott. The big driver for us on a year over year basis is the tolling mix that we're seeing in lithium. All of that growth is not coming from our internal production. It's about 60% to 70% of it will be internal and the remainder will be based on tolling. As a result of that, the tolling margins are lower than our normal internal margins. In 2019, we expect that we'll maintain margin north of 40%. It will likely be below what we had in 2018. Longer term, as you see that tolling mix change as well as the customer mix change, that will drive margins that will start to creep up over time.

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

In the hydroxide market, we've seen some industry players talking about a slower adoption of NMC 811. I was wondering given your position in the supply chain if you're seeing that same slower shift to the higher nickel cathodes and if that's having any effect on your relative mix of carbonate and hydroxide.

Eric Norris -- President, Lithium

This is Eric speaking here. I point out that 811 is our potential consumer of hydroxide and NCA is a consumer of hydroxide. So, yes, in 811, we are not seeing a rapid move to 811. The technology is interesting on an experimental level and a commercial level. It's proving difficult to process from a safety standpoint. It's having to be calcined several times versus straight 622 chemistry. It does require hydroxide, but it has been challenged. The growth in hydroxide is being driven by NCA. The poster for that is Tesla, of course, but there are other automobile manufacturers who are looking at NCA as well. That is 100% hydroxide-based chemistry.

Operator

Thank you. Our next question comes from Colin Rush from Oppenheimer. Your line is open.

Colin Rush -- Oppenheimer -- Analyst

Thanks so much. Can you guys talk a little bit about seasonality with the battery purchasing from the battery OEMs, given that about two-thirds of China's demand is coming in the back half of the year and they're constituting about 60% of the overall EV and HEV demand at this point?

Eric Norris -- President, Lithium

This is Eric again. I don't know that there's really seasonality and buying patterns. There's an ever-increasing demand. You're going to see demand increase as we go through each year being larger at the second half of the year. There are certainly effects in China in a January/February time frame that have to do with the lunar new year festivals, of course.

But outside of that, there is no seasonality. We see some seasonality, as to other volume producers, in the production of brine, that has to do with making a carbonate in solar evaporation, but outside of that, that's the only seasonality that we could ever point to in our business.

Colin Rush -- Oppenheimer -- Analyst

Great. In terms of total lithium content per kWh, could you talk a little bit about the opportunities to start doping the anode layers with lithium? Is that a near-term opportunity or is it something more longer-term?

Eric Norris -- President, Lithium

I would say that solid state, that holy grail solid state is a longer-term phenomenon. What we are seeing to your point is the gradual doping of the anode increasing and the amount of lithium increasing as we go forward over the coming five to seven years. It's not a big driver of lithium carbonate equivalents for us, but it is happening. Many of our R&D efforts are directed at trying to enable that to happen. It's happening with the large producers that represent our current customer base for carbonate and hydroxide.

Operator

Thank you. Our next question comes from David Begleiter from Deutsche Bank. Your line is open.

David Begleiter -- Deutsche Bank -- Analyst

Thank you. Luke, could you comment on what your lithium sales volume was in 2018 and what you think it will be in 2019?

Luke Kissam -- Chairman, President, and Chief Executive Officer

Somebody's looking at what the volume was in 2018. I think what we said is our volume is going to be up around 20,000 metric tons, at least 20,000 metric tons in 2019 from that '18 base.

David Begleiter -- Deutsche Bank -- Analyst

The '18 base, do you have that?

Luke Kissam -- Chairman, President, and Chief Executive Officer

It's around 75,000 to 80,000, I think. Is that right, Scott? It's around 75,000 to 80,000 and we ought to be up at least 20,000 metric tons in 2019 about 10,000 to 15,000 of that coming from internal production and the rest of it coming from tolling.

David Begleiter -- Deutsche Bank -- Analyst

Great. Luke and maybe Scott and Eric, the impact of 3,000 tons of rain-impacted production in Chile, is that about $35 million in sales and $15 million in EBITDA?

Luke Kissam -- Chairman, President, and Chief Executive Officer

You have to put in whatever you've got as your lithium carbonate sales price because it will all be carbonate, multiply it out by 3,000. You'll get a revenue number because then whatever you've got for our margins it's not dissimilar from what our overall margins are. So, that would get you to the EBTIDA numbers. So, you're probably not far off.

David Begleiter -- Deutsche Bank -- Analyst

Thank you very much.

Operator

Thank you. Our next question comes from Alexei Yefremov from Nomura Instinet.

Alexei Yefremov -- Nomura Instinet -- Analyst

Thank you. How should we think about the ramp of the 40-kiloton La Negra III and IV in 2020? Related to that, would the overall volume growth accelerate in 2020 versus 2019?

Luke Kissam -- Chairman, President, and Chief Executive Officer

Yeah. I think that 2020, you would not see a significant ramp in 2020 because we're starting commissioning activities. What you would see there would be commissioning in 2020 and see a bigger ramp in 2021 from La Negra III and IV.

Let us get through this year and see where that commissioning comes and you'll see it. What I would expect next year is we'd be able to run La Negra I and II at full flat-out rates, which ought to give us about 45,000, that kind of level, something like that. We're certainly not going to be able to run Xinyu II at full rates this year because we're doing qualifications right now.

So, you'll see an additional, I would expect, nameplate next year out at Xinyu. We'll get some for La Negra III, but not a significant ramp. Let us get through the year. Let's get more timing on the mechanical completion of III and IV and we'll have more to you toward the end of the year.

Alexei Yefremov -- Nomura Instinet -- Analyst

Great. Thank you. Can you give us a quick update on the state of your lithium hydroxide and carbonate contracts? Over the long-term, have you been able to expand the portion of your future business on the contract around a fixed price?

Luke Kissam -- Chairman, President, and Chief Executive Officer

We haven't seen a significant change. It's a slight change up from what we talked about and what we presented in the third quarter. I think that was as of November. We gave you an update. It's relatively similar to what it was then. What I would say is there are more discussions going on on additional volume than we had at that time, but no material new contracts that have been signed.

Operator

Thank you. Our next question comes from Chris Kapsch from Loop Capital Markets. Your line is open.

Chris Kapsch -- Loop Capital Markets -- Analyst

Good morning. You kind of touched on this, but the follow-up is about the partial reliance on tolling volumes and the impact on mixed and margins in 2019. So, is it right to assume that those tolling volumes would be for production in addressing non-battery-grade applications?

Eric Norris -- President, Lithium

This is Eric. In the past, that has been the case. It's been non-battery carbonate. Increasingly now, in some of the low-end battery-grade carbonate applications, we're fulfilling some of our agreements using tolled material. Then the third use of the destination of that tolled material is in total consumption for our downstream uses.

Chris Kapsch -- Loop Capital Markets -- Analyst

It was a relationship with the toller years ago that ended up resulting in your acquisition of Jiangxi Jiangli. I'm wondering if there are other toll converters that have that sort of quality capability in terms of conversion that you may think about that or is your conversion strategy focused totally on just expanding the existing capabilities you have?

Luke Kissam -- Chairman, President, and Chief Executive Officer

We've laid out a plan on Kemerton. That was a build or buy decision. So, we made the decision at that point in time with what we saw that it was better for us to move forward in Western Australia as opposed to attempting to acquire a converter. So, we always looked to see what options we have that would accelerate, de-risk our strategy, and drive a better return. We'll continue to do that.

Operator

Thank you. Our next question comes from Joel Jackson from BMO Capital Markets. Your line is open.

Joel Jackson -- BMO Capital Markets -- Analyst

Good morning. Mineral Resources last night talked about they expect 20,000 to 30,000 contents of spodumene coming out this year. Do you have any of this baked into some of your numbers in 2019 guidance or none of it?

Luke Kissam -- Chairman, President, and Chief Executive Officer

It's not baked in because we haven't closed the deal yet.

Joel Jackson -- BMO Capital Markets -- Analyst

As a follow-up to that, would that mean that knowing your numbers, do you have the incremental, about $1.1 billion of debt baked into your interest expense projections for the second half?

Scott Tozier -- Executive Vice President and Chief Financial Officer

Joel, this is Scott. We've not baked in anything on closing the mineral resources deal. So, no volume upside or the debt purchase at this point in time.

Joel Jackson -- BMO Capital Markets -- Analyst

Would you be owed some deferred payments in 2020 on some of the initial spodumene sales in 2019?

Scott Tozier -- Executive Vice President and Chief Financial Officer

I'm not sure I follow your questions.

Joel Jackson -- BMO Capital Markets -- Analyst

If Wodgina starts to sell spodumene before the deal closes, will you be [inaudible] on a payment?

Scott Tozier -- Executive Vice President and Chief Financial Officer

No. That does not. That all accrues to Mineral Resources. Although, we're marketing that.

Joel Jackson -- BMO Capital Markets -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from PJ Juvekar from Citi. Your line is open.

Scott -- Citigroup -- Analyst

Hi, this is Scott on for PJ. Thanks for taking my question. I just want to take a look at the tax rate in your outlook for 2019. You mentioned that the shift in geographic mix might push it higher compared to last year. Given that lithium appears to be driving most of the growth in 2019, is it safe to say that lithium is responsible for most of that geographic mix shift? If it is, can you talk about what countries you're shifting more lithium products to?

Scott Tozier -- Executive Vice President and Chief Financial Officer

Yeah. This is Scott Tozier. The growth we're seeing geographically is in Chile, of course, as well as China. In both of those cases, you've got tax rates that are above 30%. As you grow in those areas, you're going to have natural pressure up. The other factor we've got in the tax rate is as the final regulations and rules in US tax reform get settled out, we do see some effects from the so-called beat and guilty taxes that flow through in 2019 and hopefully get stabilized at that point in time. We'll have to keep you updated because those rules don't get finalized until the end of June.

Scott -- Citigroup -- Analyst

Got it. I don't mean to belabor the tolling point here, but one, does your increase in tolling cost this year reflect the impact from Talison expansion starting up? Does that tolling cost headwind persist into 2020 given that your own conversion capacity may not start up until the 2021 timeframe?

Luke Kissam -- Chairman, President, and Chief Executive Officer

First of all, it's got nothing to do with Talison. What this is after we take the Talison spodumene concentrate and we look to convert that to lithium carbonate and lithium hydroxide to meet the demand that we promised our customers. When we don't have that conversion capacity, we have to toll it. What we're saying is the actual cost being charged by the toller is up and the amount of volume that we're having to have tolled is up. That puts downward pressure on our margins as you move more volume through that.

Scott -- Citigroup -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from Kevin McCarthy from Vertical Research Partners. Your line is open.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Yes, good morning. With regard to your catalyst business, I was wondering if you could comment on what you're baking into guidance for price and volume on the HVC side? I think you've got a strong position in distillates. Perhaps you can put your outlook into context as it relates to the pending IMO 2020 regulations that kick in next year.

Raphael Crawford -- President, Catalysts

Hey, Kevin. This is Raphael Crawford. We're expecting an increase in volume and a nominal increase in price for HVC catalysts for 2019. As Luke had mentioned at the start, relatively more strength in distillates and in FCC pre-treat as we're driving the volume side. Distillates is one of our more profitable segments. So, that's contributing to a price mix effect.

With regard to IMO, that's generally a positive trend for us. IMO increases the demand for diesel as a substitute for low sulfur fuel oil and it's also going to increase the need for catalysts for the conversion of high sulfur fuel oil to meet those specifications. So, in total, we expect mid-single-digit demand increase for HVC catalysts.

Kevin McCarthy -- Vertical Research Partners -- Analyst

The second on lithium, I appreciate the demand detail on slide 14, I was wondering if you could speak briefly to the near-term supply considerations. You mentioned the rain event in Chile. I think a few of your competitors have cited similar dynamics in Argentina. Is that enough to have any impact short-term on either market pricing or customers willingness to engage in long-term contract discussions? How would you characterize those events in the first half?

Raphael Crawford -- President, Catalysts

Well, Kevin, one could speculate about the market, but let me talk about us. All of ours is all under contract. It's committed. This makes it difficult for us to manage because we are sold out. So, we have to manage to meet the demand. But it has no issue, really, on price because we're contracted.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Understood. I guess I was thinking more in line with the future contract discussions or tightness in the broader market.

Luke Kissam -- Chairman, President, and Chief Executive Officer

I think if you listen to one of the early questions, in the short-term, that spodumene rock going into China is probably going to be converted to lithium carbonate. I don't see 3,000 to 6,000 met tons across -- it will be soaked up. Somebody will be able to supply it. Could it have an impact on price?

For those people who are out there short-term trying to carbonate short-term, it could, but for us, we don't look at it that way. We look at the impact on our long-term agreements, don't see any. We still have a number of conversations going on with customers who are interested in those long-term agreements. So, I don't see an impact on that at all as well. We've got to be able to produce the volume. 2019 is a volume story.

So, if we can't produce it, we've got to get a toll to produce it and we've got to replace it and that may mean toll volume, which could be lower margins and push our margins down a little bit, but overall, we still believe all that is within the range of the estimates that we provided to you today.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Thank you so much.

Operator

Thank you. Our next question comes from Jim Sheehan from SunTrust. Your line is open.

Jim Sheehan -- SunTrust Robinson Humphrey -- Analyst

Good morning. Could you discuss your recent agreement with Corfo in Chile, some of the details around that? Also, if you could clarify, how would you expect to establish terms for local cathode manufacturers in that market over time?

Luke Kissam -- Chairman, President, and Chief Executive Officer

This is Luke. We did reach an agreement with Corfo. It related to the price and the terms, how it would be calculated. So, we got an agreement. We're comfortable with it. It's figured into our short, medium, and long-term analysis and forecast and it doesn't change our view of the market, our profitability, or Chile in any way.

Jim Sheehan -- SunTrust Robinson Humphrey -- Analyst

Thanks. In the bromine segment, you talked about how you're not really seeing any impact yet from macro pressures, but historically, the segment has seen such pressure. So, could you frame what you think the downside could be? Also, do you see any changes in enforcement of Chinese pollution standards?

Netha Johnson -- President, Bromine Specialties

Hi, Jim. This is Netha Johnson. As we look out, we did have a couple customers express concerns. At this time, our flexibility and production and business model allows us to incorporate that. We don't see a change in our guidance for that in 2019. In terms of the Chinese environmental regulators, we see a continued enforcement of the current standards they have, which pressure on the Chinese bromine manufacturers.

Luke Kissam -- Chairman, President, and Chief Executive Officer

Any downside that we see today, we've included it in the downside piece of the earnings, to the extent that changes during the course of the year because you're right, bromine is the first business that we have that normally feels that pressure, we'll obviously update everybody.

Jim Sheehan -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Mike Harrison from Seaport Global Securities. Your line is open.

Mike Harrison -- Seaport Global Securities -- Analyst

Good morning. I'm wondering if you could give us more detail about the customer contract loss in the PCS business and overall what you're seeing in that business. It sounds like that's going to be quite an offset to otherwise solid growth in the refinery catalyst business.

Raphael Crawford -- President, Catalysts

Yeah, Mike. This is Raphael. We're not at liberty to disclose the specifics on the customer. But there is pricing pressure on the PCS business. This is a consequence of that. That being said, we're taking action to continue to operate that business efficiently, looking for ways to fill volume and make up some of that gap in the future, but it is a circumstance that we're dealing with. On the whole, refining solutions is doing very well, did well in 2018, will continue to do well into 2019.

Mike Harrison -- Seaport Global Securities -- Analyst

Then a question about your lithium business in China -- one of your competitors referred to some uncertainty related to potential changes in EB subsidies. I'm just wondering if you've seen some reluctance among your Chinese customers to sign longer-term contracts and if so, how have you responded to that trend?

Eric Norris -- President, Lithium

Mike, this is Eric. So, I think we've said and it's still true today, most of that business is biased outside of China in the EV value chain, that's both because of the type of demand we play into from a quality perspective. It's also a reflection of the fact that the Chinese account customers had been reluctant for some time to commit to longer-term agreements.

So, in periods of time when there is uncertainty in their home market and certainly there's been macroeconomic weakness in China and changing subsidies, subsidies that don't necessarily advantage local manufacturing, which is largely carbonate-based as opposed to hydroxide-based, it creates uncertainty for them. So, I don't doubt it and we've certainly seen that, but it's part of a longer-term trend that we also note in terms of their preference for partnering on long-term contracts.

Operator

Thank you. Our next question comes from Sebastian Bray from Berenberg. Your line is open.

Sebastian Bray -- Berenberg, Gossler & Co. -- Analyst

Good morning and thank you for taking my questions. The first is on the evolution of lithium demand forecast that you set out at the start of your presentation. I think the guidance over the last two years has been that the lithium market is broadly imbalanced, which would imply that the upward revisions to demand have been matched by increases in supply. Where exactly is this supply coming from and why has it proven easier if this is the case for larger manufacturers to bring this online? That's my first question.

My second one is on the delivering profile laid out after the call late last year for the Wodgina joint venture acquisition. If you're going to spend about $800 million of CapEx per anum, I have difficulty getting to the rate of delivering guided, which is from memory to about 1.5-ish, 1.6 times post-2021. Could you step me through the moving parts? Thank you.

Eric Norris -- President, Lithium

This is Eric. I'll answer the first one supply. The way both this year and in prior years and in future years we see the growth being met, knowing that growth is largely EV growth and increasingly for higher-quality batteries and hydroxide-based chemistries, it's coming from what we call the integrated majors. There are about five of us. Luke referenced their names earlier -- ourselves, Livent, SQM, and in China Ganfeng and Tianqi. These companies benefit not only from an integrated resource in most cases, but also secondarily from a processing know-how over time in terms of how to retune their conversion assets to their specific resources.

Finally, they have the financial capabilities to fund what are significant capital expansions required to meet unused markets. These are the companies that are meeting that demand. We see likely being the ones that will provide that increasing demand into the future. Scott?

Scott Tozier -- Executive Vice President and Chief Financial Officer

Yeah, Sebastian. On the deleveraging question, assuming we close on the Wodgina deal in the fourth quarter, we'd expect to have a net debt to EBITDA ratio of around 2 to 2.1 times. As you think about the deleveraging, there are two components to it. One is the Wodgina JV will start to produce earnings immediately because of the spodumene sales, so that helps. The second part to this is our growth as a company overall drives a significant amount of that deleveraging. As you look at our earnings growth with no change in debt level, we're about to drop down to that 1.5 to 1.6 times you referenced in 2021.

Operator

Thank you. That does conclude our question and answer session for today's conference. Ladies and gentlemen, thank you for participating in today's call. Everyone have a great day.

Duration: 64 minutes

Call participants:

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

Luke Kissam -- Chairman, President, and Chief Executive Officer

Scott Tozier -- Executive Vice President and Chief Financial Officer

Eric Norris -- President, Lithium

Raphael Crawford -- President, Catalysts

Netha Johnson -- President, Bromine Specialties

John Roberts -- UBS -- Analyst

Robert Koort -- Goldman Sachs -- Analyst

Lawrence Alexander -- Jefferies -- Analyst

Arun Viswanathan -- RBC Capital Markets -- Analyst

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

Colin Rush -- Oppenheimer -- Analyst

David Begleiter -- Deutsche Bank -- Analyst

Alexei Yefremov -- Nomura Instinet -- Analyst

Chris Kapsch -- Loop Capital Markets -- Analyst

Joel Jackson -- BMO Capital Markets -- Analyst

Scott -- Citigroup -- Analyst

Kevin McCarthy -- Vertical Research Partners -- Analyst

Jim Sheehan -- SunTrust Robinson Humphrey -- Analyst

Mike Harrison -- Seaport Global Securities -- Analyst

Sebastian Bray -- Berenberg, Gossler & Co. -- Analyst

More ALB analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.